SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
SECURITIES EXCHANGE ACT OF 1934
For quarter ended JULY 31, 2004.
Commission file number: 0-13301
RF INDUSTRIES, LTD.
(Exact name of registrant as specified in its charter)
Nevada 88-0168936
(State of Incorporation) (I.R.S. Employer Identification No.)
7610 Miramar Road, Bldg. 6000, San Diego, California 92126-4202
(Address of principal executive offices) (Zip Code)
(858) 549-6340 FAX (858) 549-6345
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Check whether the issuer (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 filing requirements for the past 90
days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock at the latest practicable date.
As of July 31, 2004, the registrant had 3,002,637 shares of Common Stock, $.01
par value, issued.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
RF INDUSTRIES, LTD. CONDENSED
BALANCE SHEETS
July 31 October 31
2004 2003
------------ -----------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents ........................ $ 4,518,012 $ 2,683,896
Trade accounts receivable, net of allowance
for doubtful accounts of $54,900 and $55,322 ..... 1,277,385 1,701,618
Notes receivable ................................. 12,000 12,000
Inventories ...................................... 3,791,983 3,455,018
Other current assets ............................. 182,736 158,079
Deferred tax assets .............................. 135,600 135,600
----------- -----------
Total Current Assets ........................ 9,917,716 8,146,211
----------- -----------
Property and Equipment
Equipment and tooling ............................ 1,223,878 1,125,485
Furniture and office equipment ................... 311,857 260,183
----------- -----------
1,535,735 1,385,668
Less accumulated depreciation ............... 1,172,216 1,057,544
----------- -----------
Total ....................................... 363,519 328,124
----------- -----------
Notes receivable from related parties ............ 26,730 49,584
Note receivable from stockholder ................. 70,000 70,000
Other assets ..................................... 14,171 14,171
----------- -----------
Total Assets ................................ $10,392,136 $ 8,608,090
=========== ===========
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD. CONDENSED
BALANCE SHEETS
July 31 October 31
2004 2003
------------ -----------
(Unaudited)
Liabilities and
Stockholders' Equity
Current liabilities
Accounts payable ............................... $ 184,511 $ 181,637
Accrued expenses ............................... 262,387 328,355
------------ ------------
Total current liabilities ................... 446,898 509,992
Deferred tax liabilities ....................... 40,000 40,000
------------ ------------
Total Liabilities ........................... 486,898 549,992
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Common stock - authorized 10,000,000
shares of $0.01 par value; 3,002,637
and 2,692,683 shares issued .................... 30,026 26,927
Additional paid-in capital ..................... 3,410,637 2,418,033
Retained earnings .............................. 6,485,242 5,633,805
Treasury stock, at cost, 6,000 shares .......... (20,667) (20,667)
------------ ------------
Total stockholders' equity ................ 9,905,238 8,058,098
------------ ------------
Total liabilities and stockholders' equity $ 10,392,136 $ 8,608,090
============ ============
See Notes to Condensed Unaudited Financial Statements
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF INCOME
--------------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
(Unaudited) (Unaudited)
---------------------------------------------------
2004 2003 2004 2003
----------- ---------- ---------- -----------
Net sales ........................ $2,727,386 $2,337,410 $7,998,176 $6,830,310
Cost of sales .................... 1,377,367 1,151,146 3,977,895 3,414,791
---------- ---------- ---------- ----------
Gross profit ................ 1,350,019 1,186,264 4,020,281 3,415,519
---------- ---------- ---------- ----------
Operating expenses:
Engineering ................. 120,556 178,933 337,590 565,231
Selling and general ......... 794,953 684,425 2,280,667 2,183,275
---------- ---------- ---------- ----------
Totals ................. 915,509 863,358 2,618,257 2,748,506
---------- ---------- ---------- ----------
Operating income ................. 434,510 322,906 1,402,024 667,013
Other income - interest .......... 2,606 1,122 9,413 17,227
---------- ---------- ---------- ----------
Income before provision for income
tax ........................... 437,116 324,028 1,411,437 684,240
Provision for income tax ......... 171,000 125,750 560,000 274,650
---------- ---------- ---------- ----------
Net income ....................... $ 266,116 $ 198,278 $ 851,437 $ 409,590
========== ========== ========== ==========
Basic earnings per share ......... $ 0.09 $ 0.07 $ 0.30 $ 0.13
========== ========== ========== ==========
