10-Q 1 v326143_10q.htm 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012.

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM              TO               .

 

Commission file number 1-14120

 

BLONDER TONGUE LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   52-1611421
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
One Jake Brown Road, Old Bridge, New Jersey   08857
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (732) 679-4000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No   ¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No x

 

Number of shares of common stock, par value $.001, outstanding as of October 6, 2012: 6,215,556

 

The Exhibit Index appears on page 19.

 

 
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

 

   (unaudited)     
   September 30,   December 31, 
   2012   2011 
Assets          
Current assets:          
Cash  $170   $851 
Accounts receivable, net of allowance for doubtful accounts of  $173   4,614    4,485 
Inventories   10,897    7,567 
Prepaid and other current assets   961    399 
Deferred income taxes   383    383 
Total current assets   17,025    13,685 
Inventories, net non-current   4,143    5,564 
Property, plant and equipment, net of accumulated depreciation and amortization   4,061    3,852 
License agreements, net   535    676 
Intangible assets, net   2,534    - 
Goodwill   493    - 
Other assets, net   232    196 
Deferred income taxes   1,898    1,898 
   $30,921   $25,871 
Liabilities and Stockholders’ Equity          
Current liabilities:          
Line of credit  $3,496   $- 
Current portion of long-term debt   271    258 
Accounts payable   1,862    352 
Accrued compensation   688    258 
Accrued benefit pension liability   781    781 
Income taxes payable   49    49 
Other accrued expenses   148    149 
Total current liabilities   7,295    1,847 
           
Long-term debt   4,211    2,821 
Commitments and contingencies   -    - 
Stockholders’ equity:          
Preferred stock, $.001 par value; authorized 5,000 shares; No shares outstanding   -    - 
Common stock, $.001 par value; authorized 25,000 shares, 8,465 shares Issued   8    8 
Paid-in capital   25,844    25,660 
Retained earnings   2,813    4,785 
Accumulated other comprehensive loss   (1,942)   (1,942)
Treasury stock, at cost, 2,248 shares   (7,308)   (7,308)
Total stockholders’ equity   19,415    21,203 
   $30,921   $25,871 

 

See accompanying notes to consolidated financial statements

 

2
 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
Net sales  $8,610   $7,004   $22,921   $20,208 
Cost of goods sold   5,296    4,573    15,093    13,026 
Gross profit   3,314    2,431    7,828    7,182 
Operating expenses:                    
Selling   865    687    2,487    1,947 
General and administrative   1,458    1,068    4,405    3,334 
Research and development   815    684    2,652    2,023 
    3,138    2,439    9,544    7,304 
Earnings (loss) from operations   176    (8)   (1,716)   (122)
Other Expense:                    
Interest expense (net)   (85)   (42)   (256)   (139)
Earnings (loss) before income taxes   91    (50)   (1,972)   (261)
Provision (benefit) for income taxes   -    -    -    - 
Net earnings (loss)  $91   $(50)  $(1,972)  $(261)
Basic and diluted net earnings (loss) per share  $0.01   $(0.01)  $(0.32)  $(0.04)
Basic weighted average shares outstanding   6,216    6,212    6,216    6,209 
Diluted weighted average shares outstanding   6,263    6,212    6,216    6,209 

 

See accompanying notes to consolidated financial statements

 

3
 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

   Nine Months Ended September 30, 
   2012   2011 
Cash Flows From Operating Activities:          
Net loss  $(1,972)  $(261)
Adjustments to reconcile net loss to cash provided by operating activities:          
Loss on sale of fixed assets   55    - 
Stock compensation expense   184    163 
Depreciation   382    285 
Amortization   703    528 
Provision for inventory reserves   614    183 
Allowance for doubtful accounts   -    30 
Changes in operating assets and liabilities:          
Accounts receivable   413    (329)
Inventories   625    (176)
Prepaid and other current assets   (532)   (154)
Other assets   (36)   (23)
Accounts payable, accrued compensation and other accrued expenses   1,372    568 
Net cash provided by operating activities   1,808    814 
Cash Flows From Investing Activities:          
Proceeds on sale of fixed assets   130    - 
Capital expenditures   (106)   (366)
Acquisition of licenses   (393)   (654)
Acquisition of R.L. Drake assets   (7,020)   - 
Net cash used in investing activities   (7,389)   (1,020)
Cash Flows From Financing Activities:          
Net borrowings on line of credit   3,496    - 
Borrowings of debt   1,601    231 
Repayments of debt   (197)   (196)
Proceeds from exercise of stock options   -    23 
Net cash provided by financing activities   4,900    58 
Net decrease in cash   (681)   (148)
Cash, beginning of period   851    1,717 
Cash, end of period  $170   $1,569 
Supplemental Cash Flow Information:          
Cash paid for interest  $267   $144 
Cash paid for income taxes   -    - 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(unaudited)

 

Note 1 - Company and Basis of Presentation

 

Blonder Tongue Laboratories, Inc. (together with its consolidated subsidiaries, the “Company”) is a technology-development and manufacturing company that delivers television signal encoding, transcoding, digital transport, and broadband product solutions to the cable markets the Company serves, including the multi-dwelling unit market, the lodging/hospitality market and the institutional market including, hospitals, prisons and schools, primarily throughout the United States. The consolidated financial statements include the accounts of Blonder Tongue Laboratories, Inc. and subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

 

The results for the third quarter of 2012 are not necessarily indicative of the results to be expected for the full fiscal year and have not been audited. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of the results of operations and cash flows for the periods presented and the consolidated balance sheet at September 30, 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto that were included in the Company’s latest annual report on Form 10-K for the year ended December 31, 2011.

 

Note 2 - Liquidity

 

The Company’s primary sources of liquidity are its existing cash balances, cash generated from operations and amounts available under the Sovereign Financing (as defined in Note 7 below). As of September 30, 2012, the Company had approximately $3,496 outstanding under the Revolver (as defined in Note 7 below) and $2,793 of additional availability for borrowing under the Revolver. The Company anticipates these sources of liquidity will be sufficient to fund its operating activities, anticipated capital expenditures and debt repayment obligations for the next twelve months.

