Edgar Filing: R F INDUSTRIES LTD

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB

Quarterly Report Under Section 13 or 15 (d) of
Securities Exchange Act of 1934

for Quarter ended July 31, 2001
Commission File Number 0-13301

RF INDUSTRIES, LTD.

(Exact name of registrant as specified in its charter)

Nevada 88-0168936

(State of Incorporation) (I.R.S. Employer Identification No.)

7610 Miramar Road., Bldg. 6000, San Diego, California 92126-4202

(Address of principal executive offices) (Zip Code)

(858) 549-6340 FAX (858) 549-6345

(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.

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

Yes X No
---

State the number of shares outstanding of each of the issuer's classes of common
stock at the latest practicable date.

As of July 31, 2001, the registrant had 3,441,054 shares of Common Stock, $.01
par value, issued.

Transitional small business disclosure format

Yes No X
---

Part I. FINANCIAL INFORMATION
RF INDUSTRIES, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Item 1: Financial Statements

July 31 October 31
2001 2000
----------- ----------
(Unaudited)
ASSETS
----------------------
CURRENT ASSETS

Cash and cash equivalents ........................... $ 722,267 $ 557,923

Investments in available-for-sale securities......... 1,739,960 2,208,558

Trade accounts receivable, net of allowance
for doubtful accounts of $42,000 .................... 967,194 1,313,935

Notes receivable .................................... 12,000 12,000

Inventories ......................................... 4,980,473 4,165,242

Other current assets ................................ 106,965 174,779

Deferred tax assets ................................. 176,900 166,000
---------- ----------
TOTAL CURRENT ASSETS ........................... 8,705,759 8,598,437
---------- ----------

PROPERTY AND EQUIPMENT

Equipment and tooling ............................... 1,053,170 733,150
Furniture and office equipment ...................... 224,444 190,867
---------- ----------
Fixed assets, at cost .......................... 1,277,614 924,017
Less accumulated depreciation .................. 699,366 605,164
---------- ----------
NET FIXED ASSETS ............................... 578,248 318,853
---------- ----------

Intangible assets ................................... 174,698 0
Less accumulated amortization ....................... 8,735 0
---------- ----------
NET INTANGIBLE ASSETS .......................... 165,963 0

Note receivable from stockholder .................... 70,000 70,000
Deferred tax assets ................................. 94,000 94,000
Other assets ........................................ 11,471 11,471
---------- ----------
TOTAL ASSETS ................................... $9,625,441 $9,092,761

See Notes to Condensed Consolidated Unaudited Financial Statements.

RF INDUSTRIES, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

July 31 October 31
2001 2000
----------- ----------
(Unaudited)
LIABILITIES AND
STOCKHOLERS' EQUITY
---------------------------
CURRENT LIABILITIES

Accounts payable ................................. $ 170,495 $ 403,530

Notes payable .................................... 98,103 0

Accrued expenses ................................. 302,574 513,186
----------- -----------
TOTAL LIABILITIES .......................... 571,172 916,716
----------- -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common Stock - authorized 10,000,000 shares
of $.01 par value; 3,441,054 and
3,402,054, respectively shares issued ........... 34,411 34,021

Additional paid-in capital ....................... 4,695,146 4,686,161

Retained earnings ................................ 4,489,883 3,668,867

Unearned compensation ............................ (47,004) (117,546)

Accumulated other comprehensive loss ............. (63,599) (40,890)

Receivables from sale of stock ................... (1,715) (1,715)

Treasury stock, at cost - 29,400 shares .......... (52,853) (52,853)
----------- -----------

TOTAL STOCKHOLDERS' EQUITY .................. 9,054,269 8,176,045
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ..................... $ 9,625,441 $ 9,092,761
=========== ===========

See Notes to Condensed Consolidated Unaudited Financial Statements.

