SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended October 31, 2003
Commission File Number 0-13301
RF INDUSTRIES, LTD.
(Name of small business issuer 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
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB.
Yes X No
The issuer's revenues for the year ended October 31, 2003 were $9,875,499.
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of October 31, 2003, based on the average of
the closing price of one share of the Common Stock of the Company, as reported
on October 31, 2003 was $10,636,098. As of October 31, 2003, the registrant had
2,692,683 outstanding shares of common stock, $.01 par value.
Certain portions of the registrant's Proxy Statement for the 2004 annual meeting
of shareholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A, not later than 120 days after the close of the registrant's
fiscal year, are incorporated by reference under Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes X No
---
This Form 10-KSB consists of a total of 31 pages. The Index to Exhibits can be
found on page 22.
Forward-Looking Statements:
Certain statements in this Annual Report on Form 10-KSB, and other oral and
written statements made by the Company from time to time are "forward looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including those that discuss strategies, goals, outlook or
other non-historical matters, or projected revenues, income, returns or other
financial measures. In some cases forward-looking statements can be identified
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 forward-looking statements are
subject to numerous risks and uncertainties that may cause actual results to
differ materially from those contained in such statements. Among the most
important of these risks and uncertainties are the ability of the Company to
continue to source raw materials from its suppliers, and the market demand for
its products, which market demand is dependent to a large part on the
telecommunications industry.
Important factors which may cause actual results to differ materially from
the forward looking statements are described in the Section entitled "Risk
Factors" in the Form 10-KSB, and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission, press releases
and other communications. The Company assumes no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
PART I
ITEM 1. BUSINESS
General:
RF Industries, Ltd. (hereinafter the "Company") is a provider of
interconnect products and systems for radio frequency (RF) communications
products and wireless digital transmission systems. Since December 2000, the
Company has also been a manufacturer and seller of specialized electrical
cabling and interconnect products to the medical monitoring market. The Company
currently conducts its operations through two divisions known as (i) the RF
Connector Division, which distributes cable connectors and cable assemblies, and
(ii) the Neulink Division, which distributes complete wireless data products
such as radio frequency data links and wireless modems. For financial accounting
purposes, the Company considers these Divisions to be two separate business
units.
The Company's principal executive office is located at 7610 Miramar Road,
Building #6000, San Diego, California. The Company was incorporated in the State
of Nevada on November 1, 1979, completed its initial public offering in March
1984 under the name Celltronics, Inc. and changed its name to RF Industries,
Ltd. in November 1990. Unless the context requires otherwise, references to the
"Company" in this report include RF Industries, Ltd. and its divisions and
wholly owned subsidiary.
RF Connector Division
The RF Connector Division is engaged in the design, manufacture and
distribution of coaxial connector solutions for companies that design, build,
operate, maintain and use wireless voice, data, messaging, and location tracking
systems. Coaxial connector products consist primarily of connectors which, when
attached to a coaxial cable, facilitate the transmission of analog and digital
signals in various frequencies. Although most of the connectors are designed to
fit standard products, the Company also sells custom connectors specifically
designed and manufactured to suit its customers' requirements such as the Wi-Fi
and broadband wireless markets. The Company's RF connectors are manufactured for
the Company by third party foreign manufacturers located in Asia. The Company
has been designing, producing and selling coaxial connectors since 1987.
The RF Connector Division also is engaged in the manufacture and
distribution of RF cable assemblies. These cable assemblies consist of various
types of coaxial cables that are attached to connectors (usually the Company's
connectors) for use in a variety of communications applications. Cable
assemblies are manufactured at the Company's California facilities and are sold
through distributors or directly to major OEM (Original Equipment Manufacturer)
accounts. Cable assemblies consist of both standard cable assemblies and
assemblies that are custom manufactured for the Company's clients. The Company
offers a standard line of cable assemblies with over 70,000 cable products.
During the 2003 fiscal year, the RF Connector Division added high-speed
production and marking equipment in order to expand cable assembly capabilities
and its Bioconnect medical product line offerings. RF cable assembly sales
generated $1,398,000 of revenues, or approximately 18.4% of the RF Connector
Division's net revenues during the fiscal year ended October 31, 2003.
The Company's connectors and cable assemblies are used in thousands of
different devices, products and types of equipment. While the models and types
of devices, products and equipment may change from year to year, the demand for
the types of connectors used in such products and offered by the Company does
not fluctuate with the changes in the end product incorporating the connectors.
In addition, since the Company's standard connectors can be used in a number of
different products and devices, the discontinuation of one product does not make
the Company's connectors obsolete. Accordingly, most connectors carried by the
Company can be marketed for a number of years and are only gradually phased out.
Furthermore, because the Company's connector products are not dependent on any
line of products or any market segment, the Company's overall sales of
connectors do not fluctuate materially when there are changes to any product
line or market segment. Sales of the Company's connector products are more
dependent upon the overall economy and on the Company's ability to market its
products. While the Company's sales of connectors and cable assemblies have
fluctuated in the past few years the Company believes that the continuing
increase in new wireless products being introduced will result in an overall
increase in the demand for the radio frequency connectors and cable assemblies
that the Company distributes.
In December 2000, the Company acquired Bioconnect, Inc., a designer and
manufacturer of cables and interconnects for medical monitoring applications. In
February, 2003, the Company consolidated Bioconnect operations with those of the
RF Connector division and moved the Bioconnect operations from Lake Elsinore to
the RF Connector division's San Diego facilities. The RF Connector division
continues to design, manufacture and sell the Bioconnect line of medical
products. The Company has leased an additional 3180 square feet of manufacturing
space, adjacent to its existing facilities for the Bioconnect cable and coaxial
cable assembly operations. The Bioconnect product group is engaged in the
design, manufacture and sale of cables and interconnects for medical monitoring
applications, such as disposable ECG cables, infant apnea monitors in hospitals,
patient leads, snap leads and connecting wires.
The RF Connector Division generated $8,588,000, approximately 87% of the
Company's net revenues during the fiscal year ended October 31, 2003.
RF Neulink Division
The RF Neulink Division designs and manufactures, through outside
contractors, wireless data products commonly known as RF data links and wireless
modems. These radio modems and receivers provide high-speed wireless connections
over longer distances where wire connections may not be desirable or feasible.
RF Neulink sells its owns products and those of other manufacturers. During the
2003 fiscal year, RF Neulink completed the design and development of a new
NL6000 radio-modem, which is now RF Neulink's new standard model. In addition to
selling its own radio modem, RF Neulink also distributes antennas, transceivers
and related products of other manufacturers. The RF Neulink Division is now able
to offer complete turnkey packages for numerous remote data transmission
applications. A few of the many applications for these products include
industrial monitoring and control of remote sensors and devices (SCADA ),
wireless linking of remote weather and seismic sites, multipoint military
training range information systems, infrastructure linking of public safety
communications networks and automatic vehicle location systems. The RF Neulink
Division generated $1,288,000, or approximately 13% of the Company's net
revenues during the fiscal year ended October 31, 2003.
Product Description:
The Company produces a broad range of interconnect products and assemblies.
The products that are offered and sold by the Company's two divisions consist of
the following:
RF Connector Division:
The Company's RF Connector Division designs and distributes coaxial
connectors for the numerous products, devices and instruments. Coaxial
connectors have applications in commercial, industrial, automotive, scientific
and military markets.
The types of connectors offered by the RF Connector Division include 2.4mm
and 3.5mm, 7-16 DIN, BNC, MCX, MHV, Mini-UHF, MMCX, N, SMA, SMB, TNC and UHF.
These connectors are offered in several configurations for both plugs and jacks.
There are hundreds of applications for these connectors, some of which include
digital applications, cellular and PCS telephones, Wi-Fi and broadband wireless
applications, cellular and PCS infrastructure, GPS (Global Positioning Systems),
mobile radio products, aircraft, video surveillance systems, cable assemblies
and test equipment. Users of the Company's connectors include telecommunications
companies, circuit board manufacturers, Original Equipment Manufactures (OEM),
consumer electronics manufacturers, audio and video product manufacturers and
installers, and satellite companies. The RF Connector Division markets
approximately 1,500 types of connectors, which range in price from $0.40 to
$125.00 per unit.
The RF Connector Division also produces and markets the Company's cable
assemblies. Cable assemblies are made with a variety of sizes and combinations
of RFI coaxial connectors and coax cabling. Cabling is purchased from a variety
of major unaffiliated suppliers and is assembled with the Company connectors as
complete cable assemblies. Coaxial cable assemblies have thousands of
applications including local area networks, wide area networks, Internet
systems, PCS/cellular systems, TV/dish network systems, test equipment and
entertainment systems.
The Bioconnect group within the RF Connector division designs, manufactures
and sells specialized electrical cabling and interconnect products used in the
medical monitoring market. These products consist primarily of patient
monitoring cables, ECG cables, snap leads, and molded safety leads for neonatal
monitoring electrodes. The products, which are used in hospitals, clinics,
doctor offices, ambulances and at home are replaced frequently in order to
ensure maximum performance.