Diluted earnings per share ....... $ 0.07 $ 0.06 $ 0.23 $ 0.11
========== ========== ========== ==========
Basic weighted average shares
outstanding ................... 2,970,714 2,768,571 2,881,118 3,185,864
========== ========== ========== ==========
Diluted weighted average shares
outstanding ................... 3,779,692 3,326,677 3,655,984 3,580,094
========== ========== ========== ==========
See Notes to Condensed Unaudited Financial Statements
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF
CASH FLOWS
(Unaudited)
Nine months ended July 31
---------------------------
2004 2003
OPERATING ACTIVITIES ------------- ------------
Net income ............................................. $ 851,437 $ 409,590
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for bad debts ............................ 4,000 36,000
Depreciation and amortization ..................... 114,672 120,270
Changes in operating assets and liabilities:
Trade accounts receivable ...................... 420,233 (27,086)
Inventories .................................... (336,965) 441,738
Other assets ................................... (24,657) (61,712)
Accounts payable ............................... 2,874 118,222
Accrued expenses ............................... (65,968) (94,044)
----------- -----------
Net cash provided by operating activities .......... 965,626 942,978
----------- -----------
INVESTING ACTIVITIES
Capital expenditures ............................... (150,067) (38,279)
Collection of related party notes .................. 22,854 1,700
----------- -----------
Net cash used in investing activities .............. (127,213) (36,579)
----------- -----------
FINANCING ACTIVITIES
Payments on loans payable .......................... 0 (44,582)
Purchase of treasury stock ......................... 0 (2,353,749)
Exercise of stock options .......................... 995,703 38,840
----------- -----------
Net cash provided by (used in) financing activities ... 995,703 (2,359,491)
----------- -----------
Net increase (decrease) in cash and cash equivalents ... 1,834,116 (1,453,092)
Cash and cash equivalents at the beginning of the
period ............................................... 2,683,896 3,939,299
----------- -----------
Cash and cash equivalents at the end of the period ..... $ 4,518,012 $ 2,486,207
=========== ===========
See Notes to Condensed Unaudited Financial Statements
RF INDUSTRIES, LTD. NOTES TO
CONDENSED UNAUDITED FINANCIAL STATEMENTS
Note 1 - Unaudited interim financial statements:
The accompanying unaudited condensed financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments have been included. Operating results for
the three and nine month periods ended July 31, 2004 are not necessarily
indicative of the results that may be expected for the full year ending October
31, 2004. The unaudited condensed financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended October 31, 2003.
Note 2 - Components of inventory
July 31, 2004 October 31, 2003
--------------- ----------------
(Unaudited)
Raw materials and supplies $ 737,921 $ 591,892
Finished goods ........... 3,242,838 2,997,902
Less Inventory Reserve ... (188,766) (134,776)
---------- ----------
Total ............. $3,791,983 $3,455,018
========== ==========
Note 3 - Earnings per share:
As further explained in Note 1 of the notes to the audited financial
statements of the Company, included in Form 10-KSB for the fiscal year ended
October 31, 2003, basic earnings per share is computed by dividing net earnings
by the weighted average number of common stock outstanding during the period.
Diluted earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock increased by the effects of assuming
that other potentially dilutive securities (such as stock options) outstanding
during the period had been exercised and the treasury stock method had been
applied.
The following table summarizes the computation of basic and diluted
weighted average shares:
----------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
----------------------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted average shares outstanding
for basic net earnings per
share ........................ 2,970,714 2,768,571 2,881,118 3,185,864
Add effects of potentially dilutive
securities-assumed exercised
of stock options ............. 808,978 558,106 774,866 394,230
--------- --------- --------- ---------
Weighted average shares for diluted
net earnings per share ....... 3,779,692 3,326,677 3,655,984 3,580,094
========= ========= ========= =========
Note 4 - Segment Information
Prior to the current fiscal year, the Company had reported separate segment
information in its filings for the operations of its RF Connector, Neulink and
Bioconnect business units in the same format as reviewed by the Company's
management. The sales, operating income and assets of the Neulink and Bioconnect
segments no longer meet the thresholds that require separate disclosures.
