FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________
to __________________
Commission file number: 1-14120
BLONDER TONGUE LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1611421
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Jake Brown Road, Old Bridge, New Jersey 08857
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 679-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
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Common Stock, Par Value $.001 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant (computed by using the closing stock price on March 23, 1999, as
reported by the American Stock Exchange): $17,165,385.
Number of shares of common stock, par value $.001, outstanding as of March
23, 1999: 8,289,797
Documents incorporated by reference:
Certain portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 1999 (which is expected to be filed
with the Commission not later than 120 days after the end of the registrant's
last fiscal year) are incorporated by reference into Part III of this report.
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Forward-Looking Statements
In addition to historical information, this Annual Report contains
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company's business include, but are not limited to, those matters
discussed herein in the sections entitled Item 1 - Business, Item 3 - Legal
Proceedings, and Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. The words "believe", "expect",
"anticipate", "project" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Blonder Tongue undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission.
PART I
ITEM 1. BUSINESS
Introduction
Blonder Tongue Laboratories, Inc. (the "Company") is a designer,
manufacturer and supplier of a comprehensive line of electronics and systems
equipment for the non-franchised cable television industry, commonly referred to
as the private cable industry ("Private Cable"), and the franchised cable
industry ("CATV"), which now potentially includes the regional and long distance
telephone service providers. The Company's products are used in the acquisition,
conversion, distribution and protection of television signals transmitted via
satellite, coaxial cable, terrestrial broadcast, terrestrial multi-channel,
multi-point distribution systems and low power television. These products are
sold to customers which provide an array of communications services, including
television, to single family dwellings, multiple dwelling units ("MDU")
consisting mainly of apartment complexes and condominiums, the lodging industry
("Lodging") consisting mainly of hotels, motels and resorts, and other
facilities such as schools, hospitals, prisons and marinas. The Company's
products are also used in surveillance systems ranging in complexity from simple
in-home monitoring systems to advanced business security systems with hundreds
of cameras.
Blonder Tongue's product line can be separated, according to function,
into the following categories: (i) headend products used by a system operator
for signal acquisition, processing and manipulation for further transmission
("Headend Products"), (ii) distribution products used to permit signals to
travel to their ultimate destination in a home, apartment unit, hotel room,
office or other terminal location ("Distribution Products"), (iii) subscriber
products used to control access to programming at the subscriber's location and
to split and amplify incoming signals for transmission to multiple sites and for
multiple television sets within a site ("Subscriber Products"), and (iv)
microwave products used to transmit the output of Headend Products to multiple
locations using point-to-point communication links in the 13 GHz (for CATV) and
18 GHz (for Private Cable) range of frequencies ("Microwave Products").
The Company's principal customers are system integrators which design,
package, install and in most instances operate the cable system.
On March 26, 1998, the Company acquired all of the assets and
technology rights of the interdiction business (the "Interdiction Business") of
Scientific-Atlanta, Inc. ("Scientific") for a purchase price consisting of (i)
$19 million in cash, (ii) 67,889 shares of the Company's common stock, (iii) a
warrant to purchase 150,000 additional shares of the Company's common stock at
an exercise price of $14.25 per share and (iv) assumption by the Company of
certain obligations under executory contracts with vendors and customers and
certain warranty obligations and other current liabilities of the Interdiction
Business. The Interdiction Business
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generated approximately $16 million in revenues for the prior twelve month
period. The Company believes that Scientific's interdiction products, which have
been engineered primarily to serve the franchised cable market, will supplement
the Company's VideoMask(TM) products, which are primarily focused on the Private
Cable market. In addition, the Company expects that the technology acquired as
part of the Interdiction Business will enhance its ability to design products
that meet the specific needs of all cable providers, while improving its
position in the franchised cable market.
Industry Overview
The television signal distribution industry is dominated by broadcast
television and CATV. Private Cable, wireless cable and direct broadcast
satellite, although smaller in market size, are becoming more significant
players and are growing more rapidly. The regional telephone companies and long
distance carriers are also emerging as television providers, through telephone
lines, coaxial cable, fiber optics and/or wireless transmission. Recently
enacted governmental deregulation of the communications industry has eliminated
many remaining barriers to entry by alternative service providers, fostering an
environment of greater competition and change.
CATV service is typically provided through a coaxial cable network or a
combination of optical fiber and coaxial cable that originates from a central
headend and is carried to the subscriber's television set on telephone poles or
underground along utility rights-of-way. Since the installation and maintenance
of this network requires substantial initial and ongoing investment, a local
governmental body typically awards a CATV operator rights to provide cable
service to a defined geographic area. These rights or franchises were awarded on
an exclusive basis prior to the adoption of the Telecommunications Act of 1996.
Presently, additional franchises within geographical areas are encouraged, in
order to increase competition. In contrast, Private Cable operates within the
boundaries of private property, does not require any governmental license or
franchise (other than the FCC license for transmission of television signals in
the 18 GHz frequency band), and does not need access to public or private
rights-of-way to deliver service. In Private Cable, television signals are
acquired and transmitted from property to property via wireless transmission or
using common carrier services (i.e. fiber networks operated by telephone service
providers) rather than coaxial cable.
The traditional CATV customer is a homeowner who is likely to remain in
the same home as a long-term subscriber. For a wide variety of reasons,
including the transient nature of apartment dwellers and the high cost of
replacing lost or damaged set-top converters in apartment units when the tenants
change, CATV has failed to adequately service the MDU market. This failure,
together with the ability of Private Cable operators to link multiple properties
to a central headend system, has greatly expanded the potential market for
Private Cable. Present franchise cable operators recognizing the competition of
private cable, anticipating direct competition by telephone service providers,
and faced with employing even more costly in-house converters (i.e. as digital
service is added) realize the vulnerability of the set top concept and the need
to expand services to retain subscribers.
CATV
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Many CATV operators and telephone service providers are building fiber
optic networks with alternative combinations of fiber optic and coaxial cable to
deliver television signal programming data and phone services on one drop cable.
CATV's deployment of fiber optic trunk has been completed in only 10% to 20% of
existing systems. Deployment of the latest technology is in the test system
stage. The system architecture being employed to accomplish the combined
provision of television and telephone service is either hybrid fiber coax
("HFC") or fiber to the curb ("FTTC"). In HFC systems, fiber optic trunk lines
connect to nodes which feed 200 to 400 subscribers, using coaxial cable. In FTTC
systems fiber optic cable is used deeper into the network, with as few as four
to eight subscribers fed by coaxial cable from each node. In either case,
extensive rebuilding of a CATV system is required to provide the services
anticipated. Consequently, not only are the regional and long distance telephone
service providers faced with enormous capital expenditures to enter the video
signal delivery business, but CATV is faced with similar expenditures to compete
with them (or to discourage them from entering the race) to be the provider of
the information superhighway.
The Company believes that most major metropolitan areas will eventually
have complex networks of one or two independent operators interconnecting the
homes and private cable operators will have large networks
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interconnecting many multi-dwelling complexes. All these networks are potential
users of Blonder Tongue Headend and interdiction products.
MDU
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Until February, 1991, the ability of Private Cable operators to
penetrate the MDU market was substantially limited by FCC rules which
specifically prohibited the Private Cable operator from using coaxial cable
connections between properties. CATV operators had a significant competitive
advantage because they could connect properties within their franchised areas
with coaxial cable. In an effort to level the playing field, the FCC designated
special frequency bands enabling Private Cable operators to link multiple
properties to one central headend system via microwave signal transmission,
thereby spreading the cost of headend electronics over multiple MDUs and a wider
potential subscriber base. 18 GHz service is wide enough to support the
transmission of 72 channels of television programming, has been the catalyst
fueling the growth and product investment of MDU system operators, and has
caused a substantial increase in the demand for quality Headend Products. In
addition, provisions of the Telecommunications Act of 1996 permit Private Cable
system operators to use coaxial cable connections between adjacent properties
where no access to public rights-of-way are required. Further, fiber optic
networks built by regional and long distance telephone service providers, which
are common carriers, could be used by Private Cable system integrators as
interconnects.
Through the use of Microwave Products and common carrier fiber optic
networks, Private Cable operators can target geographic areas with multiple
properties, many of which would not otherwise have been considered economically
feasible, for inclusion as part of an extensive Private Cable network. In the
past, properties with 100 to 200 subscribers, could not financially justify more
than 15 to 20 channels, but can now be linked to a central headend and justify a
high channel carrier service of 60 channels or more. This allows Private Cable
operators to supply a wide variety of programming at a price which is
competitive with CATV.
The economic feasibility of a Private Cable system depends on
controlling the headend cost and spreading that cost over as many subscribers as
possible using microwave links to multiple MDUs. Electronic equipment providing
the best possible performance-to-cost ratio is key to successfully providing for
the needs of Private Cable operators. The Company believes that its products are
cost-effective and competitive with the products of other companies supplying
the CATV industry, in terms of quality, number of channels and price.
Lodging
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Until the early 1990's, one system integrator dominated the Lodging
market and manufactured much of its own equipment. During the last several
years, other Private Cable integrators have successfully entered and expanded
the Lodging market by offering systems with more channels, video-on-demand and
interactivity. These systems have been well received in the market, as property
owners have sought additional revenues and guests have demanded increased
in-room conveniences. The integrators leading this market evolution rely upon
outside suppliers for their system electronics and are Blonder Tongue customers.
These companies and others offer Lodging establishments VCR-based systems which
provide true video-on-demand movies with a large selection of titles. To meet
these demands, the typical Lodging system headend will include as many as 20 to
40 receivers and as many as 60 to 80 modulators, and will be capable of
providing the guest with more channels free-to-guest, video-on-demand for a
broad selection of movie titles and even interactive services such as remote
check-out and concierge services. This is in contrast to the systems which
preceded them which had typically 10 to 12 receivers and modulators and provided
six to ten channels free-to-guest and two to five channels of VCR-based movies
running at published scheduled times.
There is a trend to substitute video file servers for VCRs, which the
Company believes will eventually replace VCR's in video-on-demand systems. The
timing and speed of this transition is dependent on availability of lower cost
servers.
Most of the systems with video-on-demand service are in larger hotels,
where the economics of high channel capacity systems are more easily justified.
The conversion of hotel pay-per-view systems into video-on-demand is increasing.
Smaller hotels and motels have had limited video-on-demand penetration to date,
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principally because of the headend cost associated with each system and the
limited revenues generated by the smaller number of rooms.
International
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For much of the world, television service is in its infancy, but is
expected to rapidly expand as technological advancement reduces the cost to
consumers. In addition, economic development in Latin America and Asia has
allowed first time construction of integrated delivery systems which utilize a
variety of electronics and broadband hardware. The pace of growth is difficult
to predict, but as more alternatives become available and television service
becomes increasingly affordable, it is likely that more equipment will be placed
in the field.
In October, 1997, the Company executed a two-year distribution
agreement with American Technology Exporters, Inc. ("Amtech"), a privately held
company based in Miami, Florida. Under the terms of the contract, Amtech is
required to purchase at least $3,000,000 per year of the Company's products and
has been granted distribution rights in the Caribbean, Mexico and Central and
South America. Amtech will also provide repair services for the Company's
products in certain of these areas. During the first year of the contract, due
primarily to competitive factors as well as economic conditions in certain South
American countries, Amtech did not meet the minimum sales requirement. The
Company is evaluating other initiatives to assist in building its penetration in
these markets, including adding new distributors and obtaining "CE"
certification for certain of the Company's products which are anticipated to be
offered in several European markets.
Additional Considerations
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The technological revolution taking place in the communications
industry, which includes direct broadcast satellite, is providing digital
television to an increasing number of homes. Wireless cable systems also utilize
digital compression to provide channel capacity which is competitive with CATV
and other television delivery systems. In addition, franchised cable companies
and telephone companies, as stated earlier, are building fiber optic networks to
offer video data and telephony. There is also the possibility of convergence of
data and video communications, wherein computer and television systems merge and
the computer monitor replaces the television screen. While it is not possible to
predict with certainty which technology will be dominant in the future, it is
clear that digitized video and advances in the ability to compress the digitized
video signal make both digital television and the convergence of computer,
telephone and television systems technically possible.
Since United States television sets are analog (not digital), direct
satellite television and other digitally compressed programming requires Headend
Products or expensive set-top decoding receivers to convert the digitally
transmitted satellite signals back to analog. The replacement of all television
sets with digital sets will be costly and take many years to evolve. The Company
believes that for many years to come, program providers will be required to
deliver an analog television signal on standard channels to subscribers'
television sets using Headend Products at some distribution point in their
networks or employ decoding receivers at each television set. Headend Products
are the heart of Blonder Tongue's business and except for systems deploying
digital decoders at each television set (which is very expensive), the Company
believes interdiction is an ideal product for a system operator to use to
control access to the multitude of programming that will be available. In the
completely digital environment which may develop over the long term, all analog
Headend Products will need to be replaced with pure digital products. The
Company and all other suppliers to Private Cable, CATV and the television
industry generally will need to design and manufacture new products for that
environment.
