| BLONDER TONGUE LABORATORIES INC ITEM 1A RISK FACTORS The Company’s business operates in a rapidly changing environment that involves numerous risks, some of which are beyond the Company’s control |
| The following “Risk Factors” highlights some of these risks |
| Additional risks not currently known to the Company or that the Company now deems immaterial may also affect the Company and the value of its common stock |
| The risks described below, together with all of the other information included in this report, should be carefully considered in evaluating our business and prospects |
| The occurrence of any of the following risks could harm the Company’s business, financial condition or results of operations |
| Solely for purposes of the risk factors in this Item 1A, the terms “we” , “our” and “us” refer to Blonder Tongue Laboratories, Inc |
| and its subsidiaries |
| Any substantial decrease in sales to one or more of our five largest customers may adversely affect our results of operations or financial condition |
| Approximately 48prca, 39prca and 43prca of our revenues in fiscal years 2005, 2004 and 2003, respectively, were derived from sales of products to our five largest customers |
| There can be no assurance that any sales to these customers, individually or as a group, will reach or exceed historical levels in any future period |
| However, we anticipate that these customers will continue to account for a significant portion of our revenues in future periods, although none of them is obligated to purchase any specified amount of products (beyond outstanding purchase orders) or to provide us with binding forecasts of product purchases for any future period |
| The complement of leading customers may shift as the most efficient and better-financed integrators grow more rapidly than others |
| We believe that many integrators will grow rapidly, and, as such, our success will depend in part on: · the viability of those customers; · our ability to identify those customers with the greatest growth and growth prospects; and · our ability to maintain our position in the overall marketplace by shifting our emphasis to such customers |
| 13 _________________________________________________________________ Any substantial decrease or delay in sales to one or more of our leading customers, the financial failure of any of these entities, or our inability to develop solid relationships with the integrators which may replace the present leading customers, could have a material adverse effect on our results of operations and financial condition |
| An inability to reduce expenses or increase of revenues may cause continued net losses |
| While management believes its plans to reduce expenses and increase revenues will return us to profitability, there can be no assurance that these actions will be successful |
| Failure to reduce expenses or increase revenues could have a material adverse effect on our results of operations and financial condition |
| A significant increase to inventory reserves due to inadequate reserves in a prior period or to an increase in excess or obsolete inventories may adversely affect our results of operations and financial condition |
| We continually analyze our slow-moving, excess and obsolete inventories |
| Based on historical and projected sales volumes and anticipated selling prices, we establish reserves |
| If we do not meet our sales expectations, these reserves are increased |
| Products that are determined to be obsolete are written down to net realizable value |
| We recorded an increase to our reserve of dlra4cmam372cmam000, dlra872cmam000 and dlra1cmam576cmam000 during 2005, 2004 and 2003, respectively |
| Although we believe reserves are adequate and inventories are reflected at net realizable value, there can be no assurance that we will not have to record additional inventory reserves in the future |
| Significant increases to inventory reserves could have a material adverse effect on our results of operations and financial condition |
| An inability to develop, or acquire the rights to, technology, products or applications in response to changes in industry standards or customer needs may reduce our sales and profitability |
| Both the private cable and franchised cable industries are characterized by the continuing advancement of technology, evolving industry standards and changing customer needs |
| To be successful, we must anticipate the evolution of industry standards and changes in customer needs, through the timely development and introduction of new products, enhancement of existing products and licensing of new technology from third parties |
| Although we depend primarily on our own research and development efforts to develop new products and enhancements to our existing products, we have and may continue to seek licenses for new technology from third parties when we believes that we can obtain such technology more quickly and/or cost-effectively from such third parties than we could otherwise develop on our own, or when the desired technology has already been patented by a third party |
| There can, however, be no assurance that new technology or such licenses will be available on terms acceptable to us |
| There can be no assurance that: · we will be able to anticipate the evolution of industry standards in the cable television or the communications industry generally; · we will be able to anticipate changes in the market and customer needs; · technologies and applications under development by us will be successfully developed; or · successfully developed technologies and applications will achieve market acceptance |
| If we are unable for technological or other reasons to develop and introduce products and applications or to obtain licenses for new technologies from third parties in a timely manner in response to changing market conditions or customer requirements, our results of operations and financial condition would be materially adversely affected |
| Anticipated increases in direct and indirect competition with us may have an adverse effect on our results of operations and financial condition |
