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, 2004
Commission File Number 0-13301
RF INDUSTRIES, LTD.
(Exact name of registrant as specified in its charter)
Nevada 88-0168936
(State of Incorporation) (I.R.S. Employer Identification No.)
7610 Miramar Road, Bldg. 6000, San Diego, California 92126-4202
(Address of principal executive offices) (Zip Code)
(858) 549-6340 FAX (858) 549-6345
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act).
State the number of shares outstanding of each of the issuer's classes of common
stock at the latest practicable date.
Yes No X
--- ---
As of January 31, 2004, the registrant had 2,892,140 shares of Common Stock,
$.01 par value, issued.
Transitional small business disclosure format
Yes No X
--- ---
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
RF INDUSTRIES, LTD.
CONDENSED BALANCE SHEETS
January 31 October 31
2004 2003
------------ -----------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents ........................ $4,124,568 $2,683,896
Trade accounts receivable, net of allowance
for doubtful accounts of $73,322 and $55,322 .... 1,114,008 1,701,618
Notes receivable ................................. 12,000 12,000
Inventories ...................................... 3,540,615 3,455,018
Other current assets ............................. 168,333 158,079
Deferred tax assets .............................. 135,600 135,600
---------- ----------
TOTAL CURRENT ASSETS ........................ 9,095,124 8,146,211
---------- ----------
PROPERTY AND EQUIPMENT
Equipment and tooling ............................ 1,144,111 1,125,485
Furniture and office equipment ................... 260,183 260,183
---------- ----------
1,404,294 1,385,668
Less accumulated depreciation ............... 1,094,133 1,057,544
---------- ----------
Totals ...................................... 310,161 328,124
---------- ----------
Notes receivable from related parties ............ 27,230 49,584
Note receivable from stockholder ................. 70,000 70,000
Other assets ..................................... 14,171 14,171
---------- ----------
TOTAL ASSETS ................................ $9,516,686 $8,608,090
========== ==========
See Notes to Condensed Unaudited Financial Statements.
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED BALANCE SHEETS
January 31 October 31
2004 2003
----------- -----------
(Unaudited)
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................... $ 277,948 $ 181,637
Accrued expenses ............................... 219,487 328,355
----------- -----------
Total current liabilities ................. 497,435 509,992
Deferred tax liabilities ....................... 40,000 40,000
----------- -----------
TOTAL LIABILITIES ......................... 537,435 549,992
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000 shares
of $0.01 par value; 2,892,140 and 2,692,683
shares issued ............................... 28,921 26,927
Additional paid-in capital ..................... 3,103,322 2,418,033
Retained earnings .............................. 5,867,675 5,633,805
Treasury stock, at cost - 6,000 shares ......... (20,667) (20,667)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ................. 8,979,251 8,058,098
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ..................... $ 9,516,686 $ 8,608,090
=========== ===========
See Notes to Condensed Unaudited Financial Statements.
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF INCOME
Three Months Ended January 31
----------------------------
(Unaudited)
2004 2003
------ ------
Net sales ........................................ $2,449,359 $2,326,876
Cost of sales .................................... 1,204,475 1,192,158
---------- ----------
Gross profit ................................ 1,244,884 1,134,718
---------- ----------
Operating expenses:
Engineering ................................. 115,382 198,580
Selling and general ......................... 759,365 723,839
---------- ----------
Totals .................................. 874,747 922,419
---------- ----------
Operating income ................................. 370,137 212,299
Other income - interest .......................... 5,733 11,497
---------- ----------
Income before provision for income tax ........... 375,870 223,796
Provision for income tax ......................... 142,000 89,000
---------- ----------
Net income ....................................... $ 233,870 $ 134,796
========== ==========
Basic earnings per share ......................... $ .08 $ .04
========== ==========
Diluted earnings per share ....................... $ .08 $ .04
========== ==========
Basic weighted average shares outstanding ........ 2,757,542 3,400,254
========== ==========
Diluted weighted average shares outstanding ...... 2,943,398 3,650,571
========== ==========
See Notes to Condensed Unaudited Financial Statements.