The RF Connectors Division also designs, and manufactures through outside
contractors, a variety of connectors and hand tools that are assembled into kits
used by lab and field technicians, R&D technicians and engineers. The Company
also designs and now offers some of its own tools, which differ from those
offered elsewhere in the market. Tool products are carried as an accommodation
to the Company's customers and have not materially contributed to the Company's
revenues.
RF Neulink Division:
The wireless data products available from the RF Neulink Division come in a
variety of configurations to satisfy the requirements of the various vertical
markets. Transmitter and receiver modules come in a wide range of power output
and frequency ranges and are used to convey data or voice from point to point.
Additionally, dumb or smart programmable modems are available in a wide range of
speeds and frequency/price ranges. Accessory modules have been developed for
remotely controlling and monitoring electrical devices.
The products sold by the RF Neulink Division, including both its own
products and products of other manufacturers that are distributed by the Neulink
Division, include:
o RF9600 UHF and VHF wireless modems
o DAC9600'S incorporating RF9600's with Digital, Analogue, and Relay I/O
modules
o NL6000 UHF and VHF wireless modems
o Omnex Control Systems 900mhz Spread-Spectrum wireless modems and I/O
modules
o Teledesign high-speed wireless modems in VHF, UHF and 900 MHz frequen-
cies
o Maxrad and Antenex antennas
o Bluewave Antennas
o Custom Design and Engineering services
Current applications in use worldwide for Neulink products are various and
include:
o seismic and volcanic monitoring
o industrial remote censoring/control in oil fields, pipelines and ware-
housing
o lottery remote terminals
o various military applications
o remote camera control and tracking
o perimeter and security system control/monitoring
o water and waste management
o inventory control
o HVAC remote control and monitoring
o biomedical hazardous material monitoring
o fish farming automation of food dispensing, water aeration and moni-
toring
o remote emergency generator startup and monitoring
o Police usage for mobile want and warrant data
During the 2003 fiscal year, RF Neulink completed the design and
development of a new NL6000 radio-modem, and the Company has recently commenced
marketing and selling these units. This product is a high-speed narrow band
compliant radio modem, with a powerful DSP on board, that operates on a 12.5 KHz
channel at a 12 Kbps data transfer rate. With standard data, enhanced data, and
mobile data modes, the NL6000 is programmable to meet most needs.
The Company also is marketing its Neulink wireless data products for use in
oil and gas field monitoring, electrical control and distribution and industrial
automation and plant security. In addition, the Neulink Division's standard RF
9600 radio modem, which is used to monitor seismic and volcanic activity, is
designed to prevent loss of life by early warning of impending disaster.
In addition to its own products, the Neulink Division also is the
nationwide distributor for Zeus Wireless data spread spectrum transceivers.
These units are true frequency hoppers @ 2.4GHz offering point-to-point,
point-to- multipoint, Broadcast and TCP/IP operational modes. The Neulink
Division has agreed to handle lower volume customers of this product. Under this
agreement, the Neulink Division provides system design, tech support and service
for sales of 2500 units.
In 2002, the Neulink Division added the Antenex line of antennas to its
product line. As a distributor for both Maxrad and Antenex antennas, the Neulink
Division is now able to offer two complimentary lines of antennas, thereby
addressing most antenna needs.
In 2002, the Neulink Division also was named as a distributor of Omnex
Control System's wireless modems, thereby enabling the Neulink Division to
increase its line of products to include a 900 MHz spread spectrum transceiver
to customers who need a license-free system. The Omnex line of products has
multiple transceivers with numerous options.
Design efforts have been completed for the software and hardware products,
which, in combination with existing products, are designed to enable Neulink to
market complete wireless solutions for control and monitoring of remote sites
via radio modem links. New software enables RF Neulink's RF9600 wireless modems,
in conjunction with our I/O modules, to configure a SCADA system. The software,
named EZ-SCADA, creates a simple user-defined graphics screen that visually
displays the status, analogue values and trends. EZ-SCADA software allows remote
polling via base stations of SCADA units such as water, oil or gas tanks.
Hardware changes include addition of Analogue `C' module, allowing system design
for a full range of sensing and monitoring devices, digital, analogue and relay
control.
The Neulink Division also added several other new products to its line.
With over-the-air rates of 19.2 Kbps the Teledesign Systems TS4000 series offers
enhanced features such as dual RS-232 data ports and higher RF power levels. The
TS4000 series offer increased range for remote SCADA systems, as well as dual
RS232 port options for multiple unit control. In addition, the new TPL
amplifiers for licensed systems enable increased range of communications between
radios. The TPL line of high-speed switched amplifiers compliment Neulink,s
high-speed radio modems.
Foreign Sales:
Direct export sales by the Company to customers in South America, Canada,
Mexico, Europe, Australia, the Middle East, and the Orient accounted for
approximately 18% of Company sales for the fiscal year ended October 31, 2002
and approximately 12% of Company sales for the fiscal year ended October 31,
2003. The majority of the export sales during these periods were to Canada and
Mexico. The Company is attempting to expand its foreign distribution efforts
under its "RFI" logo, and is attempting to obtain additional foreign private
label customers.
The Company does not own, or directly operate any manufacturing operations
or sales offices in foreign countries.
Distribution, Marketing and Customers:
Sales methods vary greatly between the two divisions.
RF Connector presently sells its products primarily through warehousing
distributors and OEM (Original Equipment Manufacturer) customers who utilize
coaxial connectors and cable assemblies in the manufacture of their products.
Since there are many OEMs who are not served by any of the Company's
distributors, the Company's goal is to increase the number of OEMs that purchase
connectors directly from the Company. The Bioconnect group markets its products
both directly to hospitals and indirectly to the medical market through hospital
dealers and distributors. The group also sells its products to OEMs who
incorporate the leads and cables into their product offerings.
RF Neulink sells its products directly or through manufacturers
representatives, system integrators and OEM's. System integrators and OEMs
integrate and/or mate Company's products with their hardware and software to
produce turnkey wireless systems. These systems are then either sold or leased
to other companies, including utility companies, financial institutions,
petrochemical companies, government agencies, and irrigation/water management
companies.
Manufacturing:
The Company contracts with outside third parties for the manufacture all
its coaxial connectors, and Neulink products. However, virtually all of RF cable
assemblies sold by the Company during the fiscal year ended October 31, 2003
were manufactured by the Company at its facilities in California. RF Connector
has its manufacturing performed at numerous manufacturing plants in Japan,
Korea, the United States and International Standards Organization (ISO) approved
factories in Taiwan. The Company is not dependent on any one or only a few
manufacturers for its coaxial connectors and cable assemblies. The Company does
not have any agreements with manufacturers for its connectors, cable assemblies
or Neulink products. RF Industries has in-house design engineers who create the
engineering drawings for fabrication and assembly of connectors and cable
assemblies. Accordingly, the manufacturers are not primarily responsible for
design work related to the manufacture of the connectors and cable assemblies.
However, the third party manufacturers of the Neulink products are solely
responsible for design work related to the manufacture of the Neulink Division's
products. Neulink's products are manufactured by numerous manufacturers in the
United States, and the Company is not dependent on one or a few manufacturers
for its Neulink products.
The Bioconnect group of the RF Connector division has designed and
manufactured its own products for over 20 years (including as an unaffiliated
company). The manufacturing process for the Bioconnect medical cables includes
all aspects of the product, from the design to mold design, mold fabrication,
assembly and testing. The Bioconnect product line produces its medical
interconnect products in both high volume manufacturing and for custom or low
volume uses.
There are certain risks associated with the Company's dependence on third
party manufacturers for its products, including reduced control over delivery
schedules, quality assurance, manufacturing costs, the potential lack of
adequate capacity during periods of excess demand and increases in prices. See
"Risk Factors."
Raw Materials:
Connector materials are typically made of commodity metals and include
small applications of precious materials, including silver and gold. The RF
Connector Division purchases almost all of its connector products from contract
manufacturers located in Asia and the United States. The Company believes that
the raw materials used in its products are readily available and that the
Company is not currently dependent on any supplier for its raw materials. The
Company does not currently have any long-term purchase or supply agreements with
its connector or Neulink product suppliers. The RF Connector cable assembly
division obtains coaxial connectors from RF Connector's manufacturing sources.
The Company believes there are numerous domestic and international suppliers of
coaxial connectors. Nevertheless, should the Company experience a material delay
in obtaining raw materials and component parts from its existing suppliers,
until alternate arrangements are made, the Company's ability to meet its
customer's needs may be adversely affected.
Neulink purchases its electronic products from various U.S. suppliers, and
all Neulink wireless modem transceivers are built in the United States. The
Company believes electronic components used in these products are readily
available from a number of domestic suppliers and from other foreign suppliers.
Personnel:
As of December 31, 2003, the Company employed 52 full-time employees, of
whom 17 were in management, 16 were in manufacturing and assembly, 2 were
engineers engaged in design, research and development, and the rest were in
various administrative positions. The Company also occasionally hires part-time
employees. The Company believes that it has a good relationship with its
employees and, at this time, no employees are represented by a union.
