SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 2005.
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 and fax numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
stock at the latest practicable date. As of September 12, 2005, the registrant
had 3,074,521 shares of Common Stock, $.01 par value, issued.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
RF INDUSTRIES, LTD.
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
July 31 October 31
2005 2004
------------ ------------
(Note 1)
CURRENT ASSETS
Cash and cash equivalents .................. $ 5,159,163 $ 4,497,322
Trade accounts receivable, net of allowance
for doubtful accounts of $50,469 and $38,513 1,453,075 1,516,035
Notes receivable ........................... 2,500 12,000
Inventories ................................ 4,072,368 3,789,958
Other current assets ....................... 273,219 303,138
Deferred tax assets ........................ 141,000 141,000
----------- -----------
TOTAL CURRENT ASSETS .................. 11,101,325 10,259,453
----------- -----------
EQUIPMENT
Equipment and tooling ...................... 1,513,078 1,489,297
Furniture and office equipment ............. 342,479 299,423
----------- -----------
1,855,557 1,788,720
Less accumulated depreciation ......... 1,382,643 1,225,680
----------- -----------
Total ................................. 472,914 563,040
Goodwill ................................... 137,328 137,328
Notes receivable from related parties ...... 26,730 26,730
Note receivable from stockholder ........... 70,000 70,000
Other assets ............................... 22,091 14,171
----------- -----------
TOTAL ASSETS .......................... $11,830,388 $11,070,722
=========== ===========
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED BALANCE SHEETS
(Unaudited)
July 31 October 31
2005 2004
------------ ------------
(Note 1)
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .......................... $ 239,684 $ 209,956
Accrued expenses .......................... 362,235 353,100
----------- -----------
Total current liabilities .............. 601,919 563,056
Deferred tax liabilities .................. 53,000 53,000
----------- -----------
TOTAL LIABILITIES ...................... 654,919 616,056
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000 shares
of $0.01 par value; 3,072,309 and 2,996,937
shares issued and outstanding ............. 30,723 29,970
Additional paid-in capital ................ 3,722,866 3,566,760
Retained earnings ......................... 7,421,880 6,857,936
----------- -----------
TOTAL STOCKHOLDERS' EQUITY
11,175,469 10,454,666
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ............................... $11,830,388 $11,070,722
=========== ===========
See Notes to Condensed Unaudited Financial Statements
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF INCOME
-------------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
(Unaudited) (Unaudited)
-------------------------------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales ........................ $3,276,581 $2,727,386 $9,722,605 $7,998,176
Cost of sales .................... 1,723,522 1,377,367 5,108,306 3,977,895
---------- ---------- ---------- ----------
Gross profit ................ 1,553,059 1,350,019 4,614,299 4,020,281
---------- ---------- ---------- ----------
Operating expenses:
Engineering ................. 131,214 120,556 420,282 337,590
Selling and general ......... 1,110,674 794,953 3,294,831 2,280,667
---------- ---------- ---------- ----------
Totals ................. 1,241,888 915,509 3,715,113 2,618,257
---------- ---------- ---------- ----------
Operating income ................. 311,171 434,510 899,186 1,402,024
Other income - interest .......... 18,462 2,606 56,798 9,413
---------- ---------- ---------- ----------
Income before provision for income
taxes ......................... 329,633 437,116 955,984 1,411,437
Provision for income taxes ....... 135,290 171,000 392,040 560,000
---------- ---------- ---------- ----------
Net income ....................... 194,343 $ 266,116 $ 563,944 $ 851,437
========== ========== ========== ==========
Basic earnings per share ......... $ 0.06 $ 0.09 $ 0.19 $ 0.30
========== ========== ========== ==========
Diluted earnings per share ....... $ 0.05 $ 0.07 $ 0.15 $ 0.23
========== ========== ========== ==========
Basic weighted average shares
outstanding ................... 3,062,396 2,970,714 3,039,243 2,881,118
========== ========== ========== ==========
Diluted weighted average shares
outstanding ................... 3,782,733 3,779,692 3,804,324 3,655,984
========== ========== ========== ==========
See Notes to Condensed Unaudited Financial Statements