 

The Company’s primary long-term obligations are for payment of interest and principal on its Revolver and Term Loan, both of which expire on February 1, 2015. The Company expects to use cash generated from operations to meet its long-term debt obligations, and anticipates refinancing its long-term debt obligations at maturity. The Company considers opportunities to refinance its existing indebtedness based on market conditions. Although the Company may refinance all or part of its existing indebtedness in the future and will be required to do so by February 1, 2015, there can be no assurances that it will do so. Changes in the Company’s operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may require the Company to seek additional debt or equity financing. There can be no assurance that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions. The Company also expects to make financed and unfinanced long-term capital expenditures from time to time in the ordinary course of business. Capital expenditures were $106 and $431 in the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. The Company expects to use cash generated from operations, amounts available under its credit facility and purchase-money financing to meet any anticipated long-term capital expenditures.

 

Note 3 - Acquisition

 

On February 1, 2012, the Company’s wholly-owned subsidiary, R. L. Drake Holdings, LLC (“RLD”), a Delaware limited liability company, acquired substantially all of the assets and assumed certain specified liabilities of R. L. Drake, LLC, a Delaware limited liability company (“Seller”) (the “RLD Acquisition”), pursuant to an Asset Purchase Agreement of even date, by and among RLD, Seller, R. L. Drake Acquisition Corporation, a Delaware corporation, and WBMK Holding Company, an Ohio corporation, as amended by a certain First Amendment to Asset Purchase Agreement dated February 3, 2012 (as so amended, the “Asset Purchase Agreement”). The purchase price was approximately $7,020, which included a working capital adjustment of approximately $545, plus contingent purchase price payments of up to $1,500 in the aggregate that may be made over the three-year period after closing if certain financial results are realized. The assets acquired from Seller include assets used in the manufacturing and delivery of electronic communications solutions for cable television systems, digital television reception, video signal distribution and digital video encoding, including equipment, supplies and other tangible personal property, inventory, accounts receivable, business records, trademarks and other intellectual property rights. The Asset Purchase Agreement includes customary representations and warranties and post-closing covenants, including indemnification obligations, subject to certain limitations, on behalf of the parties with respect to the Asset Purchase Agreement. In addition, the Seller and certain members of the Seller agreed, for a period of five (5) years, not to engage in any business that competes with the business formerly conducted by Seller and/or sold by Seller to RLD or the business presently conducted by RLD or any affiliate of RLD or solicit employees or customers of Seller or RLD or any affiliate of RLD.

5
 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(unaudited)

 

The net assets acquired were:

 

Accounts receivable  $542 
Inventories   3,148 
Prepaid expenses   30 
Property and equipment   670 
Intangible assets   2,703 
Goodwill   493 
Accounts payable   (529)
Other accrued expenses   (37)
   $7,020 

 

The Company accounted for the business combination using the acquisition method of accounting. The Company’s results of operations for the three months and nine months ended September 30, 2012, include the revenue and expenses of the acquired business since the date of acquisition. The operations of the acquired business have been fully integrated with those of the Company and is not separately reportable. The unaudited pro forma financial results for the three months and nine months ended September 30, 2012 and 2011, combines the historical results of the Seller with those of the Company as if this acquisition had been completed as of the beginning of each of the periods presented. There were no material non-recurring pro forma adjustments directly attributable to this acquisition.

 

Pro Forma Combined Statements of Operations

   Three Months Ended September 30,   Nine Months Ended September 30 
   2012   2011   2012   2011 
Net sales  $8,610   $9,588   $23,618   $28,342 
Earnings (loss) from operations  $231   $368   $(1,430)  $773 
Net earnings (loss)  $91   $166   $(1,782)  $(4)
Basic and diluted net earnings (loss) per share  $0.01   $0.03   $(0.29)  $- 
Basic weighted average shares outstanding   6,216    6,212    6,216    6,212 
Diluted weighted average shares outstanding   6,263    6,212    6,216    6,212 

  

Note 4- Earnings (loss) Per Share

 

Earnings (loss) per share is calculated in accordance with ASC Topic 260 “Earnings Per Share,” which provides for the calculation of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share includes no dilution and is computed by dividing net earnings by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options. The number of shares included in the presentation of diluted earnings per share for the three months ended September 30, 2012, includes 47,519 employee stock options with exercise prices that are less than the average share price of $1.05 for the three months ended September 30, 2012. The diluted share base excludes incremental shares of 1,101 and 1,325 related to stock options for the three and nine month periods ended September 30, 2012 and 2011, respectively. These shares were excluded due to their antidilutive effect.

 

6
 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(unaudited)

 

Note 5 – New Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-12 (“ASU 2011-12”), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of AOCI in both net income and OCI on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. These requirements are in effect for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

 

The FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards updates and regulations as of September 30, 2012 that will become effective in subsequent periods; however, management of the Company does not believe that any of those updates would have significantly affected the Company’s financial accounting measures or disclosures had they been in effect during 2012 or 2011, and does not believe that any of those pronouncements will have a significant impact on the Company’s consolidated financial statements at the time they become effective.

 

Note 6 – Inventories

 

Inventories net of reserves are summarized as follows:

 

   September
30,
2012
   December 31,
2011
 
Raw Materials  $7,186   $5,757 
Work in process   2,366    1,336 
Finished Goods   7,203    7,437 
    16,755    14,530 
Less current inventory   (10,897)   (7,567)
    5,858    6,963 
Less Reserve primarily for slow moving and obsolete inventory   (1,715)   (1,399)
   $4,143   $5,564 

 

Inventories are stated at the lower of cost, determined by the first-in, first-out (“FIFO”) method, or market.

 

The Company periodically analyzes anticipated product sales based on historical results, current backlog and marketing plans. Based on these analyses, the Company anticipates that certain products will not be sold during the next twelve months. Inventories that are not anticipated to be sold in the next twelve months, have been classified as non-current.

 

Approximately 53% and 47% of the non-current inventories were comprised of finished goods at September 30, 2012 and December 31, 2011, respectively. The Company has established a program to use interchangeable parts in its various product offerings and to modify certain of its finished goods to better match customer demands. In addition, the Company has instituted additional marketing programs to dispose of the slower moving inventories.