Research and Development:
During the past two fiscal years, the Company spent approximately $300,000
on research and development. A significant portion of the recent research and
development expenses consisted on the development of RF Neulink's new NL6000
radio modem. Since the development of the NL6000 has now been completed,
research and development expenses are expected to decrease slightly. Research
and development activities of the Company consist of activities intended to
produce new products not marketed by others that can be marketed to the industry
in general. In addition, to research and development activities, the Company
also spent approximately $1,098,000 during the past two fiscal years on
engineering. Engineering activities consist of the design and development of new
products for specific customers and the design and engineering of new products
to keep up with changes in the industry and products offered by the Company's
competitors. Engineering work often is carried out in collaboration with the
Company's customers.
Patents, Trademarks and Licenses:
The Company does not own any patents on any of its products, nor has it
registered any product trademarks. Because of the Company carries thousands of
separate types of connectors and other products, most of which are available to
the Company's customers from other sources, the Company does not believe that
its business or competitive position is dependent on patent protection.
Warranties and Terms:
The Company warrants its products to be free from defects in material and
workmanship for varying warranty periods, depending upon the product. Products
are generally warranted to the dealer for one year, with the dealer responsible
for any additional warranty it may make. Certain Neulink products are sold
directly to end-users and are warranted to those purchasers. The RF Connector
products are warranted for the useful life of the connectors. Although the
Company has not experienced any significant warranty claims to date, there can
be no assurance that it will not be subjected to such claims in the future.
The Company usually sells to customers on 30-day terms pursuant to invoices
and does not generally grant extended payment terms. Sales to most foreign
customers are made on cash terms at time of shipment. Customers may delay,
cancel, reduce, or return products after shipment subject to a restocking
charge.
Competition:
Management estimates that RF Connector has over 50 competitors in a
$900,000,000 annual coaxial connector market. Management believes no one
competitor has over 15% of the total market, while the three leaders hold no
more than 30% of the total market. Many of the competitors of the RF Connector
Division have significantly greater financial resources and broader product
lines. RF Connector competes on the basis of product quality, product
availability, price, service, delivery time and value-added support to its
distributors and OEM customers. Since the Company's strategy is to provide a
broad selection of products in the areas in which it competes and to have a
ready supply of those products available at all times, the Company normally has
a significant amount of inventory of its connector products. The Bioconnect
group competes with numerous other companies in all areas of its operations,
including the manufacture of OEM custom products and medical cable products.
Most of the competitors of Bioconnect are larger and have significantly greater
financial resources than Bioconnect.
Major competitors for Neulink include Microwave Data Systems and Data
Radio. Although a number of larger firms could enter Neulink's markets with
similar products, Neulink's strategy is focused on serving and providing
specific hardware and software combinations with the goal of maintaining a
strong position in selected "niche" wireless applications. While the Neulink
Division's competitors offer products that are substantially similar to
Neulink's radio modems, the Neulink Division tries to enhance its competitive
position by offering additional service before, during, and after the sale. For
example, the Company provides design, applications engineering, and telephone
assistance to its Neulink Division customers.
Government Regulations:
The Company's products are designed to meet all known existing or proposed
governmental regulations. Management believes that the Company should be able to
meet existing standards for approvals by government regulatory agencies for its
principal products.
Neulink products are subject to the regulations of the Federal
Communications Commission (FCC) in the United States, the Department of
Communications (D.O.C.) in Canada, and the future E.C.C. Radio Regulation
Division in Europe. The Company's present equipment is "type-accepted" for use
in the United States and Canada. Neulink offers products that comply with
current FCC, Industry Canada, and some European union regulations. The system
integrator, or end user, is responsible for compliance with applicable
government regulations.
Bioconnect's products are subject to the regulations of the U.S. Food and
Drug Administration.
RISK FACTORS
Investors should carefully consider the risks described below and all other
information in this Form 10-KSB. The risks and uncertainties described below are
not the only ones facing the Company. Additional risks and uncertainties not
presently known to the Company or that it currently deems immaterial may also
impair the Company's business and operations.
If any of the following risks actually occur, the Company's business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of the Company's common stock could
decline and investors may lose all or part of the money they paid to buy the
Company's common stock.
Dependence On RF Connector Division Products
Of the Company's tow operating divisions, the RF Connector division is the
largest, accounting for approximately 87% of the Company's total sales for the
fiscal year ended October 31, 2003. 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. International
revenues are subject to a number of risks, including:
o longer accounts receivable payment cycles;
o difficulty in enforcing agreements and in collecting accounts receivable;
o tariffs and other restrictions on foreign trade;
o economic and political instability; and
o 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 Revenue 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:
o reduced control over delivery schedules and quality;
o risks of inadequate manufacturing yields and excessive costs;
o the potential lack of adequate capacity during periods of excess demand;
and
o 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.
If The Manufacturers of the Company's Coaxial Connectors Or Other Products
Discontinue The Manufacturing Processes Needed To Meet The Company's Demands Or
Fail To Upgrade Their Technologies, the Company May Face Production Delays.
The Company's coaxial connector and other product requirements typically
represent a small portion of the total production of the third-party
manufacturers. As a result, the Company is subject to the risk that a third
party manufacturer will cease production some of the Company's products or fail
to continue to advance the process design technologies on which the
manufacturing of the Company's products are based. Each of these events could
increase the Company's costs, harm its ability to deliver products on time, or
develop new products.
Dependence Upon Independent Distributors To Sell And Market The Company's
Products
The Company's sales efforts are primarily affected through independent
distributors, 73 as of the end of fiscal 2003. Sales through independent
distributors accounted for approximately 75% the net sales of the Company for
the fiscal year ended October 31, 2003. 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 total sales of the
Company's RF Connector division for the fiscal year ended October 31, 2003.
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:
o rapidly changing technologies;
o evolving and competing industry standards;
o short product life cycles;
o changing customer needs;
o emerging competition;
o frequent new product introductions and enhancements; and
o 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:
o success in subcontracting the design and manufacture of existing and new
products that implement new technologies;
o product quality;
o reliability;
o customer support;
o time-to-market;
o price;
o market acceptance of competitors' products; and
o 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.
Control By Principal Stockholders
Officers and directors, as of January 9, 2004, own or could own, upon
exercise of options, which are immediately exercisable, approximately 24% of the
outstanding common stock of the Company. Accordingly, these officers and
directors, in their capacities as stockholders, will be able to influence the
outcome of any corporate or other matter submitted to the Company's stockholders
for approval, including any merger, consolidation sale of all or substantially
all of the Company's assets. Such concentrated share ownership may prevent or
discourage potential bids to acquire the Company unless the terms are approved
by such officers and directors.
Dependence On Key Personnel
The Company's success will depend to a significant extent on the continued
service of the Company's senior executives including Howard Hill, its President
and Chief Executive Officer, and certain other key employees, including certain
technical and marketing personnel. The Company has an employment agreement with
Mr. Hill for a term, which expires on February 24, 2005. If the Company lost the
services of Mr. Hill or one or more of the Company's key executives or employees
(including if one or more of the Company's officers or employees decided to join
a competitor or otherwise compete directly or indirectly with the Company), this
could materially adversely affect the Company's business, operating results, and
financial condition.
The Company May Make Future Acquisitions, Which Will Involve Numerous Risks.
The Company periodically considers 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 such future acquisitions include:
o diversion of management's attention;
o the affect on the Company's financial statements of the amortization
of acquired intangible assets;
o the cost associated with acquisitions and the integration of acquired
operations; and
o 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.
The Company Has No Exclusive Intellectual Property Rights In The Technology
Employed In Its Products, Which May Limit the Company's Ability To Compete.
The Company does not hold any United States or foreign patents and does not
have any patents pending. In addition, the Company does not have any other
exclusive intellectual property rights in the technology employed in its
products. The Company does not actively seek to protect its rights in the
technology that it develops or that the Company's third-party contract
manufacturers develop. In addition, these parties share the technologies with
other parties, including some of the Company's competitors.
Volatility of Trading Prices
In the past several years the market price of the Company's common stock
has varied greatly, and the volume of the Company's common stock traded has
fluctuated greatly as well. These fluctuations often occur independently of the
Company's performance or any announcements by the Company. Factors that may
result in such fluctuations include:
o any shortfall in revenues or net income from revenues or net income ex-
pected by securities analysts
o fluctuations in the Company's financial results or the results of other
connector and communications - related companies, including those of the
Company's direct competitors
o changes in analysts' estimates of the Company's financial performance,
the financial performance of the Company's competitors, or the financial
performance of connector and communications-related public companies in
general
o general conditions in the connector and communications industries
o changes in the Company's revenue growth rates or the growth rates of the
Company's competitors
o sales of large blocks of the Company's common stock
o conditions in the financial markets in general
In addition, the stock market may from time to time experience extreme
price and volume fluctuations, which may be unrelated to the operating
performance of any specific company. Accordingly, the market prices of the
Company's common stock may be expected to experience significant fluctuations in
the future.