Products
Blonder Tongue's products can be separated, according to function, into
the four broad categories described below:
o Headend Products used by a system operator for signal acquisition,
processing and manipulation for further transmission. Among the products
offered by the Company in this category are satellite receivers (digital
and analog), integrated receiver/decoders, demodulators, modulators,
antennas and antenna mounts, amplifiers, equalizers, and processors. The
headend of a television signal distribution
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system is the "brain" of the system, the central location where the
multi-channel signal is initially received, converted and allocated to
specific channels for distribution. In some cases, where the signal is
transmitted in encrypted form or digitized and compressed, the receiver
will also be required to decode the signal. Blonder Tongue is a licensee of
General Instrument Corporation's VideoCipher(R) and DigiCipher(R)
encryption technologies, EchoStar Communication Corp.'s digital
technologies and Hughes Network Systems digital technologies and integrates
their decoders into integrated receiver/decoder products, where required.
The Company is negotiating with additional companies which are delivering
digital television signal transmission to acquire licenses to incorporate
their proprietary digital decoders into the Company's receivers. The
Company estimates that Headend Products accounted for approximately 70% of
the Company's revenues in 1998, 80% in 1997, and 84% in 1996.
o Distribution Products used to permit signals to travel from the headend
to their ultimate destination in a home, apartment unit, hotel room, office
or other terminal location along a distribution network of fiber optic or
coaxial cable. Among the products offered by the Company in this category
are line extenders, broadband amplifiers, directional taps, splitters and
wall taps. In CATV systems, the distribution products are either mounted on
exterior telephone poles or encased in pedestals, vaults or other security
devices. In Private Cable systems the distribution system is typically
enclosed within the walls of the building (if a single structure) or added
to an existing structure using various techniques to hide the coaxial cable
and devices. The non-passive devices within this category are designed to
ensure that the signal distributed from the headend is of sufficient
strength when it arrives at its final destination to provide high quality
audio/video images.
o Subscriber Products used to control access to programming at the
subscriber's location and to split and amplify incoming signals for
transmission to multiple sites and multiple television sets within a site.
Among the products offered by the Company in this category are addressable
interdiction devices, splitters, couplers and multiplexers. The Company
believes that the most significant products within this category are (i)
its VideoMask(TM) addressable signal jammer, licensed from Philips
Electronics North America Corporation and its affiliate Philips Broadband
Networks, Inc. in August 1995 under certain non-exclusive technology and
patent license agreements (the "Philips License Agreements"), and (ii) the
interdiction product line acquired from Scientific as part of its
Interdiction Business. Interdiction products such as these limit, through
jamming of particular channels, the availability of programs to
subscribers. Such products enable an integrator to control subscriber
access to premium channels and other enhanced services through a computer
located off-premises. They also eliminate the necessity of an operator
having to make a service call to install or remove passive traps and
eliminate the costs associated with damage or loss of set-top converters in
the subscribers' locations. Interdiction products are also being
successfully used by CATV operators as an anti-piracy system in conjunction
with set-top converters. The Company believes that the anti-piracy benefits
of interdiction will be a significant factor in further product penetration
into the CATV market. While it is not possible to predict the breadth of
market acceptance for these products, the Company believes the potential is
substantial in both the MDU market as well as in the CATV market as
alternatives to, or in conjunction with, set-top converters and as a viable
option for telephone companies, electric utilities and other new entrants
to television signal distribution, who are planning to over-build existing
cable infrastructures and are seeking a cost effective way to compete with
CATV.
o Microwave Products used to transmit the output of a cable system headend
to multiple locations using point-to-point communication links in the 13
GHz (for CATV) and 18 GHz (for Private Cable) range of frequencies. Among
the products offered by the Company in this category are power amplifiers,
repeaters, receivers, transmitters and compatible accessories. These
products convert the headend output up to the microwave band and transmit
this signal using parabolic antennas. At each receiver site, a parabolic
antenna-receiver combination converts the signal back to normal VHF
frequencies for distribution to subscribers at the receiver site. The
Company believes that this class of products will be a major catalyst for
growth in the Private Cable MDU market and will be a strategic element in
developing the Company's CATV market penetration.
The Company will modify its products to meet specific customer
requirements. Typically, these modifications are minor and do not materially
alter the functionality of the products. Thus the inability of the
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customer to accept such products does not generally result in the Company being
otherwise unable to sell such products to other customers.
Research and Product Development
The markets served by Blonder Tongue are characterized by technological
change, new product introductions, and evolving industry standards. To compete
effectively in this environment, the Company must engage in continuous research
and development in order to (i) create new products, (ii) expand the frequency
range of existing products in order to accommodate customer demand for greater
channel capacity, (iii) license new technology (such as digital satellite
receiver decoders), and (iv) acquire products incorporating technology which
could not otherwise be developed quickly enough using internal resources, to
suit the dynamics of the evolving marketplace. Research and development projects
are often initially undertaken at the request of and in an effort to address the
particular needs of its customers and customer prospects with the expectation or
promise of substantial future orders from such customers or customer prospects.
Additional research and development efforts are also continuously underway for
the purpose of enhancing product quality and engineering to lower production
costs. For the acquisition of new technologies, the Company may rely upon
technology licenses from third parties when the Company believes that it can
obtain such technology more quickly and/or cost-effectively from such third
parties than the Company could otherwise develop on its own, or when the desired
technology is proprietary to a third party. There were 22 employees in the
research and development department of the Company at December 31, 1998.
Recent research and development product initiatives include a new line
of microwave products transmitting in the 13 GHz frequency band and an internet
connectivity device for use in cable systems to allow MDU subscribers to access
the internet using DIRECTV(TM)'s DirecPC(TM) Technology to download data through
their cable connection at speeds of up to 400 kbps, which is almost 10 times the
speed of the traditional 56 kbps telephone modem.
Marketing and Sales
Blonder Tongue markets and sells its products worldwide to Private
Cable integrators, which accounted for approximately 65% of the Company's
revenues for fiscal years 1998, and 80% in 1997 and 1996, to regional and long
distance telephone service providers, and to CATV integrators. Sales are made
directly to customers by the Company's internal sales force, as well as through
numerous domestic and international stocking distributors.
The Company historically maintained contractual relationships with
numerous independent sales representatives. In February, 1998, the Company
terminated its contractual relationships with its independent sales
representatives because management believes its internal sales force has the
capacity to maintain or increase sales formerly made through independent sales
representatives without the necessity of paying sales commissions. Should it be
deemed necessary, the Company may retain independent sales representatives in
particular geographic areas or targeted to specific customer prospects.
The Company's internal sales force consists of approximately 26
employees, which currently includes six salespersons (two salespersons in Old
Bridge, New Jersey, one salesperson in each of Cincinnati, Ohio, Cudahy,
Wisconsin, and Covina and Folsom, California) and 20 sales-support personnel at
the Company headquarters in Old Bridge, New Jersey.
The Company's standard customer payment terms are 2%-10, net 30
days. From time to time where the Company determines that circumstances warrant,
such as when a customer agrees to commit to a large blanket purchase order, the
Company extends payment terms beyond its standard payment terms.
The Company has several marketing programs to support the sale and
distribution of its products. Blonder Tongue participates in industry trade
shows and conferences. The Company also publishes technical articles in trade
and technical journals, distributes sales and product literature and has an
active public relations plan to ensure complete coverage of Blonder Tongue's
products and technology by editors of trade journals. The
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Company provides system design engineering for its customers, maintains
extensive ongoing communications with many original equipment manufacturer
customers and provides one-on-one demonstrations and technical seminars to
potential new customers. Blonder Tongue supplies sales and applications support,
product literature and training to its sales representatives and distributors.
The management of the Company travels extensively, identifying customer needs
and meeting potential customers.
The Company had approximately $5,361,000 and $5,375,000 in purchase
orders as of December 31, 1998 and December 31, 1997, respectively. All of the
purchase orders outstanding as of December 31, 1998 are expected to be shipped
prior to December 31, 1999. The purchase orders are for the future delivery of
products and are subject to cancellation by the customer.
Customers
Blonder Tongue has a broad customer base, which in 1998 consisted of
more than 1,000 active accounts. Approximately 33%, 40% and 39% of the Company's
revenues in fiscal years 1998, 1997 and 1996, respectively, were derived from
sales of products to the Company's five largest customers. In 1998, sales to
Toner Cable Equipment, Inc. accounted for approximately 10% of the Company's
revenues. Sales to the five largest customers consisted principally of Headend
Products. There can be no assurance that any sales to these entities,
individually or as a group, will reach or exceed historical levels in any future
period. However, the Company anticipates that these customers will continue to
account for a significant portion of the Company's revenues in future periods,
although none of them is obligated to purchase any specified amount of products
(beyond outstanding purchase orders) or to provide the Company with binding
forecasts of product purchases for any future period.
The complement of leading customers may shift as the most efficient and
better financed integrators grow more rapidly than others. The Company believes
that many integrators will grow rapidly, and as such the Company's success will
depend in part on the viability of those customers and on the Company's ability
to maintain its position in the overall marketplace by shifting its emphasis to
those customers with the greatest growth and growth prospects. Any substantial
decrease or delay in sales to one or more of the Company's leading customers,
the financial failure of any of these entities, or the Company's inability to
develop and maintain solid relationships with the integrators which may replace
the present leading customers, would have a material adverse effect on the
Company's results of operations and financial condition.
During 1998, one of the Company's customers experienced financial
difficulties and demonstrated the inability to pay. This customer could not
continue as a going concern and, as of March 16, 1999, this customer had an
outstanding account with the Company of approximately $991,000, which has been
outstanding for more than ninety (90) days. Accordingly, the Company has
significantly increased the allowance for doubtful accounts for this exposure.
In addition, the Company has a personal guarantee from the parties involved in
the amount of $300,000, and has filed a claim in the State of California for
recovery of these funds. The Company does not anticipate a resolution to this
matter in the near future.
The Company's revenues are derived primarily from customers in the
continental United States, however, the Company also derives revenues from
customers outside the continental United States, primarily in underdeveloped
countries. Television service is in its infancy in many international markets,
particularly Latin America and Asia, creating opportunity for those participants
who offer quality products at a competitive price. Sales to customers outside of
the United States represented approximately 2%, 3% and 5% of the Company's
revenues in fiscal years 1998, 1997 and 1996, respectively. All of the Company's
transactions with customers located outside of the continental United States are
denominated in U.S. dollars, therefore, the Company has no material foreign
currency transactions.
Manufacturing and Suppliers
Blonder Tongue's manufacturing operations are located at the Company's
headquarters in Old Bridge, New Jersey. The Company's manufacturing operations
are vertically integrated and consist principally of the assembly and testing of
electronic assemblies built from fabricated parts, printed circuit boards and
electronic devices and the fabrication from raw sheet metal of chassis and
cabinets for such assemblies. Management
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continues to implement a significant number of changes to the manufacturing
process to increase production volume and reduce product cost, including
logistics modifications on the factory floor, an increased use of surface mount,
axial lead and radial lead robotics to place electronic components on printed
circuit boards, a continuing program of circuit board redesign to make more
products compatible with robotic insertion equipment and an increased
integration in machining and fabrication. All of these efforts are consistent
with and part of the Company's strategy to provide its customers with high
performance-to-cost ratio products.
Outside contractors supply standard components and etch printed circuit
boards to the Company's specifications. While the Company generally purchases
electronic parts which do not have a unique source, certain electronic component
parts used within the Company's products are available from a limited number of
suppliers and can be subject to temporary shortages because of general economic
conditions and the demand and supply for such component parts. If the Company
were to experience a temporary shortage of any given electronic part, the
Company believes that alternative parts could be obtained or system design
changes implemented. However, in such situations the Company may experience
temporary reductions in its ability to ship products affected by the component
shortage. The Company purchases several products from sole suppliers for which
alternative sources are not available, such as the VideoCipher(R) and
DigiCipher(R) encryption systems manufactured by General Instrument Corporation,
which are standard encryption methodology employed on U.S. C-Band and Ku-Band
transponders, EchoStar digital satellite receiver decoders, which are
specifically designed to work with the DISH Network(TM), and Hughes Network
Systems digital satellite receivers for delivery of DIRECTV(TM) programming. An
inability to timely obtain sufficient quantities of these components could have
a material adverse effect on the Company's operating results. The Company does
not have a supply agreement with General Instrument Corporation or any other
supplier. The Company submits purchase orders to its suppliers on an as-needed
basis.
Blonder Tongue maintains a quality assurance program which tests
samples of component parts purchased, as well as its finished products, on an
ongoing basis and also conducts tests throughout the manufacturing process using
commercially available and in-house built testing systems that incorporate
proprietary procedures. Blonder Tongue performs final product tests on 100% of
its products prior to shipment to customers.
Competition
All aspects of the Company's business are highly competitive. The
Company competes with national, regional and local manufacturers and
distributors, including companies larger than Blonder Tongue which have
substantially greater resources. Various manufacturers who are suppliers to the
Company sell directly as well as through distributors into the CATV and Private
Cable marketplaces. Because of the convergence of the cable, telecommunications
and computer industries and rapid technological development, new competitors may
seek to enter the principal markets served by the Company. Many of these
potential competitors have significantly greater financial, technical,
manufacturing, marketing, sales and other resources than Blonder Tongue. The
Company expects that direct and indirect competition will increase in the
future. Additional competition could result in price reductions, loss of market
share and delays in the timing of customer orders. The principal methods of
competition are product differentiation, performance and quality, price and
terms, service, and technical and administrative support.
Intellectual Property
The Company currently holds 30 United States patents and 14 foreign
patents covering a wide range of electronic systems and circuits, of which 19
United States patents and 10 foreign patents were obtained in the acquisition of
Scientific's Interdiction Business. Other than certain of the patents acquired
from Scientific, none of the Company's patents are considered material to the
Company's present operations because they do not relate to high volume
applications. Because of the rapidly evolving nature of the Private Cable and
CATV industries, the Company believes that its market position as a leading
supplier to Private Cable derives primarily from its ability to develop a
continuous stream of new products which are designed to meet its customers'
needs and which have a high performance-to-cost ratio.