 

The Company continually analyzes its slow-moving, excess and obsolete inventories. Based on historical and projected sales volumes and anticipated selling prices, the Company establishes reserves. If the Company does not meet its sales expectations, these reserves are increased. Products that are determined to be obsolete are written down to net realizable value. The Company believes reserves are adequate and inventories are reflected at net realizable value.

 

7
 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(unaudited)

 

Note 7 – Debt

 

On August 6, 2008, the Company entered into a Revolving Credit, Term Loan and Security Agreement with Sovereign Business Capital (“Sovereign”), a division of Sovereign Bank (“Sovereign Agreement”), pursuant to which the Company obtained an $8,000 credit facility from Sovereign (the “Sovereign Financing”). The Sovereign Financing originally consisted of (i) a $4,000 asset based revolving credit facility (“Revolver”) and (ii) a $4,000 term loan facility (“Term Loan”), each with a three-year term.

 

The amounts which may be borrowed under the Revolver are based on certain percentages of Eligible Receivables and Eligible Inventory, as such terms are defined in the Sovereign Agreement. The obligations of the Company under the Sovereign Agreement are secured by substantially all of the assets of the Company.

 

Under the Sovereign Agreement, the Revolver bears interest at a rate per annum equal to the prime lending rate announced from time to time by Sovereign (“Prime”) plus 0.25% or the LIBOR rate plus 3.00%. The Term Loan bears interest at a rate per annum equal to Prime plus 0.50% or the LIBOR rate plus 3.25%. Prime was 3.25% on September 30, 2012.

 

On January 14, 2011, the Company and Sovereign entered into a First Amendment to Revolving Credit, Term Loan and Security Agreement (the “First Amendment”) with Sovereign, to amend the Sovereign Financing. The First Amendment (1) increased the maximum amount that may be borrowed by the Company under the Revolver to $5,000 from $4,000, (2) extended the termination date of the Sovereign Agreement from August 6, 2011 to January 15, 2013, (3) modified the definition of “Eligible Receivables” to increase the permitted concentration percentage of certain customer receivables (as defined in the Sovereign Agreement) which are included in such calculation, and (4) modified a certain financial covenant.

 

On February 1, 2012, the Company entered into a Second Amendment to Revolving Credit, Term Loan and Security Agreement (the “Second Amendment”) with Sovereign, to amend the Sovereign Financing. The Second Amendment (1) added RLD as a co-borrower, (2) increased the maximum amount that may be borrowed by the Company under the Revolver to $8,500 from $5,000, (3) extended the termination date of the Sovereign Agreement from January 15, 2013 to February 1, 2015, (4) modified the amounts that may be borrowed under the Revolver based on certain percentages of Eligible Inventory (as defined in the Sovereign Agreement) that are included in such calculation, (5) modified certain financial covenants, and (6) increased the Term Loan to $4,350.

 

In August, 2012, the Sovereign Agreement was amended to modify a certain financial covenant retroactively effective as of June 30, 2012, relative to the trailing 12-month period ended on such date. Had Sovereign not retroactively amended such financial covenant, the Company would not have been in compliance therewith as of June 30, 2012 and would have required a waiver from Sovereign. Sovereign has advised the Company that had the retroactive amendment not been entered into, such waiver would have been granted.

 

Upon termination of the Revolver, all outstanding borrowings under the Revolver are due. As of September 30, 2012, the Company had a $3,496 balance under the Revolver. The Term Loan requires equal monthly principal payments of approximately $18 each, plus interest, with the remaining balance due at maturity. As of September 30, 2012, the outstanding balance under the Tem Loan was $4,233.

 

The Sovereign Agreement contains customary representations and warranties as well as affirmative and negative covenants, including certain financial covenants. The Sovereign Agreement contains customary events of default, including, among others, non-payment of principal, interest or other amounts when due.

 

Note 8 – Related Party Transactions

 

As of September 30, 2012 and December 31, 2011, the Chief Executive Officer was indebted to the Company in the amount of $125 and $130, respectively, for which no interest has been charged. This indebtedness arose from a series of cash advances, the latest of which was advanced in February 2002 and is included in other assets at September 30, 2012 and December 31, 2011. Payments on this indebtedness ceased in November 2008 when the Chief Executive Officer filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code and the indebtedness became subject to the automatic stay provisions of the United States Bankruptcy Code. On July 29, 2009 a plan of reorganization in connection with the Chief Executive Officer’s bankruptcy case was confirmed by the United States Bankruptcy Court for the District of New Jersey.

 

8
 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(unaudited)

 

Under the confirmed plan of reorganization, the Chief Executive Officer will be obligated to pay a pro-rata share, with all other unsecured pre-petition obligations, of the excess, if any, of his disposable income after the payment of all administrative claims and other expenses. The actual amount that the Company may expect to receive pursuant to the confirmed plan and the date on which required payments would commence are not presently determinable. Since May 2010, however, the Chief Executive Officer has made elective payments to the Company to reduce the indebtedness. Such elective payments aggregated $16.

 

In December 2007, the Company entered into an agreement to provide manufacturing, research and development and product support to Buffalo City Center Leasing, LLC (“Buffalo City”) for an electronic on-board recorder that Buffalo City was producing for Turnpike Global Technologies, LLC (which was purchased in 2010 by, and operates as a division of, XATA Corporation (“XATA”)). A director of the Company is also the managing member and a vice president of Buffalo City and may be deemed to control the entity which owns fifty percent (50%) of the membership interests of Buffalo City. The agreement with Buffalo City expired by its terms in the first quarter of 2011, however, Buffalo City continued purchasing such product from the Company through July, 2011 on the same terms and conditions. In the second quarter of 2011, the Company entered into a new agreement directly with XATA Corporation (the “XATA Agreement”), which sets forth the terms and conditions of purchases by XATA of the next generation of the product. The XATA Agreement also permits XATA to obtain financing from approved third party lenders to finance its purchases from the Company. In November 2011, the Company and Buffalo City entered into a letter agreement (the “Buffalo City Agreement”) to memorialize the agreement by which the Company approved Buffalo City to act as an approved third party lender to XATA and has permitted Buffalo City (in this capacity) to purchase products from the Company on open account with a credit limit of $1,000, the terms for payment of which were net 110 days after shipment. Under the terms of the XATA contract, obligations of Buffalo City were guaranteed by XATA. During the first quarter of 2012, Buffalo City advised the Company that Buffalo City would no longer be financing products as an approved third-party lender for XATA. As such, effective as of February 10, 2012, the Company and Buffalo City terminated Buffalo City’s status as an approved lender under the Buffalo City Agreement. All amounts due from Buffalo City to the Company under the Buffalo City Agreement have been fully paid. The Company received no revenue during 2012 from Buffalo City. The Company received $946 and $2,503 in revenue from Buffalo City in the three and nine months ended September 30, 2011, respectively. In addition, the Company’s accounts receivable included $960 (21% of total accounts receivable) due from Buffalo City at December 31, 2011. The Company continues to contract manufacture products directly for XATA under the XATA Agreement. While the termination of the Buffalo City Agreement did not have a material adverse impact on aggregate sales of these contract manufactured products, recent declines in sales volume to XATA have been experienced which we believe are attributable to the general decline in economic conditions.