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF
CASH FLOWS
(Unaudited)
Nine Months Ended July 31
-----------------------------
2005 2004
-------------- -------------
Net income ............................................. $ 563,944 $ 851,437
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for bad debts ............................ 11,956 4,000
Depreciation and amortization ..................... 156,963 114,672
Changes in operating assets and liabilities:
Trade accounts receivable ...................... 51,004 420,233
Inventories .................................... (282,410) (336,965)
Prepaid expenses and other current assets ...... 29,919 (24,657)
Other assets ................................... (7,920) --
Accounts payable ............................... 29,728 2,874
Accrued expenses ............................... 9,135 (65,968)
----------- -----------
Net cash provided by operating activities .............. 562,319 965,626
----------- -----------
INVESTING ACTIVITIES
Capital expenditures ............................... (66,837) (150,067)
Repayment of note receivable ....................... 9,500 --
Repayments of related party notes .................. -- 22,854
----------- -----------
Net cash used in investing activities .............. (57,337) (127,213)
----------- -----------
FINANCING ACTIVITIES - Proceeds from
exercise of stock options ............................ 156,859 995,703
----------- -----------
Net increase in cash and cash equivalents .............. 661,841 1,834,116
Cash and cash equivalents at the beginning of the period
4,497,322 2,683,896
----------- -----------
Cash and cash equivalents at the end of the period ..... $ 5,159,163 $ 4,518,012
=========== ===========
See Notes to Condensed Unaudited Financial Statements
RF INDUSTRIES, LTD. NOTES TO
CONDENSED UNAUDITED FINANCIAL STATEMENTS
Note 1 - Unaudited interim financial statements:
The accompanying unaudited condensed financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments have been included. Operating results for
the three and nine-month periods ended July 31, 2005, are not necessarily
indicative of the results that may be expected for the year ending October 31,
2005. Information included in the condensed balance sheet as of October 31, 2004
has been derived from the audited balance sheet included in the Company's annual
report on Form 10-KSB for the year ended October 31, 2004 previously filed with
the Securities and Exchange Commission. The unaudited condensed financial
statements should be read in conjunction with the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended October 31, 2004.
Note 2 - 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.
July 31, 2005 October 31, 2004
---------------- ----------------
(Unaudited)
Raw materials and supplies $1,065,878 $777,765
Finished goods, less inventory
reserve 3,006,490 3,012,193
----------- -----------
Total $4,072,368 $3,789,958
=========== ===========
Note 3 - Earnings per share:
As further explained in Note 1 of the notes to the audited financial
statements of the Company, included in Form 10-KSB for the fiscal year ended
October 31, 2004, basic earnings per share is computed by dividing net earnings
by the weighted average number of common stock outstanding during the period.
Diluted earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock increased by the effects of assuming
that other potentially dilutive securities (such as stock options) outstanding
during the period had been exercised and the treasury stock method had been
applied.
The following table summarizes the computation of basic and diluted
weighted average shares:
Three Months Ended Nine Months Ended
July 31 July 31
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- --------
Weighted average shares outstanding
for basic net earnings per
share ........................ 3,062,396 2,970,714 3,039,243 2,881,118
Add effects of potentially dilutive
securities-assumed exercised
of stock options ............. 720,337 808,978 765,081 774,866
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares for diluted
net earnings per share ....... 3,782,733 3,779,692 3,804,324 3,655,984
========= ========= ========= =========
Note 4 - Stock Option Plan
A description of the Company's 2000 Stock Option Plan and other
information related to stock options are included in Note 7 in its Annual Report
on Form 10-KSB for the year ended October 31, 2004.
During the nine months ended July 31, 2005, options to acquire 75,372
shares of common stock were exercised resulting in proceeds of $156,859 to the
Company. No options were granted during the nine months ended July 31, 2005.