Item 1: Financial Statements (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended January 31
2004 2003
OPERATING ACTIVITIES ---------- ----------
Net income ............................................. $ 233,870 $ 134,796
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for bad debts ........................... 18,000 12,000
Depreciation and amortization ..................... 36,589 40,666
Changes in operating assets and liabilities:
Trade accounts receivable .................... 569,610 23,405
Inventories ................................. (85,597) 177,525
Other assets ................................ 12,100 (101,637)
Accounts payable ............................ 96,311 197,096
Accrued expenses ............................ (108,868) (75,635)
----------- -----------
Net cash provided by operating activities ......... 772,015 408,216
----------- -----------
INVESTING ACTIVITIES -
capital expenditures .............................. (18,626) (5,934)
----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options ........... 687,283 0
Payments on loans payable ......................... 0 (44,582)
Purchase of treasury stock ........................ 0 (24,164)
----------- -----------
Net cash provided by (used in) financing activities 687,283 (68,746)
----------- -----------
Net increase in cash and cash equivalents .............. 1,440,672 333,536
Cash and cash equivalents at the beginning of
the period .......................................... 2,683,896 3,939,299
----------- -----------
Cash and cash equivalents at the end of the period ..... $ 4,124,568 $ 4,272,835
=========== ===========
See Notes to Condensed Unaudited Financial Statements.
RF INDUSTRIES, LTD.
NOTES TO CONDENSED 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, the unaudited financial information in this
report reflects all adjustments, consisting only of normal recurring
accruals, which are considered necessary for a fair presentation of its
financial position as of January 31, 2004 and its results of operations and
cash flows for the periods shown. Operating results for the three-month
period ended January 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending October 31, 2004. The unaudited
condensed financial statements should be read in conjunction with the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended October 31, 2003.
Note 2 - Components of inventory
January 31, 2004
------------------
(Unaudited)
Raw material and supplies......... $ 675,280
Finished goods ................... 2,865,335
----------
Totals ....... $3,540,615
==========
Note 3 - Earnings per share:
As further explained in Note 1 of the notes to the audited financial
statements of the Company, included in Form 10-KSB for the fiscal year
ended October 31, 2003, basic earnings per share is computed by dividing
net earnings by the weighted average number of common stock outstanding
during the period. Diluted earnings per share is computed by dividing net
earnings by the weighted average number of shares of common stock increased
by the effects of assuming that other potentially dilutive securities (such
as stock options) outstanding during the period had been exercised and the
treasury stock method had been applied.
The following table summarizes the computation of basic and diluted
weighted average shares:
Three Months Ended
January 31
------------
2004 2003
------ -----
(Unaudited) (Unaudited)
Weighted average shares outstanding for
basic net earnings per share ............... 2,757,542 3,400,254
Add effects of potentially dilutive securities
assumed exercise of stock options .......... 185,856 250,317
--------- --------
Weighted average shares for diluted net
earnings per share ......................... 2,943,398 3,650,571
========== =========
Note 4 - Segment Information
The Company's segments are described in Note 6 of the notes to the audited
financial statements of the Company included in Form 10-KSB for the fiscal
year ended October 31, 2003.
The Company had reported segment information in its previous filings for
the operations associated with its Connector, Neulink and Bioconnect
business units in the same format as reviewed by the Company's chief
operating decision maker. The sales, operating income and assets of the
Neulink and Bioconnect segments no longer meet the thresholds that require
separate disclosures. Accordingly, the Company has discontinued reporting
segment information on the Neulink and Bioconnect segments.
Substantially all of the Company's operations are conducted in the United
States; however, the Company derives a portion of its revenue from export
sales.
Note 5 - Stock Option Plan
A description of the Company's 2000 Stock Option Plan and other information
related to stock options are included in Note 8 in its Annual Report on
Form 10-KSB for the year ended October 31, 2003.
The Company continues to measure 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 had adopted the disclosure-only
provisions of Statement of Financial Accounting Principles 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
January 31
--------------------
2004 2003
-------- -------
(Unaudited) (Unaudited)
Net income - as reported .................. $ 233,870 $ 134,796
Deduct total stock-based employee
compensation expense determined under
fair value-based method for all awards 66,608 74,416
---------- -----------
Net income - pro forma .................... $ 167,262 $ 60,380
========== ===========
Basic earnings per share - as reported .... $ .08 $ .04
========== ===========
Basic earnings per share - pro forma ...... $ .06 $ .02
========== ===========
Diluted earnings per share - as reported ... $ .08 $ .04
========== ===========
Diluted earnings per share - pro forma .... $ .06 $ .02
========== ===========
Item 2: Management's discussion and analysis of financial condition and results
of operations
This report contains forward-looking statements. These statements relate to
future events or the Company's future financial performance. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "except," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual
events or results may differ materially.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
neither the Company, nor any other person, assumes responsibility for the
accuracy and completeness of the forward-looking statements. The Company is
under no obligation to update any of the forward-looking statements after
the filing of this Quarterly Report on Form 10-QSB to conform such
statements to actual results or to changes in its expectations.