Accordingly, commencing with the current fiscal year, the Company has
discontinued reporting segment information on the Neulink and Bioconnect
segments separately. Information regarding the Company's segments for prior
years is contained in Note 6 of the notes to the audited financial statements of
the Company included in Form 10-KSB for the fiscal year ended October 31, 2003.
Substantially all the Company's operations are conducted in the United
States; however, the Company derives a portion of its revenue from export sales.
Note 5 - Stock Option Plan
A description of the Company's 2000 Stock Option Plan and other information
related to stock options are included in Note 8 in its Annual Report on Form
10-KSB for the year ended October 31, 2003.
The Company measures compensation cost related to stock options issued to
employees using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation" and SFAS 148. Accordingly, no earned or unearned
compensation cost was recognized in the accompanying consolidated financial
statements for the stock options granted by the Company to its employees since
all of those options have been granted at exercise prices that equaled or
exceeded the market value at the date of grant. The Company's historical net
income and earnings per common share and pro forma net income and earnings per
share assuming compensation cost had been determined based on the fair value at
the grant date for all awards by the Company consistent with the provisions of
SFAS 123 are set forth below:
--------------------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
--------------------------------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income - as reported ........ $ 266,116 $ 198,278 $ 851,437 $ 409,590
Deduct total stock-based employee
compensation expensed
determined under fair
value-based method for all
awards ..................... (67,000) (20,000) (201,000) (60,000)
----------- ----------- ----------- -----------
Net income - pro forma .......... $ 199,116 $ 178,278 $ 650,437 $ 349,590
=========== =========== =========== ===========
Basic earnings per share - as
reported ................... $ 0.09 $ 0.07 $ 0.30 $ 0.13
Basic earnings per share - pro
forma ...................... $ 0.07 $ 0.06 $ 0.23 $ 0.11
Diluted earnings per share - as
reported ................... $ 0.07 $ 0.06 $ 0.23 $ 0.11
Diluted earnings per share - pro
forma ...................... $ 0.05 $ 0.05 $ 0.18 $ 0.10
Note 6 - Concentration of Credit Risk
One customer accounted for approximately 16% of the net sales of the
Company's RF Connector division for the fiscal year ended October 31, 2003 and
14% of net sales for the nine-month period ended July 31, 2004. Although this
customer has been an on-going major customer of the Company during the past five
years, the Company does not have a written agreement with this customer.
Therefore, this customer does not have any minimum purchase obligations and
could stop buying the Company's products at any time. A reduction, delay or
cancellation of orders from this customer or the loss of this customer could
significantly reduce the Company's revenues and profits. The Company cannot
provide assurance that this customer or any of its current customers will
continue to place orders, that orders by existing customers will continue at
current or historical levels or that the Company will be able to obtain orders
from new customers.
Note 7 - Subsequent Event
On August 16, 2004, the Company purchased the business and substantially
all of the assets of Jacelaine, Inc., a Nevada based designer, manufacturer and
distributor of microwave and radio frequency connectors. Jacelaine, Inc. has
been conducting business under the name "Aviel Electronics." The purchase price
of the assets was $510,000, of which $410,000 was paid in cash at the closing,
and $100,000 was deposited into an escrow account for one year as security for
the seller's representations, warranties and covenants. The purpose of the
acquisition is to complement the Company's coaxial connector business with
military, governmental and aerospace customers. The Company has not had an
opportunity to obtain appraisals or other relevant information related to the
valuation of certain assets and liabilities of Aviel Electronics. Management
estimates that $150,000 of the estimated acquisition costs will be allocated to
the fair value of net assets and the remainder will be allocated to intangible
assets that have definite useful lives and goodwill.
Item 2: Management's discussion and analysis of financial condition and results
of operations
This report contains forward-looking statements. These statements relate to
future events or the Company's future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company, nor any other person, assumes responsibility for the accuracy and
completeness of the forward-looking statements. The Company is under no
obligation to update any of the forward-looking statements after the filing of
this Quarterly Report on Form 10-QSB to conform such statements to actual
results or to changes in its expectations.
The following discussion should be read in conjunction with the Company's
financial statements and the related notes and other financial information
appearing elsewhere in this Form 10-QSB. Readers are also urged to carefully
review and consider the various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the Company's business,
including without limitation the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," under the caption "Risk Factors," and the audited financial
statements and related notes included in the Company's Annual Report filed on
Form 10-KSB for the year ended October 31, 2003 and other reports and filings
made with the Securities and Exchange Commission.