The Company continues to measure compensation cost related to stock
options issued to employees using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." Accordingly, no earned or unearned
compensation cost was recognized in the accompanying condensed consolidated
financial statements for the stock options granted by the Company to its
employees since all of those options have been granted at exercise prices that
equaled or exceeded the market value at the date of grant. The Company's
historical net income and earnings per common share and pro forma net income and
earnings per share assuming compensation cost had been determined based on the
fair value at the grant date for all awards by the Company consistent with the
provisions of SFAS 123 are set forth below:
--------------------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
-------------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- --------
Net income - as reported ........ $ 194,343 $ 266,116 $ 563,944 $ 851,437
Deduct total stock-based employee
compensation expensed
determined under fair
value-based method for all
awards ..................... (97,000) (67,000) (291,000) (201,000)
----------- ----------- ----------- -----------
Net income - pro forma .......... $ 97,343 $ 199,116 $ 272,944 $ 650,437
=========== =========== =========== ===========
Basic earnings per share -
as reported ................ $ 0.06 $ 0.09 $ 0.19 $ 0.30
Basic earnings per share -
pro forma .................. $ 0.03 $ 0.07 $ 0.09 $ 0.23
Diluted earnings per share - as
reported ................... $ 0.05 $ 0.07 $ 0.15 $ 0.23
Diluted earnings per share - pro
forma ...................... $ 0.03 $ 0.05 $ 0.07 $ 0.18
Note 5 - Concentration of Credit Risk
One customer accounted for approximately 15% of the Company's net sales
for the three and nine-month periods ended July 31, 2005 and 14% for the
comparable periods in 2004. Although this customer has been an on-going major
customer of the Company during the past five years, the written agreement with
this customer does not have any minimum purchase obligations and the customer
could stop buying the Company's products at any time for any reason. A
reduction, delay or cancellation of orders from this customer or the loss of
this customer could significantly reduce the Company's revenues and profits. The
Company cannot provide assurance that this customer or any of its current
customers will continue to place orders, that orders by existing customers will
continue at current or historical levels or that the Company will be able to
obtain orders from new customers.
Note 6 - Geographical Information
The Company attributes sales to geographic areas based on the location
of the customers. All of the Company's assets are located in the United States.
The following table presents the sales of the Company by geographic area for the
three and nine-month periods ended July 31, 2005 and 2004:
-------------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
----------------------- -----------------------
2005 2004 2005 2004
--------- ---------- ---------- ----------
United States ............. $2,806,249 $2,400,096 $8,641,387 $6,878,431
Foreign countries ......... 470,332 327,290 1,081,218 1,119,745
---------- ---------- ---------- ----------
$3,276,581 $2,727,386 $9,722,605 $7,998,176
========== ========== ========== ==========
Note 7 - Commitments
The Company has renewed its employment agreement with its President and Chief
Executive Officer for an annual salary of $175,000 and a term which expires on
June 20, 2008. The aggregate amount of compensation to be provided over the
remaining term of the agreement amounted to approximately $496,000 at July 31,
2005.
Note 8 - Subsequent Event
On September 1, 2005, the Company purchased all of the assets of Worswick
Industries, Inc. (Worsick), a supplier of standard and custom cabling products
to OEM, wholesale and retail markets, for $237,500 in cash and 2,212 shares of
the Company's common stock. The acquisition of Worsick is not expected to have a
material effect on the financial position or results of operations of the
Company.
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, 2004 and other reports and filings
made with the Securities and Exchange Commission.
Critical Accounting Policies
The financial statements of RF Industries are prepared in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). The preparation of these financial statements requires our management
to make estimates and assumptions about future events that affect the amounts
reported in the financial statements and related notes. Future events and their
effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. The Company
believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of financial statements. The
Company's significant accounting policies are summarized in Note 1 to the
financial statements contained in its Annual Report on Form 10-KSB filed for the
fiscal year ended October 31, 2004. The following critical accounting policies
affect the more significant judgments and estimates used in the preparation of
the Company's 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.
The Company's maintains a policy with certain distributors that permits them a
limited ability to exchange product. The effect of such exchanges has
historically been immaterial. Any material exceptions are recognized if and when
they occur.
Allowance for doubtful accounts:
The Company maintains an allowance for doubtful accounts based on
historical collections of accounts receivable. The Company monitors its accounts
receivable balances on a continual basis. If the financial condition of
customers deteriorates, additional allowances may be required.
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred tax assets and liabilities to be
computed for temporary differences between the financial statement and tax basis
of assets and liabilities that will result in taxable, or deductible amounts in
future periods based on enacted laws and rates applicable to the periods in
which the temporary differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The income tax provision is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
Inventory valuation:
Inventories are valued at the weighted average cost value. Certain
items in the inventory may be considered obsolete or excess and, as such, the
Company may establish an allowance to reduce the carrying value of these items
to their net realizable value. Based on estimates, assumptions and judgments
made from the information available at the time, the Company determines the
amounts of these allowances. If these estimates and related assumptions are
incorrect or the market changes, the Company may be required to record
additional reserves, which may decrease future earnings. Inventories as of July
31, 2005 represented approximately 34% of total assets. As a result, any
reduction in the value of our inventories would require the Company to take
write-downs that would affect the Company's financial position and results of
operations to the extent of any such write-downs.