 

Note 9 – Legal Proceedings

 

The Company is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the current opinion of management, is likely to have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows. In addition, on June 19, 2012, K Tech Telecommunications, Inc. filed a patent infringement complaint against the Company and RLD in the U.S. District Court for the Central District of California, captioned as K Tech v. Blonder Tongue Laboratories, Inc. and R.L. Drake Holdings, LLC, CV12-05316 (the “Litigation”). K Tech subsequently filed an amended complaint to add Seller as an additional defendant. The Litigation alleges that the Company and RLD infringe one or more claims of U.S. Patent Nos. 6,785,903, 7,487,533, 7,761,893, and 7,984,469 (the “K Tech Patents”) and seeks (a) a finding of patent infringement; (b) an injunction against the Company and RLD from further alleged infringement; (c) an award of actual damage suffered by K Tech; and (d) an award of costs relating to the Litigation. The Litigation complaint alleges that Company products DQMx-01, DQMx-02, DQMx-03, DQMx-04, DQMx-10, DQMx-11, DQMx-12, DQMx-13, DQMx-20, DQMx-21, DQMx-22, DQMx-30, DQMx-31, DQMx-40, and MUX-2D-QAM infringe one or more of the K Tech Patents, and alleges that RLD products MQM6000l, MQM10000, DQT1000, and MEQ1000 infringe one or more of the K Tech Patents. All of the aforementioned products are part of the Company’s digital headend product category. At this time, based on the preliminary analysis performed by the Company to date, the full scope of the claims or available defenses, or the potential outcome of the alleged claims of infringement, have not been determined by the Company. However, based on its analysis to date, the Company does presently believe there are reasoned grounds for finding that the K Tech Patents are invalid or unenforceable. The Company intends to defend the Litigation instituted by K Tech, and has answered the complaint denying the allegations of infringement and asserting defenses of invalidity of the K Tech Patents. The Company has also commenced discussions with K Tech to potentially resolve the Litigation relating to the K Tech Patents.

 

9
 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

(unaudited)

 

Note 10 – Subsequent Events

 

The Company has evaluated subsequent events through the filing of its consolidated financial statements with the SEC.

  

10
 

 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

In addition to historical information, this Quarterly Report contains forward-looking statements regarding future events 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, the Securities Act of 1933 and the Securities Exchange Act of 1934 provide safe harbors for forward-looking statements. In order to comply with the terms of these safe harbors, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially and adversely from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company’s business include, but are not limited to, those matters discussed herein in the section entitled Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. The words “believe,” “expect,” “anticipate,” “project,” “target,” “intend,” “plan,” “seek,” “estimate,” “endeavor,” “should,” “could,” “may” and similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to projections for our future financial performance, our anticipated growth trends in our business and other characterizations of future events or circumstance are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (See Item 1 – Business; Item 1A – Risk Factors; Item 3 – Legal Proceedings and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations).

 

General

 

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 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 completed the initial public offering of its shares of Common Stock in December, 1995.

 

Today the Company is a technology-development and manufacturing company that delivers television signal encoding, transcoding, digital transport and broadband product solutions for a broad range of applications. The markets served include cable televisions systems, the multi-dwelling unit communities, the lodging/hospitality market, and institutional systems including hospitals, prisons and schools. The technology requirements of these markets change rapidly and the Company’s research and development team is continually delivering high performance-lower cost solutions to meet customers’ needs.

 

The Company’s strategy is focused on the development of products for digital signal generation and transmission. Since 2008 the Company has entered into and renewed agreements for various technologies in concert with its digital encoder and EdgeQAM line of products. As a result, the Company continues to significantly expand its digital product lines. The continuing evolution of the Company’s product lines will focus on the increased needs created in the digital space by Internet Protocol Television (“IPTV”), digital standard definition (“SD”) and high definition (“HD”) video content and the transport of these signals over state of the art broadband networks.

 

The Company has experienced a shift in product mix from analog products to digital products and expects this shift to continue. Sales of digital video headend products were $10,720,000 and $6,794,000 in the first nine months of 2012 and 2011, respectively. Sales of analog video headend products were $5,238,000 and $5,021,000 in the first nine months of 2012 and 2011, respectively. Any substantial decrease in sales of analog products without a related increase in digital products could have a material adverse effect on the Company’s results of operations, financial condition and cash flows. .

 

11
 

 

In April 2010, the Company obtained a $4.1 million purchase commitment for the first member of its EdgeQAM family of products (the “EQAM-400”) from World Cinema Inc. (“World Cinema”), a supplier of free-to-guest digital and HD television to the hospitality market. These shipments were made in the second and third quarters of 2010, during which time the EQAM-400 was exclusive to World Cinema. Since then, the parties have agreed to extend the exclusivity arrangement, with the most recent extension occurring in September, 2011 which extended exclusivity through the end of 2012. In connection with this most recent extension, World Cinema committed to purchase approximately $2.2 million of EQAM-400 through the third quarter of 2012, which commitment was met. World Cinema’s purchases of this product were approximately $380,000 and $408,000 in the three months ended September 30, 2012 and 2011, respectively and $1,489,000 and $1,224,000 in the nine months ended September 30, 2012 and 2011, respectively. Future purchase commitments by World Cinema, which are presently the subject of negotiations between the Company and World Cinema, would allow them to further extend this exclusivity arrangement. The EQAM-400 product accepts HD content received by satellite via its IP Gigabit Ethernet (GbE) input, adds content protection by utilizing Pro:Idiom™ encryption, and QAM modulates it for distribution over standard coax networks.