The Company is a licensee of Philips Electronics North America
Corporation and its affiliate Philips Broadband Networks, Inc., General
Instrument Corporation ("GI"), Houston Tracker Systems, Inc., a
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subsidiary of EchoStar Communications Corp. ("EchoStar"), Hughes Network
Systems, a Hughes Electronics Corporation ("Hughes") and several smaller
software development companies.
Under the Philips License Agreements, the Company is granted a
non-exclusive license for a term which expires in 2010, concurrently with the
last to expire of the relevant patents. The Philips License Agreements provide
for the payment by the Company of a one-time license fee and for the payment by
the Company of royalties based upon unit sales of licensed products.
The Company is a licensee of GI relating to GI's VideoCipher(R)
encryption technology and is also a party to a private label agreement with GI
relating to its DigiCipher(R) technology. Under the VideoCipher(R) license
agreement, the Company is granted a non-exclusive license under certain
proprietary know-how, to design and manufacture certain licensed products to be
compatible with the VideoCipher(R) commercial descrambler module for a term of
ten years, expiring in August, 2000. The VideoCipher(R) license agreement
provides for the payment by the Company of a one-time license fee for the
Company's first model of licensed product and additional one-time license fees
for each additional model of licensed product. The VideoCipher(R) license
agreement also provides for the payment by the Company of royalties based upon
unit sales of licensed products. Under the DigiCipher(R) private label
agreement, the Company is granted the non-exclusive right to sell DigiCipher(R)
II integrated receiver decoders bearing the Blonder Tongue name for use in the
commercial market for a term expiring in December, 1999. The DigiCipher(R)
private label agreement provides for the payment by the Company of a one-time
license fee for the Company's first model of licensed product and additional
one-time license fees for each additional model of licensed product.
In November, 1996, the Company entered into a license agreement with
EchoStar, pursuant to which the Company is licensed to manufacture and sell
digital satellite receiver systems which are compatible with digital programming
transmitted by EchoStar's DISH Network(TM), for use in the commercial market.
The agreement is for a term of five years, expiring in November, 2001. The
EchoStar license agreement provides for the payment by the Company of a one-time
license fee and for the payment of royalties based upon unit sales of licensed
products.
During 1996, the Company also entered into several software development
and license agreements for specifically designed controller and interface
software necessary for the operation of the Company's Video Central(TM) remote
interdiction control system, which is used for remote operation of VideoMask(TM)
signal jammers installed at subscriber locations. These licenses are perpetual
and require the payment of a one-time license fee and in one case additional
payments, the aggregate of which are not material.
In February, 1998, the Company entered into an exclusive license
agreement with Hughes, pursuant to which the Company is licensed to design,
manufacture, and market commercial digital satellite receivers which are
compatible with DIRECTV(TM) programming, for use in headend applications in both
the franchised and private cable markets. The agreement is for a term of five
(5) years, expiring in February 2003.
The Company relies on a combination of contractual rights and trade
secret laws to protect its proprietary technology and know-how. There can be no
assurance that the Company will be able to protect its technology and know-how
or that third parties will not be able to develop similar technology and
know-how independently. Therefore, existing and potential competitors may be
able to develop products that are competitive with the Company's products and
such competition could adversely affect the prices for the Company's products or
the Company's market share. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining its leadership position.
Regulation
Private Cable (estimated by the Company to represent approximately 80%
of its business), while in some cases subject to certain FCC licensing
requirements, is not presently burdened with extensive government regulations.
CATV operators (estimated by the Company to represent approximately 20% of its
business) had been subject to extensive government regulation pursuant to the
Cable Television Consumer Protection and Competition Act of 1992, which among
other things provided for rate rollbacks for basic tier cable service, further
rate reductions
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under certain circumstances and limitations on future rate increases. The
Telecommunications Act of 1996 has deregulated many aspects of CATV system
operation and has opened the door to competition among cable operators and
telephone companies in each of their respective industries. The Company believes
that this legislation will increase the base of potential customers for the
Company's products.
In September, 1998, the FCC issued a Notice of Proposed Rulemaking
proposing to grant primary status for use of the 18 GHz frequency band to Fixed
Satellite Service Operators. If adopted, this rule would adversely affect sales
of 18 GHz microwave products to Private Cable operators. In anticipation of a
change in the frequency which would be allocated for use by Private Cable
operators, the Company has developed a new line of microwave products operating
in the 13 GHz frequency band. Pending release of the FCC's Report and Order with
respect to this matter, any applications filed by Private Cable operators for
use of the 18 GHz frequency band will be grandfathered.
Environmental Regulations
The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
processes. The Company did not incur in 1998 and does not anticipate incurring
in 1999 material capital expenditures for compliance with federal, state and
local environmental laws and regulations. There can be no assurance, however,
that changes in environmental regulations will not result in the need for
additional capital expenditures or otherwise impose additional financial burdens
on the Company. Further, such regulations could restrict the Company's ability
to expand its operations. Any failure by the Company to obtain required permits
for, control the use of, or adequately restrict the discharge of, hazardous
substances under present or future regulations could subject the Company to
substantial liability or could cause its manufacturing operations to be
suspended.
The Company presently holds a permit from the New Jersey Department of
Environmental Protection ("NJDEP"), Division of Environmental Quality, Air
Pollution Control Program relating to its operation of certain process
equipment, which permit expires in June, 2001. The Company has held such a
permit for this equipment on a substantially continuous basis since
approximately April, 1989. The Company also has authorization under the New
Jersey Pollution Discharge Elimination System/Discharge to Surface Waters
General Industrial Stormwater Permit, Permit No. NJ0088315. This permit will
expire January 2002.
Employees
The Company employs approximately 526 persons, including 397 in
manufacturing, 20 in research and development, 15 in quality assurance, 45 in
production services, 26 in sales and marketing, and 23 in a general and
administrative capacity. 326 of the Company's employees are members of the
International Brotherhood of Electrical Workers Union, Local 2066, which has a
three year labor agreement with the Company expiring in February, 2002.
ITEM 2. PROPERTIES
The Company's principal manufacturing, engineering, sales and
administrative facilities consist of one building totalling approximately
130,000 square feet located on approximately 20 acres of land in Old Bridge, New
Jersey (the "Old Bridge Facility") which is owned by the Company. The Company
also leases office space in Cincinnati, Ohio for which it pays rent of
approximately $260 per month.
Management believes that the Old Bridge Facility is adequate to support
the Company's anticipated needs in 1999. Subject to compliance with applicable
zoning and building codes, the Old Bridge real property is large enough to
double the size of the plant to accommodate expansion of the Company's
operations should the need arise.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain proceedings incidental to the
ordinary course of its business, none of which, in the current opinion of
management, is likely to have a material adverse effect on the Company's
business, financial condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1998 through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock has been traded on the American Stock
Exchange since the Company's initial public offering on December 14, 1995. The
following table sets forth for the fiscal quarters indicated, the high and low
sale prices for the Company's Common Stock on the American Stock Exchange.
Market Information
Fiscal Year Ended December 31, 1998: High Low
---- ---
First Quarter ............................. 16 1/8 12 3/8
Second Quarter ............................. 14 1/4 9 3/8
Third Quarter ............................. 11 3/4 5 3/8
Fourth Quarter............................ .. 9 1/4 5 1/4
Fiscal Year Ended December 31, 1997: High Low
---- ---
First Quarter ............................. 9 1/2 6 3/8
Second Quarter ............................. 9 6 1/8
Third Quarter ............................. 17 1/2 7 11/16
Fourth Quarter............................ .. 18 7/16 12 5/8
The Company's Common Stock is traded on the American Stock Exchange
under the symbol "BDR".
Holders
As of March 16, 1999, the Company had approximately 66 holders of
record of the Common Stock. Since a portion of the Company's common stock is
held in "street" or nominee name, the Company is unable to determine the exact
number of beneficial holders.
Dividends
The Company currently anticipates that it will retain all of its
earnings to finance the operation and expansion of its business, and therefore
does not intend to pay dividends on its Common Stock in the foreseeable future.
Other than in connection with certain S Corporation distributions, the Company
has never declared or paid any cash dividends on its Common Stock. Any
determination to pay dividends in the future is at the discretion of the
Company's Board of Directors and will depend upon the Company's financial
condition, results of operations, capital requirements, limitations contained in
loan agreements and such other factors as the Board of Directors
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deems relevant. The Company's loan agreement with First Union National Bank
prohibits the payment of dividends by the Company on its Common Stock, unless at
the time of and after giving effect to any proposed dividend payment, the
Company is not in default under the loan agreement and is in compliance with
certain financial covenants relating to, among other things, working capital,
tangible net worth and debt service coverage.
Sale of Unregistered Securities
In connection with the acquisition of Scientific's Interdiction
Business, in March, 1998, the Company issued 67,889 shares of common stock and a
warrant to purchase an additional 150,000 shares of common stock to Scientific
pursuant to the exemption from registration provided by Section 4(2) and
Regulation D under the Securities Act of 1933, as amended.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of earnings data presented below
for each of the years ended December 31, 1998, 1997 and 1996, and the selected
consolidated balance sheet data as of December 31, 1998 and 1997 are derived
from, and are qualified by reference to, the audited consolidated financial
statements of the Company and notes thereto included elsewhere in this Form
10-K. The selected consolidated statement of earnings data for the years ended
December 31, 1995 and 1994 and the selected consolidated balance sheet data as
of December 31, 1996, 1995 and 1994 are derived from audited consolidated
financial statements not included herein. The data set forth below is qualified
in its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, notes thereto and other financial and
statistical information appearing elsewhere herein.
Year Ended December 31,
--------------------------------------------------
1998(1) 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands, except per share data)
Consolidated Statement of
Earnings Data:
Net sales.................. $70,792 $62,057 $48,862 $51,982 $35,804
Cost of goods sold......... 45,344 39,656 30,613 32,528 21,791
------- ------- ------- ------- -------
Gross profit............. 25,448 22,401 18,249 19,454 14,013
------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative......... 10,755 9,938 9,135 9,791 7,060
Research and development. 2,156 1,954 1,972 2,011 1,477
------- ------- ------- ------- -------
Total operating expenses. 12,911 11,892 11,107 11,802 8,537
------- ------- ------- ------- -------
Earnings from operations... 12,537 10,509 7,142 7,652 5,476
Interest expense........... 1,596 414 658 1,296 439
Other (income) expense, net (40) (595) -- (60) (89)
------- ------- ------- ------- -------
Earnings before income taxes 10,981 10,690 6,484 6,416 5,126
Provisions for income taxes 3,868 4,276 2,601
------- ------- -------
Net earnings............... $ 7,113 $ 6,414 $ 3,883
======= ======= =======
Basic earnings per share... $ 0.86 $ 0.78 $ 0.48
Basic weighted average
shares outstanding(2)...... 8,292 8,227 8,144
Diluted earnings per share. $ 0.84 $ 0.77 $ 0.47
Diluted weighted average
shares outstanding(2)...... 8,471 8,375 8,300
Pro Forma Data:
Pro forma provision for
income taxes(3)............ 2,566 2,050
------- -------
Pro forma net earnings..... $ 3,850 $ 3,076
======= =======
Pro forma basic net earnings
per share.................. $ 0.66 $ 0.48
Basic weighted average
shares outstanding(2)...... 5,823 6,406
Pro forma diluted earnings
per share.................. $ 0.64 $ 0.48
Diluted weighted average
shares outstanding(2)...... 6,054 6,475
Other Data:
S Corporation distributions
declared................... $ -- $ -- $ -- $ 7,896 $ 4,425
Year Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
(in thousands)
Consolidated Balance Sheet
Data:
Working capital........... $17,049 $26,055 $23,015 $14,407 $ 5,786
Total assets.............. 69,651 42,272 36,165 31,804 15,832
Long-term debt (including
current maturities) ...... 22,359 5,054 6,347 2,145 5,196
Stockholders' equity...... 40,496 31,795 25,576 19,740 3,509
- ------------------
(1) On March 26, 1998, the Company acquired all of the assets and technology
rights of Scientific-Atlanta, Inc.'s interdiction business. See Note 11 to
the Company's consolidated financial statements.
(2) Weighted average shares are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
See Note 1(j) of notes to the Company's consolidated financial statements.
(3) On December 11, 1995, the Company's status as an S Corporation terminated
and as a result the Company is now subject to corporate income taxes.
Accordingly, pro forma net earnings reflect a pro forma adjustment for
income taxes which would have been recorded had the Company been a C
Corporation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's historical
results of operations and liquidity and capital resources should be read in
conjunction with "Selected Consolidated Financial Data" and the consolidated
financial statements of the Company and notes thereto appearing elsewhere
herein.
Overview
The Company was incorporated in November, 1988, under the laws of
Delaware as GPS Acquisition Corp. for the purpose of acquiring the business of
Blonder-Tongue Laboratories, Inc., a New Jersey corporation which was founded in
1950 by Ben H. Tongue and Isaac S. Blonder (the "former Blonder-Tongue") to
design, manufacture and supply a line of electronics and systems equipment
principally for the Private Cable industry. Following the acquisition, the
Company changed its name to Blonder Tongue Laboratories, Inc.