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4"
("SFAS 151"). SFAS 151 clarifies that abnormal inventory costs such as costs of
idle facilities, excess freight and handling costs, and wasted materials
(spoilage) are required to be recognized as current period charges. The
provisions of SFAS 151 are effective for fiscal years beginning after June 15,
2005. The adoption of SFAS 151 is not expected to have a significant impact on
the Company's financial position or results of operations.
Stock-Based Compensation:
SFAS No. 123, "Accounting for Stock-Based Compensation," as in effect
prior to December 2004, established and encouraged the use of the fair value
based method of accounting for stock-based compensation arrangements under which
compensation cost is determined using the fair value of stock-based compensation
determined as of the date of grant and is recognized over the periods in which
the related services are rendered. The statement also permitted companies to
elect to continue using the current intrinsic value accounting method specified
in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," to account for stock-based compensation. The Company uses
the intrinsic value-based method and has disclosed the pro forma effect of using
the fair value based method to account for our stock-based compensation. For
non-employee stock based compensation, we recognized an expense in accordance
with SFAS No. 123 and value the equity securities based on the fair value of the
security on the date of grant.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS 123R"), a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," requiring that the compensation cost relating to share-based
payment transactions, including grants of employee stock options, be measured
and recognized in the financial statements using the fair value of the
compensation awards. The provisions of SFAS 123R are effective for the first
annual period that begins after December 15, 2005; therefore, the Company will
adopt the new requirements no later than the beginning of its fiscal year ending
October 31, 2007. Adoption of the expensing requirements will reduce the
Company's reported earnings. Management is currently evaluating the two methods
of adoption allowed by SFAS 123R; the modified-prospective transition method and
the modified-retrospective transition method. The impact of such adoption upon
the Company's financial position or results of operations is not presently
known.
Executive Overview
RF Industries markets connectors and cables to numerous industries for
use in thousands of products, primarily for the wireless marketplace. In
addition, to a limited extent, the Company also markets wireless products that
incorporate connectors and cables. In the past, RF Industries has reported
results of operations in three segments that, in general terms, defined the
primary markets. However, since sales of connectors and cable assemblies
represent over 94% of the Company's net sales during the three and nine-month
periods ended July 31, 2005, and since the operations to all of the Company's
smaller business units effectively operate as subunits of the Company's
principal business unit, the Company no longer reports the results of these
other, smaller business units as separate business segments.
Liquidity and Capital Resources
Management believes that existing current assets and the amount of cash
it anticipates it will generate from current operations will be sufficient to
fund the anticipated liquidity and capital resource needs of the Company for at
least twelve months. The Company does not, however, currently have any
commercial banking arrangements providing for loans, credit facilities or
similar matters should the Company need to obtain additional capital.
Management's beliefs that its existing assets and the cash expected to be
generated from operations will be sufficient during the current fiscal year are
based on the following:
As of July 31, 2005, the amount of cash and cash equivalents was equal to
$5,159,163 in the aggregate.
As of July 31, 2005, the Company had $11,101,325 in current assets, and
$601,919 in current liabilities.
As of July 31, 2005, the Company had no outstanding indebtedness (other
than accounts payable and accrued expenses).
The Company does not believe it will need material additional capital
equipment in the next twelve months. In the past, the Company has financed some
of its equipment and furnishings requirements through capital leases. No
additional capital equipment purchases have been currently identified that would
require significant additional leasing or capital expenditures during the next
twelve months. Management also believes that based on the Company's current
financial condition, the absence of outstanding bank debt and recent operating
results, the Company would be able to obtain bank loans to finance its
expansion, if necessary, although there can be no assurance any bank loan would
be obtainable or, if obtained, would be on favorable terms or conditions.
The Company recognized net income of $563,944 for the nine months ended
July 31, 2005 and realized cash flow of $562,319 from its operating activities.
The Company's overall cash position increased by $661,841 during the nine month
period ended July 31, 2005. Contributing to the amount of net cash provided by
operations were depreciation and increases in accounts payable and accrued
expenses together with decreases in accounts receivable and in prepaid expenses.
Trade accounts receivable (net of allowances for doubtful accounts) at July 31,
2005 decreased approximately 4.2%, or by $62,960, to $1,453,075 compared to the
October 31, 2004 balance of $1,516,035. The decrease in accounts receivable in
relation to the 20.1% increase in net sales for the third fiscal quarter of 2005
compared with the same period in the prior year is due to improved receivables
management and collection efforts by the Company.