 

On February 1, 2012, the Company’s wholly-owned subsidiary, R. L. Drake Holdings, LLC (“RLD”), a Delaware limited liability company, acquired substantially all of the assets and assumed certain specified liabilities of R. L. Drake, LLC, a Delaware limited liability company (“Seller”) (the “RLD Acquisition”), pursuant to an Asset Purchase Agreement of even date, by and among RLD, Seller, R. L. Drake Acquisition Corporation, a Delaware corporation, and WBMK Holding Company, an Ohio corporation, as amended by a certain First Amendment to Asset Purchase Agreement dated February 3, 2012 (as so amended, the “Asset Purchase Agreement”). The purchase price was approximately $7,020,000, which included a working capital adjustment of approximately $545,000, plus contingent purchase price payments of up to $1,500,000 in the aggregate that may be made over the three year period after closing if certain financial results are realized. The assets acquired from Seller include assets used in the manufacturing and delivery of electronic communications solutions for cable television systems, digital television reception, video signal distribution and digital video encoding, including equipment, supplies and other tangible personal property, inventory, accounts receivable, business records, trademarks and other intellectual property rights. The Asset Purchase Agreement includes customary representations and warranties and post-closing covenants, including indemnification obligations, subject to certain limitations, on behalf of the parties with respect to the Asset Purchase Agreement. In addition, the Seller and certain members of the Seller agreed, for a period of five (5) years, not to engage in any business that competes with the business formerly conducted by Seller and/or sold by Seller to RLD or the business presently conducted by RLD or any affiliate of RLD or solicit employees or customers of Seller or RLD or any affiliate of RLD.

 

RLD manufactures and distributes similar products to those currently being produced by the Company. The acquisition allows the Company to leverage the combined research and development and sales and marketing departments to shorten the development and manufacturing cycle and deliver a more complete compliment of business and product solutions for the markets the Company serves.

 

The Company’s manufacturing is allocated primarily between its facility in Old Bridge, New Jersey and a key contract manufacturer located in the People’s Republic of China (“PRC”). The Company currently manufactures most of its digital products, including the latest encoder and EdgeQAM collections at its New Jersey facility. Since 2007 the Company has transitioned and continues to manufacture certain high volume, labor intensive products, including many of the Company’s analog products, in the PRC, pursuant to a manufacturing agreement that governs the production of products that may from time to time be the subject of purchase orders submitted by (and in the discretion of) the Company. The Company may transition additional products to the PRC if determined by the Company to be advantageous based upon changing business and market conditions. Manufacturing products both at the Company’s Old Bridge facility as well as in the PRC, enables the Company to realize cost reductions while maintaining a competitive position and time-to-market advantage. As a result of the RLD Acquisition, the Company assumed certain post-closing obligations for a leased manufacturing, engineering, sales and administrative facility in Franklin, Ohio at which the RLD products were being manufactured. The lease for this facility expired in November, 2012. In anticipation of such expiration, in August 2012 the Company secured an alternative smaller space in Miamisburg, Ohio, that it believes is more suitable to its continuing business activities. The Company began the process of transitioning the manufacture of RLD products from the Franklin, Ohio facility to the Old Bridge facility shortly after the closing of the RLD Acquisition. This transition was substantially completed during July 2012 and is now complete.

 

The Company may, from time to time, provide manufacturing, research and development and product support services for other companies’ products. In December 2007, the Company entered into an agreement to provide manufacturing, research and development and product support to Buffalo City Center Leasing, LLC (“Buffalo City”) for an electronic on-board recorder that Buffalo City was producing for Turnpike Global Technologies, LLC (which was purchased in 2010 by, and operates as a division of, XATA Corporation (“XATA”)). A director of the Company is also the managing member and a vice president of Buffalo City and may be deemed to control the entity which owns fifty percent (50%) of the membership interests of Buffalo City. The agreement with Buffalo City expired by its terms in the first quarter of 2011, however, Buffalo City continued purchasing such product from the Company through July, 2011 on the same terms and conditions. In the second quarter of 2011, the Company entered into a new agreement directly with XATA Corporation (the “XATA Agreement”), which sets forth the terms and conditions of purchases by XATA of the next generation of the product. The XATA Agreement also permits XATA to obtain financing from approved third party lenders to finance its purchases from the Company. In November 2011, the Company and Buffalo City entered into a letter agreement (the “Buffalo City Agreement”) to memorialize the agreement by which the Company approved Buffalo City to act as an approved third party lender to XATA and has permitted Buffalo City (in this capacity) to purchase products from the Company on open account with a credit limit of $1,000,000, the terms for payment of which were net 110 days after shipment. Under the terms of the XATA Agreement, obligations of Buffalo City to the Company were guaranteed by XATA. During the first quarter of 2012, Buffalo City advised the Company that Buffalo City would no longer be financing products as an approved third-party lender for XATA. As such, effective as of February 10, 2012, the Company and Buffalo City terminated Buffalo City’s status as an approved lender under the Buffalo City Agreement. All amounts due from Buffalo City to the Company under the Buffalo City Agreement have been fully paid. The Company received no revenue during 2012 from Buffalo City. The Company received $946,000 and $2,503,000 in revenue from Buffalo City in the three and nine months ended September 30, 2011, respectively. In addition, the Company’s accounts receivable included $960,000 (21% of total accounts receivable) due from Buffalo City at December 31, 2011. The Company continues to contract manufacture products directly for XATA under the XATA Agreement. While the termination of the Buffalo City Agreement did not have a material adverse impact on aggregate sales of these contract manufactured products, recent declines in sales volume to XATA have been experienced, which we believe are attributable to the general decline in economic conditions.