Critical Accounting Policies
The financial statements of RF Industries are prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). The preparation of these financial statements requires our management
to make estimates and assumptions about future events that affect the amounts
reported in the financial statements and related notes. Future events and their
effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. The Company
believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of financial statements. Our
significant accounting policies are summarized in Note 1 to our financial
statements contained in our Annual Report on Form 10-KSB filed for the fiscal
year ended October 31, 2003. We believe the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our financial statements.
Allowance for doubtful accounts:
The Company maintains an allowance for doubtful accounts based on
historical collections of accounts receivable. The Company monitors its accounts
receivable balances on a continual basis. If the financial condition of
customers deteriorates, additional allowances may be required.
Income taxes:
The Company accounts for income taxes pursuant to the asset and liability
method which requires deferred income tax assets and liabilities to be computed
for temporary differences between the financial statement and tax bases of
assets and liabilities that will result in taxable, or deductible amounts in
future periods based on enacted laws and rates applicable to the periods in
which the temporary differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The income tax provision is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
Inventory valuation:
Inventories are valued at the weighted average cost value. Certain items in
the inventory may be considered obsolete or excess and, as such, the Company may
establish an allowance to reduce the carrying value of these items to their net
realizable value. Based on estimates, assumptions and judgments made from the
information available at the time, the Company determines the amounts of these
allowances. If these estimates and related assumptions are incorrect or the
market changes, we may be required to record additional reserves, which may
decrease future earnings. Inventories as of July 31, 2004 represented over 36%
of our total assets. As a result, any reduction in the value of our inventories
would require us to take write-offs that would affect our net worth and future
earnings.
Executive Overview
RF Industries markets connectors and cables to numerous industries for use
in thousands of products, primarily for the wireless marketplace. In addition,
to a limited extent, the Company also markets wireless products that incorporate
connectors and cables. In the past, RF Industries has reported results of
operations in three segments that, in general terms, defined the primary
markets. However, since sales of connectors and cable assemblies represent over
90% of the Company's sales, and since the operations to all of the Company's
smaller business units effectively operate as subunits of the Company's
principal business unit, effective November 1, 2003, RF Industries will no
longer report the results of these other, smaller business units as separate
business segments.
Liquidity And Capital Resources
Management believes that existing current assets and the amount of cash it
anticipates it will generate from current operations will be sufficient to fund
the anticipated liquidity and capital resource needs of the Company for at least
twelve months. The Company does not, however, currently have any commercial
banking arrangements providing for loans, credit facilities or similar matters
should the Company need to obtain additional capital. Management's beliefs that
its existing assets and the cash expected to be generated from operations will
be sufficient during the current fiscal year are based on the following:
|X| As of July 31, 2004, the amount of cash and cash equivalents was equal to $
4,518,000 in the aggregate.
|X| As of July 31, 2004, the Company had $ 9,917,700 in current assets, and
$ 446,900 of current liabilities.
|X| As of July 31, 2004, the Company had no outstanding indebtedness (other
than accounts payable and accrued expenses).
The Company does not believe it will need material additional capital
equipment in the next twelve months. In the past, the Company has financed some
of its property and equipment requirements through capital leases. No additional
capital equipment purchases have been currently identified that would require
significant additional leasing or capital expenditures during the next twelve
months. Management also believes that based on the Company's current financial
condition, the absence of outstanding bank debt and recent operating results,
the Company would be able to obtain bank loans to finance its expansion, if
necessary, although there can be no assurance any bank loan would be obtainable,
or if obtained, would be on favorable terms or conditions.
As of July 31, 2004, the Company had a total of $ 4,518,000 of cash and
cash equivalents compared to a total of $ 2,684,000 of cash and cash equivalents
on October 31, 2003. The increase in liquid assets is the result of (i) net
income earned by the Company in the nine-month period following October 31,
2003, (ii) the reduction of outstanding accounts receivable by $424,200, and
(iii) $996,000 of cash proceeds the Company received from exercise of stock
options. The Company's cash balances as of July 31, 2004 were reduced by
$510,000 on August 16, 2004 due to the purchase by the Company of the business
and substantially all of the assets of Jacelaine, Inc., a Nevada designer,
manufacturer and distributor of microwave and radio frequency connectors. See,
"Part II, Item 5. Other Information," below. The foregoing expenditure of cash
is not expected to have a negative effect on the Company's liquidity.
