SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended October 31, 2004
Commission File Number 0-13301
RF INDUSTRIES, LTD.
(Name of small business issuer in its charter)
Nevada 88-0168936
(State of Incorporation) (I.R.S. Employer Identification No.)
7610 Miramar Road, Bldg. 6000, San Diego, California 92126-4202
(Address of principal executive offices) (Zip Code)
(858) 549-6340 FAX (858) 549-6345
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB.
Yes X No
The issuer's revenues for the year ended October 31, 2004 were $11,227,000.
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of October 31, 2004, based on the average of
the closing price of one share of the Common Stock of the Company, as reported
on October 31, 2004 was $14,876,246. As of October 31, 2004, the registrant had
2,996,937 outstanding shares of common stock, $.01 par value.
Certain exhibits previously filed with the registrant's prior Forms 10-KSB and
Forms 10-QSB are incorporated by reference into Item 13 of this Form 10-KSB.
Transitional Small Business Disclosure Format: _____ Yes ___X___ No
This Form 10-KSB consists of a total of 50 pages. The Index to Exhibits can be
found on page 28.
Forward-Looking Statements:
Certain statements in this Annual Report on Form 10-KSB, and other oral and
written statements made by the Company from time to time are "forward looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including those that discuss strategies, goals, outlook or
other non-historical matters, or projected revenues, income, returns or other
financial measures. In some cases forward-looking statements can be identified
by terminology such as "may," "will," "should," "except," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms or other comparable terminology. These forward-looking statements are
subject to numerous risks and uncertainties that may cause actual results to
differ materially from those contained in such statements. Among the most
important of these risks and uncertainties are the ability of the Company to
continue to source its raw materials and products from its suppliers and
manufacturers, and the market demand for its products, which market demand is
dependent to a large part on the state of the telecommunications industry.
Important factors which may cause actual results to differ materially from the
forward looking statements are described in the Section entitled "Risk Factors"
in the Form 10-KSB, and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission, press releases
and other communications. The Company assumes no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
PART I
ITEM 1. BUSINESS
General:
RF Industries, Ltd. (hereinafter the "Company") is a provider of interconnect
products and systems for radio frequency (RF) communications products and
wireless digital transmission systems. For internal operational purposes, and
for marketing purposes, the Company currently classifies its operations into the
following four related divisions: (i) The RF Connector and Cable Assembly
Division designs, manufactures and distributes coaxial connectors, assembles and
sells cable assemblies that are integrated with coaxial connectors; (ii) the
Bioconnect Division manufactures and distributes cabling and interconnect
products to the medical monitoring market; (iii) the Aviel Electronics Division
designs, manufactures and distributes RF connectors primarily for aerospace and
military customers, and (iv) the Neulink Division distributes complete wireless
data products such as radio frequency data links and wireless modems.
The Company's principal executive office is located at 7610 Miramar Road,
Building #6000, San Diego, California. The Company was incorporated in the State
of Nevada on November 1, 1979, completed its initial public offering in March
1984 under the name Celltronics, Inc. and changed its name to RF Industries,
Ltd. in November 1990. Unless the context requires otherwise, references to the
"Company" in this report include RF Industries, Ltd. and its divisions.
Operating Divisions
Connector Division
The Connector Division is engaged in the design, manufacture and distribution of
coaxial connector solutions for companies that design, build, operate, maintain
and use wireless voice, data, messaging, and location tracking systems. Coaxial
connector products consist primarily of connectors which, when attached to a
coaxial cable, facilitate the transmission of analog and digital signals in
various frequencies. Although most of the connectors are designed to fit
standard products, the Company also sells custom connectors specifically
designed and manufactured to suit its customers' requirements such as the Wi-Fi
and broadband wireless markets. The Company's RF connectors are used in
thousands of different devices, products and types of equipment. While the
models and types of devices, products and equipment may change from year to
year, the demand for the types of connectors used in such products and offered
by the Company does not fluctuate with the changes in the end product
incorporating the connectors. In addition, since the Company's standard
connectors can be used in a number of different products and devices, the
discontinuation of one product does not make the Company's connectors obsolete.
