SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JANUARY 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 number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for the past 90
days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock at the latest practicable date.
As of March 15, 2005, the registrant had 3,038,272 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
January 31 October 31
2005 2004
----------- -----------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents ........... $ 4,370,511 $ 4,497,322
Trade accounts receivable, net of
allowance for doubtful accounts of
$39,245 and $38,513 ................. 1,529,136 1,516,035
Notes receivable .................... 5,900 12,000
Inventories ......................... 4,278,952 3,789,958
Other current assets ................ 461,680 303,138
Deferred tax assets ................. 141,000 141,000
----------- -----------
Total current assets ........... 10,787,179 10,259,453
----------- -----------
Equipment and Furnishings
Equipment and tooling ............... 1,489,297 1,489,297
Furnishings and office equipment .... 314,422 299,423
----------- -----------
1,803,719 1,788,720
Less accumulated depreciation .. 1,278,119 1,225,680
----------- -----------
Totals ......................... 525,600 563,040
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 ................... $11,568,928 $11,070,722
=========== ===========
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED BALANCE SHEETS
January 31 October 31
2005 2004
----------- -----------
(Unaudited)
Liabilities and
Stockholders' Equity
Current liabilities
Accounts payable ....................... $ 443,577 $ 209,956
Accrued expenses ....................... 287,767 353,100
----------- -----------
Total current liabilities ........... 731,344 563,056
Deferred tax liabilities ............... 53,000 53,000
----------- -----------
Total liabilities ................... 784,344 616,056
----------- -----------
Commitments and Contingencies
Stockholders' Equity
Common stock - authorized 10,000,000
shares of $0.01 par value; 3,038,272
and 2,996,937 shares issued ........ 30,383 29,970
Additional paid-in capital ............. 3,689,780 3,566,760
Retained earnings ...................... 7,064,421 6,857,936
----------- -----------
Total stockholders' equity ........ 10,784,584 10,454,666
----------- -----------
Total liabilities and stockholders'
equity ............................ $11,568,928 $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 January 31
(Unaudited)
--------------------------------
2005 2004
--------------- -------------
Net sales .................................... $2,868,102 $2,449,359
Cost of sales ................................ 1,401,590 1,204,475
---------- ----------
Gross profit ............................ 1,466,512 1,244,884
---------- ----------
Operating expenses:
Engineering ............................. 153,823 115,382
Selling and general ..................... 991,072 759,365
---------- ----------
Totals ............................. 1,144,895 874,747
---------- ----------
Operating income ............................. 321,617 370,137
Other income ................................. 16,468 5,733
---------- ----------
Income before provision for income taxes ..... 338,085 375,870
Provision for income taxes ................... 131,600 142,000
---------- ----------
Net income ................................... $ 206,485 $ 233,870
========== ==========
Basic earnings per share ..................... $ .07 $ .08
========== ==========
Diluted earnings per share ................... $ .05 $ .07
========== ==========
Basic weighted average shares outstanding .... 3,008,765 2,757,542
========== ==========
Diluted weighted average shares outstanding .. 3,823,195 3,520,397
========== ==========
See Notes to Condensed Unaudited Financial Statements
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
Three months ended January 31
(Unaudited)
OPERATING ACTIVITIES: 2005 2004
----------- -----------
Net income ...................................................... $ 206,485 $ 233,870
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for bad debts ..................................... 732 18,000
Depreciation and amortization .............................. 52,439 36,589
Changes in operating assets and liabilities:
Trade accounts receivable ............................... (13,833) 569,610
Notes receivable ........................................ 6,100 --
Inventories ............................................. (488,994) (85,597)
Other current assets .................................... (158,542) 12,100
Other assets ............................................ (7,920) --
Accounts payable ........................................ 233,621 96,311
Accrued expenses ........................................ (65,333) (108,868)
----------- -----------
Net cash provided by (used in) operating activities ............. (235,245) 772,015
INVESTING ACTIVITIES - capital expenditures ..................... (14,999) (18,626)
FINANCING ACTIVITIES - proceeds from exercise of stock
options ......................................................... 123,433 687,283
----------- -----------
Net increase (decrease) in cash and cash equivalents ............ (126,811) 1,440,672
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 .............. $ 4,370,511 $ 4,124,568
=========== ===========
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 month period ended January 31, 2005 are not necessarily indicative of
the results that may be expected for the full year ending October 31, 2005. 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 - Components of inventories
January 31 October 31
2005 2004
----------- -----------
(Unaudited)
Raw materials and supplies $803,921 $777,765
Finished goods 3,583,747 3,120,909
Less inventory reserve (108,716) (108,716)
--------- ---------
Totals $4,278,952 $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 January 31
-------------------------------------
2005 2004
----------------- ----------------
Weighted average shares outstanding
for basic earnings per share 3,008,765 2,757,542
Add effects of potentially dilutive
securities-assumed exercised
of stock options 814,430 762,855
----------------- ----------------
Weighted average shares for diluted
earnings per share 3,823,195 3,520,397
================= ================
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 three month period ended
January 31, 2005, no stock options were granted, and 41,335 with a weighted
average share price of $2.99 were exercised.