The following discussion should be read in conjunction with the Company's
financial statements and the related notes and other financial information
appearing elsewhere in this Form 10-QSB. Readers are also urged to
carefully review and consider the various disclosures made by the Company
which attempt to advise interested parties of the factors which affect the
Company's business, including without limitation the disclosures made under
the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations," under the caption "Risk Factors," and the
audited financial statements and related notes included in the Company's
Annual Report filed on Form 10-KSB for the year ended October 31, 2003 and
other reports and filings made with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
these financial statements requires us to make significant estimates and
judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosure of contingent assets and
liabilities. We evaluate our estimates, including those related to bad
debts, inventories and contingencies on an ongoing basis. We base our
estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. One of the accounting policies that involves significant
judgments and estimates concerns our inventory valuation. Inventories are
valued at the weighted average cost value. Certain items in the inventory
may be considered obsolete or excess and, as such, we may establish an
allowance to reduce the carrying value of these items to their net
realizable value. Based on estimates, assumptions and judgments made from
the information available at the time, we determine the amounts of these
allowances. Inventories as of January 31, 2004 represented over 37% of our
total assets. As a result, any reduction in the value of our inventories
would require us to take write-offs that would affect our net worth and
future earnings.
EXECUTIVE OVERVIEW
RF Industries markets connectors and cables to numerous industries for use
in thousands of products, primarily for the wireless market place. In
addition, to a limited extend, the Company also markets wireless products
that incorporate connectors and cables. In the past, RF Industries has
reported results of operations in three segments that, in general terms,
defined the primary markets. However, since sales of connectors and cable
assemblies represent over 90% of the Company's sales, and since the
operations to all of the Company's smaller business units effectively
operate as subunits of the Company's principal business unit, effective
November 1, 2003, RF Industries will no longer report the results of these
other, smaller business units as separate business segments.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that existing current assets and the amount of cash it
anticipates it will generate from current operations will be sufficient to
fund the anticipated liquidity and capital resource needs of the Company
for at least twelve months. The Company does not, however, currently have
any commercial banking arrangements providing for loans, credit facilities
or similar matters should the Company need to obtain additional capital.
Management believes that its existing assets and the cash expected to be
generated from operations will be sufficient during the current fiscal year
and are based on the following:
o As of January 31, 2004, the amount of cash and cash equivalents was
equal to $ 4,125,000 in the aggregate.
o As of January 31, 2004, the Company had $ 9,095,000 in current assets,
and only $ 498,000 of current liabilities.
o As of January 31, 2004, the Company had no outstanding indebtedness
(other than accounts payable and accrued expenses).
The Company does not believe it will need material additional capital
equipment in the next twelve months. In the past, the Company has financed
some of its property and equipment requirements through capital leases. No
additional capital equipment purchases have been currently identified that
would require significant additional leasing or capital obligations 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, 2004, the Company had a total of $ 4,125,000 of cash and
cash equivalents compared to a total of $ 2,684,000 of cash and cash
equivalents on October 31, 2003. The increase in cash and cash equivalents
is the result of $772,000 of net cash provided by operating activities, and
$687,000 of cash received from the issuance of the Company's common stock
upon the exercise of outstanding stock options. Net cash provided by
operating activities was the result of the net income the Company generated
since October 31, 2003 and the $570,000 decrease in outstanding trade
accounts receivable. The decrease in trade accounts receivable is due to
the Company's increased collection efforts and timing issues related to
calendar year-end payments made by the Company's customers.
Net cash used in investing activities of $ 18,600 for the three months
ended January 31, 2004 represented minor capital expenditures.
As a result of the foregoing factors, the Company's cash and cash
equivalents position increased by $1,440,700 during the past three months.