 

12
 

 

Results of Operations

 

Third three months of 2012 Compared with third three months of 2011

 

Net Sales. Net sales increased $1,606,000 or 22.9%, to $8,610,000 in the third three months of 2012 from $7,004,000 in the third three months of 2011. The increase is primarily attributed to an increase in sales of digital video headend products, offset by a decrease in sales of contract manufactured products. Sales of digital video headend products were $4,246,000 and $2,190,000 and contract manufactured products were $538,000 and $1,274,000 in the third three months of 2012 and 2011, respectively. The Company has experienced and expects to continue to experience a shift in product mix from analog products to digital products. While the Company’s sales of contract manufactured products have not been adversely affected by the termination of its business with Buffalo City, recent declines in sales volume to XATA have been experienced, which we believe are attributable to the general decline in economic conditions. The RLD Acquisition contributed $1,851,000 to net sales for the third three months of 2012.

 

Cost of Goods Sold. Cost of goods sold increased to $5,296,000 for the third three months of 2012 from $4,573,000 for the third three months of 2011 but decreased as a percentage of sales to 61.5% from 65.3%. The increase was primarily due to an increase in sales. The decrease as a percentage of sales was primarily attributed to a more favorable product mix as well as the integration of the RLD acquisition. The Company expects cost of goods sold as a percentage of sales to approximate this level in the fourth quarter of 2012.

 

Selling Expenses. Selling expenses increased to $865,000 for the third three months of 2012 from $687,000 in the third three months of 2011, and increased as a percentage of sales to 10.1% for the third three months of 2012 from 9.8% in the third three months of 2011. The $178,000 increase was primarily the result of an increase in salary expense (including fringe benefits) of $145,000 due to increased headcount primarily related to the RLD Acquisition. The percentage increase was also the result of the ongoing operation of RLD.

 

General and Administrative Expenses. General and administrative expenses increased to $1,458,000 for the third three months of 2012 from $1,068,000 for the third three months of 2011, and increased as a percentage of sales to 16.9% for the third three months of 2012 from 15.3% for the third three months of 2011. The $390,000 increase was primarily the result of increased salary expense (including fringe benefits) of $163,000 due to increased headcount, and increased amortization expense of $64,000 relating to intangible assets, all associated with the RLD Acquisition. The percentage increase was primarily the result of these same increases.

 

Research and Development Expenses. Research and development expenses increased to $815,000 in the third three months of 2012 from $684,000 in the third three months of 2011 but decreased as a percentage of sales to 9.5% for the third three months of 2012 from 9.8% for the third three months of 2011. This $131,000 increase is primarily the result of an increase in salary expense (including fringe benefits) of $182,000 associated with the increased headcount of ongoing operation of RLD. The percentage decrease was primarily the result of increased sales. These transitional increases were contemplated in connection with the RLD Acquisition; however the Company expects its future research and development expenses will be reduced by annualized savings of approximately $325,000 after evaluating its combined research and development capabilities to determine the extent to which future efficiencies would be realized.

 

Operating Income (Loss). Operating income of $176,000 for the third three months of 2012 represents an increase from the operating loss of $(8,000) for the third three months of 2011. Operating income (loss) as a percentage of sales was 2.0% in the third three months of 2012 compared to (0.1) % in the third three months of 2011.

 

13
 

 

Other Expense. Interest expense increased to $85,000 in the third three months of 2012 from $42,000 in the third three months of 2011. The increase is the result of higher average borrowing.

 

Income Taxes.  The current provision for income taxes for the third three months of 2012 and 2011 was zero.  The Company sustained an estimated tax loss for the period and the resulting deferred tax asset was offset by a corresponding valuation allowance.

 

First nine months of 2012 Compared with first nine months of 2011

 

Net Sales. Net sales increased $2,713,000, or 13.4%, to $22,921,000 in the first nine months of 2012 from $20,208,000 in the first nine months of 2011. The increase is primarily attributed to an increase in sales of digital video headend products offset by a reduction in contract manufactured product sales. Sales of digital video headend products were $10,720,000 and $6,794,000 and contract manufactured product sales were $1,684,000 and $2,837,000 in the first nine months of 2012 and 2011, respectively. The Company has experienced and expects to continue to experience a shift in product mix from analog products to digital products. While the Company’s sales of contract manufactured products have not been adversely affected by the termination of its business with Buffalo City, recent declines in sales volume to XATA have been experienced, which we believe are attributable to the general decline in economic conditions. The RLD Acquisition contributed $3,252,000 to net sales for the first nine months of 2012.

 

Cost of Goods Sold. Cost of goods sold increased to $15,093,000 for the first nine months of 2012 from $13,026,000 for the first nine months of 2011 and increased as a percentage of sales to 65.9% from 64.5%. The increase was primarily due to an increase in sales of lower margin products. The increase as a percentage of sales was primarily attributed to an increase in inventory reserve of $614,000, an overall reduction in manufacturing overhead, a less favorable product mix as well as the impact of RLD Acquisition through the absorption of certain redundancies and inefficiencies in the first and second quarters of 2012. The Company expects cost of goods sold as a percentage of sales to decrease from 65.9% in the fourth quarter of 2012 as products manufactured by RLD in Ohio will have been transitioned to the Old Bridge facility and as overall product mix is anticipated to improve.

 

Selling Expenses. Selling expenses increased to $2,487,000 for the first nine months of 2012 from $1,947,000 in the first nine months of 2011, and increased as a percentage of sales to 10.9% for the first nine months of 2012 from 9.6% in the first nine months of 2011. The $540,000 increase was primarily the result of an increase in salary expense (including fringe benefits) of $434,000 due to increased headcount and an increase in travel and entertainment expense of $47,000, both primarily related to the RLD Acquisition. The percentage increase was also the result of the ongoing operation of RLD.

 

General and Administrative Expenses. General and administrative expenses increased to $4,405,000 for the first nine months of 2012 from $3,334,000 for the first nine months of 2011, and increased as a percentage of sales to 19.2% for the first nine months of 2012 from 16.5% for the first nine months of 2011. The $1,071,000 increase was primarily the result of increased professional fees of $311,000, increased salary expense (including fringe benefits) of $405,000 due to increased headcount, and increased amortization expense of $169,000 relating to intangible assets, all associated with the RLD Acquisition. The percentage increase was primarily the result of these same increases.