The Company's success is due in part to management's efforts to
leverage the Company's reputation by broadening its product line to offer
one-stop shop convenience to Private Cable and CATV system integrators and to
deliver products having a high performance-to-cost ratio. The Company has
experienced significant growth since the acquisition of the former
Blonder-Tongue, both internally and through strategic acquisitions.
In December 1995, the Company successfully concluded an initial public
offering of 2,200,000 shares of its Common Stock. Thereafter, in January 1996,
the Company's underwriters exercised their over-allotment option, as a result of
which an additional 181,735 shares of the Company's Common Stock were sold. The
proceeds received by the Company from the sale of its Common Stock in the
offering (including shares sold pursuant to the over-allotment option), net of
expenses of the offering and certain S Corporation distributions to the
Company's principal stockholders, was approximately $14,045,000. These funds
were used to acquire the Company's Old Bridge Facility and to reduce the
Company's outstanding bank debt. The Company has further enhanced its liquidity
through a long-term loan secured by a mortgage against the Old Bridge Facility.
On March 26, 1998, the Company acquired all of the assets and
technology rights of the interdiction business (the "Interdiction Business") of
Scientific-Atlanta, Inc. ("Scientific") for a purchase price consisting of (i)
$19 million in cash, (ii) 67,889 shares of the Company's common stock, (iii) a
warrant to purchase 150,000 additional shares of the Company's common stock at
an exercise price of $14.25 per share and (iv) assumption by the Company of
certain obligations under executory contracts with vendors and customers and
certain warranty obligations and other current liabilities of the Interdiction
Business. The Interdiction Business generated approximately $16 million in
revenues for the prior twelve month period. The Company believes that
Scientific's interdiction products, which have been engineered primarily to
serve the franchised cable market, will supplement the Company's VideoMask(TM)
products, which are primarily focused on the Private Cable market. In addition,
the Company expects that the technology acquired as part of the Interdiction
Business will enhance its ability to design products that meet the specific
needs of all cable providers, while improving its position in the franchised
cable market.
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Results of Operations
The following table sets forth, for the fiscal periods indicated,
certain consolidated statement of earnings data as a percentage of net sales:
Year Ended December 31,
----------------------------------
1998 1997 1996
------ ------ ------
Net sales.............................. 100.0% 100.0% 100.0%
Costs of goods sold.................... 64.1 63.9 62.7
Gross profit........................... 35.9 36.1 37.3
Selling expenses....................... 6.8 8.0 9.8
General and administrative expenses.... 8.4 8.0 8.9
Research and development expenses...... 3.0 3.2 4.0
Earnings from operations............... 17.7 16.9 14.6
Other (income) expense, net............ 2.2 (.3) 1.3
Earnings before income taxes........... 15.5 17.2 13.3
1998 Compared with 1997
Net Sales. Net sales increased $8,735,000, or 14.1%, to $70,792,000 in
1998 from $62,057,000 in 1997. International sales accounted for $1,137,000
(1.6% of total sales) for 1998 compared to $1,620,000 (2.6% of total sales) for
1997.
The increase in sales is primarily attributed to the increase in sales
of interdiction equipment including sales to the franchised cable market. Net
sales included approximately $15,938,000 of interdiction equipment for 1998
compared to approximately $7,567,000 for 1997.
Cost of Goods Sold. Cost of goods sold increased to $45,344,000 for
1998 from $39,656,000 for 1997, primarily due to increased volume, and increased
as a percentage of sales to 64.1% from 63.9%. The increase as a percentage of
sales was caused primarily by a greater proportion of sales during the period
being comprised of lower margin products.
Selling Expenses. Selling expenses decreased to $4,823,000 in 1998 from
$4,964,000 in 1997, and decreased as a percentage of sales to 6.8% in 1998 from
8.0% in 1997. The decrease was primarily due to a decrease in commissions and
promotional goods offset by an increase in shipping materials.
General and Administrative Expenses. General and administrative
expenses increased to $5,932,000 in 1998 from $4,974,000 for 1997 and increased
as a percentage of sales to 8.4% in 1998 from 8.0% for 1997. The $958,000
increase can be attributed to an increase in the allowance for doubtful accounts
along with an increase in the amortization of intangibles related to the
acquisition of Scientific's Interdiction Business offset by a decrease in the
accrual for executive bonuses. The increase in the allowance for doubtful
accounts is primarily attributable to one account demonstrating the inability to
pay within the third quarter.
Research and Development Expenses. Research and development expenses
increased 10.3% to $2,156,000 in 1998 from $1,954,000 in 1997. The $202,000
increase is primarily due to an increase in purchased materials for research and
development and the reimbursement of costs incurred as a result of the
termination of the Pacific Bell contract in 1997. Research and development
expenses decreased as a percentage of sales to 3.0% from 3.2%.
Operating Income. Operating income increased 19.3% to $12,537,000 for
1998 from $10,509,000 for 1997. Operating income as a percentage of sales
increased to 17.7% in 1998 from 16.9% in 1997.
Interest and Other Expenses. Other expenses in 1998 consisted of
$1,596,000 of interest expense offset by $40,000 of interest income. Other
income in 1997 consisted of $535,000 related to the final payment received from
Pacific Bell as a result of the contract termination in July 1997, along with
$60,000 of interest income
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offset by $414,000 of interest expense. The increase in interest expense is
primarily attributed to increased borrowings under the Company's acquisition
loan commitment.
Income Taxes. The provision for income taxes for 1998 decreased to
$3,868,000 from $4,276,000 for 1997 as a result of state tax credits available
to the Company related to 1997 activity which also reduced the Company's
effective tax rate to 39% from 40%.
1997 Compared with 1996
Net Sales. Net sales increased $13,195,000, or 27%, to $62,057,000 in
1997 from $48,862,000 in 1996. International sales accounted for $1,620,000
(2.6% of total sales) for 1997 compared to $2,655,000 (5.4% of total sales) for
1996. Net sales did not include any milestone billings under the Company's
agreement with Pacific Bell for 1997 compared to $2,192,000 for 1996.
The increase in sales is primarily attributed to an increase in demand
for products in the MDU market and the continued growth in the Lodging market.
In addition, the sales of VideoMask(TM) interdiction equipment remained strong.
Net sales included approximately $7,567,000 of VideoMask(TM) interdiction
equipment for 1997 compared to $2,939,000 for 1996.
Effective July 18, 1997, the Company's agreement to supply interdiction
equipment to Pacific Bell was terminated. The termination did not have a
significant impact on 1997 sales. The Pacific Bell contract contained provisions
for penalties upon early termination by either party. In July, 1997, the Company
received a payment in the amount of $1.5 million from Pacific Bell for
reimbursement of costs incurred by the Company through the date of termination.
The payment was offset by a portion of the costs incurred by the Company for
customized inventory ($708,000) and operating expenses ($257,000) incurred in
connection with the contract. In addition, the Company recognized $535,000 in
other income.
Cost of Goods Sold. Cost of goods sold increased to $39,656,000 for
1997 from $30,613,000 for 1996, primarily due to increased volume, and increased
as a percentage of sales to 63.9% from 62.7%. The increase as a percentage of
sales was caused primarily by a greater proportion of sales during the period
being comprised of lower margin products.
Selling Expenses. Selling expenses increased to $4,964,000 in 1997 from
$4,780,000 in 1996, but decreased as a percentage of sales to 8.0% in 1997 from
9.8% in 1996. The dollar increase was primarily due to an increase in
commissions ($128,000) as a result of the increase in sales, an increase in
shipping materials ($86,000) and an increase in royalty payments related to
licensing agreements ($76,000). These increases were offset by a reduction of
costs incurred for trade shows ($142,000).
General and Administrative Expenses. General and administrative
expenses increased to $4,974,000 in 1997 from $4,355,000 for 1996 but decreased
as a percentage of sales to 8.0% in 1997 from 8.9% for 1996. The $619,000
increase can be primarily attributable to an increase in the accrual for
executive bonuses in connection with the implementation of the Company's
Executive Officer Bonus Plan and an increase in the allowance for doubtful
accounts related to the increase in sales volume.
Research and Development Expenses. Research and development expenses
decreased 1% to $1,954,000 in 1997 from $1,972,000 in 1996, primarily due to the
reimbursement of costs incurred as a result of the termination of the Pacific
Bell contract and a decrease in expenditures for consulting services that were
incurred with respect to the VideoMask(TM) product line in 1996. These decreases
were offset by an increase in amortization of technology license agreements, an
increase in depreciation expense related to the acquisition of new equipment and
an increase in wages due to the hiring of personnel with higher qualifications.
Research and development expenses also decreased as a percentage of sales to
3.2% from 4.0%.
Operating Income. Operating income increased 47.1% to $10,509,000 for
1997 from $7,142,000 for 1996. Operating income as a percentage of sales
increased to 16.9% in 1997 from 14.6% in 1996.
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Interest and Other Expenses. Other income in 1997 consisted of $535,000
related to the final payment received from Pacific Bell as a result of the
contract termination in July, 1997, along with $60,000 of interest income offset
by $414,000 of interest expense. Other expenses in 1996 consisted of interest
expense of $658,000. The reduction in interest expense is primarily attributed
to reduced borrowings under the Company's credit line.
Income Taxes. The provision for income taxes for 1997 increased to
$4,276,000 from $2,601,000 for 1996 as a result of increased taxable income. The
effective tax rate for both years remained at 40%.
Inflation and Seasonality
Inflation and seasonality have not had a material impact on the results
of operations of the Company. Fourth quarter sales in 1998 were slightly
impacted by fewer production days. The Company expects sales each year in the
fourth quarter to be impacted by fewer production days.
Year 2000
The Company has assigned certain individuals to identify and correct
Year 2000 compliance issues. Information technology ("IT") systems with
non-compliant code are expected to be modified or replaced with systems that are
Year 2000 compliant. Similar actions are being taken with respect to non-IT
systems, primarily systems embedded in manufacturing and the Company's products.
The individuals are also responsible for investigating the readiness of
suppliers, customers and other third parties along with the development of
contingency plans where necessary.
All IT systems have been inventoried and assessed for compliance, and
detailed plans are in place for required system modifications or replacements.
Remediation and testing activities are underway with approximately 60% of the
systems already compliant. IT systems are expected to be fully compliant by the
end of the second quarter of 1999. Inventories and assessments of non-IT systems
have been completed. Progress of the Year 2000 compliance program is
continuously being monitored by senior management.
The Company has identified critical suppliers, customers and other
third parties and has surveyed their Year 2000 remediation programs. Risk
assessments and contingency plans, where necessary, will be finalized in the
first quarter of 1999.
Incremental costs directly related to Year 2000 issues are estimated to
be $300,000 to be incurred between 1998 and 2000, of which $240,000 (or 80%) has
been spent to date. Approximately 90% of the total estimated spending represents
costs to modify existing systems. Costs incurred prior to 1998 were immaterial.
This estimate assumes that the Company will not incur significant Year 2000
related costs on behalf of suppliers, customers or other third parties.
The Company's most likely potential risk is the inability of some
customers to order and pay on a timely basis. In addition, the Company has
several foreign suppliers, which, if not in compliance, would cause the Company
to utilize more expensive suppliers resulting in reduced margins. Contingency
plans for Year 2000-related interruptions are being developed and will include,
but not be limited to, the development of emergency backup and recovery
procedures, remediation of existing systems parallel with installation of new
systems and identification of alternate suppliers. All plans are expected to be
completed by the end of the second quarter of 1999.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates no major
interruption of its business activities, that will be dependent in part, upon
the ability of third parties to properly remediate their IT and non-IT systems
in a timely manner. Although the Company has implemented the actions described
above to address third party issues, it has no ability to influence the
compliance actions of such parties. Accordingly, while the Company believes its
actions in this regard should have the effect of reducing Year
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2000 risks, it is unable to eliminate them or estimate the ultimate effect Year
2000 risks will have on the Company's operating results.
Liquidity and Capital Resources
As of December 31, 1998 and 1997, the Company's working capital was
$17,049,000 and $26,055,000, respectively. The decrease in working capital is
attributable primarily to the Company's acquisition of Scientific's Interdiction
Business resulting in $19,000,000 outstanding under the acquisition loan
commitment. Historically, the Company has satisfied its cash requirements
primarily from net cash provided by operating activities and from borrowings
under its line of credit.
The Company's net cash provided by operating activities for the period
ended December 31, 1998 was $921,000 as a result of the Company's net earnings
offset by $4,147,000 to fund the increase in inventory and $3,456,000 related to
the increase in accounts receivable, compared to cash provided by operating
activities for the period ended December 31, 1997 of $2,290,000.
Cash used in investing activities was $19,879,000. $19,000,000 was
utilized for the acquisition of Scientific's Interdiction Business, and $879,000
is attributable to capital expenditures for new equipment. The Company purchased
automated assembly and test equipment, along with computer hardware and
software. The Company does not have any present plans or commitments for
material capital expenditures for fiscal year 1999.
Cash provided by financing activities was $18,945,000 for the period
ended December 31, 1998, comprised primarily of $19,000,000 in proceeds from the
Company's acquisition loan commitment.