Item 1: Financial Statements (continued)

RF INDUSTRIES, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME

2001 2000 2001 2000
INCOME: ---------- ---------- ---------- ----------

Net sales .................................. $ 2,596,391 $ 2,311,667 $ 7,348,531 $ 5,964,646

Cost of sales .............................. 1,275,342 1,091,539 3,633,569 2,802,631
----------- ----------- ----------- -----------
Gross profit .......................... 1,321,049 1,220,128 3,714,962 3,162,015
----------- ----------- ----------- -----------
Operating expenses:
Engineering ........................... 134,661 83,153 376,064 221,744
Selling and general ................... 749,107 535,272 2,192,742 1,565,415
----------- ----------- ----------- -----------
Totals ............................ 883,768 618,425 2,568,806 1,787,159
----------- ----------- ----------- -----------

Operating income ........................... 437,281 601,703 1,146,156 1,374,856
----------- ----------- ----------- -----------
Other income:
Commissions ........................... 91,691 0 152,548 0
Interest .............................. 15,393 33,097 70,314 97,223
----------- ----------- ----------- -----------
Totals ............................ 107,084 33,097 222,862 97,223
----------- ----------- ----------- -----------
Income before provision
for income tax ......................... 544,365 634,800 1,369,018 1,472,079

Provision for income tax ................... 218,000 254,000 548,000 589,000
----------- ----------- ----------- -----------
Net income ................................. $ 326,365 $ 380,800 $ 821,018 $ 883,079
=========== =========== =========== ===========
Basic earnings per share ................... $ 0.10 $ 0.11 $ 0.24 $ 0.27
=========== =========== =========== ===========
Diluted earnings per share ................. $ 0.08 $ 0.10 $ 0.21 $ 0.24
=========== =========== =========== ===========
Basic weighted average
shares outstanding ..................... 3,415,721 3,402,054 3,407,146 3,299,085
=========== =========== =========== ===========
Diluted weighted average
shares outstanding ..................... 3,938,595 3,735,175 3,943,982 3,708,455
=========== =========== =========== ===========
COMPREHENSIVE INCOME:
Net income ................................. $ 326,365 $ 380,800 $ 821,018 $ 883,079

Unrealized loss on available-
for-sale securities, net of tax effect ..... (5,966) 0 (22,709) 0
----------- ----------- ----------- -----------
Total comprehensive income ............ $ 320,399 $ 380,800 $ 798,309 $ 883,079
=========== =========== =========== ===========

See Notes to Condensed Consolidated Unaudited Financial Statements

Item 1: Financial Statements (continued)

RF INDUSTRIES, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended July 31
---------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES

Net income .................................................. $ 821,018 $ 883,079
Adjustments to reconcile net income
to net cash provided by operating activities
Bad debts .............................................. 28,320 0
Inventory deposit write-offs ........................... 30,294 0
Depreciation and amortization .......................... 102,937 52,652
Amortization of unearned compensation .................. 70,542 70,542

Changes in operating assets and liabilities, net of
acquisition in 2001:
Trade accounts receivable ......................... 394,758 (10,434)
Inventories ....................................... (805,569) (1,083,678)
Other assets ...................................... 71,647 (46,873)
Accounts payable .................................. (261,021) 185,706
Accrued expenses .................................. (210,656) 107,185
----------- -----------
Net cash provided by operating activities ............. 242,270 158,179
----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of (investments in) securities ..... 445,889 (173,330)
Capital expenditures .................................. (165,741) (193,612)
Payment for acquisition, net of cash acquired ......... (147,078) 0
----------- -----------
Net cash provided by (used in) investing activities.... 133,070 (366,942)
----------- -----------
FINANCING ACTIVITIES
Payments on loans payable ............................. (220,371) 0
Proceeds from exercise of common stock options ........ 9,375 138,470
----------- -----------
Net cash provided by (used in) financing activities.... (210,996) 138,470
----------- -----------
Net increase (decrease) in cash and cash equivalents ........ 164,344 (70,293)

Cash and cash equivalents at the
beginning of the period ............................... 557,923 1,100,816
----------- -----------
Cash and cash equivalents at the end of the period .......... $ 722,267 $ 1,030,523
=========== ===========
SUPPLEMENTARY CASH FLOW DATA:
Income taxes paid ...................................... $ 255,000 0
=========== ===========
Noncash investing and financing activities:
Fair value of assets acquired .......................... $ 496,504
Liabilities assumed .................................... (207,341)
Note payable ........................................... (139,163)
-----------
Cash paid .............................................. $ 150,000
===========

See Notes to Condensed Consolidated Unaudited Financial Statements.

RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Unaudited interim financial statements:

The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10- QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended July 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 2001. The unaudited condensed consolidated financial statements
should be read in conjunction with the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended October 31, 2000.

Note 2 - The acquisition and other matters

On December 1, 2000, the Company acquired all the outstanding stock of
Bioconnect, Inc. for total consideration of $289,163, of which $139,163 was
financed by the seller.