The Company measures compensation cost related to stock options issued to
employees using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation" and SFAS 148. Accordingly, no earned or unearned
compensation cost was recognized in the accompanying condensed 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 January 31
-------------------------------------
2005 2004
----------------- ----------------
Net income - as reported $206,485 $233,870
Deduct total stock-based employee
compensation expense
determined under fair
value-based method for all
awards 96,588 66,608
----------------- ----------------
Net income - pro forma $109,897 $167,262
================= ================
Basic earnings per share - as
reported $.07 $.08
==== ====
Basic earnings per share - pro
forma $.04 $.06
==== ====
Diluted earnings per share - as
reported $.05 $.07
==== ====
Diluted earnings per share - pro
forma $.03 $.05
==== ====
Note 5 - Concentration of Credit Risk
One customer accounted for approximately 14% of the Company's net sales for
the three-month period ended January 31, 2005. Although this customer has been
an on-going major customer of the Company during the past five years, the
Company does not have a written agreement with this customer. Therefore, this
customer does not have any minimum purchase obligations and could stop buying
the Company's products at any time. A reduction, delay or cancellation of orders
from this customer or the loss of this customer could significantly reduce the
Company's revenues and profits. The Company cannot provide assurance that this
customer or any of its current customers will continue to place orders, that
orders by existing customers will continue at current or historical levels or
that the Company will be able to obtain orders from new customers.
Note 6 - Geographical Information
The Company attributes sales to geographic areas based on the location of
the customers. The following table presents the sales of the Company by
geographic area for the three months ended January 31, 2005 and 2004:
2005 2004
------------ --------------
United States $2,532,925 $2,160,298
Foreign countries 335,177 289,061
----------------- ----------------
$2,868,102 $2,449,359
================= ================
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.
Allowance for doubtful accounts:
The Company maintains an allowance for doubtful accounts based on
historical collections of accounts receivable. The Company monitors its accounts
receivable balances on a continual basis. If the financial condition of
customers deteriorates, additional allowances may be required.
Income taxes:
The Company accounts for income taxes pursuant to the asset and liability
method which requires deferred income tax assets and liabilities to be computed
for temporary differences between the financial statement and tax 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 January 31, 2005 represented
over 37% 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 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 2204, 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
interim or annual period that begins after December 15, 2005; therefore, the
Company will adopt the new requirements no later than the beginning of its first
quarter of its fiscal 2006. 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
84 % of the Company's sales, and since the operations to all of the Company's
smaller business units effectively operate as subunits of the Company's
principal business unit, effective November 1, 2003, RF Industries 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 January 31, 2005, the amount of cash and cash equivalents was equal
to $4,370,511 in the aggregate.
As of January 31, 2005, the Company had $10,787,179 in current assets, and
$731,344 in current liabilities.
As of January 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.
As of January 31, 2005, the Company had a total of $4,370,511 of cash and
cash equivalents compared to a total of $4,497,322 of cash and cash equivalents
on October 31, 2004. The decrease of $126,811 in cash and cash equivalents
despite net income earned by the Company in the three-month period of $206,485
is primarily the result of an increase in inventories of $488,994 to support
increased sales levels, and an increase in prepaid expenses and other current
assets totaling $158,542.
Trade accounts receivable at January 31, 2005 increased approximately 1%,
or by $13,101, to $1,529,136 compared to the October 31, 2004 balance of
$1,516,035. The minor increase in accounts receivable in relation to the 17.1%
increase in net sales is due primarily to timing of collections and the
Company's increased efforts to reduce its outstanding accounts receivable.
Inventories at January 31, 2005 increased 12.9%, or $488,994, to $4,278,952
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.