In October, 1997, the Company executed a new $15 million revolving line
of credit with its bank, on which funds may be borrowed at the bank's overnight
base rate ("OBR") plus a margin ranging from .95% to 2.45%, depending upon the
calculation of certain financial covenants (7.95% at December 31, 1998). As of
December 31, 1998, the Company had $1.8 million outstanding under the line of
credit. The line of credit is collateralized by a security interest in all of
the Company's assets. The agreement contains restrictions that require the
Company to maintain certain financial ratios as well as restrictions on the
payment of dividends. In addition, the Company has an acquisition loan
commitment which may be drawn upon by the Company to finance acquisitions in
accordance with certain terms. The acquisition loan commitment had been $15
million until March, 1998 when it was increased to $20 million to accommodate
the acquisition of Scientific's Interdiction Business. Funds may be borrowed
under the acquisition loan commitment at OBR plus a margin ranging from 1.25% to
2.75%, depending upon the calculation of certain financial covenants. At
December 31, 1998, there was $19 million outstanding under the acquisition loan
commitment. The line of credit and the acquisition loan commitment expire on
June 30, 1999. The Company is currently in the final stages of negotiations to
renew the line of credit and acquisition loan commitment with interest rates
based upon LIBOR plus a variable margin. When executed, the renewed line of
credit and acquisition loan commitment (and LIBOR-based interest rate) will be
effective as of February 1, 1999.
On February 3, 1999, the Company entered into an interest rate swap
agreement with a notional amount of $10,000,000. The swap agreement has a
maturity date of June 3, 2002 and requires the Company to make fixed rate
interest payments on the notional amount of 8.01% per annum in exchange for
floating rate payments equal to LIBOR plus 2.55%. The Company is exposed to
credit risk in the unlikely event of the nonperformance by the counterparties.
Interest to be paid or received is accrued over the life of the agreement at the
net effective interest rate for the swap and corresponding debt instrument.
The Company currently anticipates that the cash generated from
operations, existing cash balances and amounts available under its existing or a
replacement line of credit, will be sufficient to satisfy its foreseeable
working capital needs.
New Accounting Pronouncements
In June, 1998, SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS 133 standardizes accounting and reporting
for derivative instruments and for hedging activities. This
19
<PAGE>
statement is effective in the year 2000. The Company will be reviewing this
pronouncement to determine its applicability to the Company, if any.
Additional Factors That May Affect Future Results and Market Price of Stock
Blonder Tongue's business operates in a rapidly changing environment
that involves a number of risks, some of which are beyond the Company's control.
The following discussion highlights some of these risks which are not otherwise
addressed elsewhere in this Annual Report. There can be no assurance that the
Company will anticipate the evolution of industry standards in Private Cable or
the communications industry generally, changes in the market and customer needs,
or that technologies and applications under development by the Company will be
successfully developed, or if they are successfully developed, that they will
achieve market acceptance. The competition to attract and retain highly-skilled
engineering, manufacturing, marketing and managerial personnel is intense.
Capital spending by cable operators for constructing, rebuilding, maintaining or
upgrading their systems (upon which the Company's sales and profitability are
dependent) is dependent on a variety of factors, including access to financing,
demand for their cable services, availability of alternative video delivery
technologies, and general economic conditions. Factors such as announcements of
technological innovations or new products by the Company, its competitors or
third parties, quarterly variations in the Company's actual or anticipated
results of operations, market conditions for emerging growth stocks or cable
industry stocks in general, or the failure of revenues or earnings in any
quarter to meet the investment community's expectations, may cause the market
price of the Company's Common Stock to fluctuate significantly. The stock price
may also be affected by broader market trends unrelated to the Company's
performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and
positions represents the potential loss arising from adverse changes in interest
rates. At December 31, 1998 and 1997 the principal amount of the Company's
aggregate outstanding variable rate indebtedness was $20,827,000 and $1,278,000,
respectively. A hypothetical 10% adverse change in interest rates would have had
an annualized unfavorable impact of approximately $156,000 and $10,000,
respectively, on the Company's earnings and cash flows based upon these year-end
debt levels. To ameliorate these risks, in February, 1999, the Company entered
into an interest rate Swap Agreement with a notional amount of $10,000,000. The
specific terms of the Swap Agreement are more fully discussed above in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the consolidated financial statements
and notes thereto of the Company which are attached hereto beginning on page 25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
20
<PAGE>
PART III
ITEMS 10. through 13. INCORPORATED BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers
of the Registrant," Item 11 "Executive Compensation," Item 12 "Security
Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held May 6, 1999, which definitive proxy statement is expected
to be filed with the Commission not later than 120 days after the end of the
fiscal year to which this report relates. Note that the sections in the
definitive proxy statement entitled "Report of Compensation Committee on
Executive Compensation Policies" and "Comparative Stock Performance" pursuant to
Regulation S-K, Item 402(a)(9), are not deemed "soliciting material" or "filed"
as part of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data.
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants, BDO Seidman, LLP....... 26
Consolidated Balance Sheets as of December 31, 1998 and 1997............... 27
Consolidated Statements of Earnings for the Years Ended December 31, 1998,
1997 and 1996.............................................................. 28
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996........................................... 29
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996........................................................ 30
Notes to Consolidated Financial Statements................................. 31
</TABLE>
(a)(2) Financial Statement Schedules.
Included in Part IV of this report:
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the applicable instructions or are inapplicable and therefore
have been omitted.
21
<PAGE>
(a)(3) Exhibits
The exhibits are listed in the Index to Exhibits appearing below and
are filed herewith or are incorporated by reference to exhibits previously filed
with the Commission.
(b) No reports on Form 8-K were filed in the quarter ended December 31, 1998.
(c) Exhibits:
Exhibit # Description Location
- --------- ----------- --------
3.1 Restated Certificate of Incorporated by reference
Incorporation of Blonder Tongue from Exhibit 3.1 to
Laboratories, Inc. Registrant's S-1
Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
3.2 Restated Bylaws of Blonder Tongue Incorporated by reference
Laboratories, Inc. from Exhibit 3.2 to
Registrant's S-1
Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
4.1 Specimen of stock certificate Incorporated by reference
from Exhibit 4.1 to
Registrant's S-1
Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.1 Consulting Agreement, dated Incorporated by reference
January 1, 1995, between Blonder from Exhibit 10.3 to
Tongue Laboratories, Inc. and Registrant's S-1
James H. Williams. Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.2 1994 Incentive Stock Option Plan. Incorporated by reference
from Exhibit 10.5 to
Registrant's S-1
Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.3 1995 Long Term Incentive Plan. Incorporated by reference
from Exhibit 10.6 to
Registrant's S-1
Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.4 Amended and Restated 1996 Director Incorporated by reference
Option Plan. from Appendix B to
Registrant's Proxy Statement
for its 1998 Annual Meeting of
Stockholders originally filed
March 27, 1998.
10.5 Employment Agreement, dated August Incorporated by reference
1, 1995, between Blonder Tongue from Exhibit 10.9 to
Laboratories, Inc. and Daniel J. Registrant's S-1
Altiere. Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.6 Form of Indemnification Agreement Incorporated by reference
entered into by Blonder Tongue from Exhibit 10.10 to
Laboratories, Inc. in favor of Registrant's S-1
each of its Directors and Officers. Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.7 VideoCipher(R) IICM Commercial Incorporated by reference
Descrambler Module Master Purchase from Exhibit 10.11 to
and License Agreement, dated Registrant's S-1
August 23, 1990, between Blonder Registration Statement No.
Tongue Laboratories, Inc. and 33-98070 originally filed
Cable/Home Communication Corp. October 12, 1995, as amended.
22
<PAGE>
Exhibit # Description Location
- --------- ----------- --------
+10.8 Patent License Agreement, dated Incorporated by reference
August 21, 1995, between Blonder from Exhibit 10.12 to
Tongue Laboratories, Inc. and Registrant's S-1
Philips Electronics North America Registration Statement No.
Corporation. 33-98070 originally filed
October 12, 1995, as amended.
+10.9 Interdiction Technology License Incorporated by reference
Agreement, dated August 21, 1995, from Exhibit 10.13 to
between Blonder Tongue Registrant's S-1
Laboratories, Inc. and Philips Registration Statement No.
Broadband Networks, Inc. 33-98070 originally filed
October 12, 1995, as amended.
10.10 401(k) Savings & Investment Incorporated by reference
Retirement Plan. from Exhibit 10.21 to S-1
Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.11 Bargaining Unit Pension Plan. Incorporated by reference
from Exhibit 10.22 to S-1
Registration Statement No.
33-98070 originally filed
October 12, 1995, as amended.
10.12 Mortgage, Assignment of Leases, Incorporated by reference
and Security Agreement dated May from Exhibit 10.2 to
23, 1996 by Blonder Tongue Registrant's Quarterly
Laboratories, Inc. in favor of Report on Form 10-Q for the
CoreStates Bank, N.A., successor period ended June 30, 1996,
to Meridian Bank. filed August 14, 1996.
10.13 Real Estate Loan Note dated May Incorporated by reference
23, 1996 from Blonder Tongue from Exhibit 10.3 to
Laboratories, Inc. in favor of Registrant's Quarterly
CoreStates Bank, N.A., successor Report on Form 10-Q for the
to Meridian Bank. period ended June 30, 1996,
filed August 14, 1996.
10.14 Allonge to Real Estate Loan Note, Incorporated by reference
dated September 26, 1996 from from Exhibit 10.3 to
Blonder Tongue Laboratories, Inc., Registrant's Quarterly
in favor of CoreStates Bank, N.A., Report on Form 10-Q for the
successor to Meridian Bank. period ended September 30,
1996, filed November 14, 1996.
+10.15 License Agreement dated November Incorporated by reference
12, 1996 between Blonder Tongue from Exhibit 10.31 to
Laboratories, Inc. and Houston Registrant's Annual Report
Tracker Systems, Inc. on Form 10-K for fiscal year
ended December 31, 1996,
filed March 27, 1997.
10.16 Executive Officer Bonus Plan Incorporated by reference
from Exhibit 10.3 to
Registrant's Quarterly
Report on Form 10-Q for the
period ended March 31, 1997.
10.17 Second Amendment to 1995 Long Term Incorporated by reference
Incentive Plan from Appendix A to
Registrant's Proxy Statement
for its 1998 Annual Meeting of
Stockholders originally filed
March 27, 1998.
10.18 Third Amended and Restated Loan Incorporated by reference
Agreement dated October 29, 1997 from Exhibit 10.18 to
between Blonder Tongue Registrant's Annual Report
Laboratories, Inc. and CoreStates on Form 10-K for fiscal year
Bank, N.A. ended December 31, 1997,
filed March 27, 1998.
10.19 Third Amended and Restated Line of Incorporated by reference
Credit Note dated October 29, 1997 from Exhibit 10.19 to
by Blonder Tongue Laboratories, Registrant's Annual Report
Inc. in favor of CoreStates Bank, on Form 10-K for fiscal year
N.A. ended December 31, 1997,
filed March 27, 1998.
21 Subsidiaries of Blonder Tongue Filed herewith.
Laboratories, Inc.
23 Consent of BDO Seidman, LLP Filed herewith.
27 Financial Data Schedule Electronic filing only.
23
<PAGE>
- ------------------
+Certain portions of exhibit have been afforded confidential treatment by
the Securities and Exchange Commission.
(d) Financial Statement Schedules:
Report of BDO Seidman, LLP on financial statement schedule.
The following financial statement schedule is included on page 47 of this
Annual Report on Form 10-K:
Schedule II. Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the applicable
instructions or are inapplicable and therefore have been omitted.