Trade accounts receivable at July 31, 2004 decreased 24.9%, or by $424,200,
to $1,277,400 compared to the October 31, 2003 balance of $1,701,600. The
decrease is due primarily to timing of collections and the Company's increased
efforts to reduce its outstanding accounts receivable.
Inventories at July 31, 2004 increased 9.8%, or $337,000, to $3,792,000
compared to $3,455,000 on October 31, 2003. The Company increased its inventory
levels based on anticipated customer demand for certain of its products. Since
the Company considers its ability to fill customer orders on short notice to be
an important aspect of its marketing strategy, the Company normally increases
inventory levels in anticipation of customer orders in order to be able to
maintain the product mix its customers may need.
Other current assets, including prepaid expenses and deposits, increased
$24,700 to $182,700, from $158,000 on October 31, 2003. This increase is
primarily due to increased prepaid insurance costs.
Net cash used in investing activities was $ 127,000 for the nine months
ended July 31, 2004 as a result of $150,000 of capital expenditures made by the
Company during the nine-month period. The capital expenditures were partially
offset by $23,000 the Company received upon the collection of outstanding
related party notes.
Net cash provided by financing activities was $996,000 for the nine months
ended July 31, 2004, and was attributable to proceeds from the exercise of stock
options.
As a result of the foregoing factors, the Company generated $1,834,000 in
net cash flow during the past nine months.
Results Of Operations
Three Months 2004 vs. Three Months 2003
Net sales in the current fiscal quarter ended July 31, 2004, increased
16.7%, or $390,000, to $2,727,400 from $2,337,400 in the third fiscal quarter
last year, due to increased demand for the Company's connector, cable assembly
and wireless products. The increase in sales reflects a general increase in
demand for wireless connectors and cable products, primarily for Wi-Fi network
applications. The Company believes this increase is due, in part, to a revival
in some sectors of the telecommunication industries and the continuing increase
in the demand for wireless products.
Cost of sales increased 19.7% or $226,300, to $1,377,400 from $1,151,100 in
the same quarter last year. The increase is primarily due to the 16.7% increase
in sales. Overall gross profit, as a percentage of sales, decreased 1.3%
compared to the prior year to 49.5% from 50.8%. The decrease in the cost of
sales reflects normal fluctuations of costs based on the products sold rather
than any identifiable factors.
Engineering expenses decreased 32.6%, or $58,400, to $120,600 from $179,000
in the third fiscal quarter last year. Engineering expenses were higher last
year primarily as a result of the additional expenses incurred to develop a new
high-speed wireless radio modem to upgrade and replace the Neulink product
line's existing RF9600 transceiver product line. That development of the Neulink
product was completed in fiscal year 2003.
Selling and general expenses increased 16.2% or $110,600, to $795,000 for
the three-month period ended July 31, 2004 from $684,400 in the same quarter
last year. Selling and general expenses were higher in the third quarter this
year due primarily to increased salary expenses, commission expenses and travel
and trade show expenses compared to last year.
Nine Months 2004 vs. Nine Months 2003
Net sales increased 17%, or $1,167,900, to $7,998,200 from $6,830,300 in
the first nine month period of 2004 compared to last year. This increase can be
attributed to increased demand for the connector, cable assembly and wireless
products. The increase in sales reflects a general increase in demand for
wireless connectors and cable products, primarily for Wi-Fi network
applications. The Company believes this increase is due, in part, to a revival
in some sectors of the telecommunication industries and the continuing increase
in the demand for wireless products.
Cost of sales increased 16.5% or $563,100, to $3,977,900 from $3,414,800 in
the same nine months last year. The increase is primarily due to increase in
sales. Overall gross profits, as a percentage of sales, increased to 50.3% from
50% last year. The increase in the cost of sales reflects normal fluctuations of
costs based on the products sold rather than any identifiable factors.
Engineering expenses decreased 40.3%, or $227,600, to $337,600 from
$565,200 in the first nine months last year. Engineering expenses were higher
last year primarily as a result of the additional expenses incurred to develop a
new high-speed wireless radio modem to upgrade and replace the Neulink product
line's existing RF9600 transceiver product line.
Selling and general expenses increased 4.5% or $97,400, to $2,280,700 from
$2,183,300 in the same nine months last year. Selling and general expenses were
higher due to increased insurance costs, increased trade show expenses and
increased salary expenses.
