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| BDR > SEC Filings for BDR > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
Forward-Looking Statements
In addition to historical information, this Quarterly Report contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company's business include, but are not limited to, those matters discussed herein in the section entitled Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The words "believe", "expect", "anticipate", "project" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including without limitation, the Company's Annual Report on Form 10-K for the year ended December 31, 2007 (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 is principally a designer, manufacturer and supplier of a comprehensive line of electronics and systems equipment, primarily for the cable television industry (both franchise and private cable). Over the past few years, the Company has also introduced equipment and innovative solutions for the high-speed transmission of data and the provision of telephony services in multiple dwelling unit applications. The Company's products are used to acquire, distribute and protect the broad range of communications signals carried on fiber optic, twisted pair, coaxial cable and wireless distribution systems. These products are sold to customers providing an array of communications services, including television, high-speed data (Internet) and telephony, to single family dwellings, multiple dwelling units ("MDUs"), the lodging industry and institutions such as hospitals, prisons, schools and marinas. The Company's principal customers are cable system operators (both franchise and private cable), as well as contractors that design, package, install and in most instances operate, upgrade and maintain the systems they build, including institutional and lodging/hospitality operators.
A key component of the Company's strategy is to leverage its reputation across a broad product line, offering one-stop shop convenience to private cable and franchise cable system operators and delivering products having a high performance-to-cost ratio. The Company continues to expand its core product lines (headend and distribution), to maintain its ability to provide all of the electronic equipment necessary to build small cable systems and much of the equipment needed in larger systems for the most efficient operation and highest profitability in high density applications. The Company has also divested its interests in certain non-core businesses as part of its strategy to focus on the efficient operation of its core businesses.
Over the past several years, the Company expanded beyond its core business by acquiring private cable television systems (BDR Broadband, LLC and Hybrid Networks, LLC). However, as part of its strategy to focus on its core business, the Company sold its interests in BDR Broadband, LLC during 2006, and the Company decided to cease the operations of Hybrid Networks, LLC during 2008. These dispositions are described in more detail below, along with other recent transactions affecting the Company.
On December 15, 2006, the Company completed the divesture of its wholly-owned subsidiary, BDR Broadband, LLC ("BDR"), through the sale of all of the issued and outstanding membership interests of BDR to DirecPath Holdings, LLC, a Delaware limited liability company ("DirecPath"), which is a joint venture between Hicks Holdings LLC and The DIRECTV Group, Inc. This sale took place pursuant to a Membership Interest Purchase Agreement ("Purchase Agreement"). Pursuant to the Purchase Agreement, DirecPath paid the Company an aggregate purchase price of approximately $3,130,000 in cash, resulting in a gain of approximately $880,000 on the sale, after certain post-closing adjustments. A portion of the purchase price, $465,000, is being held in an escrow account, and is included as part of the prepaid and other current assets, pursuant to an Escrow Agreement dated December 15, 2006, among the Company, DirecPath and U.S. Bank National Association, to secure the Company's indemnification obligations under the Purchase Agreement.
The Company made the decision in 2008 to cease the operations of its wholly-owned subsidiary, Hybrid Networks, LLC ("Hybrid"), and liquidate its assets. The Company expects to wind down the operations of Hybrid during the fourth quarter of 2008.
Hybrid's business activities consist of the operation of video, high-speed data and/or telephony systems ("Systems") at four multi-dwelling unit communities under certain right-of-entry agreements ("ROE Agreements"). As part of the Company's on-going implementation of its strategic plan, management has continued to evaluate the impact and long-term viability of non-core business activities, including the continued operation of the Systems. The decision of the Board of Directors to discontinue Hybrid's operations was based upon such evaluation and the current cash flow and operating losses of Hybrid. Hybrid had revenues of $148,000 and $177,000 and net losses of $249,000 and $368,000 in 2007 and 2006, respectively. The results of operations of Hybrid are reflected as discontinued operations in the consolidated statement of operations included in this Quarterly Report on Form 10-Q.
Based on this decision, the Company recognized net loss on disposal of approximately $290,000 related to the Hybrid fixed assets, which includes the ROE Agreements and the equipment necessary to operate the Systems, substantially all of which is installed at the applicable property locations.