24
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants, BDO Seidman, LLP.... 26
Consolidated Balance Sheets as of December 31, 1998 and 1997............ 27
Consolidated Statements of Earnings for the Years Ended December 31,
1998, 1997 and 1996..................................................... 28
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996........................................ 29
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996..................................................... 30
Notes to Consolidated Financial Statements.............................. 31
25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Blonder Tongue
Laboratories, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Blonder
Tongue Laboratories, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
February 12, 1999
26
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
--------------------
1998 1997
-------- --------
Assets (Note 4)
Current assets:
Cash ............................................... $ 542 $ 555
Accounts receivable, net of allowance for doubtful
accounts of $1,201 and $607, respectively .......... 15,988 13,130
Inventories (Note 2) ............................... 24,540 17,875
Other current assets ............................... 597 318
Deferred income taxes (Note 13) .................... 1,445 1,054
-------- --------
Total current assets ............................ 43,112 32,932
Property, plant and equipment, net of accumulated
depreciation and amortization (Notes 3 and 5) ...... 7,968 7,721
Patents, net (Note 11) ................................ 4,115 176
Goodwill, net (Note 11) ............................... 13,157 274
Other assets .......................................... 1,299 1,169
-------- --------
$ 69,651 $ 42,272
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Revolving line of credit (Note 4) .................. $ 1,827 $ --
Current portion of long-term debt, including related
party debt of $1,278 in 1997 (Note 4) .............. 19,494 1,866
Accounts payable ................................... 2,134 2,305
Accrued compensation ............................... 1,287 1,606
Other accrued expenses ............................. 933 929
Income taxes (Note 13) ............................. 388 171
-------- --------
Total current liabilities ....................... 26,063 6,877
-------- --------
Deferred income taxes (Note 13) ....................... 227 412
Long-term debt (Note 4) ............................... 2,865 3,188
Commitments and contingencies (Notes 5, 6 and 7) ...... -- --
Stockholders' equity (Notes 9, 10, 11 and 12):
Preferred stock, $.001 par value; authorized 5,000
shares; no shares outstanding ...................... -- --
Common stock, $.001 par value; authorized 25,000
shares, 8,370 shares issued at December 31, 1998 and 8 8
8,273 shares issued at December 31, 1997
Paid-in capital .................................... 23,743 21,802
Retained earnings .................................. 17,596 10,483
Treasury stock at cost, 81 shares at December 31,
1998 and 40 at December 31, 1997 (Note 9) .......... (851) (498)
-------- --------
Total stockholders' equity ...................... 40,496 31,795
-------- --------
$ 69,651 $ 42,272
======== ========
See accompanying notes to consolidated financial statements
27
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales ..................................... $ 70,792 $ 62,057 $ 48,862
Cost of goods sold ............................ 45,344 39,656 30,613
-------- -------- --------
Gross profit ............................... 25,448 22,401 18,249
-------- -------- --------
Operating expenses:
Selling expenses ........................... 4,823 4,964 4,780
General and administrative ................. 5,932 4,974 4,355
Research and development ................... 2,156 1,954 1,972
-------- -------- --------
12,911 11,892 11,107
-------- -------- --------
Earnings from operations ...................... 12,537 10,509 7,142
-------- -------- --------
Other income (expense):
Interest expense ........................... (1,596) (414) (658)
Other income .............................. 40 595 --
-------- -------- --------
(1,556) 181 (658)
-------- -------- --------
Earnings before income taxes .................. 10,981 10,690 6,484
Provision for income taxes (Note 13) .......... 3,868 4,276 2,601
-------- -------- --------
Net earnings ............................... $ 7,113 $ 6,414 $ 3,883
======== ======== ========
Basic earnings per share (Note 10) ............ $ 0.86 $ 0.78 $ 0.48
======== ======== ========
Basic weighted average shares outstanding
(Note 10) ................................... 8,292 8,227 8,144
======== ======== ========
Diluted earnings per share (Note 10) .......... $ 0.84 $ 0.77 $ 0.47
======== ======== ========
Diluted weighted average shares outstanding
(Note 10) ................................... 8,471 8,375 8,300
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock
---------------------
Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ..... 7,919 $ 8 $ 19,546 $ 186 $ -- $ 19,740
Proceeds from sale of stock .. 182 -- 1,606 -- -- 1,606
Proceeds from exercise of
stock options ................ 84 -- 261 -- -- 261
Issuance of common stock in
exchange for investment ...... 8 -- 86 -- -- 86
Net earnings ................. -- -- -- 3,883 -- 3,883
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ... 8,193 8 21,499 4,069 -- 25,576
Proceeds from exercise of
stock options ................ 80 -- 303 -- -- 303
Acquisition of treasury stock -- -- -- -- (498) (498)
Net earnings ................. -- -- -- 6,414 -- 6,414
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ... 8,273 8 21,802 10,483 (498) 31,795
Proceeds from exercise of
stock options ................ 29 -- 166 -- -- 166
Acquisition of treasury stock -- -- -- -- (353) (353)
Issuance of common stock for
acquired business ............ 68 -- 1,000 -- -- 1,000
Issuance of warrant for
acquired business ............ -- -- 775 -- -- 775
Net earnings ................. -- -- -- 7,113 -- 7,113
-------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ... 8,370 $ 8 $ 23,743 $ 17,596 $ (851) $ 40,496
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings ...................................................... $ 7,113 $ 6,414 $ 3,883
Adjustments to reconcile net earnings to cash
provided by (used in) operating activities:
Depreciation and amortization .................................. 2,365 1,130 1,099
Provision for doubtful accounts ................................ 598 327 135
Deferred income taxes .......................................... (576) (518) (469)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable .......................................... (3,456) (4,470) 33
Inventories .................................................. (4,147) (1,847) (2,638)
Other current assets ......................................... (279) 85 503
Other assets ................................................. (428) (10) (184)
Income taxes ................................................. 217 (452) 97
Accounts payable and accrued expenses ........................ (486) 1,631 (2,993)
-------- -------- --------
Net cash provided by (used in) operating
activities ................................................ 921 2,290 (534)
-------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures .............................................. (879) (1,424) (1,471)
Acquisition of licenses ........................................... -- (163) (492)
Acquisition of business ........................................... (19,000) -- --
-------- -------- --------
Net cash used in investing activities ....................... (19,879) (1,587) (1,963)
-------- -------- --------
Cash Flows From Financing Activities:
Net borrowings (repayments) under revolving line of
credit .......................................................... 1,827 (1,176) (1,533)
Repayments of borrowings from stockholders ........................ -- (313) --
Proceeds from long-term debt ...................................... 19,199 683 3,422
Repayments of long-term debt ...................................... (1,894) (487) (396)
Proceeds from sale of common stock ................................ -- -- 1,606
Proceeds from exercise of stock options ........................... 166 303 261
Acquisition of treasury stock ..................................... (353) (498) --
-------- -------- --------
Net cash provided by (used in) financing activities ......... 18,945 (1,488) 3,360
-------- -------- --------
Net (Decrease) Increase In Cash ...................................... (13) (785) 863
Cash, beginning of year .............................................. 555 1,340 477
-------- -------- --------
Cash, end of year .................................................... $ 542 $ 555 $ 1,340
======== ======== ========
Supplemental Cash Flow Information:
Cash paid for interest ............................................ $ 1,261 $ 397 $ 650
Cash paid for income taxes ........................................ 4,276 5,251 2,681
======== ======== ========
Non-cash transactions:
Common stock issued for acquired business ......................... $ 1,000 $ -- $ --
Warrant issued for acquired business .............................. 775 -- --
Issuance of common stock in exchange for investment ............... -- -- 86
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1 - Summary of Significant Accounting Policies
(a) Company and Basis of Presentation
Blonder Tongue Laboratories, Inc. (the "Company") is a manufacturer of
television and satellite signal distribution equipment supplied to the
private cable television and broadcast industries. The consolidated
financial statements include the accounts of Blonder Tongue Laboratories,
Inc. and subsidiaries as discussed below. Significant intercompany accounts
and transactions have been eliminated in consolidation.
(b) Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out ("FIFO") method, or market.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation generally on the straight-line method based upon estimated useful
lives of 3 to 5 years for office equipment, 5 to 7 years for furniture and
fixtures, 6 to 10 years for machinery and equipment, 10 to 15 years for building
improvements and 40 years for the manufacturing and administrative office
facility.
(d) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred
income taxes are provided for temporary differences in the recognition of
certain income and expenses for financial and tax reporting purposes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
(e) Intangible Assets
Intangible assets totaling $18,571 and $1,617 as of December 31, 1998 and
1997, respectively, consist of goodwill, prepaid licensing fees, and acquired
patent rights, and are carried at cost less accumulated amortization.
Amortization is computed utilizing the straight-line method over the estimated
useful life of the respective asset, 3 to 15 years. Accumulated amortization was
$1,985 and $724 for 1998 and 1997, respectively.
(f) Long-Lived Assets
The Company follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121 standardized the accounting practices for
the recognition and measurement of impairment losses on certain long-lived
assets based on non-discounted cash flows. No impairment losses have been
recorded through December 31, 1998.
(g) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with a maturity of less than three
months at purchase to be cash equivalents. The Company did not have any cash
equivalents at December 31, 1998, 1997 and 1996.
(h) Research and Development
Research and development expenditures for the Company's projects are
expensed as incurred.
31
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(i) Revenue Recognition
The Company records revenues when products are shipped. Customers do not
have a right to return products shipped.
(j) Earnings Per Share
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
provides for the calculation of "basic" and "diluted" earnings per share. This
Statement, effective for financial statements issued for periods ended after
December 15, 1997, required restatement of all prior-period earnings per share
data presented. Basic earnings per share includes no dilution and is computed by
dividing net earnings by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect, in periods in
which they have a dilutive effect, the effect of common shares issuable upon
exercise of stock options. All periods presented have been restated to comply
with the provisions of SFAS 128.
(k) Treasury Stock
Treasury Stock is recorded at cost. Gains and losses on disposition are
recorded as increases or decreases to additional paid-in capital with losses in
excess of previously recorded gains charged directly to retained earnings.
(l) Derivative Financial Instruments
The Company utilizes interest rate swaps to manage interest rate
exposures. The Company specifically designates interest rate swaps as hedges of
debt instruments and recognizes interest differentials as adjustments to
interest expense in the period they occur. The Company does not hold or issue
financial instruments for trading purposes.
(m) Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Approximately 62% of the Company's employees are covered by a three year
collective bargaining agreement, which expires in February, 2002.
The Company estimates that Headend products accounted for approximately
70% of the Company's revenues in 1998, 80% in 1997 and 84% in 1996. Any
substantial decrease in sales of Headend products could have a material adverse
effect on the Company's results of operations and financial condition.
The Company purchases several products from sole suppliers for which
alternative sources are not available, such as the VideoCipher(R) and
DigiCipher(R) encryption systems manufactured by General Instrument Corporation,
which are standard encryption methodology employed on U.S. C-Band and Ku-Band
transponders and EchoStar digital satellite receiver decoders, which are
specifically designed to work with the DISH Network(TM) and Hughes Network
Systems digital satellite receivers for delivery of DIRECTV(TM) programming. An
inability to timely obtain sufficient quantities of these components could have
a material adverse effect on the Company's operating results. The Company does
not have a supply agreement with General Instrument Corporation or any other
supplier. The Company submits purchase orders to its suppliers on an as-needed
basis.
32
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(n) New Accounting Pronouncements
In June, 1998, SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS 133 standardizes accounting and reporting
for derivative instruments and for hedging activities. This statement is
effective in the year 2000. The Company will be reviewing this pronouncement to
determine its applicability to the Company, if any.
Note 2 - Inventories
Inventories are summarized as follows:
December 31,
--------------------
1998 1997
------- -------
Raw materials.................................. $ 9,550 $ 8,740
Work in process................................ 2,463 2,907
Finished goods................................. 12,527 6,228
------- -------
$24,540 $17,875
======= =======
Note 3 - Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
December 31,
-------------------
1998 1997
------- -------
Land............................................... $ 1,000 $ 1,000
Building........................................... 3,361 3,361
Machinery and equipment............................ 5,158 4,623
Furniture and fixtures............................. 395 391
Office equipment................................... 764 729
Building improvements.............................. 466 415
------- -------
11,144 10,519
Less: Accumulated depreciation and amortization... (3,176) (2,798)
------- -------
$ 7,968 $ 7,721
======= =======
Note 4 - Debt
In October, 1997, the Company executed a new $15,000 revolving line
of credit with its bank, on which funds may be borrowed at the bank's overnight
base rate ("OBR") plus a margin ranging from .95% to 2.45%, depending upon the
calculation of certain financial covenants (7.95% at December 31, 1998). As of
December 31, 1998, the Company had $1,800 outstanding under the line of credit.
The line of credit is collateralized by a security interest in all of the
Company's assets. The agreement contains restrictions that require the Company
to maintain certain financial ratios as well as restrictions on the payment of
dividends. In addition, the Company has an acquisition loan commitment which may
be drawn upon by the Company to finance acquisitions in accordance with certain
terms. The acquisition loan commitment had been $15,000 until March, 1998 when
it was increased to $20,000 to accommodate the acquisition of Scientific's
Interdiction Business (See Note 11). Funds may be borrowed under the acquisition
loan commitment at OBR plus a margin ranging from 1.25% to 2.75%, depending upon
the calculation of certain financial covenants. At December 31, 1998, there was
$19,000 outstanding under the acquisition loan commitment. The line of credit
and the acquisition loan commitment expire on June 30, 1999. The Company is
currently in negotiations to renew the line of credit and acquisition loan
commitment with interest rates based upon LIBOR plus a variable margin.
33
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The average amount outstanding on the line of credit during 1998 was
$544 at a weighted average interest rate of 7.14%. The maximum outstanding under
this facility was $4,110 in 1998.
On May 24, 1996, the Company borrowed $2,800 for a ten year term
secured by a mortgage against the Company's Old Bridge Facility. The loan bears
interest at the fixed rate of 7.25% through May 1999 and may be negotiated to
another fixed rate or remain variable for the remaining seven years of the loan.
Long-term debt consists of the following:
December 31,
-----------------------
1998 1997
------- --------
Term loan with a bank bearing interest at
prime rate less 2%, payable in quarterly
installments through June, 1998 .................. $ -- $ 143
Term loan with a bank bearing interest at
7.25%, payable in monthly installments ........... 2,318 2,505
Loan with a bank bearing interest at OBR
plus 2.75%(a) .................................... 19,000 --
Term loans with stockholders bearing
interest at prime, due December 19, 1998(b) ...... -- 1,278
Capital leases (Note 5) .......................... 1,041 1,128
-------- --------
22,359 5,054
Less: Current portion ........................... (19,494) (1,866)
-------- --------
$ 2,865 $ 3,188
======== ========
(a) The Company is in the final stages of negotiations of a term loan with a
bank bearing interest at LIBOR plus a variable margin ranging from 1.05% to
2.55% based on certain financial ratios. When executed, the new term loan and
interest rate will be effective as of February 1, 1999.
(b) $1,591 of the S Corporation distributions made after September 30, 1995 was
lent back to the Company by the principal stockholders on an unsecured basis for
a term of three years at an interest rate equal to the rate on the Company's
line of credit. These loan agreements with the stockholders provide for payments
of accrued interest on a monthly basis with the principal balance due in
December, 1998. In 1997, the Company made prepayments of $313 on these notes. In
January, 1998, the Company prepaid the balance due plus accrued interest in full
satisfaction of these notes.
The fair value of the debt approximates the recorded value based on the
borrowing rates currently available for loans with similar terms and maturities.