| All aspects of our business are highly competitive |
| We compete with national, regional and local manufacturers and distributors, including companies larger than us, which have substantially greater resources |
| Various manufacturers who are suppliers to us sell directly as well as through distributors into the cable television marketplace |
| Because of the convergence of the cable, telecommunications and computer industries and rapid technological development, new competitors may seek to enter the principal markets served by us |
| Many of these potential competitors have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we have |
| We expect that direct and indirect competition will increase in the future |
| Additional competition could have a material adverse effect on our results of operations and financial condition through: 14 _________________________________________________________________ · price reductions; · loss of market share; · delays in the timing of customer orders; and · an inability to increase our penetration into the cable television market |
| Our sales and profitability may suffer due to any substantial decrease or delay in capital spending by private cable or franchise cable operators |
| The vast majority of our revenues in fiscal years 2005, 2004 and 2003 came from sales of our products for use primarily in private cable systems |
| Demand for our products depends to a large extent upon capital spending on private cable systems and specifically by private cable operators for constructing, rebuilding, maintaining or upgrading their systems |
| Capital spending by private cable operators and, therefore, our sales and profitability, are dependent on a variety of factors, including · access by private cable operators to financing for capital expenditures; · demand for their cable services; · availability of alternative video delivery technologies; and · general economic conditions |
| In addition, our sales and profitability may in the future be more dependent on capital spending by traditional franchise cable system operators as well as by new entrants to this market planning to over-build existing cable system infrastructures, or constructing, rebuilding, maintaining and upgrading their systems |
| There can be no assurance that system operators in private cable or franchise cable will continue capital spending for constructing, rebuilding, maintaining, or upgrading their systems |
| Any substantial decrease or delay in capital spending by private cable or franchise cable operators would have a material adverse effect on our results of operations and financial condition |
| Any significant casualty to our facility in Old Bridge, New Jersey may cause a lengthy interruption to our business operations |
| We operate out of one manufacturing facility in Old Bridge, New Jersey (the “Old Bridge Facility”) |
| While we maintain a limited amount of business interruption insurance, a casualty that results in a lengthy interruption of the ability to manufacture at, or otherwise use, that facility would have a material adverse effect on our results of operations and financial condition |
| Our dependence on certain third party suppliers could create an inability for us to obtain component products not otherwise available or to do so only at increased prices |
| We purchase several products from sole suppliers for which alternative sources are not available, such as the VideoCipher® and DigiCipher® encryption systems manufactured by General Instrument Corporation, which are standard encryption methodology employed on United States C-Band and Ku-Band transponders, certain components of EchoStar’s digital satellite receiver decoders, which are specifically designed to work with the DISH Network™, and certain components of Hughes Network Systems digital satellite receivers which are specifically designed to work with DIRECTV® programming |
| Our results of operations and financial condition could be materially adversely affected by: 15 _________________________________________________________________ · an inability to obtain sufficient quantities of these components; · our receipt of a significant number of defective components; · an increase in component prices; or · our inability to obtain lower component prices in response to competitive pressures on the pricing of our products |
| Our existing and proposed international sales and operations subject us to the risks of changes in foreign currency exchange rates, changes in foreign telecommunications standards, and unfavorable political, regulatory, labor and tax conditions in other countries |
| Sales to customers outside of the United States represented approximately 6prca, 4prca and 2prca of our revenues in fiscal years 2005, 2004 and 2003, respectively |
| Such sales are subject to certain risks such as: · changes in foreign government regulations and telecommunications standards; · export license requirements; · tariffs and taxes; · other trade barriers; · capital and exchange control programs; · fluctuations in foreign currency exchange rates; · difficulties in staffing and managing foreign operations; and · political and economic instability |
| Fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country |
| There can be no assurance that sales to customers outside the United States will reach or exceed historical levels in the future, or that international markets will continue to develop or that we will receive additional contracts to supply our products for use in systems and equipment in international markets |
| Our results of operations and financial condition could be materially adversely affected if international markets do not continue to develop, we do not continue to receive additional contracts to supply our products for use in systems and equipment in international markets or our international sales are affected by the other risks of international operations |