Accordingly, most connectors carried by the Company can be marketed for a number
of years and are only gradually phased out. Furthermore, because the Company's
connector products are not dependent on any line of products or any market
segment, the Company's overall sales of connectors do not fluctuate materially
when there are changes to any product line or market segment. Sales of the
Company's connector products are more dependent upon the overall economy and on
the Company's ability to market its products. The Company's sales of connectors
and cable assemblies have increased in the past two years as the overall market
demand for wireless products that use the Company's connectors has increased.
The Company believes that the continuing growth in new wireless products as well
as its increased sales in the military/aerospace markets will result in an
overall increase in the demand for the radio frequency connectors and cable
assemblies that the Company distributes.
Third party foreign manufacturers located in Asia manufacture the Company's RF
connectors for the Company. The Company has been designing, producing and
selling coaxial connectors since 1987, and the Connector Division therefore
represents the Company's oldest and most established division. The Connector
Division has, during all of the recent fiscal years, generated the majority of
the Company's revenues.
The Cable Assembly Group is engaged in the manufacture and distribution of RF
cable assemblies. These cable assemblies consist of various types of coaxial
cables that are attached to connectors (usually the Company's connectors) for
use in a variety of communications applications. Cable assemblies are
manufactured at the Company's California facilities and are sold through
distributors or directly to major OEM (Original Equipment Manufacturer)
accounts. Cable assemblies consist of both standard cable assemblies and
assemblies that are custom manufactured for the Company's clients The Company
offers a line of cable assemblies with over 100,000 cable products. The Company
launched its cable assembly operations in 2000, and the operations of this
division constituted the second largest generator of revenues for the Company
during the fiscal year ended October 31, 2004.
Bioconnect Division
The Bioconnect Division is engaged in the design, manufacture and sale of cables
and interconnects for medical monitoring applications, such as disposable ECG
cables, infant apnea monitors in hospitals, patient leads, snap leads and
connecting wires. The Company acquired the Bioconnect division in December 2000.
Aviel Electronics Division
In August 2004, the Company acquired the business and all of the assets of Aviel
Electronics, a privately held Las Vegas, Nevada based manufacturer and marketer
of microwave and radio frequency (RF) connectors. Aviel Electronics has a 47
year history serving the microwave transmission industries, and is an approved
vendor to leading aerospace, electronics, OEM's and government agencies in the
United States and abroad. The acquisition of Aviel Electronics complemented the
Company's Connector Division's capabilities by providing additional custom
design capabilities, expanding the Company's products in the military and
commercial aerospace markets, and by expanding the Company's client base.
RF Neulink Division
The RF Neulink Division designs and manufactures, through outside contractors,
wireless data products commonly known as RF data links and wireless modems.
These radio modems and receivers provide high-speed wireless connections over
longer distances where wire connections may not be desirable or feasible. In
addition to selling its own radio modem, RF Neulink also distributes antennas,
transceivers and related products of other manufacturers. The RF Neulink
Division also offers complete turnkey packages for numerous remote data
transmission applications. The Company established the RF Neulink Division in
1984.
Product Description:
The Company produces a broad range of interconnect products and assemblies. The
products that are offered and sold by the Company's various divisions consist of
the following:
Connector Division:
The Company's Connector Division designs and distributes coaxial connectors for
the numerous products, devices and instruments. Coaxial connectors have
applications in commercial, industrial, automotive, scientific and military
markets. The types of connectors offered by the RF Connector Division include
2.4mm and 3.5mm, 7-16 DIN, BNC, MCX, MHV, Mini-UHF, MMCX, N, SMA, SMB, TNC, QMA
and UHF. These connectors are offered in several configurations for both plugs
and jacks. There are hundreds of applications for these connectors, some of
which include digital applications, cellular and PCS telephones, Wi-Fi and
broadband wireless applications, cellular and PCS infrastructure, GPS (Global
Positioning Systems), mobile radio products, aircraft, video surveillance
systems, cable assemblies and test equipment. Users of the Company's connectors
include telecommunications companies, circuit board manufacturers, OEM, consumer
electronics manufacturers, audio and video product manufacturers and installers,
and satellite companies. The Connector Division markets approximately 1,500
types of connectors, which range in price from $0.40 to $125.00 per unit.
The Connector Division also designs and sells a variety of connector tools and
hand tools that are assembled into kits used by lab and field technicians, R&D
technicians and engineers. The Company also designs and now offers some of its
own tools, which differ from those offered elsewhere in the market. These tools
are manufactured for the Company by outside contractor. Tool products are
carried as an accommodation to the Company's customers and have not materially
contributed to the Company's revenues.