34
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Annual maturities of long-term debt at December 31, 1998 are:
1999.............. $19,494
2000.............. 515
2001.............. 464
2002.............. 315
2003.............. 187
Thereafter........ 1,384
-------
$22,359
=======
Note 5 - Commitments and Contingencies
Leases
The Company leases certain factory and automotive equipment under
noncancellable operating leases expiring at various dates through December 2002.
Future minimum rental payments, required for all noncancellable leases
are as follows:
Capital Operating
------- ---------
1999............................................ $ 378 $ 129
2000............................................ 378 60
2001............................................ 308 26
2002............................................ 124 14
2003............................................ -- 2
----- ---------
Total future minimum lease payments............. 1,188 $ 231
=========
Less: amounts representing interest............ (147)
-----
Present value of minimum lease payments......... $1,041
=====
Property, plant and equipment included capitalized leases of $1,533,
less accumulated amortization of $449, at December 31, 1998, and $1,331, less
accumulated amortization of $183, at December 31, 1997.
Rent expense, net of sublease income was $12, $31 and $77 for the years
ended December 31, 1998, 1997 and 1996 respectively. Rent expense was $12, $43
and $79 for the years ended December 31, 1998, 1997 and 1996, respectively.
Litigation
The Company is a party to certain proceedings incidental to the
ordinary course of its business, none of which, in the current opinion of
management, is likely to have a material adverse effect on the Company's
business, financial condition, or results of operations.
35
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 6 - Benefit Plans
Defined Contribution Plan
The Company has a defined contribution plan covering all full time
non-union employees qualified under Section 401(k) of the Internal Revenue Code,
in which the Company matches a portion of an employee's salary deferral. The
Company's contributions to this plan were $122, $59 and $54 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Defined Benefit Pension Plan
Substantially all union employees who meet certain requirements of age,
length of service and hours worked per year are covered by a Company sponsored
non-contributory defined benefit pension plan. Benefits paid to retirees are
based upon age at retirement and years of credited service. Net periodic pension
cost for this plan includes the following components:
December 31,
----------------------------
Components of net periodic pension cost: 1998 1997 1996
---- ---- ----
Service cost............................ $118 $ 81 $ 78
Interest cost........................... 64 56 49
Actual return on plan assets............ (57) (90) (63)
Recognized net actuarial loss........... 6 42 29
---- ---- ----
Net periodic pension cost............... $131 $ 89 $ 93
==== ==== ====
The funded status of the plan and the amounts recorded in the Company's
consolidated balance sheets are as follows:
December 31,
---------------
1998 1997
----- -----
Change in benefit obligation:
Benefit obligation at beginning of year...... $ 862 $ 753
Service cost................................. 118 81
Interest cost................................ 64 56
Amendment to discount rate................... 86 --
Actuarial loss............................... -- 104
Benefits paid................................ (24) (132)
----- -----
Benefit obligation at end of year............ 1,106 862
----- -----
Change in plan assets:
Fair value of plan assets at beginning of
year......................................... 762 681
Actual return on plan assets................. 57 90
Employer contribution........................ 120 123
Benefits paid................................ (24) (132)
----- -----
Fair value of plan assets at end of year..... 915 762
----- -----
Funded status................................ (191) (100)
Unrecognized net actuarial loss.............. 360 290
Unrecognized net transition liability........ (79) (89)
----- -----
Prepaid benefit cost......................... $ 90 $ 101
===== =====
36
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Key economic assumptions used in these determinations were:
December 31,
-------------
1998 1997
---- ----
Discount rate................................ 7.0% 7.5%
Expected long-term rate of return............ 7.0% 7.0%
Note 7 - Related Party Transactions
On January 1, 1995, the Company entered into a consulting and
non-competition agreement for a period of five years with a director, who is
also the largest stockholder. During this period, the director will provide
consulting services on various operational and financial issues and is currently
paid at an annual rate of $130 but in no event is such amount permitted to
exceed $150. The director also agreed to keep all Company information
confidential and will not compete directly or indirectly with the Company for
the term of the agreement and for a period of two years thereafter.
Note 8 - Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash deposits
and trade accounts receivable.
The Company maintains cash balances at several banks located in the
northeastern United States. As part of its cash management process, the Company
periodically reviews the relative credit standing of these banks.
Credit risk with respect to trade accounts receivable is concentrated
with ten of the Company's customers. These customers accounted for approximately
48% and 64% of the Company's outstanding trade accounts receivable at December
31, 1998 and 1997, respectively. These customers are distributors of
telecommunications and private cable television components, and providers of
private cable television service. The Company performs ongoing credit
evaluations of its customers' financial condition, uses credit insurance and
requires collateral, such as letters of credit, to mitigate its credit risk. The
deterioration of the financial condition of one or more of its major customers
could adversely impact the Company's operations.
For the year ended December 31, 1998, the Company's largest customer
accounted for approximately 10% of the Company's sales. At December 31, 1998,
this customer accounted for approximately 2% of the Company's outstanding trade
accounts receivable. Management believes these amounts to be collectible. A
different customer accounted for approximately 16% of the Company's sales in
1997 while a third customer accounted for approximately 17% of the Company's
sales in 1996.
Note 9 - Stockholders' Equity
In December, 1995, the Company sold 2,200 shares of Common Stock at a
price of $9.50 per share in a public offering which generated net proceeds of
approximately $18,334. The proceeds were used to repay outstanding bank debt,
purchase the Company's manufacturing facility, make certain S Corporation
distributions and for working capital.
In January, 1996, an additional 182 shares of Common Stock were sold at
a price of $9.50 per share pursuant to the exercise of the underwriters'
over-allotment option which generated net proceeds of approximately $1,606.
37
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Stock Repurchase Program
On April 1, 1997, the Company announced that its Board of Directors
authorized management to purchase up to 100 shares of its common stock.
Purchases will be made from time to time in the open market, and it is expected
that the funding of this program will come from operating cash flow and existing
bank facilities. As of December 31, 1998, the Company had repurchased 81 shares
under this new program.
Note 10 - Earnings Per Share
Basic and diluted earnings per share for each of the three years ended
December 31, 1998, 1997 and 1996 are calculated as follows:
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------
<S> <C> <C> <C>
For the year ended December 31, 1998:
Basic earnings per share .................. $7,113 8,292 $0.86
Effect of assumed conversion of employee
stock options ............................. -- 179
----------------------------------------------
Diluted earnings per share ................ $7,113 8,471 $0.84
==============================================
For the year ended December 31, 1997:
Basic earnings per share .................. $6,414 8,227 $0.78
Effect of assumed conversion of employee
stock options ............................. -- 148
----------------------------------------------
Diluted earnings per share ................ $6,414 8,375 $0.77
==============================================
For the year ended December 31, 1996:
Basic earnings per share .................. $3,883 8,144 $0.48
Effect of assumed conversion of employee
stock options ............................. -- 156
----------------------------------------------
Diluted earnings per share ................ $3,883 8,300 $0.47
==============================================
</TABLE>
Note 11 - Acquisition
On March 26, 1998, the Company acquired all of the assets and
technology rights of the interdiction business (the "Interdiction Business") of
Scientific-Atlanta, Inc. ("Scientific") for a purchase price consisting of (i)
$19,000 in cash, (ii) 68 shares of the Company's common stock, (iii) a warrant
to purchase 150 additional shares of the Company's common stock at an exercise
price of $14.25 per share and (iv) assumption by the Company of certain
obligations under executory contracts with vendors and customers and certain
warranty obligations and current liabilities of the Interdiction Business. The
Interdiction Business generated approximately
38
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
$16,000 in revenues for the prior twelve month period. The Company believes that
Scientific's interdiction products, which have been engineered primarily to
serve the franchised cable market, will supplement the Company's VideoMask(TM)
products, which are primarily focused on the Private Cable market. In addition,
the Company expects that the technology acquired as part of the Interdiction
Business will enhance its ability to design products that meet the specific
needs of all cable providers, while improving its position in the franchised
cable market.
The acquisition has been accounted for under the purchase method of
accounting in accordance with Accounting Principles Board No. 16 with the net
assets recorded at fair market value and operations included in the financial
statements from the date of acquisition. The allocation of the purchase price
was recorded to inventory $2,518, property, plant and equipment $472, patents
$4,200, and goodwill $13,585.
The following table presents the unaudited pro forma results of
operations as though the acquisition of Scientific-Atlanta, Inc.'s Interdiction
Business occurred on January 1, 1997:
Year Ended December 31,
-----------------------
1998 1997
------- ------
Net sales $76,782 $77,833
Earnings from operations 13,682 8,829
Net income 8,251 4,565
Basic earnings per share 1.00 0.55
Diluted earnings per share 0.97 0.55
Note 12 - Stock Option Plans
In 1994, the Company established the 1994 Incentive Stock Option Plan
(the "1994 Plan"). The 1994 Plan provides for the granting of Incentive Stock
Options to purchase shares of the Company's common stock to officers and key
employees at a price not less than the fair market value at the date of grant as
determined by the compensation committee of the Board of Directors. The maximum
number of shares available for issuance under the plan was 298. Options become
exercisable as determined by the compensation committee of the Board of
Directors at the date of grant. Options expire ten years from the date of grant.
In October, 1995, the Company's Board of Directors and stockholders
approved the 1995 Long Term Incentive Plan (the "1995 Plan"). The 1995 Plan
provides for grants of "incentive stock options" or nonqualified stock options,
and awards of restricted stock, to executives and key employees, including
officers and employee Directors. The 1995 Plan is administered by the
Compensation Committee of the Board of Directors, which determines the optionees
and the terms of the options granted under the 1995 Plan, including the exercise
price, number of shares subject to the option and the exercisability thereof, as
well as the recipients and number of shares awarded for restricted stock awards;
provided, however, that no employee may receive stock options or restricted
stock awards which would result, separately or in combination, in the
acquisition of more than 100 shares of Common Stock of the Company under the
1995 Plan. The exercise price of incentive stock options granted under the 1995
Plan must be equal to at least the fair market value of the Common Stock on the
date of grant. With respect to any optionee who owns stock representing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option must be equal to at
least 110% of the fair market value of the Common Stock on the date of grant,
and the term of the option may not exceed five years. The term of all other
incentive stock options granted under the 1995 Plan may not exceed ten years.
The aggregate fair market value of Common Stock (determined as of the date of
the option grant) for which an incentive stock option may for the first time
become exercisable in any calendar year may not exceed $100. The exercise price
for nonqualified stock options is established by the Compensation Committee, and
may be more or less than the fair market value of the Common Stock on the date
of grant.
Generally, options granted under the 1995 Plan are exercisable over the
term of the option, as provided by the Compensation Committee. Upon any merger
or consolidation, if the Company is not the surviving corporation, all
outstanding options granted shall terminate unless such options are assumed or
other options are substituted therefor by the successor corporation, or the
vesting of such shares is accelerated by the Compensation Committee.
Under the 1995 Plan awards may be made to key executive employees of
restricted stock which is forfeitable unless the employee remains in the employ
of the Company for five years and does not violate other
39
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
terms of the award, such as non-transferability. Exceptions to forfeiture are
provided for the cases of retirement at age 65 or death while in employment. No
restricted shares have been awarded under the 1995 Plan.
Stockholders have previously approved a total of 750 shares of common
stock for issuance under the 1995 Plan, as amended to date.
In December, 1995, the stockholders of the Company approved the
adoption of the Company's 1996 Director Option Plan (the "1996 Plan"). Under the
1996 Plan, Directors who within the preceding 12 months have not been employed
by the Company and have not served as a consultant to the Company where annual
compensation exceeds $100, are eligible to receive options to purchase 0.5
shares of the Company's Common Stock for each year of service on the Board. The
exercise price for such shares is the fair market value thereof on the date of
grant (which is December 31 of each year) and the options are subject to a
one-year vesting requirement. The options become exercisable, in whole or in
part, during the second through sixth years from the date of grant. Under the
1996 Plan the grant of options is automatic to each eligible Director serving on
December 31 of any year provided the Director had served in such capacity since
June 30 of such year. A maximum of 25 shares may be awarded under the 1996 Plan
which expires January 2, 2006. The plan is administered by a committee presently
comprised of James A. Luksch and Robert J. Palle, Jr.
During October, 1997, subject to stockholder approval, the Board of
Directors amended the 1996 Plan to provide that it would be administered by the
Board of Directors rather than the 1996 Plan Committee, and that rather than
providing for annual automatic grants of options for a specified number of
shares to all non-employee Directors, the Board would have the power to grant
options to non-employee Directors at its discretion from time to time to
purchase the number of shares of Common Stock determined by the Board; provided,
however, that no Director would be permitted to receive options to purchase more
than 2 shares of Common Stock in any one calendar year.
During December, 1997, the Board of Directors adopted the Amended and
Restated 1996 Director Option Plan (the "Amended 1996 Plan") subject to
stockholder approval. The Amended 1996 Plan incorporates the amendments to the
1996 Plan the Board had approved in October, 1997, as well as certain additional
amendments, and restates the 1996 Plan as amended. Under the Amended 1996 Plan,
Directors who are not currently employed by the Company or any subsidiary of the
Company and have not been so employed within the preceding six months are
eligible to receive options from time to time to purchase the number of shares
of Common Stock determined by the Board; provided, however, that no Director is
permitted to receive options to purchase more than 5 shares of Common Stock in
any one calendar year. The exercise price for such shares is the fair market
value thereof on the date of grant, and the options vest as determined in each
case by the Board of Directors. Options granted under the Amended 1996 Plan must
be exercised within 10 years from the date of grant. A maximum of 100 shares of
Common Stock are subject to issuance under the Amended 1996 Plan. The plan will
be administered by the Board of Directors. Also subject to stockholder approval
and in keeping with the terms of the Amended 1996 Plan, in 1997 no Director
received the grant of an option to purchase 0.5 shares of Common Stock at year
end provided for in the original 1996 Plan.