Inventories at July 31, 2005 increased 7.5%, or $282,410, to $4,072,368
compared to $3,789,958 on October 31, 2004. The Company increased its inventory
levels based on anticipated customer demand for certain of its products. Since
the Company considers its ability to fill customer orders on short notice to be
an important aspect of its marketing strategy, the Company normally increases
inventory levels in anticipation of customer orders in order to be able to
maintain the product mix its customers may need. Accordingly, the Company may
increase its inventory levels in future periods if sales continue to rise.
Net cash used in investing activities was $57,337 for the nine months
ended July 31, 2005 primarily as a result of capital expenditures made by the
Company.
Net cash provided by financing activities was $156,859 for the nine
months ended July 31, 2005, and was attributable to proceeds received from the
exercise of stock options.
As of July 31, 2005, the Company had a total of $5,159,163 of cash and
cash equivalents compared to a total of $4,497,322 of cash and cash equivalents
on October 31, 2004. The $562,319 in cash from operating activities, together
with the decrease in cash of $57,337 from its investing activities and an
increase of $156,859 from its financing activities, which resulted in the
Company's overall cash and cash equivalent position increasing by $661,841
during the past nine months.
On September 1, 2005, the Company used $237,500 of its existing cash
balances to purchase all of the assets of Worswick Industries, Inc., a San
Diego, California supplier of standard and custom cabling products to OEM,
wholesale and retail markets. The purchase price of the assets of Worswick
Industries, Inc. was $237,500, plus the issuance to the seller of 2,212 shares
of the Company's common stock. The effect of the Worswick operations on the
Company's future liquidity cannot be predicted, but is not expected to be
material.
Results Of Operations
Three Months 2005 vs. Three Months 2004
Net sales in the current fiscal quarter ended July 31, 2005, increased
20.1%, or $549,195, to $3,276,581 from $2,727,386 in the comparable fiscal
quarter in the prior year, due to increased demand for the Company's connector,
cable assembly and wireless products. The increase in sales reflects a general
increase in demand for wireless connectors and cable products. The Company
believes this increase is due, in part, to a revival in some sectors of the
telecommunication industries and the continuing overall market increase in the
demand for wireless products. In addition, the increased revenues during the
current quarter reflect the addition of the new Aviel Electronics division in
Nevada, which operations were not owned during the comparable fiscal quarter
last year. Aviel Electronics added $229,635 to the Company's sales during the
July 31, 2005 fiscal quarter.
The Company's gross profit as a percentage of sales declined from 49.5%
to 47.4% during the current fiscal quarter compared to the same fiscal quarter
last year. The decline in gross margins during the current quarter resulted from
costs of labor and materials in its main connector division having increased
more than increases in selling prices in the 2005 period from the comparable
period in 2004. Overall, the Company's three smaller divisions have lower gross
margins than the RF Connectors division. Since the RF Connector division's net
sales decreased as a percentage of the Company's net sales (RF Connector sales
represented 82% of net sales in the current three-month period, compared with
90% in the comparable period of the prior year), the increase in sales of lower
margin divisions reduced the combined gross margins in the current period.
Engineering expenses increased 8.8%, or $10,658, to $131,214 from
$120,556 in the comparable quarter of the prior year due to development costs
for new product enhancements. Engineering expenses fluctuate based on design
engineering expenses incurred by the Company at the request of its customers.
Selling and general expenses increased 39.7% or $315,721 to $1,110,674
from $794,953 in the comparable quarter of the prior fiscal year. Selling and
general expenses were higher in the third quarter of the current fiscal year due
primarily to the substantial additional cost of compliance with the provisions
of Section 404 of the Sarbanes-Oxley Act of 2002. Although the Company believes
that its administrative expenses will be higher in future periods due to the
on-going provisions of the Sarbanes-Oxley Act, the Company believes that most of
the amounts incurred during the past fiscal quarter represent one-time expenses
incurred to set up and document the Company's controls and procedures.
Accordingly, the Company does not expect its Sarbanes-Oxley expenses to be as
great during any future fiscal quarter. The increase in selling and general
expenses also resulted from increased compensation expenses (including the
salaries of the additional personnel retained to improve the Company's reporting
systems), increased selling expenses, and increased insurance costs compared to
the prior fiscal year. Also, the current period general and administrative
expenses reflect the acquisition of Aviel Electronics in August, 2004. Aviel's
selling and general expenses in the current quarter were $84,897, compared with
$0 in the comparable period of the prior year. After eliminating the effect of
the Sarbanes-Oxley and Aviel sales and expenses, the selling and general
expenses for the current period increased $157,824 over the comparable period in
the prior year, and, as a percentage of sales, was 31% compared with 29% in the
prior year.