 

Research and Development Expenses. Research and development expenses increased to $2,652,000 in the first nine months of 2012 from $2,023,000 in the first nine months of 2011 and increased as a percentage of sales to 11.6% for the first nine months of 2012 from 10.0% for the first nine months of 2011. This $629,000 increase is primarily the result of an increase in salary expense (including fringe benefits) of $564,000 associated with the increased headcount of ongoing operation of RLD. The percentage increase was primarily the result of these same increases. These transitional increases were contemplated in connection with the RLD Acquisition; however the Company expects its future research and development expenses will be reduced by annualized savings of approximately $325,000 after evaluating its combined research and development capabilities to determine the extent to which future efficiencies would be realized.

 

Operating Income (Loss). Operating loss of $(1,716,000) for the first nine months of 2012 represents an increase from the operating loss of $(122,000) for the first nine months of 2011 (due to costs incurred in connection with the acquisition of RLD). Operating loss as a percentage of sales was (7.5%) in the first nine months of 2012 compared to (0.6%) in the first nine months of 2011.

 

Other Expense. Interest expense increased to $256,000 in the first nine months of 2012 from $139,000 in the first nine months of 2011. The increase is the result of higher average borrowing.

 

Income Taxes.  The current provision for income taxes for the first nine months of 2012 and 2011 was zero.  The Company sustained an estimated tax loss for the period and the resulting deferred tax asset was offset by a corresponding valuation allowance.

 

14
 

 

Liquidity and Capital Resources

 

As of September 30, 2012 and December 31, 2011, the Company’s working capital was $9,730,000 and $11,838,000, respectively. The decrease in working capital is primarily due to an increase in the Revolver of $3,496,000 due to the RLD Acquisition.

 

The Company’s net cash provided by operating activities for the nine month period ended September 30, 2012 was $1,808,000, compared to net cash provided by operating activities of $814,000 for the nine month period ended September 30, 2011, primarily due to an increase in accounts payable of $1,510,000.

 

Cash used in investing activities for the nine month period ended September 30, 2012 was $7,389,000, of which $7,020,000 was attributable to the RLD Acquisition.

 

Cash provided by financing activities was $4,900,000 for the first nine months of 2012, which was comprised of borrowings on the Revolver of $3,496,000 and additional borrowings under the Term Loan of $1,550,000 for the RLD Acquisition and additional debt borrowings of $51,000, offset by repayment of debt of $197,000.

 

On August 6, 2008, the Company entered into a Revolving Credit, Term Loan and Security Agreement with Sovereign Business Capital (“Sovereign”), a division of Sovereign Bank (“Sovereign Agreement”), pursuant to which the Company obtained an $8,000,000 credit facility from Sovereign (the “Sovereign Financing”). The Sovereign Financing consisted of (i) a $4,000,000 asset-based revolving credit facility (“Revolver”) and (ii) a $4,000,000 term loan facility (“Term Loan”), each with a three-year term. The amounts which may be borrowed under the Revolver are based on certain percentages of Eligible Receivables and Eligible Inventory, as such terms are defined in the Sovereign Agreement. The obligations of the Company under the Sovereign Agreement are secured by substantially all of the assets of the Company.

 

Under the Sovereign Agreement, the Revolver bears interest at a rate per annum equal to the prime lending rate announced from time to time by Sovereign (“Prime”) plus 0.25% or the LIBOR rate plus 3.00%. The Term Loan bears interest at a rate per annum equal to Prime plus 0.50% or the LIBOR rate plus 3.25%. Prime was 3.25% at September 30, 2012.

 

On January 14, 2011, the Company entered into a First Amendment to Revolving Credit, Term Loan and Security Agreement (the “First Amendment”) with Sovereign, to amend the Sovereign Financing. The First Amendment (1) increased the maximum amount that may be borrowed by the Company under the Revolver to $5,000,000 from $4,000,000, (2) extended the termination date of the Sovereign Agreement from August 6, 2011 to January 15, 2013, (3) modified the definition of “Eligible Receivables” to increase the permitted concentration percentage of certain customer receivables (as defined in the Sovereign Agreement) which are included in such calculation, and (4) modified a certain financial covenant.

 

On February 1, 2012, the Company entered into a Second Amendment to Revolving Credit, Term Loan and Security Agreement (the “Second Amendment”) with Sovereign, to amend the Sovereign Financing. The Second Amendment (1) added RLD as a co-borrower, (2) increased the maximum amount that may be borrowed by the Company under the Revolver to $8,500,000 from $5,000,000, (3) extended the termination date of the Sovereign Agreement from January 15, 2013 to February 1, 2015, (4) modified the amounts that may be borrowed under the Revolver based on certain percentages of Eligible Inventory, (as defined in the Sovereign Agreement) that are included in such calculation, (5) modified certain financial covenants, and (6) increased the Term Loan to $4,350,000.

 

In August, 2012, the Sovereign Agreement was amended to modify a certain financial covenant retroactively effective as of June 30, 2012, relative to the trailing 12-month period ended on such date. Had Sovereign not retroactively amended such financial covenant, the Company would not have been in compliance therewith as of June 30, 2012 and would have required a waiver from Sovereign. Sovereign has advised the Company that had the retroactive amendment not been entered into, such waiver would have been granted.

 

Upon termination of the Revolver, all outstanding borrowings under the Revolver are due. The Term Loan requires equal monthly principal payments of approximately $18,000 each, plus interest, with the remaining balance due at maturity. The outstanding principal balance of the Term Loan was $4,233,000 at September 30, 2012.

 

15
 

 

The Sovereign Agreement contains customary representations and warranties as well as affirmative and negative covenants, including certain financial covenants. The Sovereign Agreement contains customary events of default, including, among others, non-payment of principal, interest or other amounts when due.

 

The Company’s primary sources of liquidity are its existing cash balances, cash generated from operations and amounts available under the Sovereign Financing. As of September 30, 2012, the Company had approximately $3,496,000 outstanding under the Revolver and $2,793,000 of additional availability for borrowing under the Revolver. The Company anticipates these sources of liquidity will be sufficient to fund its operating activities, anticipated capital expenditures and debt repayment obligations for the next twelve months.