The Cable Assembly group produces and markets cable assemblies in a variety of
sizes and combinations of RF coaxial connectors and coax cabling. Cabling is
purchased from a variety of major unaffiliated suppliers and is assembled with
the Company's connectors as complete cable assemblies. Coaxial cable assemblies
have thousands of applications including local area networks, wide area
networks, Internet systems, PCS/cellular systems, TV/dish network systems, test
equipment, military/aerospace (mil-standard and COTS (Commercial Off The Shelf))
and entertainment systems. Most cable assemblies are manufactured to the
purchaser's specifications.
Bioconnect Division
The Bioconnect group designs, manufactures and sells specialized electrical
cabling and interconnect products used in the medical monitoring market. These
products consist primarily of patient monitoring cables, ECG cables, snap leads,
and molded safety leads for neonatal monitoring electrodes. The products, which
are used in hospitals, clinics, doctor offices, ambulances and at home are
replaced frequently in order to ensure maximum performance.
Aviel Electronics Division
The Aviel Electronics Division designs, manufactures and sells specialized
connectors. Standard configuration and custom connectors include connectors
ranging from subminiature to type "L" to Nan-Hex, SMA, SMB, SMC, TNC, BNC, SC
and NL. Aviel also specializes in the design and manufacture of non-standard
configurations required for specific applications, hard to locate and
discontinued connectors for aerospace and other unique applications.
RF Neulink Division:
The wireless data products available from the RF Neulink Division come in a
variety of configurations to satisfy the requirements of the various vertical
markets. Transmitter and receiver modules come in a wide range of power output
and frequency ranges and are used to convey data or voice from point to point.
Additionally, dumb or smart programmable modems are available in a wide range of
speeds and frequency/price ranges. Accessory modules have been developed for
remotely controlling and monitoring electrical devices.
The products sold by the RF Neulink Division include both its own products and
products of other manufacturers that are distributed by the Neulink Division.
The products offered by the Neulink Division include:
o RF9600 UHF and VHF wireless modems.
o DAC9600'S incorporating RF9600's with Digital, Analogue, and Relay I/O
modules
o NL6000 UHF and VHF wireless moderns o NL900 and NL2400 Spread Spectrum
point to point wireless modems
o Ornnex Control Systems 900mhz Spread-Spectrum wireless modems and I/O
modules
o Teledesign high-speed wireless modems in VHF, UHF and 900 MHz frequencies o
BlueWave, Maxrad. and Antenex antennas
o Custom Design and Engineering services
Current applications in use worldwide for Neulink products are various and
include seismic and volcanic monitoring, industrial remote censoring/control in
oil fields, pipelines and warehousing, lottery remote terminals, various
military applications, remote camera control and tracking, perimeter and
security system control/monitoring, water and waste management, inventory
control, HVAC remote control and monitoring, biomedical hazardous material
monitoring, fish farming automation of food dispensing, water aeration and
monitoring, remote emergency generator startup and monitoring, police usage for
mobile warrant database access
During the 2004 fiscal year, the Neulink Division introduced a new radio modem
that it developed. The new NL6000 radio modem was repositioned within the
marketplace to compete against a more upscale market segment and was designed to
meet the FCC's new mandatory requirement to provide narrow-band channels that
became effective in January 2005. This product is a high-speed narrow band
compliant radio modem, that operates on a 12.5 KHz channel at a 12 Kbps data
transfer rate.
Foreign Sales:
Direct export sales by the Company to customers in South America, Canada,
Mexico, Europe, Australia, the Middle East, and Asia accounted for approximately
8.9% of Company sales for the fiscal year ended October 31, 2004. The majority
of the export sales during these periods were to Canada and Mexico. The Company
is attempting to expand its foreign distribution efforts under its "RFI" logo,
and is attempting to obtain additional foreign private label customers.
The Company does not own, or directly operate any manufacturing operations or
sales offices in foreign countries.
Distribution, Marketing and Customers:
Sales methods vary greatly between its divisions.