Other income for the third quarter of 2005 increased over the same
period in the prior year due to higher investment interest.
Nine months 2005 vs. Nine months 2004
Net sales in the nine months ended July 31, 2005 increased 21.6% or
$1,724,429 to $9,722,605 from $7,998,176 in the comparable period in the prior
year, due to increased demand for the Company's connector, cable assembly and
wireless products. The increase in sales reflects a general increase in demand
for wireless connectors and cable products. The Company believes this increase
is due, in part, to a revival in some sectors of the telecommunication
industries and the continuing overall market increase in the demand for wireless
products. In addition, Aviel Electronics, which was owned and in operation
during the entire nine-month period ended July 31, 2005 but not owned in the
comparable nine-month period of the prior year, contributed $615,576 to net
sales during the current nine month period.
The Company's gross profit as a percentage of sales declined from 50.3%
to 47.5% during the current fiscal quarter compared to the same nine-month
period last year. The decline in the Company's gross margins during the current
nine-month period resulted from costs of labor and materials in its main
connector division having increased more than increases in selling prices in the
2005 period from the comparable period in 2004, resulting in a decline in gross
margins from 54.4% to 52.2%. In addition, the Company's gross margins were
affected by lower margins in its Bioconnect division, and additions to
allowances for inventory obsolescence in its RF Neulink division. Overall, the
Company's three smaller divisions have lower margins than the RF Connectors
division, which accounted for 83% of net sales in the current nine-month period,
compared with 89% in the comparable period of the prior year. Accordingly, the
greater sales from the lower margin division exerted a downward influence on the
combined gross margins in the current period.
Engineering expenses for the first nine months of fiscal 2005 increased
24%, or $82,692, to $420,282 from $337,590 in the comparable period of the prior
year due to development costs for new product enhancements.
Selling and general expenses increased 45% or $1,014,164 to $3,294,831
from $2,280,667 in the comparable period of the prior fiscal year. The increase
in selling and general expenses includes expense items that were not present
(Sarbanes-Oxley Act costs and the new Aviel division) during the comparable
nine-month period in the prior fiscal year, plus additional expenses related to
additional personnel and general increases in costs. Selling and general
expenses were higher in the first nine months of the current fiscal year due
primarily to the substantial cost of compliance with the provisions of Section
404 of the Sarbanes-Oxley Act of 2002 in the current fiscal year, which were
$413,000 in the first nine months of the current year. The increase in selling
and general expenses also resulted from increased compensation expenses (due to
normal annual increases and to additional employees), increased selling expenses
and increased insurance costs compared to the prior fiscal year. Also, the
current period general and administrative expenses reflect the acquisition of
Aviel Electronics in August, 2004. Aviel's selling and general expenses in the
current period were $268,645, compared with $0 in the comparable period of the
prior year. After eliminating the effect of the Sarbanes-Oxley and Aviel sales
and expenses, the selling and general expenses for the current period increased
$332,519 over the comparable period in the prior year, and, as a percentage of
sales, declined to 28% from 29% in the prior year.
Although the Company expects that selling and general expenses will be
higher in the future due to the addition of the new Aviel Electronics division
in Nevada and the increased on-going expenses related to the Sarbanes-Oxley Act,
future expenses are not expected to be as large as the expenses during the most
current nine-month period.
Other income for the first nine months of fiscal 2005 increased over
the same period in the prior year due to higher investment interest.
Risk Factors
Investors should carefully consider the risks described below and in
the Company's Annual Report on Form 10-KSB for the fiscal year ended October 31,
2004. The risks and uncertainties described below and in the Annual Report are
not the only ones facing the Company. If any of the following risks actually
occur, the Company's business, financial condition or results of operations
could be materially adversely affected.
Dependence On RF Connector Division Products
Of the Company's four operating divisions, the RF Connectors division
is the largest, accounting for approximately 88% of the Company's net sales for
the fiscal year ended October 31, 2004, and approximately 82% and 83% of net
sales during the three and nine-month periods ended July 31, 2005, respectively.