 

The Company’s primary long-term obligations are for payment of interest and principal on its Revolver and Term Loan, both of which expire on February 1, 2015. The Company expects to use cash generated from operations to meet its long-term debt obligations, and anticipates refinancing its long-term debt obligations at maturity. The Company considers opportunities to refinance its existing indebtedness based on market conditions. Although the Company may refinance all or part of its existing indebtedness in the future and will be required to do so by February 1, 2015, there can be no assurances that it will do so. Changes in the Company’s operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may require the Company to seek additional debt or equity financing. There can be no assurance that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions. The Company also expects to make financed and unfinanced long-term capital expenditures from time to time in the ordinary course of business. Capital expenditures were $106,000 and $431,000 in the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. The Company expects to use cash generated from operations, amounts available under its credit facility and purchase-money financing to meet any anticipated long-term capital expenditures.

 

New Accounting Pronouncements

 

See Note 5 of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on the Company’s consolidated financial position and results of operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company maintains a system of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at September 30, 2012.

 

During the quarter ended September 30, 2012, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

16
 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the current opinion of management, is likely to have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows. In addition, on June 19, 2012, K Tech Telecommunications, Inc. (“K Tech”) filed a patent infringement complaint against the Company and RLD in the U.S. District Court for the Central District of California, captioned as K Tech v. Blonder Tongue Laboratories, Inc. and R.L. Drake Holdings, LLC, CV12-05316 (the “Litigation”). K Tech subsequently filed an amended complaint to add Seller as an additional defendant. The Litigation alleges that the Company and RLD infringe one or more claims of U.S. Patent Nos. 6,785,903; 7,487,533; 7,761,893; and 7,984,469 (the “K Tech Patents”) and seeks (a) a finding of patent infringement, (b) an injunction against the Company and RLD from further alleged infringement; (c) an award of actual damage suffered by K Tech; and (d) an award of costs relating to the Litigation. The Litigation complaint alleges that Company products DQMx-01, DQMx-02, DQMx-03, DQMx-04, DQMx-10, DQMx-11, DQMx-12, DQMx-13, DQMx-20, DQMx-21, DQMx-22, DQMx-30, DQMx-31, DQMx-40, and MUX-2D-QAM infringe one or more of the K Tech Patents, and alleges that RLD products MQM6000l, MQM10000, DQT1000, and MEQ1000 infringe one or more of the K Tech Patents. All of the aforementioned products are part of the Company’s digital headend product category. At this time, based on the preliminary analysis performed by the Company to date, the full scope of the claims or available defenses, or the potential outcome of the alleged claims of infringement, have not been determined by the Company. However, based on its analysis to date, the Company does presently believe there are reasoned grounds for finding that the K Tech Patents are invalid or unenforceable. The Company intends to defend the Litigation instituted by K Tech, and has answered the complaint denying the allegations of infringement and asserting defenses of invalidity of the K Tech Patents. The Company has also commenced discussions with K Tech to potentially resolve the Litigation relating to the K Tech Patents.

 

As of September 30, 2012, the Company’s Chief Executive Officer was indebted to the Company in the amount of $125,000, for which no interest has been charged. This indebtedness arose from a series of cash advances made to the Chief Executive Officer, the latest of which was advanced in February, 2002. Payments on this indebtedness ceased in November 2008 when the Chief Executive Officer and his spouse filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code and the indebtedness became subject to the automatic stay provisions of the United States Bankruptcy Code. On July 29, 2009 a plan of reorganization in connection with the Chief Executive Officer’s bankruptcy case was confirmed by the United States Bankruptcy Court for the District of New Jersey.

 

Under the confirmed plan of reorganization, the Chief Executive Officer will be obligated to pay a pro-rata share, with all other unsecured pre-petition obligations, of the excess, if any, of his disposable income after the payment of all administrative claims and other expenses. The actual amount that the Company may expect to receive pursuant to the confirmed plan and the date on which required payments would commence are not presently determinable. Since May 2010, however, the Chief Executive Office has made elective payments to the Company to reduce the indebtedness. Such elective payments aggregated $16,000 through September 30, 2012.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In August 2012, the Company issued a warrant to purchase 100,000 shares of common stock of the Company to Adaptive Micro-Ware, Inc., an Indiana corporation (“AMW”). The warrant was granted as partial consideration in connection with a commercial licensing and manufacturing agreement between the Company and AMW. The warrant is exercisable at $1.09 per share, and the warrant vests one-third (1/3) on May 23, 2013 and another one-third (1/3) on each of May 23, 2014 and 2015. The warrant was issued in reliance upon an exemption under Section 4(2) of the Securities Act for securities issued pursuant to a transaction by an issuer not involving any public offering, which were offered without any advertising or general solicitation being employed.

 

ITEM 6. EXHIBITS

 

The exhibits are listed in the Exhibit Index appearing at page 19 herein.

 

17
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BLONDER TONGUE LABORATORIES, INC.
     
Date:  November 14, 2012 By:           /s/  James A. Luksch
    James A. Luksch
    Chief Executive Officer
     
  By:           /s/  Eric Skolnik
    Eric Skolnik
    Senior Vice President and Chief Financial Officer
     (Principal Financial Officer)

 

18
 

 

EXHIBIT INDEX

 

Exhibit #   Description   Location
         
3.1   Restated Certificate of Incorporation of Blonder Tongue Laboratories, Inc.   Incorporated by reference from Exhibit 3.1 to S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended.
         
3.2   Restated Bylaws of Blonder Tongue Laboratories, Inc., as amended.   Incorporated by reference from Exhibit 3.2 to Annual Report on Form 10-K/A originally filed May 9, 2008.
         
4.1   Warrant to Adaptive Micro-Ware, Inc.   Filed herewith.
         
10.1   Third Amendment to Revolving Credit, Term Loan and Security Agreement, dated August 10, 2012, between Sovereign Business Capital and Blonder Tongue Laboratories, Inc. and R. L. Drake Holdings, LLC   Incorporated by reference from Exhibit 10.1 to Quarterly Report on Form 10-Q originally filed August 14, 2012.
         
31.1   Certification of James A. Luksch pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith.
         
31.2   Certification of Eric Skolnik pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith.
         
32.1   Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.   Furnished herewith.
         
101.1*   Interactive data files.   Furnished herewith.

 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

19