ITEM 2. PROPERTIES:
The Company leases its corporate headquarters building at 7610 Miramar
Road, Building 6000, San Diego, California. The building consists of
approximately 11,000 square feet which houses administrative, sales and
marketing, engineering, production and warehousing for the Company's Connector
Division. In addition, in February 2003, the Company leased an additional 3180
square foot facility adjacent to the Company's existing facilities to house the
operations of Bioconnect, which were relocated as part of the consolidation of
the operations of RF Connector and Bioconnect. The Neulink Division operates
from a separate building that is located adjacent to the Company's corporate
headquarters at 7606 Miramar Road, Building 7200. RF Neulink's building consists
of approximately 2,400 square feet, which houses the production and sales staff
of the Neulink Division. All of the foregoing leases will terminate in May 31,
2005. The aggregate monthly rental for all the Company's facilities currently is
approximately $13,500 per month, plus utilities, maintenance and insurance.
The Company currently believes that its facilities are sufficient to meet
its foreseeable needs. However, should the Company require additional space, the
Company believes that suitable additional space is available near the Company's
current facilities.
ITEM 3. LEGAL PROCEEDINGS:
The Company is not currently a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
Market information: The Company's Common Stock is listed and trades on the
NASDAQ Small Cap Market under the "RFIL."
For the periods indicated, the following tables sets forth the high and low
sales prices per share of Common Stock. These prices represent inter-dealer
quotations without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.
Quarter High Low
----------- ------ -------
Fiscal 2003
-------------
November 1, 2002 - January 31, 2003......... 2.69 2.00
February 1, 2003 - April 30, 2003........... 2.87 2.00
May 1, 2003 - July 31, 2003................. 3.78 2.67
August 1, 2003 - October 31, 2003........... 4.50 3.35
Fiscal 2002
-------------
November 1, 2001 - January 31, 2002......... 2.90 2.62
February 1, 2002 - April 30, 2002........... 2.92 2.601
May 1, 2002 - July 31, 2002................. 2.85 2.031
August 1, 2002 - October 31, 2002........... 2.22 1.569
On January 9, 2004, the closing sales price of the Company's Common Stock
was $6.84.
As of January 9, 2004, there were 613 holders of the Company's Common Stock
according to the records of the Company's transfer agent, Continental Stock
Transfer & Trust Company, New York, New York.
The Company has not paid any dividends to date and does not presently
intend to pay cash dividends on its Common Stock in the foreseeable future.
There were no sales of equity securities by the Company that were not
registered under the Securities Act during fiscal 2003.
The Company did not repurchase any of its shares during the fourth quarter
of the fiscal year covered by this report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make significant estimates and judgments
that affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosure of contingent assets and liabilities. We evaluate our
estimates, including those related to bad debts, inventories and contingencies
on an ongoing basis. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. One of accounting policies that involve significant
judgments and estimates concerns our 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, we 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, we determine the amounts of these allowances. Because inventories have,
during the past few years, represented over 40% of our total assets, any
reduction in the value of our inventories would require us to take write-offs
that would affect our net worth and future earnings.
OVERVIEW
Historically, over 85% of the Company's revenues are generated by our RF
Connector divisions from the sale of connector products and connector cable
assemblies. Because we sell thousands of connector products for uses in
thousands of end products, our sales are relatively stable and not dependent
upon any industry sector or product line. As a result, our revenues and expenses
are typically not subject to major fluctuations. During the fiscal year ended
October 31, 2003, our sales did, however, increase by 11% over the sales in the
prior year due to an overall increase in the economy and, in particular, a
rebound in the telecommunications and wireless industries, which resulted in
increased sales to those industries. Our RF Neulink division also contributed to
the growth in sales due to increased service revenues.
We also continued to manage our operating costs by reducing our selling and
general expenses during fiscal 2003 by almost 4% by consolidating two of our
facilities and by merging our medical cable and connector operations into our
connector divisions. The savings in our selling and general expenses for fiscal
2003 were offset by an increase in engineering and research and development
expenses as we completed the development of a new wireless modem that our RF
Neulink division released for sale at the end of the fiscal year.
As a result of our increased sales and control of our operating expenses, the
Company generated net income for the 10th consecutive year.
During the 2003 fiscal year. we generated $1,129,000 of cash from our
operations. Since the Company had $3,939,000 of cash at the beginning of the
fiscal year, during this past fiscal year the Company used $2,388,000 to
repurchase stock. Nevertheless, since, as of October 31, 2003, we had cash and
cash equivalents of $2,684,000 in the aggregate and currently have no debt,
other than normal accounts payable and accrued expenses, we continue to have
sufficient cash to fund our anticipated financing and liquidity needs for the
foreseeable future. Financial Condition:
The following table presents the key measures of consolidated financial
condition as of October 31, 2003 and 2002:
2003 2002
------------------------- -------------------------
% Total % Total
Amount Assets Amount Assets
----------- ----------- ----------- ---------
Cash and cash equivalents......... $2,683,896 31.2% $3,939,299 38.8%
Current assets.................... 8,146,211 94.6% 9,573,351 94.4%
Current liabilities............... 509,992 5.9% 442,659 4.4%
Working capital................... 7,636,219 88.7% 9,130,692 90.0%
Property and equipment - net......
328,124 3.8% 434,823 4.3%
Total assets...................... 8,608,090 100.0% 10,146,150 100.0%
Stockholders' equity.............. 8,058,098 93.6% 9,595,691 94.6%
Liquidity and Capital Resources:
Management believes that its 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 the
fiscal year ended October 31, 2004. 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 believes that its existing assets and the cash it expects to generate
from operations will be sufficient during the current fiscal year are based on
the following:
o As of October 31, 2003, the amount of cash and cash equivalents was equal
to $2,684,000 in the aggregate. This amount represented approximately 94%
of the selling and general expenses of the Company for the entire fiscal
year ended October 31, 2003. Accordingly, the Company believes that it has
sufficient cash available to operate for an entire year even if it did not
generate any profits.
o As of October 31, 2003, the Company had approximately $8,146,000 in current
assets, and only $510,000 of current liabilities.
o As of October 31, 2003, the Company had only $40,000 of outstanding
indebtedness (other than accounts payable and other current liabilities).
o As of October 31, 2003, the total amount of fixed commitments of the
Company (such as lease payments for its properties and equipment, and other
non-cancelable obligations) was $241,000.
In addition, the Company currently does not believe it will need to make
any material acquisitions in fiscal 2004. Management also believes that based on
the Company's financial condition at October 31, 2003, the absence of
outstanding bank debt, and its 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.
The Company is not a party to off-balance sheet arrangements and does not
engage in trading activities involving non-exchange traded contracts. In
addition, the Company has no financial guarantees, debt or lease agreements or
other arrangements that could trigger a requirement for an early payment or that
could change the value of the Company's assets.
Inventories as of October 31, 2003 were $3,455,000, a $689,000 decrease
from October 31, 2002. As part of its business strategy, and because of its
offshore manufacturing arrangements, the Company normally maintains a high level
of inventory. As described elsewhere in this Annual Report, one of the Company's
competitive advantages and strategies is to maintain customer satisfaction by
having sufficient inventory on hand to fulfill most customer orders on short
notice. Accordingly, the Company maintains a significant amount of inventory,
which amount it increases or decreases to reflect its sales. The Company
continuously monitors its inventory levels and, because of recent increases in
sales, may commence increasing its inventory levels.
The net income for the current year was $711,000, net cash provided by
operating activities for the year ended October 31, 2003 was $1,129,000. For the
prior year ended October 31, 2002, net income was $380,000, and cash provided by
operating activities was $1,415,000. In each of the past two fiscal years, net
cash provided from operations exceeded net income due to the reduction in
inventories (which enabled the Company to generate sales without having to
expend cash to purchase or replenish those inventories), non-cash depreciation
and amortization expenses, and certain other factors.
Net cash used in investing activities was $44,000 during fiscal 2003,
compared to $1,653,000 provided by investing activities in fiscal 2002. The net
cash that the Company realized in fiscal 2002 from investing activities was due
to the liquidation by the Company of its short-term money market holdings.
Financing activities reduced the Company's net cash by $2,340,000 in the
current year primarily as a result of the repurchase in May 2003 by the Company
of 752,167 of its outstanding shares of common stock at $3.00 per share (a cash
outlay of $2,256,501), and repurchase of stock on open market of $83,499. The
decrease in cash due to the repurchase of shares was partially offset by the
issuance of $90,000 of new shares upon the exercise of stock options. The
Company used $45,000 in financing activities during the previous year to repay
outstanding loans.
Results of Operations:
The following summarizes the key components of the consolidated results of
operations for the years ended October 31, 2003 and 2002:
2003 2002
----------------------- ----------------------
% of % of
Amount Sales Amount Sales
----------- ---------- ----------- --------
Net sales...................... $9,875,499 100.0% $8,915,935 100.0%
Cost of sales.................. 5,079,307 51.4% 4,669,673 52.4%
Gross profit................... 4,796,192 48.6% 4,246,262 47.6%
Engineering expenses........... 753,562 7.6% 644,120 7.2%
Selling and general expenses...
2,849,506 28.9% 2,964,072 33.2%
Impairment of goodwill.... - - 220,509 2.5%
Operating income............... 1,193,124 12.1% 417,561 4.7%
Other income................... 22,321 .2% 354,423 4.0%
Income before income taxes.....