RESULTS OF OPERATIONS
Three Months 2004 vs. Three Months 2003
Net sales, in the current fiscal quarter ended January 31, 2004, increased
5.3%, or $122,500, to $2,449,400 from $2,326,900 in the first fiscal
quarter last year, due to increased demand for the connector, cable
assembly and wireless products. The increase in sales reflects a general
increase in demand for wireless connectors and cable products, primarily
for Wi-Fi network applications. The Company believes this increase is due,
in part, to a revival in some sectors of the telecommunication industries
and the continuing increase in the demand for wireless products.
Sales of RF Connector and coaxial cable products increased 19% to
$2,146,000, an extremely encouraging performance for what is typically RF
Industries' seasonally weakest quarter. This growth was led by higher
shipments of new coaxial connectors and cable assemblies for Wi-Fi and
telecom applications.
Increased sales of Bioconnect products helped offset lower sales for the
Neulink product line.
Cost of sales increased 1%, or $12,300, to $1,204,500 from $1,192,200 in
the same quarter last year. The increase is primarily due to the increase
in sales. Overall gross margins, as a percentage of sales, increased 2.1%
compared to the first quarter of last year primarily related to the
improvement in Connector's product mix during the quarter. In order to meet
the changing demands of its customers, the Company has been developing and
selling new products that have a slightly higher gross margin.
Bioconnect sales growth and benefits from consolidating the business with
RF Connector significantly reduced the operating loss associated with the
sales of the Bioconnect products to only $17,000 for the quarter ended
January 31, 2004, compared to a loss of $107,000 on this product line in
the first quarter last year.
Engineering expenses in the first quarter ended January 31, 2004 decreased
41.9%, or $83,200, to $115,400 from $198,600 in the first quarter last
year. Engineering expenses were higher last year primarily as a result of
the additional expenses incurred to develop a new high-speed wireless radio
modem to upgrade and replace the Company's existing RF9600 transceiver
product line.
Selling and general expenses increased 4.9%, or $35,600, to $759,400 from
$723,800 in the same quarter last year. Selling and general expenses were
higher in the first quarter this year due primarily to increases in salary
expenses and increased cost of insurance.
MATERIAL CHANGES IN FINANCIAL CONDITION:
Cash and cash equivalents increased by $1,441,000 to $4,125,000 at January
31, 2004 compared to $2,684,000 at October 31, 2003. The increase is due
primarily to the cash provided by operating activities and the exercise of
employee stock options.
Trade accounts receivable at January 31, 2004 decreased 34.5%, or $587,600
to $1,114,000 compared to the October 31, 2003 balance of $1,701,600. The
decrease is due primarily to timing of collections and the Company's
increased efforts to reduce its outstanding accounts receivable.
Inventories at January 31, 2004 increased 2.5%, or $85,600, to $3,540,600,
compared to $3,455,000 on October 31, 2003. As part of its business
strategy, and because of its offshore manufacturing arrangements, the
Company normally maintains a high level of inventory. For the past year,
the Company's improved inventory management has enabled it to steadily
reduce inventory levels. However, based on the recent increases in customer
demand, the Company has added inventory to meet customer demand.
Other current assets, including prepaid expenses and deposits, increased
$10,300 to $168,300, from $158,000 on October 31, 2003. This increase is
primarily due to increased insurance costs, prepaid in first quarter of
each year.
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 as of January 31, 2004, the principal
executive officer and the principal financial officer concluded that the
Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company's periodic
SEC filings. There were no significant changes in the Company's internal
controls on other factors that could significantly affect those controls
subsequent to the date of our most recent evaluation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1: Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2: Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1: Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. *
32.2: Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. *
* Pursuant to Commission Release No. 33-8238, this certification
will be treated as "accompanying" this Quarterly Report of Form
10-QSB and not "filed" as part of such report for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of Section 18 of the
Securities Exchange Act of 1934, as amended, and this
certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the
extent that the registrant specifically incorporates it by
reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RF INDUSTRIES, LTD.
Dated: March 4, 2004 By: /s/ Howard F. Hill
------------------------------
Howard F. Hill, President
Chief Executive Officer
Dated: March 4, 2004 By: /s/ Terrie A. Gross
------------------------------
Terrie A. Gross
Chief Financial Officer