Risk Factors
Investors should carefully consider the risks described below and in the
Company's Annual Report on Form 10-KSB. The risks and uncertainties described
below and in the Annual Report are not the only ones facing the Company. If any
of the following risks actually occur, the Company's business, financial
condition or results of operations could be materially adversely affected.
Dependence On RF Connector Division Products
Of the Company's two operating divisions, the RF Connector division is the
largest, accounting for approximately 90% of the Company's net sales for the
fiscal year ended October 31, 2003, and approximately 90% of net sales during
the nine-month period ended July 31, 2004. The Company expects the RF Connector
division products will continue to account for the majority of the Company's
revenues for the near future. Accordingly, an adverse change in the operations
of the RF Connector division could materially adversely affect the Company's
business, operating results and financial condition. Factors that could
adversely affect the RF Connector division are described below.
International Sales And Operations
Sales to customers located outside the United States, either directly or
through U.S. and foreign distributors, accounted for approximately 12% of the
net sales of the Company in the year ended October 31, 2003, and 14% of net
sales during the nine-month period ended July 31, 2004. International revenues
are subject to a number of risks, including:
|X| longer accounts receivable payment cycles;
|X| difficulty in enforcing agreements and in collecting accounts receivable;
|X| tariffs and other restrictions on foreign trade;
|X| economic and political instability; and
|X| and the burdens of complying with a wide variety of foreign laws.
The Company's foreign sales are also affected by general economic
conditions in its international markets. A prolonged economic downturn in its
foreign markets could have a material adverse effect on the Company's business.
There can be no assurance that the factors described above will not have an
adverse material effect on the Company's future international revenues and,
consequently, on the financial condition, results of operations and business of
the Company.
Since sales made to foreign customers or foreign distributors have
historically been in U.S. dollars, the Company has not been exposed to the risks
of foreign currency fluctuations. However, if the Company in the future is
required to accept sales denominated in the currencies of the countries where
sales are made, the Company thereafter also be exposed to currency fluctuation
risks.
The Company Depends On Third-Party Contract Manufacturers For Substantially All
Of Its Connector Manufacturing Needs. If They Are Unable To Manufacture A
Sufficient Quantity Of High-Quality Products On A Timely And Cost-Efficient
Basis, The Company's Net Sales And Profitability Would Be Harmed And Its
Reputation May Suffer.
Substantially all of the Company's RF Connector products are manufactured
by third-party contract manufacturers. The Company relies on them to procure
components for RF Connectors and in certain cases to design, assemble and test
its products on a timely and cost-efficient basis. If the Company's contract
manufacturers are unable to complete design work on a timely basis, the Company
will experience delays in product development and its ability to compete may be
harmed. In addition, because some of the Company's manufacturers have
manufacturing facilities in Taiwan and Korea, their ability to provide the
Company with adequate supplies of high-quality products on a timely and
cost-efficient basis is subject to a number of additional risks and
uncertainties, including earthquakes and other natural disasters and political,
social and economic instability. If the Company's manufacturers are unable to
provide it with adequate supplies of high-quality products on a timely and
cost-efficient basis, the Company's operations would be disrupted and its net
revenue and profitability would suffer. Moreover, if the Company's third-party
contract manufacturers cannot consistently produce high-quality products that
are free of defects, the Company may experience a higher rate of product
returns, which would also reduce its profitability and may harm the Company's
reputation and brand.
The Company does not currently have any agreements with any of its contract
manufacturers, and such manufacturers could stop manufacturing products for the
Company at any time. Although the Company believes that it could locate
alternate contract manufacturers if any of its manufacturers terminated their
business, the Company's operations could be impacted until alternate
manufacturers are found.
The Company's Dependence On Third-Party Manufacturers Increases The Risk That It
Will Not Have An Adequate Supply Of Products Or That Its Product Costs Will Be
Higher Than Expected.
The risks associated with the Company's dependence upon third parties which
develop and manufacture and assemble the Company's products, include:
|X| reduced control over delivery schedules and quality;
|X| risks of inadequate manufacturing yields and excessive costs;
|X| the potential lack of adequate capacity during periods of excess demand;
and
|X| potential increases in prices.
These risks may lead to increased costs or delay product delivery, which
would harm the Company's profitability and customer relationships.