1,215,445 12.3% 771,984 8.7%
Income taxes................... 504,700 5.1% 392,300 4.4%
Net income..................... 710,745 7.2% 379,684 4.3%
Net sales of the Company increased by $960,000, or 11%, for the fiscal year
ended October 31, 2003 compared to the fiscal year ended October 31, 2002. The
increase in fiscal 2003 is attributable in part to a $537,000 increase in sales
at the Company's RF Connector Division to $8,588,000 in fiscal 2003 from
$8,051,000 in fiscal 2002. The increase in net sales in the RF Connector
Division was due to an increase in overall demand for connector products,
particularly for wireless applications, during the second half of the fiscal
year. For the fiscal year ended October 31, 2003, net sales of Neulink Division
increased by $423,000.
Net sales for the Neulink Division increased by $423,000 to $1,288,000 in
fiscal 2003 from $865,000 in fiscal 2002. The primary reason for the increase in
Neulink's revenues is due to the consulting and engineering assistance that
Neulink started to offer to its customers. Neulink also offered its customers
cables, antennas and radio modems to optimize their end use performance, thus
increasing sales. Neulink has recently supplemented the product line that it
offers with the new modem that it has developed and recently introduced.
The Company's gross profit increased by $550,000 to $4,796,000 in 2003 from
$4,246,000 in 2002 due to the increase in net sales and a slight decrease in the
cost of sales. As a percent of sales, gross profit increased to 48.6% in fiscal
2003 from 47.6% of sales in fiscal 2002. The increase in the gross profit
percentage is primarily due to product mix, and increased sales volume, which
increased volume enabling the Company to obtain better pricing on its product
purchases and reduce its per unit labor costs.
Engineering expenses, which include research and development expenses,
increased by $110,000 from $644,000 in fiscal 2002 to $754,000 in fiscal 2003.
As a percent of sales, engineering expenses increased from 7.2% in fiscal 2002
to 7.6% in fiscal 2003. The increase in engineering expenses is attributable to
an increase in the design and development activities related the development of
the recently released new Neulink modem. Since the development of that modem has
now been completed, research and development expenses are expected to decrease
slightly during the current fiscal year.
Selling and general expenses decreased by $114,000, or by 3.9%, from
$2,964,000 in fiscal 2002 to $2,850,000 in fiscal 2003. The decrease is
primarily due to the consolidation of the Bioconnect operations with and into
the RF Connector division, which consolidation eliminated certain duplicative
costs.
Operating income increased by $775,000 from $418,000 in fiscal 2002 to
$1,193,000 in fiscal 2003. The increase in operating income is primarily
attributable to increased sales in both the divisions, the higher gross margins,
and the decrease in selling and general expenses. Operating income in fiscal
2002 also was lowered by $221,000 due to an impairment of goodwill charge. No
similar charge was taken in fiscal 2003.
Other income decreased by $332,000. Other income in fiscal 2002 benefited
from a one-time contract settlement of $272,000 and from commissions of $23,000.
The remaining decrease in other income in fiscal 2003 from other income in
fiscal 2002 was due to a $45,000 decrease in interest earnings, which decrease
is due to the lower cash balances held by the Company during the current year
(cash balances were reduced by $2,388,000 due to the repurchase of shares)
Net income increased by $331,000to $711,000, compared to net income of
$380,000 in fiscal 2002. The increase in net income is due to the overall
increase in net sales coupled with a decrease in operating expenses.
ITEM 7. FINANCIAL STATEMENTS
The following Financial Statements of the Company with related Notes and
Report of Independent Public Accountants are attached hereto as pages F-1 to
F-19 and filed as part of this Annual Report:
o Report of J.H. Cohn LLP, Independent Public Accountants
o Balance Sheet as of October 31, 2003 and 2002
o Statements of Income for the years ended October 31, 2003 and 2002
o Statements of Stockholders' Equity for the years ended October 31, 2003
and 2002
o Statements of Cash Flows for the years ended October 31, 2003 and 2002
o Notes to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company has adopted a code of ethics that applies to all executive
officers and directors of the Company, a copy of which is filed as Exhibit 14 to
this Form 10-K/SB.
The information required by this item is incorporated by reference to the
information under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Exchange Act" of the Registrant's definitive Proxy
Statement and notice of the Company's 2004 Annual Meeting of Shareholders which
the Company will file with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this report.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" of the Registrant's
definitive Proxy Statement and notice of the Company's 2004 Annual Meeting of
Shareholders, which the Company will file, with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
report.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" of the Registrant's definitive Proxy Statement and notice of the
Company's 2004 Annual Meeting of Shareholders which the Company will file with
the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
of the Registrant's definitive Proxy Statement and notice of the Company's 2004
Annual Meeting of Shareholders which the Company will file with the Securities
and Exchange Commission within 120 days after the end of the fiscal year covered
by this report.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this report:
3.1 Articles of Incorporation, as amended (1)
3.2.1 Company Bylaws as Amended through August, 1985 (2)
3.2.2 Amendment to Bylaws dated January 24, 1986(2)
3.2.3 Amendment to Bylaws dated February 1, 1989(3)
10.1 Form of 2000 Stock Option Plan(4)
10.2 Directors' Nonqualified Stock Option Agreements (2)
10.3 Lease Agreement - San Diego, CA Facility (3)
10.4 Employment Contract - Howard Hill (4)
10.5 Employment Contract-Terrie Gross(4)
10.6 Lease Agreement-Neulink Division - San Diego, CA Facility (3)
14.1 Code of Ethics
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350
--------------------------------
(1) Previously filed as an exhibit to the Company's Form 10-KSB for the
year ended October 31, 2000, which exhibit is hereby incorporated
herein by reference.
(2) Previously filed as an exhibit to the Company's Form 10-KSB for the
year ended October 31, 1987, which exhibit is hereby incorporated
herein by reference.
(3) Previously filed as an exhibit to the Company's Form 10-KSB for the
year ended October 31, 1992, which exhibit is hereby incorporated
herein by reference.
(4) Previously filed as an exhibit to the Company's Form 10-QSB for the
quarter ended January 31, 2001, which exhibit is hereby incorporated
herein by reference.
Reports on Form 8-K
The Company filed the following reports on Form 8-K during the last quarter
of the fiscal year ending October 31, 2003:
o On September 8, 2003, the Company filed a Current Report on Form 8-K
attaching a press release concerning the Company's earnings and
results of operations for the Company's third fiscal quarter ended
July 31, 2003.
o On September 25, 2003, the Company filed a Current Report on Form 8-K
to disclose the introduction of a new product.
Shareholders of the Company may obtain a copy of any exhibit referenced in
this 10-KSB Report by writing to: Secretary, RF Industries, Ltd., 7610 Miramar
Road, Bldg. 6000, San Diego, CA 92126. The written request must specify the
shareholder's good faith representation that such shareholder is a stockholder
of record of common stock of the Company. A charge of twenty cents ($.20) per
page will be made to cover Company expenses in furnishing the requested
documents.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
As of October 31, 2003, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934, as amended). Based upon that evaluation, the Company's
Chief Executive Officer and its Chief Financial Officer concluded that the
Company's disclosure controls and procedures, for a company of its size, are
adequate to ensure material information and other information requiring
disclosure are identified and communicated in a timely fashion.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the
information under the caption "Principal Accountant Fees And Services" of the
Registrant's definitive Proxy Statement and notice of the Company's 2004 Annual
Meeting of Shareholders which the Company will file with the Securities and
Exchange Commission within 120 days after the end of the fiscal year covered by
this report.
SIGNATURE
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RF INDUSTRIES, LTD.
Date: January 23, 2004 By: /s/ Howard F. Hill
-------------------------
Howard F. Hill, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Dated: January 23, 2004 By: /s/ Terrie A. Gross
--------------------------
Terrie A. Gross,
Chief Financial Officer
(Principal Accounting Officer)
Dated: January 23, 2004 By: /s/ Howard F. Hill
----------------------
Howard F. Hill,
Chief Executive Officer
Dated: January 23, 2004 By: /s/ John Ehret
--------------------
John Ehret, Director
Dated: January 23, 2004 By: /s/ Marvin Fink
--------------------
Marvin Fink, Director
Dated: January 23, 2004 By: /s/ Henry Hooper
---------------------
Henry Hooper, Director
Dated: January 23, 2004 By: /s/ Robert Jacobs
----------------------
Robert Jacobs, Director
Dated: January 23, 2004 By: /s/ Linde Kester
----------------------
Linde Kester, Director
RF INDUSTRIES, LTD.
INDEX TO FINANCIAL STATEMENTS
[ATTACHMENT TO ITEM 7]
PAGE
------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ....................... F-2
BALANCE SHEETS
OCTOBER 31, 2003 AND 2002 .................................... F-3
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2003 AND 2002 ........................ F-4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2003 AND 2002 ........................ F-5
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2003 AND 2002 ........................ F-6
NOTES TO FINANCIAL STATEMENTS .................................. F-7/19
* * *
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
RF Industries, Ltd.