One of the Company's recent initiatives is to manufacture products in the People's Republic of China ("PRC") in order to reduce the Company's manufacturing costs and allow a more aggressive marketing program in the private cable market. The Company's manufacturing initiative in the PRC entails a combination of contract manufacturing agreements and purchasing agreements with key PRC manufacturers that can most fully meet the Company's needs. In early 2007, the Company entered into a manufacturing agreement with a core contract manufacturer in the PRC that will govern its production of certain of the Company's high volume and complex products upon the receipt of purchase orders from the Company. This ongoing transition is being implemented in phases over the next several years with the goal that it will ultimately relate to products representing a significant portion of the Company's net sales. The first products were produced in the PRC during the fourth quarter of 2007.
On February 27, 2006 (the "Effective Date"), the Company entered into a series of agreements related to its MegaPortä line of high-speed data communications products. As a result of these agreements, the Company expanded its distribution territory, favorably amended certain pricing and volume provisions and extended by 10 years the term of the distribution agreement for its MegaPortä product line. These agreements also require the Company to guaranty payment due by Shenzhen Junao Technology Company Ltd. ("Shenzhen") to Octalica, Ltd. ("Octalica"), in connection with Shenzhen's purchase of T.M.T.-Third Millennium Technology Limited ("TMT") from Octalica. In exchange for this guaranty, MegaPort Technology, LLC ("MegaPort"), a wholly-owned subsidiary of the Company, obtained an assignable option (the "Option") to acquire substantially all of the assets and assume certain liabilities of TMT on substantially the same terms as the acquisition of TMT by Shenzhen from Octalica. The purchase price for TMT and, therefore, the amount and payment terms guaranteed by the Company is the sum of $383,150 plus an earn-out. The earn-out will not exceed 4.5% of the net revenues derived from the sale of certain products during a period of 36 months commencing after the sale of certain specified quantities of TMT inventory following the Effective Date. The cash portion of the purchase price was payable (i) $22,100 on the 120th day following the Effective Date, (ii) $22,100 on the last day of the twenty-fourth month following the Effective Date, and (iii) $338,950 commencing upon the later of (A) the second anniversary of the Effective Date and (B) the date after which certain volume sales targets for each of the MegaPortäproducts have been met, and then only as and to the extent that revenues are derived from sales of such products. As of the date of the filing of this report, none of the volume sales targets for these MegaPort products have been met and, accordingly, no further purchase price payments have been made. In February 2007, MegaPort sent notice to TMT and Shenzhen of its election to exercise the Option to acquire substantially all of the assets of TMT. Shenzhen has not responded to MegaPort's notice of exercise of the Option. In 2007, MegaPort engaged legal representation in Israel to explore its options in connection with enforcement of its contractual rights; however, MegaPort has determined not to take any specific action in this regard at the present time. If MegaPort ultimately consummates the acquisition, MegaPort, or its assignee, will pay Shenzhen, in the same manner and at the same times, cash payments equal to the purchase price payments due from Shenzhen to Octalica and will assume certain liabilities of TMT.
The Federal Communications Commission (FCC) mandated that all analog broadcasts are to cease by February 17, 2009. In anticipation of this analog shut down, the FCC also granted second licenses to all broadcasters to begin simulcasting digital signals. As a result, the Company expects to see a continuing shift in product mix from analog products to digital products.
Results of Operations
Third three months of 2008 Compared with third three months of 2007
Net Sales. Net sales increased $498,000, or 5.4%, to $9,709,000 in the third three months of 2008 from $9,211,000 in the third three months of 2007. The increase in sales is primarily attributed to an increase in sales of digital products and a contract manufactured product, offset by a decrease in sales of analog headend products. Digital product sales were $3,304,000 and $1,544,000, contract manufactured product sales were $326,000 and zero and analog headend product sales were $3,390,000 and $4,691,000 in the third three months of 2008 and 2007, respectively.
Cost of Goods Sold. Cost of goods sold increased to $6,810,000 for the third three months of 2008 from $5,737,000 for the third three months of 2007 and increased as a percentage of sales to 70.1% from 62.3% . The increase in percentage of sales was primarily attributed to an increase in the provision for inventory reserves of $472,000 in the third three months of 2008 compared to zero in the third three months of 2007, and by a less favorable product mix.
Selling Expenses. Selling expenses decreased to $1,049,000 for the third three months of 2008 from $1,123,000 in the third three months of 2007 and decreased as a percentage of sales to 10.8% for the third three months of 2008 from 12.2% for the third three months of 2007. The $74,000 decrease was primarily the result of a decrease in salaries and fringe benefits of $36,000 due to a decrease in headcount, a decrease in direct materials of $26,000 and a decrease in travel and entertainment of $19,000.