Dependence Upon Independent Distributors To Sell And Market The Company's
Products
The Company's sales efforts are primarily effected through independent
distributors. Sales through independent distributors accounted for approximately
75% the net sales of the Company for the fiscal year ended October 31, 2003, and
75% of net sales during the nine-month period ended July 31, 2004. Although the
Company has entered into written agreements with most of the distributors, the
agreements are nonexclusive and generally may be terminated by either party upon
30-60 days' written notice. The Company's distributors are not within the
control of the Company, are not obligated to purchase products from the Company,
and may also sell other lines of products. There can be no assurance that these
distributors will continue their current relationships with the Company or that
they will not give higher priority to the sale of other products, which could
include products of competitors. A reduction in sales efforts or discontinuance
of sales of the Company's products by its distributors would lead to reduced
sales and could materially adversely affect the Company's financial condition,
results of operations and business. Selling through indirect channels such as
distributors may limit the Company's contact with its ultimate customers and the
Company's ability to assure customer satisfaction.
Dependence On Principal Customer
One customer accounted for approximately 16% of the net sales of the
Company's RF Connector division for the fiscal year ended October 31, 2003 and
14% of net sales for the nine-month period ended July 31, 2004. Although this
customer has been an on-going major customer of the Company during the past five
years, the Company does not have a written agreement with this customer.
Therefore, this customer does not have any minimum purchase obligations and
could stop buying the Company's products at any time. A reduction, delay or
cancellation of orders from this customer or the loss of this customer could
significantly reduce the Company's revenues and profits. The Company cannot
provide assurance that this customer or any of its current customers will
continue to place orders, that orders by existing customers will continue at
current or historical levels or that the Company will be able to obtain orders
from new customers.
Certain of The Company's Markets Are Subject To Rapid Technological Change, So
the Company's Success In These Markets Depends On Its Ability To Develop And
Introduce New Products.
Although most of the Company's products have a stable market and are only
gradually phased out, certain of the new and emerging market, such as the
wireless digital transmission markets, are characterized by:
|X| rapidly changing technologies;
|X| evolving and competing industry standards;
|X| short product life cycles;
|X| changing customer needs;
|X| emerging competition;
|X| frequent new product introductions and enhancements; and
|X| rapid product obsolescence.
To develop new products for the connector and wireless digital transmission
markets, the Company must develop, gain access to and use new technologies in a
cost-effective and timely manner. In addition, the Company must maintain close
working relationship with key customers in order to develop new products that
meet customers' changing needs. The Company also must respond to changing
industry standards and technological changes on a timely and cost-effective
basis.
Products for connector applications are based on industry standards that
are continually evolving. The Company's ability to compete in the future will
depend on its ability to identify and ensure compliance with these evolving
industry standards. If the Company is not successful in developing or using new
technologies or in developing new products or product enhancements, its future
revenues may be materially affected. The Company's attempt to keep up with
technological advances may require substantial time and expense.
The Markets In Which The Company Competes Are Highly Competitive.
The markets in which the Company operates are highly competitive and the
Company expects that competition will increase in these markets. In particular,
the connector and communications markets in which the Company's products are
sold are intensely competitive. Because the Company does not own any proprietary
property that can be used to distinguish the Company from its competitors, the
Company's ability to compete successfully in these markets depends on a number
of factors, including:
|X| success in subcontracting the design and manufacture of existing and new
products that implement new technologies;
|X| product quality;
|X| reliability;
|X| customer support;
|X| time-to-market;
|X| price;
|X| market acceptance of competitors' products; and
|X| general economic conditions.
In addition, the Company's competitors or customers may offer enhancements
to its existing products or offer new products based on new technologies,
industry standards or customer requirements that have the potential to replace
or provide lower-cost or higher performance alternatives to the Company's
products. The introduction of enhancements or new products by the Company's
competitors could render its existing and future products obsolete or
unmarketable.
Many of the Company's competitors have significantly greater financial
and other resources. In certain circumstances, the Company's customers or
potential customers have internal manufacturing capabilities with which the
Company may compete.
If The Industries Into Which The Company Sells Its Products Experience Recession
Or Other Cyclical Effects Impacting The Budgets Of Its Customers, The Company's
Operating Results Could Be Negatively Impacted.