We have audited the accompanying balance sheets of RF INDUSTRIES, LTD. as of
October 31, 2003 and 2002, and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RF Industries, Ltd. as of
October 31, 2003 and 2002, and its results of operations and cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
San Diego, California
December 9, 2003
F-2
RF INDUSTRIES, LTD.
BALANCE SHEETS
OCTOBER 31, 2003 AND 2002
ASSETS
--------
2003 2002
------------ -----------
Current assets:
Cash and cash equivalents ............................ $ 2,683,896 $ 3,939,299
Trade accounts receivable, net of allowance for
doubtful accounts of $55,322 and $84,806 ......... 1,701,618 1,146,439
Notes receivable ..................................... 12,000 12,000
Inventories .......................................... 3,455,018 4,143,617
Other current assets ................................. 158,079 169,396
Deferred tax assets .................................. 135,600 162,600
------------ ------------
Total current assets .......................... 8,146,211 9,573,351
------------ ------------
Property and equipment:
Equipment and tooling ................................ 1,125,485 1,082,813
Furniture and office equipment ....................... 260,183 251,514
------------ ------------
1,385,668 1,334,327
Less accumulated depreciation ........................ 1,057,544 899,504
------------ ------------
Totals ........................................ 328,124 434,823
------------ ------------
Notes receivable from related parties .................... 49,584 56,505
Note receivable from stockholder ......................... 70,000 70,000
Other assets ............................................. 14,171 11,471
------------ ------------
Totals ........................................ $ 8,608,090 $ 10,146,150
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
Current liabilities:
Accounts payable ..................................... $ 181,637 $ 70,806
Accrued expenses ..................................... 328,355 327,271
Notes payable ........................................ 44,582
------------ ------------
Total current liabilities ..................... 509,992 442,659
Deferred tax liabilities ................................. 40,000 107,800
------------ ------------
Total liabilities ............................. 549,992 550,459
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 10,000,000 shares at $.01
par value; 2,692,683 and 3,441,054 shares issued . 26,927 34,410
Additional paid-in capital ........................... 2,418,033 4,695,147
Retained earnings .................................... 5,633,805 4,923,060
Receivables from sale of stock ....................... (1,715)
Treasury stock, at cost - 6,000 and 31,700 shares .... (20,667) (55,211)
------------ ------------
Total stockholders' equity .................... 8,058,098 9,595,691
------------ ------------
Totals ........................................ $ 8,608,090 $ 10,146,150
============ ============
See Notes to Financial Statements.
F-3
RF INDUSTRIES, LTD.
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2003 AND 2002
2003 2002
----------- -----------
Net sales .................................................. $ 9,875,499 $ 8,915,935
Cost of sales .............................................. 5,079,307 4,669,673
---------- ----------
Gross profit ............................................... 4,796,192 4,246,262
---------- ----------
Operating expenses:
Engineering ............................................ 753,562 644,120
Selling and general .................................... 2,849,506 2,964,072
Impairment of goodwill ................................. 220,509
---------- ----------
Totals ............................................. 3,603,068 3,828,701
---------- ----------
Operating income ........................................... 1,193,124 417,561
---------- ----------
Other income (expense):
Realized loss from sale of available-for-sale securities (8,192)
Commissions ............................................ 23,101
Contract settlement .................................... 272,031
Interest ............................................... 22,321 67,483
---------- ----------
Totals ............................................. 22,321 354,423
---------- ----------
Income before provision for income taxes ................... 1,215,445 771,984
Provision for income taxes ................................. 504,700 392,300
---------- ----------
Net income ................................................. $ 710,745 $ 379,684
========== ==========
Earnings per share:
Basic .................................................. $ .23 $ .11
========== ==========
Diluted ............................................... $ .19 $ .09
========== ==========
See Notes to Financial Statements.
F-4
RF INDUSTRIES, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2003 AND 2002
Accumulated Total
Additional Other Receivables Stock-
Common Stock Paid-In Retained Unearned Comprehen- from Sale Treasury holders'
Shares Amount Capital Earnings Compensation sive Loss of Stock Stock Equity
------- -------- --------- ----------- ----------- ---------- --------- ---------- --------
Balance, November 1, 2001 ... 3,441,054 $34,410 $4,695,147 $4,543,376 $(23,490) $(7,986) $(1,715) $(55,211) $9,184,531
Net income .................. 379,684 379,684
Effect of change in fair
value of available-for-sale
securities, net of deferred
taxes of $5,105 ............ 7,986 7,986
----------
Comprehensive income ........ 387,670
Amortization of unearned
compensation ............... 23,490 23,490
--------- -------- ---------- ---------- --------- --------- -------- ------- ----------
Balance, October 31, 2002 ... 3,441,054 34,410 4,695,147 4,923,060 -- -- (1,715) (55,211) 9,595,691
Net income ................... 710,745 710,745
Tax benefit on non-qualified
stock options................ 47,500 47,500
Repayments of receivables
from sale of stock ........... 1,715 1,715
Exercise of stock options .... 73,296 733 89,962 90,695
Purchase of treasury stock ... (2,388,248) (2,388,248)
Retirement of common stock ... (821,667) (8,216) (2,414,576) 2,422,792
----------- ------- ----------- ---------- --------- -------- --------- ---------- ----------
Balance, October 31, 2003 ....2,692,683 $26,927 $2,418,033 $5,633,805 $ -- $ -- $ -- $(20,667) $8,058,098
=========== ======== =========== ========== ========= ======== ========= ========== ===========
See Notes to Financial Statements.
F-5
RF INDUSTRIES, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2003 AND 2002
2003 2002
----------- ----------
Operating activities:
Net income .................................................. $ 710,745 $ 379,684
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debts .................................. 54,000 60,000
Depreciation and amortization ............................ 158,040 162,226
Amortization of unearned compensation .................... 23,490
Deferred income taxes .................................... (40,800) 12,700
Realized loss on sale of available-for-sale securities ... 8,192
Impairment of goodwill ................................... 220,509
Income tax benefit on non-qualified stock options ........ 47,500
Changes in operating assets and liabilities:
Trade accounts receivable ............................. (609,179) (224,636)
Inventories ........................................... 688,599 602,508
Other assets .......................................... 8,617 158,010
Accounts payable ...................................... 110,831 (36,339)
Accrued expenses ...................................... 1,084 48,864
----------- -----------
Net cash provided by operating activities ......... 1,129,437 1,415,208
----------- -----------
Investing activities:
Proceeds from sale of securities ............................ 1,780,598
Investments in securities ................................... (30,910)
Capital expenditures ........................................ (51,341) (40,049)
Payments from/(loans to) to related party ................... 6,921 (56,505)
----------- -----------
Net cash provided by (used in) investing activities (44,420) 1,653,134
----------- -----------
Financing activities:
Exercise of stock options ................................... 90,695
Purchase of treasury stock .................................. (2,388,248)
Payments on notes payable ................................... (44,582) (44,581)
Repayments of receivables from sale of stock ................ 1,715
----------- -----------
Net cash used in financing activities ............. (2,340,420) (44,581)
----------- -----------
Net increase (decrease) in cash and cash equivalents ............ (1,255,403) 3,023,761
Cash and cash equivalents at beginning of year .................. 3,939,299 915,538
----------- -----------
Cash and cash equivalents at end of year ........................ $ 2,683,896 $ 3,939,299
=========== ===========
Supplemental cash flow information - income taxes paid .......... $ 514,700 $ 91,000
=========== ===========
Noncash financing activities - retirement of common stock ....... $ 2,422,792
===========
See Notes to Financial Statements.
F-6
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
F-19
Note 1 - Business activities and summary of significant accounting policies:
Business activities:
The Company's business is comprised of the design, manufacture and/or sale
of communications equipment primarily to the radio and other professional
communications related industries. The Company is engaged in the design and
distribution of coaxial connectors used primarily in radio and other
professional communications applications (the "RF CONNECTOR Business Unit")
and the design, manufacture and sale of radio links for receiving and
transmitting control signals for remote operation and monitoring of
equipment (the "NEULINK Business Unit"). Management considers each business
unit to be a separate business segment (see Note 6).
Principles of consolidation:
The consolidated financial statements include the accounts of RF
Industries, Ltd. (the "Parent") and its wholly-owned subsidiary,
Bioconnect, Inc. (collectively, the "Company"). All significant
intercompany accounts and transactions are eliminated in consolidation. On
February 1, 2003, Bioconnect, Inc. was dissolved and its operations were
merged into RF Industries, Ltd. Accordingly, the accompanying financial
statements are no longer presented as consolidated financial statements.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results may differ from those
estimates.
Cash equivalents:
The Company considers all highly-liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Revenue recognition:
Revenue from product sales is recognized when the product is shipped. In
addition, the Company had a strategic alliance in 2002 with a supplier
where the Company recognized commission income when payment was received.
Investments:
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company's investments in mutual fund units were classified as
available-for-sale securities and, accordingly, were valued at fair value
at the end of each period. If there is an other than temporary decline in
fair value, the cost basis of the individual security would have been
written down to fair value via a charge to earnings. Unrealized holding
gains and losses arising from such valuation were excluded from income and
recognized, net of applicable income taxes, in accumulated other
comprehensive income until realized. The Company used the specific
identification method to determine the cost basis for realized gains or
losses included in income.