The Connector and Cable Assembly Divisions currently sell their products
primarily through warehousing distributors and OEM customers who utilize coaxial
connectors and cable assemblies in the manufacture of their products. Since
there are many OEMs who are not served by any of the Company's distributors, the
Company's goal is to increase the number of OEMs that purchase connectors
directly from the Company. The Aviel Division will continue to sell products to
its customer base with the addition of customers referred through the Connector
Division. The Aviel and Connector divisions sell to similar customer market
segments and will combine marketing efforts where economically advantageous. The
Bioconnect group markets its products to the medical market through hospital
dealers and distributors. The Bioconnect Division also sells its products to
OEMs who incorporate the leads and cables into their product offerings.
The Neulink Division sells its products directly or through manufacturers
representatives, system integrators and OEM's. System integrators and OEMs
integrate and/or mate Company's products with their hardware and software to
produce turnkey wireless systems. These systems are then either sold or leased
to other companies, including utility companies, financial institutions,
petrochemical companies, government agencies, and irrigation/water management
companies.
Manufacturing:
The Company contracts with outside third parties for the manufacture of all its
coaxial connectors, and Neulink products. However, virtually all of RF cable
assemblies sold by the Company during the fiscal year ended October 31, 2004
were manufactured by the Company at its facilities in California. The Connector
Division has its manufacturing performed at numerous manufacturing plants in
Japan, Korea, the United States and International Standards Organization (ISO)
approved factories in Taiwan. The Company is not dependent on any one or only a
few manufacturers for its coaxial connectors and cable assemblies. The Company
does not have any agreements with manufacturers for its connectors, cable
assemblies or Neulink products. RF Industries has in-house design engineers who
create the engineering drawings for fabrication and assembly of connectors and
cable assemblies. Accordingly, the manufacturers are not primarily responsible
for design work related to the manufacture of the connectors and cable
assemblies. However, the third party manufacturers of the Neulink products are
solely responsible for design work related to the manufacture of the Neulink
Division's products. Neulink's products are manufactured by numerous
manufacturers in the United States, and the Company is not dependent on one or a
few manufacturers for its Neulink products.
The Bioconnect Division has designed and manufactured its own products for over
20 years (including as an unaffiliated company before being acquired by the
Company in 2000). The manufacturing process for the Bioconnect medical cables
includes all aspects of the product, from the design to mold design, mold
fabrication, assembly and testing. The Bioconnect product line produces its
medical interconnect products in both high volume manufacturing and for custom
or low volume uses.
The Aviel Electronics Division manufactures all its connectors at its Las Vegas,
Nevada manufacturing facility. The Aviel Electronics Division has designed and
manufactured its own products for 47 years (including as an unaffiliated company
before being acquired by the Company in 2004). The manufacturing process for the
Aviel connectors includes all aspects of the product from design, tooling,
fabrication, assembly and testing. The Aviel Electronics product line produces
its connector products for low volume custom manufacturing uses, for the
military, aerospace and other unique applications.
There are certain risks associated with the Company's dependence on third party
manufacturers for some of its products, including reduced control over delivery
schedules, quality assurance, manufacturing costs, the potential lack of
adequate capacity during periods of excess demand and increases in prices. See
"Risk Factors."
Raw Materials:
Connector materials are typically made of commodity metals and include small
applications of precious materials, including silver and gold. The RF Connector
Division purchases most of its connector products from contract manufacturers
located in Asia and the United States. The Company believes that the raw
materials used in its products are readily available and that the Company is not
currently dependent on any supplier for its raw materials. The Company does not
currently have any long-term purchase or supply agreements with its connector or
Neulink product suppliers. The RF Connector cable assembly division obtains
coaxial connectors from RF Connector. The Company believes there are numerous
domestic and international suppliers of coaxial connectors. Nevertheless, should
the Company experience a material delay in obtaining raw materials and component
parts from its existing suppliers, until alternate arrangements are made, the
Company's ability to meet its customer's needs may be adversely affected.
Neulink purchases its electronic products from various U.S. suppliers, and all
Neulink wireless modem transceivers are built in the United States. The Company
believes electronic components used in these products are readily available from
a number of domestic suppliers and from other foreign suppliers.
Aviel Electronics Division connector materials are typically made of commodity
metals and include some application of precious materials, including silver and
gold. The Aviel Electronic Division purchases almost all of its connector
products from vendors in Asia and the United States. The Company believes the
connector materials used in the manufacturing of its connector products are
readily available from a number of foreign and domestic suppliers.