The primary customers for the Company's coaxial connectors are in the
connector and communications industries. Any significant downturn in the
Company's customers' markets, in particular, or in general economic conditions
which result in the cut back of budgets would likely result in a reduction in
demand for the Company's products and services and could harm the Company's
business. Historically, the communications industry has been cyclical, affected
by both economic conditions and industry-specific cycles. Depressed general
economic conditions and cyclical downturns in the communications industry have
each had an adverse effect on sales of communications equipment, OEMs and their
suppliers, including the Company. No assurance can be given that the connector
industry will not experience a material downturn in the near future. Any
cyclical downturn in the connector and/or communications industry could have a
material adverse effect on the Company.
The Company May Make Future Acquisitions, Which Will Involve Numerous Risks.
On August 16, 2004, the Company acquired the business and assets of a
Nevada based designer, manufacturer and distributor of microwave and radio
frequency connectors. As a result of the acquisition, the Company will have to
integrate the operations of this business into its own business and maintain an
office in Nevada. In addition to the foregoing acquisition, the Company
periodically considers other potential acquisitions of other companies that
could expand the Company's product line or customer base. Accordingly, the
Company may in the future acquire one or more additional companies. The risks
involved with acquiring the Nevada business and in any other future acquisitions
include:
|X| diversion of management's attention;
|X| the affect on the Company's financial statements of the amortization of
acquired intangible assets;
|X| the cost associated with acquisitions and the integration of acquired
operations; and
|X| assumption of unknown liabilities, or other unanticipated events or
circumstances.
Any of these risks could materially harm the Company's business, financial
condition and results of operations. There can be no assurance that any business
that the Company acquires will achieve anticipated revenues or operating
results.
Item 3. Controls and Procedures.
Based on an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, the principal executive officer and the
principal financial officer concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures are effective
to ensure the information required to be disclosed by the Company in reports
filed or submitted under the Exchange Act were timely recorded, processed and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms.
There have been no significant changes in the Company's internal controls
over financing reporting or in other factors which occurred during the last
quarter covered by this report, which could materially affect or are reasonably
likely to materially affect the Company's internal controls over financing
reporting.
PART II. OTHER INFORMATION
Item 5. Other Information
On August 16, 2004, the Company purchased the business and substantially
all of the assets of Jacelaine, Inc., a Nevada based designer, manufacturer and
distributor of microwave and radio frequency connectors. Jacelaine, Inc. has
been conducting business under the name "Aviel Electronics." The purchase price
of the assets was $510,000, of which $410,000 was paid in cash at the closing,
and $100,000 was deposited into an escrow account for one year as security for
the seller's representations, warranties and covenants. The purpose of the
acquisition is to complement the Company's coaxial connector business with
military, governmental and aerospace customers.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1:Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2:Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1:Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. *
32.2:Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. *
* Pursuant to Commission Release No. 33-8238, this
certification will be treated as "accompanying" this
Quarterly Report of Form 10-QSB and not "filed" as part of
such report for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to
the liability of Section 18 of the Securities Exchange Act
of 1934, as amended, and this certification will not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that
the registrant specifically incorporates it by reference.
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with 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.
RF INDUSTRIES, LTD.
Dated: September 14, 2004 By:/s/ Howard F. Hill
------------------
Howard F. Hill, President
Chief Executive Officer
Dated: September 14, 2004 By:/s/ Terrie A. Gross
-------------------
Terrie A. Gross
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number
31.1:Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2:Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1:Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2:Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.1
CERTIFICATIONS
I, Howard F. Hill, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of RF Industries, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
Date: September 14, 2004 /s/ Howard F. Hill
------------------
Howard F. Hill
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Terrie A. Gross, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of RF Industries, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
Date: September 14, 2004 /s/ Terrie A. Gross
-------------------
Terrie A. Gross
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RF Industries, Ltd. (the
"Company") on Form 10-QSB for the period ended July 31, 2004, as filed with the
Securities and Exchange Commission (the "Report"), I, Howard F. Hill, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 14, 2004 /s/ Howard F. Hill
------------------
Howard F. Hill
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RF Industries, Ltd. (the
"Company") on Form 10-QSB for the period ended July 31, 2004, as filed with the
Securities and Exchange Commission (the "Report"), I, Terrie A. Gross, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 14, 2004 /s/ Terrie A. Gross
-------------------
Terrie A. Gross
Chief Financial Officer