In 1996, the Board of Directors granted a non-plan, non-qualified
option for 10 shares to an individual, who was not an employee or director of
the Company at the time of the grant. The option was originally exercisable at
$10.25 per share and expires in 2006. This option was repriced to $6.88 per
share on September 17, 1998.
Stock Option Repricing
During the third quarter of 1998, the Compensation Committee of the
Board of Directors observed that, despite the strong financial performance of
the Company over the past several months attributable to the contributions of
the Company's employees, officers and Directors, the market price of the
Company's Common Stock had recently declined significantly due to market forces
and other outside factors. The decline in the Company's stock price caused many
of its outstanding stock options granted to employees, officers and Directors to
have exercise prices above (in many cases significantly above) the current
market price for the Common Stock. The
40
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Compensation Committee was of the view that stock options with exercise prices
well above the market value of the Company's Common Stock do not serve any
incentive function and do not serve to retain employees of the Company.
Accordingly, in an effort to ensure that the Company continues to provide
meaningful, long-term incentive compensation to and retains its employees,
officers and Directors through stock option grants, on September 4, 1998, the
Compensation Committee recommended and the Board approve a repricing (the
"Repricing") of all outstanding, unexercised stock options held by the Company's
employees, officers and Directors having exercise prices exceeding the fair
market value of the Common Stock as of September 17, 1998 (the "Affected
Options"), provided, that no options would be repriced if the fair market value
for the Common Stock exceeded $7.50 per share on September 17, 1998 (the
"Effective Date"). The fair market value for the Common Stock as of the
Effective Date was determined by the Board to be $6.88 per share (the "New
Exercise Price"), which was the average of the high and low sales prices for the
Common Stock on the American Stock Exchange on the Effective Date.
All of the Company's optionholders were required to elect whether or
not they wished to have their Affected Options repriced as of the Effective
Date. Those who elected not to reprice their options retained their existing
options without change. Those who elected to have their Affected Options
repriced had such options cancelled as of the Effective Date, with new options
(the "New Options") being granted as of such date on the same terms and in the
same amounts except (i) all New Options have an exercise price equal to the New
Exercise Price and (ii) the New Options retained the same vesting schedule as
the options they replaced, except that (x) options which were already vested as
of the Effective Date were treated as first becoming vested on the Effective
Date and (y) in certain cases the vesting of a portion of the New Options was
delayed in order to preserve the "incentive stock option" status of such options
under the Internal Revenue Code.
Neither James A. Luksch nor Robert J. Palle, Jr. elected to reprice any
of their stock options in the Company. The Company has not conducted any other
repricings of stock options during the last ten fiscal years.
41
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Weighted- Weighted
Average Average
1994 Exercise 1995 Exercise 1996 Weighted-Average
Plan (#) Price ($) Plan (#) Price ($) Plan (#) Exercise Price ($)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at
January 1, 1996 269 3.21 -- -- -- --
Granted 34 10.38 227 9.72 2 8.50
Exercised (84) 3.10 -- -- -- --
Canceled (6) 4.33 (2) 9.63 -- --
Outstanding at
December 31, 1996 213 4.36 225 9.72 2 8.50
Granted -- -- 254(a) 9.27 --(b) --
Exercised (67) 2.77 (12) 9.63 -- --
Canceled (5) 4.33 (33) 9.35 -- --
Outstanding at
December 31, 1997 141 5.13 434 9.49 2 8.50
Granted 6 6.88 903 7.86 49 9.41
Exercised (19) 3.23 (11) 9.63 -- --
Canceled (6) 9.38 (665) 9.74 (25) 11.90
Outstanding at
December 31, 1998 122 5.30 661 7.00 26 6.91
Options exercisable at
December 31, 1998 93 4.92 186 7.15 6 7.03
Weighted-average fair
value of options granted
during: 1996 $6.36 $6.27 $5.53
1997 -- $5.81 --
1998 $4.67 $5.42 $4.88
</TABLE>
- ------------
(a) Does not include options to purchase an aggregate of 30 shares of common
stock which were conditionally granted by the Compensation Committee of the
Board of Directors, subject to stockholder approval of an increase in the
number of shares of common stock subject to issuance under the 1995 Plan.
(b) Does not include options to purchase an aggregate of 4 shares of common
stock which were conditionally granted by the Board of Directors, subject to
stockholder approval of the Amended 1996 Plan.
42
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------
Number of Weighted-
Options Average Weighted- Number Weighted-
Range of Exercise Outstanding at Remaining Average Exercisable at Average
Prices ($) 12/31/98 Contractual Life Exercise Price ($) 12/31/98 Exercise Price ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 Plan:
2.57 41 5.6 years 2.57 41 2.57
4.33 47 6.0 4.33 29 4.33
6.88 6 7.9 6.88 4 6.88
10.59 28 2.6 10.59 19 10.59
--- ---
2.57 to 10.59 122 5.2 5.30 93 4.92
=== ===
1995 Plan:
6.88 640 8.1 6.88 172 6.88
10.59 21 2.6 10.59 14 10.59
--- ---
6.88 to 10.59 661 7.9 7.00 186 7.15
=== ===
1996 Plan:
6.88 25 8.5 6.88 5 6.88
8.50 1 4.0 8.50 1 8.50
--- ---
26 8.5 6.91 6 7.03
=== ===
</TABLE>
The Corporation has adopted the disclosures only provisions of SFAS
123. Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost been recognized for the stock option plans been
determined based on the fair value at the date of grant consistent with the
provisions of SFAS No. 123, the Corporation's net earnings and net earnings per
share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
---------------------------
1998 1997 1996
------ ------ ------
Net earnings - as reported $7,113 $6,414 $3,883
Net earnings - pro forma 6,851 5,957 3,686
Basic earnings per share - as
reported 0.86 0.78 0.48
Basic earnings per share - pro
forma 0.83 0.72 0.45
Diluted earnings per share - as
reported 0.84 0.77 0.47
Diluted earnings per share - pro
forma 0.81 0.71 0.44
43
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The fair market value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants:
Year Ended December 31,
-----------------------
1998 1997 1996
Expected volatility 61% 60% 65%
Risk-free interest rate 5.6% 6.0% 6.45%
Expected lives 8 6 6
Dividend yield none none none
Note 13 - Income Taxes
The following summarizes the provision for income taxes:
Year Ended December 31,
-----------------------
1998 1997 1996
------ ------ ------
Current:
Federal.................................. $3,844 $3,707 $2,372
State and local.......................... 600 1,087 698
------ ------ ------
4,444 4,794 3,070
Deferred:
Federal.................................. (495) (399) (361)
State and local.......................... (81) (119) (108)
------ ------ ------
(576) (518) (469)
------ ------ ------
Provision for income taxes................. $3,868 $4,276 $2,601
====== ====== ======
The provision for income taxes on adjusted historical income differs
from the amounts computed by applying the applicable Federal statutory rates due
to the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Provision for Federal income taxes at the
statutory rate.................................. $3,734 $3,630 $2,205
State and local income taxes, net of Federal
benefit......................................... 549 641 391
Research and development credits................ -- (28) (28)
Adjustment of prior year's accruals............. (415) -- --
Other, net...................................... -- 33 33
------ ------ ------
Provision for income taxes...................... $3,868 $4,276 $2,601
====== ====== ======
</TABLE>
44
<PAGE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
------------------
1998 1997
------ ------
Deferred tax assets:
Allowance for doubtful accounts $ 468 $ 243
Inventory 785 658
Accrued vacation 233 179
Other 117 123
------ ------
Total deferred tax assets 1,603 1,203
------ ------
Deferred tax liabilities:
Tax accounting method (80) (165)
Depreciation (305) (396)
------ ------
Total deferred tax liabilities (385) (561)
------ ------
$1,218 $ 642
====== ======
Note 14 - Export Sales
The Company exports its products to countries in North and South
America, Europe, and Asia. The Company's export sales were approximately 2% in
1998, 3% in 1997, and 5% in 1996. The Company's export sales were concentrated
to customers in North and South America for all periods presented.
Note 15 - Quarterly Financial Information - Unaudited
<TABLE>
<CAPTION>
1998 Quarters 1997 Quarters
------------- -------------
First Second Third Fourth First Second Third Fourth
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $15,119 $20,525 $18,929 $16,219 $14,041 $15,575 $16,965 $15,476
Gross profit 5,095 6,739 7,362 6,252 4,745 5,284 6,181 6,191
Net earnings 1,005 1,776 2,274 2,058 1,130 1,510 2,098 1,676
Basic earnings per
share .12 .21 .27 .25 0.14 0.18 0.26 0.20
Diluted earnings per
share .12 .21 .27 .25 0.14 0.18 0.25 0.20
</TABLE>
Note 16 - Subsequent Event
On February 3, 1999, the Company entered into an interest rate swap
agreement with a notional amount of $10,000. The swap agreement has a maturity
date of June 3, 2002 and requires the Company to make fixed rate interest
payments on the notional amount of 8.01% per annum in exchange for floating rate
payments equal to LIBOR plus 2.55%. The Company is exposed to credit risk in the
unlikely event of the nonperformance by the counterparties. Interest to be paid
or received is accrued over the life of the agreement at the net effective
interest rate for the swap and corresponding debt instrument.
45
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Blonder Tongue Laboratories, Inc.:
The audits referred to in our report dated February 12, 1999 relating to the
consolidated financial statements of Blonder Tongue Laboratories, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the audit
of the financial statement schedule listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Woodbridge, New Jersey
February 12, 1999
46
<PAGE>
BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- --------- -------- --------
Additions
Balance at Charged Charged
Allowance for Doubtful Beginning to to Other Deductions Balance at
Accounts of Period Expenses Accounts Write-Offs End of Period
---------------------- --------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998: $607 $598 -- ($4) $1,201
Year ended December 31, 1997: $280 $366 -- ($39) $607
Year ended December 31, 1996: $205 $135 -- ($60) $280
</TABLE>
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BLONDER TONGUE LABORATORIES, INC.
Date: March 30, 1999 By: /S/ JAMES A. LUKSCH
---------------------------------------------------
James A. Luksch
President and Chief Executive Officer
By: /S/ PETER PUGIELLI
---------------------------------------------------
Peter Pugielli, Senior Vice President - Finance
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/S/ JAMES A. LUKSCH Director, President and Chief March 30, 1999
- ----------------------------- Executive Officer (Principal
James A. Luksch Executive Officer)
/S/ PETER PUGIELLI Senior Vice President, Chief March 30, 1999
- ----------------------------- Financial Officer, Treasurer and
Peter Pugielli Assistant Secretary (Principal
Financial Officer and Principal
Accounting Officer)
/S/ ROBERT J. PALLE, JR. Director, Executive Vice March 30, 1999
- ----------------------------- President, Chief Operating
Robert J. Palle, Jr. Officer and Secretary
/S/ JOHN E. DWIGHT Director and Senior Vice March 30, 1999
- ----------------------------- President
John E. Dwight
/S/ JAMES H. WILLIAMS Director March 30, 1999
- -----------------------------
James H. Williams
/S/ JAMES F. WILLIAMS Director March 30, 1999
- -----------------------------
James F. Williams
/S/ ROBERT B. MAYER Director March 30, 1999
- -----------------------------
Robert B. Mayer
/S/ GARY P. SCHARMETT Director March 30, 1999
- -----------------------------
Gary P. Scharmett
/S/ ROBERT E. HEATON Director March 30, 1999
- -----------------------------
Robert E. Heaton
</TABLE>
48
EXHIBIT 21
- ----------
List of Subsidiaries of Blonder Tongue Laboratories, Inc.
1. Blonder Tongue International, Inc.
2. Vu-Tech Communications, Inc. (79% - owned subsidiary)
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Blonder Tongue Laboratories, Inc.
We hereby consent to the incorporation by reference in Registration No.
333-15039 of Blonder Tongue Laboratories, Inc. on Form S-8 of our report dated
February 12, 1999, relating to the consolidated financial statements and
schedule of Blonder Tongue Laboratories, Inc. included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
BDO Seidman, LLP
Woodbridge, New Jersey
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND BALANCE SHEET AS AT DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 542
<SECURITIES> 0
<RECEIVABLES> 17,189
<ALLOWANCES> 1,201
<INVENTORY> 24,540
<CURRENT-ASSETS> 43,112
<PP&E> 11,144
<DEPRECIATION> 3,176
<TOTAL-ASSETS> 69,651
<CURRENT-LIABILITIES> 26,063
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 40,488
<TOTAL-LIABILITY-AND-EQUITY> 69,651
<SALES> 70,792
<TOTAL-REVENUES> 70,792
<CGS> 45,344
<TOTAL-COSTS> 45,344
<OTHER-EXPENSES> 12,313
<LOSS-PROVISION> 598
<INTEREST-EXPENSE> 1,596
<INCOME-PRETAX> 10,981
<INCOME-TAX> 3,868
<INCOME-CONTINUING> 12,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,113
<EPS-PRIMARY> .86
<EPS-DILUTED> .84
</TABLE>