General and Administrative Expenses. General and administrative expenses increased to $1,225,000 for the third three months of 2008 from $1,172,000 for the third three months of 2007 but decreased as a percentage of sales to 12.6% for the third three months of 2008 from 12.7% for the third three months of 2007. The $53,000 increase was primarily the result of an increase in travel and entertainment of $34,000 and an increase in credit and collection fees of $27,000, offset by a decrease in professional fees of $54,000.
Research and Development Expenses. Research and development expenses increased to $480,000 in the third three months of 2008 from $454,000 in the third three months of 2007, but remained at 4.9% as a percentage of sales for both periods. This $26,000 increase is primarily the result of an increase in salaries and fringe benefits of $46,000 due to an increase in headcount offset by a decrease in consulting fees of $23,000.
Operating Incomes. Operating income of $65,000 for the third three months of 2008 represents a decrease from an operating income of $725,000 for the third three months of 2007. Operating income as a percentage of sales decreased to 0.7 % in the third three months of 2008 from 7.9% in the third three months of 2007.
Other Expense. Interest expense decreased to $95,000 in the third three months of 2008 from $122,000 in the third three months of 2007. The decrease is the result of lower average borrowing and lower interest rates.
Income Taxes. The current provision for income taxes for the third three months of 2008 and 2007 was zero. A valuation allowance has been recorded on the 2008 and 2007 deferred tax assets. As a result of the Company's historical losses, there is no change in the remaining deferred tax asset in 2008 or 2007.
First nine months of 2008 Compared with first nine months of 2007
Net Sales. Net sales increased $435,000, or 1.8%, to $25,155,000 in the first nine months of 2008 from $24,720,000 in the first nine months of 2007. The increase in sales is primarily attributed to an increase in digital products and a contract manufactured product, offset by a decrease in analog headend and distribution products. Digital product
Cost of Goods Sold. Cost of goods sold increased to $16,955,000 for the first nine months of 2008, from $16,371,000 for the first nine months of 2007 and increased as a percentage of sales to 67.4% from 66.2% . The increase was primarily attributed to a less favorable product mix.
Selling Expenses. Selling expenses decreased to $3,238,000 for the first nine months of 2008 from $3,733,000 in the first nine months of 2007 and decreased as a percentage of sales to 12.9% for the first nine months of 2008 from 15.1% for the first nine months of 2007. The $495,000 decrease was primarily the result of a decrease in salaries and fringe benefits of $422,000 due to a decrease in headcount and a decrease in travel and entertainment of $107,000, offset by an increase in royalty fees of $79,000.
General and Administrative Expenses. General and administrative expenses decreased to $3,795,000 for the first nine months of 2008 from $3,799,000 for the first nine months of 2007 and decreased as a percentage of sales to 15.1% for the first nine months of 2008 from 15.4% for the first nine months of 2007. The $4,000 decrease was primarily the result of a decrease in bad debt expense of $155,000 due to improved accounts receivable collections and a decrease in salary and fringe benefits of $31,000 due to a decrease in headcount, offset by an increase in miscellaneous taxes of $55,000.
Research and Development Expenses. Research and development expenses increased to $1,452,000 in the first nine months of 2008 from $1,354,000 in the first nine months of 2007 and increased as a percentage of sales to 5.8 % for the first nine months of 2008 from 5.5% for the first nine months of 2007. This $98,000 increase is primarily the result of an increase in salaries and fringe benefits of $141,000 due to an increase in headcount offset by a decrease in consulting fees of $66,000.
Operating Loss. Operating loss of $365,000 for the first nine months of 2008 represents a decrease from an operating loss of $537,000 for the first nine months of 2007. Operating loss as a percentage of sales decreased to (1.5) % in the first nine months of 2008 from (2.2) % in the first nine months of 2007.
Other Expense. Interest expense decreased to $345,000 in the first nine months of 2008 from $358,000 in the first nine months of 2007. The decrease is the result of lower average borrowing and lower average interest rates.
Income Taxes. The current provision for income taxes for the first nine months of 2008 and 2007 was zero. A valuation allowance has been recorded on the 2008 and 2007 deferred tax assets. As a result of the Company's historical losses, there is no change in the remaining deferred tax asset in 2008 or 2007.