The Company expects the RF Connectors 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 Connectors division could materially
adversely affect the Company's business, operating results and financial
condition. Factors that could adversely affect the RF Connectors division are
described below.
The Company Depends On Third-Party Contract Manufacturers For Substantially All
Of Its Connector Manufacturing Needs.
Substantially all of the Company's RF Connectors 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
that develop and manufacture and assemble the Company's products include:
reduced control over delivery schedules and quality;
risks of inadequate manufacturing yields and excessive costs;
the potential lack of adequate capacity during periods of excess demand;
and
potential increases in prices.
These risks may lead to increased costs or delay product delivery,
which would harm the Company's profitability and customer relationships.
Dependence Upon Independent Distributors To Sell And Market The Company's
Products
The Company's sales efforts are primarily conducted through independent
distributors. Sales through independent distributors accounted for approximately
75% of the net sales of the Company for the fiscal year ended October 31, 2004,
and for the three and nine-month periods ended July 31, 2005, respectively.
Although the Company has entered into written agreements with most of the
distributors, the agreements are nonexclusive and generally may be terminated by
either party upon 30-60 days' written notice. The Company's distributors are not
within the control of the Company, are not obligated to purchase products from
the Company, and may also sell other lines of products. There can be no
assurance that these distributors will continue their current relationships with
the Company or that they will not give higher priority to the sale of other
products, which could include products of competitors. A reduction in sales
efforts or discontinuance of sales of the Company's products by its distributors
would lead to reduced sales and could materially adversely affect the Company's
financial condition, results of operations and business. Selling through
indirect channels such as distributors may limit the Company's contact with its
ultimate customers and the Company's ability to assure customer satisfaction.
Dependence On Principal Customer
One customer accounted for approximately 16% of the net sales of the
Company's RF Connectors division for the fiscal year ended October 31, 2004 and
15% of net sales for the three and nine-month periods ended July 31, 2005,
respectively. 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 that requires this customer to purchase any minimum
amount of products. Accordingly, the Company's largest customer 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:
rapidly changing technologies;
evolving and competing industry standards;
short product life cycles;
changing customer needs;
emerging competition;
frequent new product introductions and enhancements; and
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:
success in subcontracting the design and manufacture of existing and new
products that implement new technologies;
product quality;
reliability;
customer support;
time-to-market;
price;
market acceptance of competitors' products; and
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
that result in the cut back of budgets would likely result in a reduction in
demand for the Company's products and services and could harm the Company's
business. Historically, the communications industry has been cyclical, affected
by both economic conditions and industry-specific cycles. Depressed general
economic conditions and cyclical downturns in the communications industry have
each had an adverse effect on sales of communications equipment, OEMs and their
suppliers, including the Company. No assurance can be given that the connector
industry will not experience a material downturn in the near future. Any
cyclical downturn in the connector and/or communications industry could have a
material adverse effect on the Company.
The Company May Make Future Acquisitions That Will Involve Numerous Risks.
Since August 2004, the Company has purchased the operations of two
smaller businesses (Aviel Electronics in Las Vegas, Nevada, and Worswick
Industries, Inc. in San Diego, California). The Company periodically may make
acquisitions of other companies that could expand the Company's product line or
customer base. The risks involved with both the recent acquisitions and with any
possible future acquisitions include:
diversion of management's attention;
the affect on the Company's financial statements of the amortization of
acquired intangible assets;
the cost associated with acquisitions and the integration of acquired
operations; and
the 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.
International Sales And Operations
Sales to customers located outside the United States, either directly
or through U.S. and foreign distributors, accounted for approximately 14% and
12% of net sales during the three and nine-month periods ended July 31, 2005,
and approximately 11% and 14% for the comparable periods in 2004. The increases
in sales in the 2005 periods were due to increased cooperative advertising,
primarily in Mexico.
International revenues are subject to a number of risks, including:
longer accounts receivable payment cycles;
difficulty in enforcing agreements and in collecting accounts receivable;
tariffs and other restrictions on foreign trade;
economic and political instability; 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 may also be exposed to currency
fluctuation risks.
Changes In Stock Option Accounting Rules May Adversely Affect Our Reported
Operating Results, Our Stock Price, And Our Ability To Attract And Retain
Employees.