Personnel:
As of December 31, 2004, the Company employed 72 full-time employees, of whom 16
were in management, 43 were in manufacturing and assembly, 2 were engineers
engaged in design, research and development, and the rest were in various
administrative positions. The Company also occasionally hires part-time
employees. The Company believes that it has a good relationship with its
employees and, at this time, no employees are represented by a union.
Research and Development:
The Company has spent approximately $40,000 and $234,000 on research and
development in the fiscal years ended October 31, 2004 and 2003, respectively. A
significant portion of research and development expenses during the past two
years were spent on the development of the Neulink Division's NL6000 radio
modem. Since the development of the NL6000 has now been completed, research and
development expenses decreased significantly. Research and development
activities of the Company consist of activities intended to produce new products
not marketed by others that can be marketed to the industry in general.
In addition to research and development activities, the Company also spent
approximately $1,000,000 during the past two fiscal years on engineering.
Engineering activities consist of the design and development of new products for
specific customers, the design and engineering of new products and the redesign
of existing products to keep up with changes in the industry and products
offered by the Company's competitors. Engineering work often is carried out in
collaboration with the Company's customers.
The increase in business in the military/aerospace sector has encouraged the
Company to pursue the development of an ISO 9000 system thereby improving its'
competitive edge.
Patents, Trademarks and Licenses:
The Company does not own any patents on any of its products, nor has it
registered any product trademarks. Because of the Company carries thousands of
separate types of connectors and other products, most of which are available to
the Company's customers from other sources, the Company does not believe that
its business or competitive position is dependent on patent protection.
Warranties and Terms:
The Company warrants its products to be free from defects in material and
workmanship for varying warranty periods, depending upon the product. Products
are generally warranted to the dealer for one year, with the dealer responsible
for any additional warranty it may make. Certain Neulink products are sold
directly to end-users and are warranted to those purchasers. The RF Connector
products are warranted for the useful life of the connectors. Although the
Company has not experienced any significant warranty claims to date, there can
be no assurance that it will not be subjected to such claims in the future.
The Company usually sells to customers on 30-day terms pursuant to invoices and
does not generally grant extended payment terms. Sales to most foreign customers
are made on cash terms at time of shipment. Customers may delay, cancel, reduce,
or return products after shipment subject to a restocking charge.
Competition:
Management estimates that the Connector Division has over 50 competitors in the
approximately $900,000,000 annual coaxial connector market. Management believes
no one competitor has over 15% of the total market, while the three leaders hold
no more than 30% of the total market. Many of the competitors of the RF
Connector Division have significantly greater financial resources and broader
product lines. RF Connector competes on the basis of product quality, product
availability, price, service, delivery time and value-added support to its
distributors and OEM customers. Since the Company's strategy is to provide a
broad selection of products in the areas in which it competes and to have a
ready supply of those products available at all times, the Company normally has
a significant amount of inventory of its connector products. The Bioconnect
group competes with numerous other companies in all areas of its operations,
including the manufacture of OEM custom products and medical cable products.
Most of the competitors of Bioconnect are larger and have significantly greater
financial resources than Bioconnect.
There are numerous small privately held manufacturers and marketers of
connectors, but Aviel Electronics has specialized in microwave and radio
frequency (RF) custom connectors which lowers the number of its direct
competitors. Because Aviel Electronics is an approved vendor of leading
aerospace, electronics, OEM and government agencies in the United States and
abroad, competition is limited to those manufacturers who have been approved.
Major competitors for Neulink include Microwave Data Systems and Data Radio.
Although a number of larger firms could enter Neulink's markets with similar
products, Neulink's strategy is focused on serving and providing specific
hardware and software combinations with the goal of maintaining a strong
position in selected "niche" wireless applications. While the Neulink Division's
competitors offer products that are substantially similar to Neulink's radio
modems, the Neulink Division tries to enhance its competitive position by
offering additional service before, during, and after the sale.
Government Regulations:
The Company's products are designed to meet all known existing or proposed
governmental regulations. Management believes that the Company currently meets
existing standards for approvals by government regulatory agencies for its
principal products. Because the products designed and sold by the Aviel
Electronics Division are used in commercial and military aerospace products, its
products are regulated by various government agencies in the United States and
abroad.