The acquisition has been accounted for as a purchase and, accordingly, the net
assets acquired were recorded at estimated fair values on the date of
acquisition. A summary of the allocation of the cost of the acquisition to the
net assets acquired as of December 1, 2000 follows:

Cash ................................. $ 2,922
Accounts receivable .................. 76,337
Inventory ............................ 39,956
Property and equipment ............... 187,855
Intangibles and other assets ......... 189,434
---------
Total assets acquired ................ 496,504

Accounts payable and other liabilities (207,341)
---------
Net assets acquired .................. $ 289,163
=========

The unaudited condensed 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. Goodwill of $174,698,
related to the acquisition is being amortized over fifteen years.

Note 3 - Components of inventory

July 31 October 31
2001 2000
----------- -----------
(Unaudited) (Audited)
Raw material and supplies $ 895,400 $ 559,786
Finished goods .......... 4,085,073 3,605,456
---------- ----------
Totals ................. $4,980,473 $4,165,242
========== ==========

Note 4 - Earnings per share:

The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share", which requires the presentation of
"basic" and "diluted" earnings per common share, as further explained in Note 1
of the notes to the audited financial statements of the Company, included in
Form 10-KSB for the fiscal year ended October 31, 2000.

Basic earnings per share is computed by dividing net earnings by the weighted
average number of common stock outstanding during the period.

Diluted earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock increased by the effects of assuming
that other potentially dilutive securities (such as stock options) outstanding
during the period had been exercised.

The following table summarizes basic and diluted shares:

Three Months Ended Nine Months Ended
July 31 July 31
--------------------- ---------------------
2001 2000 2001 2000
--------- ---------- ---------- ---------

Weighted average shares outstanding for
basic net earnings per share ............. 3,415,721 3,402,054 3,407,146 3,299,085
Add effects of potentially dilutive securities-
assumed exercised of stock options ....... 522,874 333,121 536,836 409,370
--------- --------- --------- ---------
Weighted average shares for diluted net
earnings per share ...................... 3,938,595 3,735,175 3,943,982 3,708,455
========= ========= ========= =========

Note 5 - Segment Information

Net sales and income (loss) before provision for income taxes for the three
months ended July 31, 2001 and 2000 follows:

Connector/ Common/
Cable Neulink *Bioconnect Corporate Total
------------ ----------- ----------- ----------- ----------
2001
------

Net sales ............. $ 2,305,096 $ 184,434 $ 106,861 $ 2,596,391
Income (loss) before
provision for income
taxes ............. 580,226 83,312 (131,713) $ 12,540 544,365

2000
------
Net sales ............. $ 2,118,336 $ 193,331 $ 2,311,667
Income (loss) before
provision for income
taxes ............. 756,945 (155,242) $ 33,097 634,800

Net sales and income (loss) before provision for income taxes for the nine
months ended July 31, 2001 and 2000 follows:

Connector/ Common/
Cable Neulink *Bioconnect Corporate Total
------------ ----------- ----------- ----------- ----------
2001
------
Net sales ............. $ 6,534,643 $ 587,377 $ 226,511 $ 7,348,531
Income (loss) before
provision for income
taxes ............. 1,669,881 (27,234) (343,943) $ 70,314 1,369,018

2000
------
Net sales ............. $ 5,490,785 $ 473,861 $ 5,964,646
Income (loss) before
provision for income
taxes ............. 1,553,035 (178,179) $ 97,223 1,472,079

* Bioconnect was purchased on December 1, 2000.

Note 6 - Stock Options

During the quarter ended July 31, 2001, several employees exercised their right
to purchase 38,000 shares of common stock with a weighted average exercise price
of $0.21.

During the quarter ended July 31, 2001, the Company granted compensatory stock
options to employees to purchase 200,000 shares of common stock at a price of
$2.90 per share, the market value of the Company's common stock at the grant
date. The options vest 10% per year over ten years and expire upon termination
of employment or in ten years.

Note 7 - New Accounting Pronouncement

In June, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires that goodwill and certain intangibles assets, including
those recorded in past business combinations, no longer be amortized against
earnings, but instead be tested for impairment at least annually. SFAS No. 142
will become effective for fiscal years beginning after December 15, 2001 with
early adoption permitted for fiscal years beginning after March 15, 2001. The
Company plans to elect early adoption of SFAS No. 142 on November 1, 2001 and
does not expect the adoption to have a material effect on its consolidated
financial statements.