SFAS No. 123, "Accounting for Stock-Based Compensation," as in effect
prior to December 2004, established and encouraged the use of the fair value
based method of accounting for stock-based compensation arrangements under which
compensation cost is determined using the fair value of stock-based compensation
determined as of the date of grant and is recognized over the periods in which
the related services are rendered. The statement also permitted companies to
elect to continue using the current intrinsic value accounting method specified
in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," to account for stock-based compensation. The Company uses
the intrinsic value-based method and has disclosed the pro forma effect of using
the fair value based method to account for our stock-based compensation. For
non-employee stock based compensation, we recognized an expense in accordance
with SFAS No. 123 and value the equity securities based on the fair value of the
security on the date of grant.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS 123R"), a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," requiring that the compensation cost relating to share-based
payment transactions, including grants of employee stock options, be measured
and recognized in the financial statements using the fair value of the
compensation awards. The provisions of SFAS 123R are effective for the first
annual period that begins after December 15, 2005; therefore, the Company will
adopt the new requirements no later than the beginning of its fiscal year ending
October 31, 2007. Adoption of the expensing requirements will reduce the
Company's reported earnings. Management is currently evaluating the two methods
of adoption allowed by SFAS 123R; the modified-prospective transition method and
the modified-retrospective transition method. The impact of such adoption upon
the Company's financial position or results of operations is not presently
known.
Item 3. Controls and Procedures.
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934
(the "Exchange Act"), the Company's management, with the participation of the
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Acting Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective.
Since the end of the Company's fiscal year on October 31, 2004, the
Company has undertaken a number of remediation actions to improve the Company's
internal controls over financial reporting, including the following:
o Upgrading its legacy computer accounting system with significant new
enhancements.
o Hiring an acting, part-time financial consultant experienced in SEC
reporting, pending the recruitment of a permanent Chief Financial Officer.
o Replacing certain of its accounting department personnel.
o Implementing extensive new procedures to bring the Company's controls and
procedures into compliance with Section 404 of the Sarbanes-Oxley Act of
2002 within the time frame required under the Act.
The upgrade of the computer accounting system has been accomplished,
and additional enhancements are underway. The Company is in the process of
completing the selection of a permanent Chief Financial Officer. The other
remediation actions described above are in process and are in varying stages of
completion.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Securities and Use of Proceeds
On September 1, 2005, the Company purchased all of the assets of Worswick
Industries, Inc. As part of the purchase price paid for all of the assets, on
September 1, 2005 we issued 2,212 shares to Worswick Industries, Inc. The shares
were valued at a price of $5.65. The issuance of these securities was exempt
from registration under the Securities Act of 1933, as a transaction not
involving a public offering under Section 4(2). No underwriter or placement
agent fees or commissions were paid in connection with the sale of these shares.
Item 4. Submission of Matters to a Vote of Security Holders
On June 10, 2005, we held the annual meeting of our shareholders. At the
meeting, the holders of our outstanding common stock acted on the following
matters:
(1) The shareholders voted for six directors, each to serve for a term of one
year and until his successor is elected. Each nominee received the
following votes:
Votes Votes
(1) Name of Nominee For Withheld
-------------- -----------
John R. Ehret 2,826,047 9,677
Marvin H. Fink 2,827,821 7,903
Howard F. Hill 2,829,141 6,583
Robert Jacobs 2,825,477 10,247
Linde Kester 2,827,651 8,073
William L. Reynolds 2,829,421 6,303
(2) To ratify the selection of J.H. Cohn LLP as the Company's independent
registered public accounting firm for the fiscal year ending October 31,
2005. Votes cast were as follows:
For 2,824,077
Against 56,433
Abstain 6,004
Item 6. Exhibits
(a) Exhibits:
10.1: Employment Agreement, made as of the 10th day of July, 2005, by
and between RF Industries, Ltd. and Howard F. Hill.
31.1: Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2: Certification of the Acting Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1: Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
32.2: Certification of Acting Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
* Pursuant to Commission Release No. 33-8238, this certification will
be treated as "accompanying" this Quarterly Report of Form 10-QSB and
not "filed" as part of such report for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to
the liability of Section 18 of the Securities Exchange Act of 1934, as
amended, and this certification will not be deemed to be incorporated
by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to
the extent that the registrant specifically incorporates it by
reference.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
RF INDUSTRIES, LTD.
Dated: September 14, 2005 By:/s/ Howard F. Hill
------------------
Howard F. Hill, President
Chief Executive Officer
Dated: September 14, 2005 By:/s/Howard F. Hill
-----------------
Howard F. Hill
Acting Chief Financial Officer