The Company's cash position was also negatively affected as other current
assets, including prepaid expenses and deposits, increased $158,542 to $461,680,
from $303,138 on October 31, 2004. This increase is primarily due to increased
prepaid insurance costs.
Accounts payable at January 31, 2005 increased $233,621 to $443,577 from
$209,956 on October 31, 2004 primarily due to the aforementioned increase in
inventory levels.
Net cash used in investing activities was $14,999 for the three months
ended January 31, 2005 as a result of capital expenditures made by the Company.
Net cash provided by financing activities was $123,433 for the three months
ended January 31, 2005, and was attributable to proceeds received from the
exercise of stock options.
As a result of the $235,245 net decrease in cash from operating activities,
which was not offset by increases in cash from its financing activities, the
Company's overall cash and cash equivalent position decreased by $126,811 during
the past three months.
Results of Operations
Three Months 2005 vs. Three Months 2004
Net sales in the current fiscal quarter ended January 31, 2005, increased
17.1%, or $418,743, to $2,868,102 from $2,449,359 in the first fiscal quarter
last year, due to increased demand for the Company's connector, cable assembly
and wireless products. The increase in sales reflects a general increase in
demand for wireless connectors and cable products. 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.
The Company's gross margins and gross profits as a percentage of sales
remained substantially unchanged during the current fiscal quarter compared to
the same fiscal quarter last year. Cost of sales increased 16.4% or $197,115 to
$1,401,590 from $1,204,475 in the same quarter last year, but less than the
17.1% increase in sales. Consequently, gross profit, as a percentage of sales,
increased to 51.1% from 50.8% of sales in the same quarter last year. This
improvement in gross profit, as a percent of sales, reflects normal fluctuations
of costs based on the product mix during the quarter.
Engineering expenses increased 33.3%, or $38,441, to $153,823 from $115,382
in the first fiscal quarter last year due to development costs for new product
enhancements.
Selling and general expenses increased 30.5% or $231,707 to $991,072 for
the three-month period ended January 31, 2005 from $759,365 in the same quarter
of the prior fiscal year. Selling and general expenses were higher in the first
quarter of the current fiscal year due primarily to increased compensation
expenses, increased selling expenses and increased insurance costs compared to
the prior fiscal year, and the cost of compliance with the provisions of Section
404 of the Sarbanes-Oxley Act of 2002 in the first quarter of the current fiscal
year. First quarter general and administrative expenses also reflect the
acquisition of Aviel Electronics in August, 2004.
Other income for the first quarter of 2005 increased over the same period
in the prior year due to the receipt of minor insurance proceeds.
Risk Factors
Investors should carefully consider the risks described below and in the
Company's Annual Report on Form 10-KSB. The risks and uncertainties described
below and in the Annual Report are not the only ones facing the Company. If any
of the following risks actually occur, the Company's business, financial
condition or results of operations could be materially adversely affected.
Dependence On RF Connector Division Products
Of the Company's five operating divisions, the RF Connector division is the
largest, accounting for approximately 88% of the Company's net sales for the
fiscal year ended October 31, 2004, and over 84% of net sales during the
three-month period ended January 31, 2005. 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.
The Company Depends On Third-Party Contract Manufacturers For Substantially All
Of Its Connector Manufacturing Needs.
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:
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 both the fiscal year ended October 31,
2004, and the three-month period ended January 31, 2005. Although the Company
has entered into written agreements with most of the distributors, the
agreements are nonexclusive and generally may be terminated by either party upon
30-60 days' written notice. The Company's distributors are not within the
control of the Company, are not obligated to purchase products from the Company,
and may also sell other lines of products. There can be no assurance that these
distributors will continue their current relationships with the Company or that
they will not give higher priority to the sale of other products, which could
include products of competitors. A reduction in sales efforts or discontinuance
of sales of the Company's products by its distributors would lead to reduced
sales and could materially adversely affect the Company's financial condition,
results of operations and business. Selling through indirect channels such as
distributors may limit the Company's contact with its ultimate customers and the
Company's ability to assure customer satisfaction.