F-7
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(continued):
Inventories:
Inventories, consisting of materials, labor and manufacturing overhead, are
stated at the lower of cost or market. Cost has been determined using the
weighted average cost method.
Property and equipment:
Equipment, tooling and furniture are recorded at cost and depreciated over
their estimated useful lives (generally 3 to 7 years) using the
straight-line method.
Goodwill:
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets", which requires that goodwill and
certain intangible assets, including those recorded in past business
combinations, no longer be amortized against earnings, but instead be
tested for impairment at least annually. At October 31, 2002, due to
recurring losses generated by its Bioconnect Business Unit, the Company did
not believe that there was sufficient projected cash flows to support the
net book value of the goodwill. As a result, the Company wrote off $220,509
of goodwill as of October 31, 2002.
Long-lived assets:
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. An impairment loss is
recognized when the undiscounted cash flows expected to be generated by an
asset (or group of assets) is less than its carrying amount. Any required
impairment loss is measured as the amount by which the assets carrying
value exceeds its fair value, and is recorded as a reduction in the
carrying value of the related asset and a charge to operations.
Advertising:
The Company expenses the cost of advertising and promotions as incurred.
Advertising costs charged to operations were $66,890 and $78,440 in 2003
and 2002, respectively.
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.
F-8
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(continued):
Stock options:
In accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the Company
will recognize compensation costs as a result of the issuance of stock
options based on the excess, if any, of the fair value of the underlying
stock at the date of grant or award (or at an appropriate subsequent
measurement date) over the amount the employee must pay to acquire the
stock. Therefore, the Company is not required to recognize compensation
expense as a result of any grants of stock options at an exercise price
that is equivalent to or greater than fair value at the date of grant. The
Company also makes pro forma disclosures, as required by SFAS No. 123,
"Accounting for Stock-Based Compensation", of net income as if a fair value
based method of accounting for stock options had been applied.
Earnings per share:
Basic earnings per share is calculated by dividing net income applicable to
common stockholders by the weighted average number of common shares
outstanding during the period. The calculation of diluted earnings per
share is similar to that of basic earnings per share, except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if all potentially dilutive common shares,
principally those issuable upon the exercise of stock options, were issued
and the treasury stock method had been applied during the period.
The following table summarizes the calculation of basic and diluted
earnings per share:
2003 2002
---------- ----------
Numerators:
Net income (A) .............................. $ 710,745 $ 379,684
========== ==========
Denominators:
Weighted average shares outstanding for basic
earnings per share (B) .................... 3,053,352 3,441,054
Add effects of potentially dilutive securities-
assumed exercise of stock options ......... 617,273 609,584
---------- ----------
Weighted average shares for diluted
earnings per share (C) .................... 3,670,625 4,050,638
========== ==========
Basic net earnings per share (A)/(B) ............ $ .23 $ .11
========== ==========
Diluted net earnings per share (A)/(C) .......... $ .19 $ .09
========== ==========
F-9
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(concluded):
Comprehensive income:
Comprehensive income or loss is presented pursuant to SFAS No. 130,
"Reporting Comprehensive Income," and, accordingly, has been displayed for
each year in the accompanying statements of stockholders' equity and
includes the net income or loss, plus or minus the effect of the net change
in the fair value of available-for-sale securities each year, net of
deferred income taxes.
Note 2 - Concentration of credit risk and sales to major customers:
The Company maintains its cash balances primarily in one financial
institution. As of October 31, 2003, the balance exceeded the Federal
Deposit Insurance Corporation limitation for coverage of $100,000 by
$244,417. As of October 31, 2003, the Company had two unsecured money
market accounts totaling $2,349,277. The Company reduces its exposure to
credit risk by maintaining such balances with financial institutions that
have high credit ratings.
Accounts receivable are financial instruments that also expose the Company
to concentration of credit risk. Such exposure is limited by the large
number of customers comprising the Company's customer base and their
dispersion across different geographic areas. In addition, the Company
routinely assesses the financial strength of its customers and maintains an
allowance for doubtful accounts that management believes will adequately
provide for credit losses.
Sales to one customer represented 16% and 17% of total sales in 2003 and
2002, respectively. The Company does not have a written agreement with this
customer and, 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.
Note 3 - Investments:
Realized losses from sales of investments were $8,192 in 2002. There were
no sales of investments in 2003.
The reclassification adjustment included in comprehensive income during
2002 consisted of net unrealized holding gains arising during the year, net
of deferred taxes of $206, and an adjustment for realized loss, net of
deferred taxes included in net earnings of $7,986.
F-10
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 4 - Inventories:
Inventories consisted of the following as of October 31, 2003 and 2002:
2003 2002
------------ ------------
Raw materials and supplies.......... $ 591,892 $ 655,746
Finished goods ..................... 2,997,902 3,547,551
Less inventory reserve ............. (134,776) (59,680)
----------- -----------
Totals ........................ $ 3,455,018 $ 4,143,617
=========== ===========
Note 5 - Commitments:
The Company leases its facilities in San Diego, California under a
noncancelable operating lease. The lease expires in May 2005 and requires
minimum annual rental payments that are subject to fixed annual increases.
The minimum annual rentals under this lease are being charged to expense on
a straight-line basis over the lease term. Deferred rentals were not
material at October 31, 2003. The lease also requires the payment of the
Company's pro rata share of the real estate taxes and insurance,
maintenance and other operating expenses related to the facilities. The
Company also leases certain automobiles under operating leases which expire
at various dates through December 2005.
Rent expense under all operating leases totaled approximately $218,000 and
$174,000 in 2003 and 2002, respectively.
Minimum lease payments under these operating leases for years subsequent to
October 31, 2003 are as follows:
Year Ending
October 31, Amount
--------------- ----------
2004 ............................... $155,000
2005 ............................... 85,000
2006 ............................... 1,000
--------
Total ........................... $241,000
========
The Company has an employment agreement with its President and Chief
Executive Officer for a term which expires on February 24, 2005. The
aggregate amount of compensation provided for over the remaining term of
the agreement amounted to $220,000 at October 31, 2003.
F-11
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Segment information:
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information. Pursuant to the
provisions of SFAS No. 131, the Company reports segment sales in the same
format reviewed by the Company's management (the "management approach").
Management identifies the Company's segments based on strategic business
units that are, in turn, based along market lines. These strategic business
units offer products and services to different markets in accordance with
their customer base and product usage. The Company had reported segment
information in its previous filings for the operations associated with its
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 Bioconnect segment no longer meet the thresholds that require
separate disclosures and the product line of Bioconnect is comparable with
the Connector business unit. Accordingly, the Company discontinued
reporting segment information on the Bioconnect segment separately and
included this information in the Connector business unit for the year ended
October 31, 2003. The comparable segment information for the year ended
October 31, 2002 has been restated to conform with the 2003 presentation.
Substantially all of the Company's operations are conducted in the United
States; however, the Company derives a portion of its revenue from export
sales. The Company evaluates the performance of each segment based on
income or loss before income taxes. The Company allocates depreciation and
amortization and other indirect expenses at the rate of 92.5% to the RF
CONNECTOR Business Unit and 7.5% to the NEULINK Business Unit. The basis
for this allocation is based upon the number of personnel employed in each
Business Unit.
The Company attributes revenues to geographic areas based on the location
of the customers. The following table presents the revenues of the Company
by geographic area for the years ended October 31, 2003 and 2002:
2003 2002
---------- --------
United States .......................... $8,675,099 $7,321,967
Foreign countries ...................... 1,200,400 1,593,968
---------- ----------
Totals ............................. $9,875,499 $8,915,935
========== ==========
F-12
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Segment information (concluded):
Net sales, income (loss) before provision for income taxes and other
related segment information as of October 31, 2003 and 2002, and for the
years ended October 31, 2003 and 2002 follows:
Common/
Connector Neulink Corporate Total
------------- ----------- ----------- ----------
2003
----------
Net sales ....................... $8,587,993 $1,287,506 $9,875,499
Income (loss) before
provision for income
taxes ......................... 1,317,242 (124,118) $ 22,321 1,215,445
Depreciation and
amortization .................. 140,227 17,813 158,040
Total assets .................... 7,903,480 704,610 8,608,090
Additions to property
and equipment ................. 51,341 51,341
2002
----------
Net sales ....................... $8,051,058 $ 864,877 $8,915,935
Income (loss) before
provision for income
taxes ......................... 754,016 (41,323) $ 59,291 771,984
Depreciation and
amortization .................. 142,095 20,131 162,226
Total assets .................... 9,163,044 983,106 10,146,150
Additions to property
and equipment ................. 40,049 40,049
F-13
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Income taxes:
The provision for income taxes consists of the following:
2003 2002
-------- -------
Current:
Federal .......................... $ 426,500 $ 290,400
State ............................ 119,000 89,200
---------- ---------
545,500 379,600
---------- ---------
Deferred:
Federal .......................... (30,800) 10,700
State ............................ (10,000) 2,000
---------- ---------
(40,800) 12,700
---------- ---------
Totals ....................... $ 504,700 $ 392,300
========== =========
Income tax at the Federal statutory rate is reconciled to the Company's
actual net provision for income taxes as follows:
2003 2002
---------------------- ---------------------
% of Pretax % of Pretax
Amount Income Amount Income
--------- ---------- --------- -----------
Income tax at Federal
statutory rate ................ $413,200 34.0% $262,500 34.0%
State tax provision, net
of Federal tax benefit ........ 72,000 5.9 60,200 7.8
Nondeductible differences ........ 6,600 0.5 80,100 10.4
Other ............................ 12,900 1.1 (10,500) (1.4)
-------- ------- --------- ------
Provision for income
taxes .................. $504,700 41.5% $392,300 50.8%
========= ======= ========= ======
F-14
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Income taxes (concluded):
The Company's total deferred tax assets and deferred tax liabilities at
October 31, 2003 and 2002 are as follows:
2003 2002
--------- -------
Assets:
Allowance for doubtful accounts .... $ 23,700 $ 36,300
Inventory obsolescence ............. 57,700 25,600
Accrued vacation ................... 34,600 43,400
State income taxes ................. 36,900 30,300
Other .............................. 73,000 60,900
--------- ---------
Total ......................... 225,900 196,500
Liabilities:
Depreciation ....................... (96,400) (107,800)
Valuation allowance ................ (33,900) (33,900)
--------- ---------
Net deferred tax assets ....... $ 95,600 $ 54,800
========= =========
The other temporary differences generating net current and noncurrent
deferred tax assets and liabilities were primarily related to deferred
compensation and capital loss carryforward.