| Our anticipated international operations in the PRC may subject us to the risks of unfavorable political, regulatory, legal, and labor conditions in the PRC During the second half of 2006, we expect to being manufacturing and assembling some of our products in the Peoples’ Republic of China, or PRC In addition, we may increase the amount of revenues we derive from sales to customers outside the United States, including sales in the PRC Our future operations and earnings may be adversely affected by the risks related to, or any other problems arising from, operating in the PRC, including those risks described in the preceding risk factor |
| Although the PRC has a large and growing economy, its potential economic, political, legal and labor developments entail uncertainties and risks |
| While the PRC has been receptive to foreign investment, we cannot be certain that its current policies will continue indefinitely into the future |
| In the event of any changes that adversely affect our ability to conduct our operations within the PRC after we commence operations, our business will suffer |
| Shifting our operations between regions may entail considerable expense |
| We have signed an agreement with Master Gain with an intention to acquire a manufacturing facility in the PRC and ultimately commence production of certain products at this facility |
| If successful, over time we may shift a material portion of our operations to the PRC in order to maximize manufacturing and operational efficiency |
| This could result in reducing our domestic operations in the future, which in turn could entail significant one-time earnings charges to account for severance, equipment write offs or write downs and moving expenses |
| 16 _________________________________________________________________ Competitors may develop products that are similar to, and compete with, our products due to our limited proprietary protection |
| Other than the SMI Interdiction product line acquired by us from Scientific-Atlanta, Inc, the underlying technology for which is covered by numerous US and international patents, we possess limited patent or registered intellectual property rights with respect to our technology |
| We rely on a combination of contractual rights and trade secret laws to protect our proprietary technology and know-how |
| There can be no assurance that we will be able to protect our technology and know-how or that third parties will not be able to develop similar technology independently |
| Therefore, existing and potential competitors may be able to develop similar products which compete with our products |
| Such competition could adversely affect the prices for our products or our market share and could have a material adverse effect upon our results of operations and financial condition |
| Patent infringement claims against us or our customers, whether or not successful, may cause us to incur significant costs |
| While we do not believe that our products (including products and technologies licensed from others) infringe the proprietary rights of any third parties, there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted against us or our customers |
| Damages for violation of third party proprietary rights could be substantial, in some instances damages are trebled, and could have a material adverse effect on the Company’s financial condition and results of operation |
| Regardless of the validity or the successful assertion of any such claims, we would incur significant costs and diversion of resources with respect to the defense thereof which could have a material adverse effect on our financial condition and results of operations |
| If we are unsuccessful in defending any claims or actions that are asserted against us or our customers, we may seek to obtain a license under a third party’s intellectual property rights |
| There can be no assurance, however, that under such circumstances, a license would be available under reasonable terms or at all |
| The failure to obtain a license to a third party’s intellectual property rights on commercially reasonable terms could have a material adverse effect on our results of operations and financial condition |
| Any increase in governmental regulation of the private cable or franchise cable market may have an adverse effect on our results of operations and financial condition |
| The private cable industry, which represents the vast majority of our business, while in some cases subject to certain FCC licensing requirements, is not presently burdened with extensive government regulations |
| It is possible, however, that regulations could be adopted in the future which impose burdensome restrictions on private cable operators resulting in, among other things, barriers to the entry of new competitors or limitations on capital expenditures by private cable operators |
| Any such regulations, if adopted, could have a material adverse effect on our results of operations and financial condition |
| Operators in the franchise cable market, which represents a relatively small percentage of our business, had been subject to extensive government regulation pursuant to the Cable Television Consumer Protection and Competition Act of 1992, which among other things provided for rate rollbacks for basic tier cable service, further rate reductions under certain circumstances and limitations on future rate increases |
| The Telecommunications Act of 1996 has deregulated many aspects of franchise cable system operation and has opened the door to competition among cable operators and telephone companies in each of their respective industries |
| It is possible, however, that regulations could be adopted which would re-impose burdensome restrictions on franchise cable operators resulting in, among other things, the grant of exclusive rights or franchises within certain geographical areas |
| In addition, certain rules adopted by the FCC in June, 2000 (as further revised in 2002 and 2004) provide for the re-designation of portions of the 18GHz-frequency band among the various currently allocated services, which rules have shifted demand away from our microwave gear |
| Any increased regulation of franchise cable could have a material adverse effect on our results of operations and financial condition |