Item 2: Management's discussion and analysis of financial condition and results
of operations

This report contains forward-looking statements. These statements relate to
future events or the Company's future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.

Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company, nor any other person, assumes responsibility for the accuracy and
completeness of the forward-looking statements. The Company is under no
obligation to update any of the forward-looking statements after the filing of
this Quarterly Report on Form 10-QSB to conform such statements to actual
results or to changes in its expectations.

The following discussion should be read in conjunction with the Company's
financial statements and the related notes and other financial information
appearing elsewhere in this Form 10-QSB. Readers are also urged to carefully
review and consider the various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the Company's business,
including without limitation the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," under the caption "Risk Factors," and the audited financial
statements and related notes included in the Company's Annual Report filed on
Form 10-KSB for the year ended October 31, 2000 and other reports and filings
made with the Securities and Exchange Commission.

Liquidity and Capital Resources

Management believes that its existing capital resources and cash it expects to
generate from operations will be sufficient to fund the Company's working
capital needs for the next twelve months. Management believes that any financing
requirements can be met through a combination of cash and investments held as of
July 31, 2001, and internally generated cash flow. The Company does not
currently have any commercial banking arrangements providing for loans, credit
facilities or similar matters.

The Company does not believe it will need material additional capital equipment
in fiscal 2001. In the past, the Company has financed some of its fixed asset
requirements through capital leases. No additional capital equipment purchases
have been currently identified that would require significant additional leasing
or capital obligations during fiscal 2001. Management also believes that based
on the Company's financial condition at July 31, 2001, the absence of
outstanding bank debt and recent operating results, the Company would be able to
obtain bank loans to finance its expansion, if necessary, although there can be
no assurance any bank loan would be obtainable, or if obtained, would be on
favorable terms or conditions.

Net cash provided by operating activities for the first nine months of fiscal
2001 was $242,3000 whereas cash provided by operating activities for the nine
month period ended July 31, 2000 was $158,200. Non cash charges for bad debt and
inventory deposit write-offs, for the current nine month period, were $58,600.
There were no such charges in the first nine months of last year. Depreciation
and amortization, including amortization of unearned compensation, was $173,500
for the first nine months, compared to $123,200 for the same period last year.
An increase of $50,300 is primarily due to the depreciation of assets associated
with the Bioconnect acquisition. Seasonal factors resulted in a decline in trade
accounts receivable by $394,800. Inventories increased $805,600 to support
higher sales levels, new distributors and the rapid sales growth of RF cable
assemblies. The Company has historically maintained high inventory levels as
part of its strategy of providing high quality service and quick response to
customer requirements. Other assets decreased $71,650 in the first nine months
of 2001, principally due to lower prepayments to the Company's vendors. Seasonal
factors also caused accounts payable and accrued expenses to decline by
$471,700.

Net cash provided by investing activities was $133,100 during the first nine
month period ended July 31, 2001, compared to $367,000 used in the previous
year. Proceeds from the sale of available for sale securities of $445,900 in the
current year were used for capital expenditures of $165,700 and for the
Bioconnect acquisition of $147,100.

Net cash used in financing activities was $211,000 for the nine month period
ended July 31, 2001, and consisted principally of payments on loans payable of
$220,400, which were associated with the Bioconnect acquisition.

As of July 31, 2001 the Company had $722,300 in cash, and investments in
available for sale securities of $1,739,900, as compared to $557,900 in cash and
cash equivalents, and $2,208,500 in available for sales securities at October
31, 2000.

Three Months 2001 vs. Three Months 2000

Net sales increased 12%, or $285,000, to $2,596,000 from $2,311,000 in the three
months ended July 31, 2001. RF Connectors sales increased 9% to $2,306,000,
compared to $2,118,000 for the same period last year, due to continuing strong
order rates for cable assemblies. Sales at RF Neulink increased 5% to $184,000
compared to $193,000 last year. This increase can be attributed to stronger
sales in new application areas. Bioconnect's three month sales were $107,000.

Cost of sales increased 17%, or $183,000 to $1,275,000 from $1,092,000 last
year, due to higher sales levels. Minor changes in the product mix reduced gross
profits, as a percent of sales, to 51% compared to 53% last year. Substancially,
all sales for the three months ended July 31, 2001 were produced by the
Connector division where the gross magin was 53%.

Engineering expenses increased $51,500, or 62%, from $83,000 last year. The
increase is attributable to added personnel, increased expenses for Bioconnect
to develop new products, and engineering costs associated with the rapid
expansion of RF Cable products.