Note 8 - Stock options:
Incentive and Non-Qualified Stock Option Plans:
The Board of Directors approved an Incentive Stock Option Plan (the
"1990 Incentive Plan") during fiscal 1990 that provides for grants of
options to employees to purchase up to 500,000 shares of common stock
of the Company. Under its terms, the 1990 Incentive Plan terminated in
2000, and no additional options can be granted under that option plan.
However, options previously granted under the 1990 Incentive Plan
remain outstanding and continue in effect until they either expire,
are forfeited or are exercised. As of October 31, 2003, a total of
54,585 options were still outstanding under the 1990 Incentive Plan,
all of which are currently exercisable.
The Board of Directors also approved a Non-Qualified Stock Option Plan
(the "1990 Non-Qualified Plan") during fiscal 1990 that provides for
grants of options to purchase up to 200,000 shares of common stock to
officers, directors and other recipients selected by the Board of
Directors. Under its terms, the 1990 Non-Qualified Plan terminated in
2000, and no additional options can be granted under that option plan.
However, options previously granted under the 1990 Non-Qualified Plan
remain outstanding and continue in effect until they either expire,
are forfeited or are exercised. As of October 31, 2003, a total of
39,555 options were still outstanding under the 1990 Non-Qualified
Plan, all of which are currently exercisable.
F-15
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 8 - Stock options (continued):
Incentive and Non-Qualified Stock Option Plans (concluded):
In May 2000, the Board of Directors adopted the Company's 2000
Stock Option Plan (the "2000 Option Plan"). Under the 2000 Option
Plan, the Company may grant options to purchase shares of common
stock to officers, directors, key employees and others providing
services to the Company. The number of shares of common stock
that the Company is authorized to issue under options granted
under the 2000 Option Plan initially was 300,000, which number
automatically increases on January 1 of each year by the lesser
of (i) 4% of the total number of shares of common stock then
outstanding or (ii) 10,000 shares. Accordingly, as of October 31,
2003, the authorized number of shares of common stock that could
be issued under the 2000 Option Plan was 330,000, of which 58,252
shares were still available to be granted. Under the 2000 Option
Plan, the Company is authorized to grant both incentive stock
options and non-qualified stock options. Incentive stock options
are granted at an exercise price no less than the fair value of
the common stock on the date of grant, while non-qualified
options are granted at no less than 85% of the fair value of the
common stock on the date of grant.
Compensatory stock option plans:
The Company granted options to two executives to purchase a total
of 180,000 shares of common stock at $.10 per share pursuant to
the terms of their employment contracts dated February 1, 1998.
The options to purchase 45,000 shares are scheduled to vest and
become exercisable annually from March 1, 1998 through February
28, 2002. The difference of $376,200 between the market value and
the aggregate purchase price of the shares subject to option at
the date of grant was initially recorded as unearned compensation
and deducted from stockholders' equity, and is being amortized
over the vesting period. A total of $23,490 was amortized to
compensation expense in 2002; the unearned compensation was fully
amortized in 2002.
Additional required disclosures related to stock option plans:
Since the Company has elected to continue to use the provisions
of APB 25 in accounting for stock options, no earned or unearned
compensation cost was recognized in the accompanying financial
statements for stock options other than the amounts attributable
to the compensatory options granted to the executives described
above. Had compensation cost been determined based on the fair
value at the grant date for all awards consistent with the
provisions of SFAS 123, the Company's net income and earnings per
share in 2003 and 2002 would have been reduced to the pro forma
amounts set forth below:
F-16
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 8 - Stock options (continued):
Additional required disclosures related to stock option plans
(continued):
2003 2002
---------- ----------
Net income:
As reported ............................ $ 710,745 $ 379,684
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards .............................. (297,665) (349,865)
----------- -----------
Pro forma .............................. $ 413,080 $ 29,819
=========== ===========
Basic earnings per share:
As reported ............................ $ .23 $ .11
Pro forma .............................. $ .14 $ .01
Diluted earnings per share:
As reported ............................ $ .19 $ .09
Pro forma .............................. $ .11 $ .01
The fair value of each option granted in 2003 and 2002 was estimated
on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2003 2002
---------- ----------
Dividend yield ........................... 0% 0%
Expected volatility ...................... 60% 94%
Risk-free interest rate .................. 4.33% 3.85%
Expected lives ........................... 10 years 10 years
F-17
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 8 - Stock options (concluded):
Additional required disclosures related to stock option plans
(concluded):
Additional information regarding all of the Company's outstanding
stock options at October 31, 2003 and 2002 and changes in
outstanding stock options in 2003 and 2002 follows:
Weighted Weighted
Shares Average Shares Average
or Price Exercise or Price Exercise
Per Share Price Per Share Price
----------- --------- ---------- -----------
Options outstanding at
beginning of year ................. 1,245,764 1.71 1,125,334 1.67
Options granted ..................... 170,365 2.83 120,430 2.03
Options exercised ................... (73,296) 1.23
Options forfeited ................... (54,966) 3.39
---------- ------ ---------- -----
Options outstanding at end of year.. 1,287,867 1.67 1,245,764 1.71
========== =========
Option price range at end of year... $.10 -$5.75 $.10-$5.75
Weighted average fair value of
options granted during the year... $ 2.05 $ 1.80
========== =====
The following table summarizes information about stock options
outstanding at October 31, 2003, all of which are at
fixed-prices:
Weighted Average
Remaining
Contractual Life Number
Exercise Number of Options of Options
Price Outstanding Outstanding Exercisable
--------- ----------- ------------------- ------------
$0.10 470,000 1 yr. after termination 470,000
$1.33 10,000 6 yrs. 10,000
$1.50 100,000 1 yr. after termination 80,000
$1.56 16,313 6 yrs. 16,313
$1.59 17,555 5 yrs. 17,555
$1.76 14,000 9 yrs. 14,000
$1.87 4,470 5 yrs. 4,470
$2.07 81,135 9 yrs. 81,135
$2.13 100,000 1 yr. after termination
$2.13 6,000 4 yrs. 6,000
$2.26 41,335 8 yrs. 41,335
$2.50 5,000 4 yrs. 5,000
$2.66 49,755 8 yrs. 49,755
$2.90 200,000 1 yr. after termination 60,000
$3.36 16,000 10 yrs.
$3.95 43,000 10 yrs.
$4.35 10,000 7 yrs. 10,000
$4.88 6,000 3 yrs. 6,000
$5.12 69,002 7 yrs. 69,002
$5.75 28,302 3 yrs. 28,302
----------- ------------
1,287,867 968,867
=========== ============
F-18
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 9 - Retirement plan:
The Company sponsors a deferred savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code. Substantially all of its
employees may participate in and make voluntary contributions to this
defined contribution plan after they meet certain eligibility
requirements. The Board of Directors of the Company can authorize
additional discretionary contributions by the Company. The Company did
not make contributions to the plan in 2003 or 2002.
Note 10- Related party transactions:
The note receivable from stockholder of $70,000 at October 31, 2003 is
due from the President of the Company, bears interest at 6%, payable
annually, and has no specific due date.
The notes receivable from related parties of $49,584 and $56,505 at
October 31, 2003 and 2002, respectively, are due from employees of the
Company, bear interest at 6% and are due when shares of the Company's
common stock are sold by the employees. The notes are collateralized
by properties owned by the employees.
Receivables from sales of stock arose from advances made to assist
officers and employees in the exercise of stock options and,
accordingly, are reported as a reduction of stockholders' equity in
the accompanying balance sheet. The receivables were collected during
2003.
* * *
F-19