| 17 _________________________________________________________________ Any increase in governmental environmental regulations or our inability or failure to comply with existing environmental regulations may cause an adverse effect on our results of operations or financial condition |
| We are subject to a variety of federal, state and local governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes |
| We do not anticipate material capital expenditures during the fiscal year ending 2006 for compliance with federal, state and local environmental laws and regulations |
| There can be no assurance, however, that changes in environmental regulations will not result in the need for additional capital expenditures or otherwise impose additional financial burdens on us |
| Further, such regulations could restrict our ability to expand our operations |
| Any failure by us to obtain required permits for, control the use of, or adequately restrict the discharge of, hazardous substances under present or future regulations could subject us to substantial liability or could cause our manufacturing operations to be suspended |
| Such liability or suspension of manufacturing operations could have a material adverse effect on our results of operations and financial condition |
| Losing the services of our executive officers or our other highly qualified and experienced employees, or our inability to continue to attract and retain highly qualified and experienced employees, could adversely affect our business |
| Our future success depends in large part on the continued service of our key executives and technical and management personnel, including James A Luksch, Chief Executive Officer, and Robert J Palle, President and Chief Operating Officer |
| We maintain and are the beneficiary of dlra1cmam000cmam000 of key man life insurance on each of Mr |
| Luksch and Mr |
| Our future success also depends on our ability to continue to attract and retain highly skilled engineering, manufacturing, marketing and managerial personnel |
| The competition for such personnel is intense, and the loss of key employees, in particular the principal members of our management and technical staff, could have a material adverse effect on our results of operations and financial condition |
| Our organizational documents and Delaware state law contain provisions that could discourage or prevent a potential takeover or change in control of our company or prevent our stockholders from receiving a premium for their shares of our Common Stock |
| Our board of directors has the authority to issue up to 5cmam000cmam000 shares of undesignated Preferred Stock, to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any unissued series of undesignated Preferred Stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders |
| The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to the rights of the Common Stock |
| Furthermore, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and as a result, the issuance of such stock could have a material adverse effect on the market value of the Common Stock |
| In addition, our Restated Certificate of Incorporation: · eliminates the right of our stockholders to act without a meeting; · does not provide cumulative voting for the election of directors; · does not provide our stockholders with the right to call special meetings; · provides for a classified board of directors; and · imposes various procedural requirements which could make it difficult for our stockholders to affect certain corporate actions |
| These provisions and the Board’s ability to issue Preferred Stock may have the effect of deterring hostile takeovers or offers from third parties to acquire our company, preventing our stockholders from receiving a premium for their shares of our Common Stock, or delaying or preventing changes in control or management of our company |
| We are also afforded the protection of Section 203 of the Delaware General Corporation Law, which could: · delay or prevent a change in control of our company; 18 _________________________________________________________________ · impede a merger, consolidation or other business combination involving us; or · discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company |
| Any of these provisions which may have the effect of delaying or preventing a change in control of our company or could have a material adverse effect on the market value of our Common Stock |
| It is unlikely that we will pay dividends on our Common Stock |
| We intend to retain all earnings to finance the growth of our business and therefore do not intend to pay dividends on our Common Stock in the foreseeable future |
| Moreover, our loan agreement with National City Business Credit prohibits the payment of cash dividends by us on our Common Stock |
| Potential fluctuations in the stock price for our Common Stock may adversely affect the market price for our Common Stock |
| Factors such as: · announcements of technological innovations or new products by us, our competitors or third parties; · quarterly variations in our actual or anticipated results of operations; · failure of revenues or earnings in any quarter to meet the investment community’s expectations; and · market conditions for cable industry stocks in general, may cause the market price of our Common Stock to fluctuate significantly |
| The stock price may also be affected by broader market trends unrelated to our performance |
| These fluctuations may adversely affect the market price of our Common Stock |
| Delays or difficulties in negotiating a labor agreement may cause an adverse effect on our manufacturing and business operations |
| All of our direct labor employees are members of the International Brotherhood of Electrical Workers Union, Local 2066, under a collective bargaining agreement, which expires in February 2009 |
| Delays or difficulties in negotiating and executing a new agreement, which may result in work stoppages, could have a material adverse effect on our results of operations and financial condition |