Selling and general expenses increased 40% or $214,000, to $749,000 from
$535,000 last year, and as a percent of sales increased to 29% from 23% of sales
last year. The increase can be attributed to the expenses associated with
Bioconnect and higher expenses for increased travel, advertising, and insurance
expenses.

Net interest income decreased $17,500 to $15,500 from $33,000 the previous year
primarily due to lower balances of cash and equivalents and available for sale
securities. The decrease can be attributed to cash paid for the Bioconnect
acquisition and cash utilized for inventory expansion and the acquisition of
certain fixed assets to support the Company's expansion.

Commissions for the Neulink divisions sales were $92,000. There were no
commissions in the previous year. Commission income is payment to RF Neulink for
sales services to obtain a contract for one of the Company's wireless product
suppliers.

Net income for the three month period ended July 31, 2001 decreased by $54,000
to $326,000 as a result of lower gross margins, increased engineering expenses,
and highter sellling and general expenses.

Nine Months 2001 vs Nine Months 2000

Net sales increased $1,384,000, or 23%, to $7,350,000 from $5,966,000 the
previous year. RF Connectors sales increased 18% to $6,500,000 from $5,500,000
last year, due to continuing strong sales of connectors and cable assemblies.
Sales for RF Neulink increased 24% to $587,000 from $474,000 the previous year.
The increase can be attributed to increased sales for new application areas.
Bioconnect sales were $226,500 with no comparable sales from the prior year due
to the acquisition.

Cost of sales increased $830,000, or 30%, to $3,630,000 from $2,800,000 last
year due to higher sales levels. Gross profit was influenced by changes in
product mix, which reduced gross profit, as a percent of sales, to 51% compared
to 53% last year. Gross margin for the Connector division, the source of 89% of
the sales for the nine months, was 53%.

Engineering expenses increased $154,000, or 69%, to $376,000 from $222,000 last
year. This increase can be attributed to added personnel and expenses associated
with the Bioconnect acquisition and expansion of our engineering departments to
meet the increased business demands.

Selling and general expenses increased $630,000 or 40%, to $2,195,000 compared
to $1,565,000 last year, and as a percent of sales increased to 30% from 27% of
sales last year.

The increase is due to the added expenses associated with the Bioconnect
acquisition and higher expenses for legal fees due to the SEC inquiry, increased
travel, advertising, and insurance expenses.

Net interest income decreased $27,000 to $70,000 from $97,000 the previous year
primarily due to lower balances of cash and equivalents and available for sale
securities. The decrease can be attributed to cash paid for the Bioconnect
acquisition and cash utilized to support the Company's expansion.

Commissions for the Neulink division's sales were approximately $152,500
compared to no commissions the previous year. Commission income is payment to RF
Neulink for sales services to obtain a contract for one of the Company's
wireless product suppliers.

Net income for the nine month period ending July 31, 2001 decreased by $62,000
to $821,000 as a result of lower gross margins, increased engineering expenses,
and higher selling and general expenses.

Material changes in financial condition:

Cash increased $160,000 to $720,000 compared to the October 31, 2000 fiscal year
balance of $560,000. Cash and investments were $2,460,000 at July 31, 2001
compared to $2,760,000 at July 31, 2000. Cash was used, in the nine month
period, for expanded inventory, the acquisition of Bioconnect and for certain
capital equipment to support the sales growth of cable products.

Trade accounts receivable decreased $346,000, or 26% to $967,000 compared to the
October 31, 2000 balance of $1,314,000. This decrease is due to seasonal factors
and to continued collection efforts.

Inventories increased $815,000 compared to October 31, 2000 inventory levels.
This increase is to support sales growth and the anticipated backlog
requirements, and includes $57,000 in Bioconnect inventory.

Other current assets, including prepaid expenses and deposits, decreased to
$107,000 from $175,000 on October 31, 2000. This decrease is due to receipt of
prepaid inventory items and deposits.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Items 2-5 Not applicable

Item 6. Exhibits and Reports on Form 8-K

None

(b) Reports on Form 8-K

None

SIGNATURES

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

RF INDUSTRIES, LTD.

Dated: September 14, 2001 By: /s/ Howard F. Hill
-------------------------------
Howard F. Hill, President
Chief Executive Officer

Dated: September 14, 2001 By: /s/ Terrie A. Gross
-------------------------------
Terrie A. Gross
Chief Financial Officer