Dependence On Principal Customer
One customer accounted for approximately 16% of the net sales of the
Company's RF Connector division for the fiscal year ended October 31, 2004 and
14% of net sales for the three-month period ended January 31, 2005. 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:
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
which result in the cut back of budgets would likely result in a reduction in
demand for the Company's products and services and could harm the Company's
business. Historically, the communications industry has been cyclical, affected
by both economic conditions and industry-specific cycles. Depressed general
economic conditions and cyclical downturns in the communications industry have
each had an adverse effect on sales of communications equipment, OEMs and their
suppliers, including the Company. No assurance can be given that the connector
industry will not experience a material downturn in the near future. Any
cyclical downturn in the connector and/or communications industry could have a
material adverse effect on the Company.
The Company May Make Future Acquisitions, Which Will Involve Numerous Risks.
The Company periodically considers other potential acquisitions of other
companies that could expand the Company's product line or customer base.
Accordingly, the Company may in the future acquire one or more additional
companies. The risks involved with 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 11.7% of net
sales during the three-month period ended January 31, 2005 and approximately
11.8% for the comparable period in 2004. The increase in sales in the 2005
period 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 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.
In December 2004, the Financial Accounting Standards Board published new
rules that will require companies in 2005 to record all stock-based employee
compensation as an expense. The new rules apply to stock options grants, as well
as a wide range of other share-based compensation arrangements. Small business
issuers such as the Company will have to apply the new rules in their first
reporting period beginning after December 15, 2005. As a small company with
limited financial resources, we have depended upon compensating our officers,
directors, employees and consultants with such stock based compensation awards
in the past in order to limit our cash expenditures and to attract and retain
officers, directors, employees and consultants. Accordingly, if we continue to
grant stock options or other stock based compensation awards to our officers,
directors, employees, and consultants after the new rules apply to us, our
future earnings, if any, will be reduced (or our future losses will be
increased) by the expenses recorded for those grants. Since we are a small
company, the expenses we may have to record as a result of future options grants
may be significant and may materially negatively affect our reported financial
results. The adverse effects that the new accounting rules may have on our
future financial statements, should we continue to rely heavily on stock-based
compensation, may reduce our stock price and make it more difficult for us to
attract new investors.
Item 3. Controls and Procedures.
Based on an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, the principal executive officer and the
principal financial officer concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures are effective
to ensure the information required to be disclosed by the Company in reports
filed or submitted under the Exchange Act were timely recorded, processed and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms.
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 Chief Financial Officer who is experienced in
SEC reporting.
o Replacing the Company's prior stock option record system with a new
software system.
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 hiring of an acting, part-time Chief Financial Officer has recently
been accomplished. The other remediation actions described above are in process,
and are in varying stages of completion.
PART II. OTHER INFORMATION
Item 5. Other Information.
On February 24, 2005, the Company engaged the services of William T.
Gochnauer as its part-time, interim, acting Chief Financial Officer, subject to
his appointment as such by the Audit Committee of the Company's Board of
Directors. On March 16, 2005 the Audit Committee appointed Mr. Gochnauer to that
post. Mr. Gochnauer has agreed to provide his services to the Company on a
part-time, interim basis as needed by the Company until the Company engages Mr.
Gochnauer or some other person as the permanent Chief Financial Officer. Mr.
Gochnauer's employment with the Company may be terminated at any time by either
Mr. Gochnauer or by the Company.
From September 2000 until October 2003, Mr. Gochnauer was the Senior Vice
President, Treasurer and Chief Financial Officer of Western Water Company, a
public water development company. Prior to joining Western Water Company, Mr.
Gochnauer was a Vice President for Corporate Development for a subsidiary of
Century Business Services, Inc., a public financial services company.
Previously, he also served as Chief Financial Officer of the Devon Group of
Companies, a real estate development company. He has held Chief Financial
Officer or Corporate Controllership positions at several public and private
companies. Mr. Gochnauer began his career at the international accounting firm
now known as KPMG LLP. Mr. Gochnauer is a graduate of Armstrong College, and is
a California Certified Public Accountant.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1: Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2: Certification of 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.
(b) Reports on Form 8-K
- On January 4, 2005 the registrant filed a Current Report on
Form 8-K attaching a press release announcing the appointment of George R. Marks
as President and General Manager of the Company's Bioconnect Division
- On January 7, 2005 the registrant filed a Current Report on
Form 8-K announcing its fourth quarter financial results.
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: March 16, 2005 By:/s/ Howard F. Hill
------------------
Howard F. Hill, President
Chief Executive Officer
Dated: March 16, 2005 By:/s/ William T. Gochnauer
------------------------
William T. Gochnauer
Acting Chief Financial Officer