Liquidity and Capital Resources
As of September 30, 2008 and December 31, 2007, the Company's working capital was $12,107,000 and $7,902,000, respectively. The increase in working capital is attributable primarily to the refinancing of current debt to long term.
The Company's net cash provided by operating activities for the nine-month period ended September 30, 2008 was $24,000 compared to $452,000 for the nine-month period ended September 30, 2007.
Cash used in investing activities for the nine-month period ended September 30, 2008 was $232,000, which was primarily attributable to capital expenditures for new equipment.
Cash provided by financing activities was $1,426,000 for the first nine months of 2008, which was comprised of $23,940,000 of net borrowings offset by $22,514,000 of repayment of debt.
On August 6, 2008, the Company entered into a Revolving Credit, Term Loan and Security Agreement ("Sovereign Agreement") with Sovereign Business Capital ("Sovereign"), a division of Sovereign Bank, pursuant to which the Company obtained an $8,000,000 credit facility from Sovereign ("Sovereign Financing"). The Sovereign Financing consists of (i) a $4,000,000 asset based revolving credit facility ("Revolver") and (ii) a $4,000,000 term loan facility ("Term Loan"), each of which has 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.
The Revolver terminates on August 5, 2011, at which time all outstanding borrowings under the Revolver are due. The Term Loan matures on August 5, 2011 and requires equal monthly principal payments of approximately $17,000 each, plus interest, with the remaining balance due at maturity. The loans are subject to a prepayment penalty if satisfied in full prior to the second anniversary of the effective date of the loans.
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.
Proceeds from the Term Loan were used to refinance the Company's credit facility with National City Business Credit, Inc. ("NCBC") and National City Bank (the "Bank"), to pay transaction costs, to provide working capital and for other general corporate purposes. As of September 30, 2008, the Company has not drawn any funds under the Revolver.
The Company's credit facility with NCBC and the Bank was entered into on December 29, 2005 and had a three year term. The former credit facility, as amended, was for an aggregate amount of $11,000,000, comprised of (i) a $7,500,000 asset based revolving credit facility under which funds could be borrowed at a rate per annum equal to the "Alternate Base Rate," being the higher of (x) the prime lending rate announced from time to time by the Bank plus 1.50% or (y) the Federal Funds Effective Rate (as defined in the credit facility agreement), plus 1.50%, and (ii) a $3,500,000 term loan facility that bore interest at a rate per annum equal to the Alternate Base Rate plus 1.50% and which required equal monthly principal payments of $19,000 each, plus interest, with the remaining balance due at maturity. In connection with the former term loan, the Company entered into an interest rate swap agreement with the Bank which exchanged the variable interest rate of the term loan for a fixed interest rate of 5.13% per annum effective January 10, 2006 through the maturity of the term loan. This swap agreement was also terminated along with the former credit facility.
As of the end of each fiscal quarter during 2007 and the first quarter of 2008, the Company was in violation of a certain financial covenant under the former credit facility, compliance with which was waived by the Bank effective as of each such date. This covenant was again violated for the second quarter of 2008; however, a waiver was neither sought nor obtained, due to the termination of the credit facility in connection with obtaining the new Sovereign Financing.
At September 30, 2008, there was zero and $3,983,000 outstanding under the Sovereign revolver and the term loan, respectively.
The Company anticipates that the cash generated from operations, existing cash balances and amounts available under its credit facility with Sovereign, will be sufficient to satisfy its foreseeable working capital needs.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. This statement applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued Staff Positions ("FSPs") No. 157-1 and No. 157-2, which, respectively, remove leasing transactions from the scope of SFAS No. 157 and defer its effective date for one year relative to certain nonfinancial assets and liabilities. As a result, the application of the definition of fair value and related disclosures of SFAS No. 157 (as impacted by these two FSPs) was effective for the Company beginning January 1, 2008 on a prospective basis with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company's financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. This adoption did not have a material impact on the Company's consolidated results of operations or financial condition. The remaining aspects of SFAS No. 157 for which the effective date was deferred under FSP No. 157-2 are currently being evaluated by the Company. Areas impacted by the deferral relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment. The effects of these remaining aspects of SFAS No. 157 are to be applied to fair value measurements prospectively beginning January 1, 2009. The Company does not expect them to have a material impact on the Company's consolidated results of operations or financial condition.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 "("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. The . . .
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