Neulink products are subject to the regulations of the Federal Communications
Commission (FCC) in the United States, the Department of Communications (D.O.C.)
in Canada, and the future E.C.C. Radio Regulation Division in Europe. The
Company's present equipment is "type-accepted" for use in the United States and
Canada. Neulink offers products that comply with current FCC, Industry Canada,
and some European union regulations. The system integrator, or end user, is
responsible for compliance with applicable government regulations.
Bioconnect's products are subject to the regulations of the U.S. Food and Drug
Administration.
RISK FACTORS
Investors should carefully consider the risks described below and all other
information in this Form 10-KSB. The risks and uncertainties described below are
not the only ones facing the Company. Additional risks and uncertainties not
presently known to the Company or that it currently deems immaterial may also
impair the Company's business and operations.
If any of the following risks actually occur, the Company's business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of the Company's common stock could decline and
investors may lose all or part of the money they paid to buy the Company's
common stock.
Dependence On The Connector Division
Of the Company's five operating divisions, the RF Connector division is the
largest, accounting for approximately 87% of the Company's total sales for the
fiscal year ended October 31, 2004. 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 Connector Division could materially adversely affect the Company's
business, operating results and financial condition. Factors that could
adversely affect the Connector Division are described below.
The Company Depends On Third-Party Contract Manufacturers For A Majority Of Its
Connector Manufacturing Needs. If They Are Unable To Manufacture A Sufficient
Quantity Of High-Quality Products On A Timely And Cost-Efficient Basis, The
Company's Net Revenue And Profitability Would Be Harmed And Its Reputation May
Suffer.
Substantially all of the Company's RF Connector products are manufactured by
third-party contract manufacturers. The Company relies on them to procure
components for RF Connectors and in certain cases to design, assemble and test
its products on a timely and cost-efficient basis. If the Company's contract
manufacturers are unable to complete design work on a timely basis, the Company
will experience delays in product development and its ability to compete may be
harmed. In addition, because some of the Company's manufacturers have
manufacturing facilities in Taiwan and Korea, their ability to provide the
Company with adequate supplies of high-quality products on a timely and
cost-efficient basis is subject to a number of additional risks and
uncertainties, including earthquakes and other natural disasters and political,
social and economic instability. If the Company's manufacturers are unable to
provide it with adequate supplies of high-quality products on a timely and
cost-efficient basis, the Company's operations would be disrupted and its net
revenue and profitability would suffer. Moreover, if the Company's third-party
contract manufacturers cannot consistently produce high-quality products that
are free of defects, the Company may experience a higher rate of product
returns, which would also reduce its profitability and may harm the Company's
reputation and brand.
The Company does not currently have any agreements with any of its
contract manufacturers, and such manufacturers could stop manufacturing products
for the Company at any time. Although the Company believes that it could locate
alternate contract manufacturers if any of its manufacturers terminated their
business, the Company's operations could be impacted until alternate
manufacturers are found.
The Company's Dependence On Third-Party Manufacturers Increases The Risk That It
Will Not Have An Adequate Supply Of Products Or That Its Product Costs Will Be
Higher Than Expected.
The risks associated with the Company's dependence upon third parties which
develop and manufacture and assemble the Company's products, include:
o reduced control over delivery schedules and quality;
o risks of inadequate manufacturing yields and excessive costs;
o the potential lack of adequate capacity during periods of excess demand;
and
o potential increases in prices.
These risks may lead to increased costs or delay product delivery, which would
harm the Company's profitability and customer relationships.
If The Manufacturers of the Company's Coaxial Connectors Or Other Products
Discontinue The Manufacturing Processes Needed To Meet The Company's Demands Or
Fail To Upgrade Their Technologies, the Company May Face Production Delays.
The Company's coaxial connector and other product requirements typically
represent a small portion of the total production of the third-party
manufacturers. As a result, the Company is subject to the risk that a third
party manufacturer will cease production some of the Company's products or fail
to continue to advance the process design technologies on which the
manufacturing of the Company's products are based. Each of these events could
increase the Company's costs, harm its ability to deliver products on time, or
develop new products.
Dependence Upon Independent Distributors To Sell And Market The Company's
Products
The Company's sales efforts are primarily affected through independent
distributors, of which there were 73 as of the end of fiscal 2004. Sales through
independent distributors accounted for approximately 75% the net sales of the
Company for the fiscal year ended October 31, 2004. Although the Company has
entered into written agreements with most of the distributors, the agreements
are nonexclusive and generally may be terminated by either party upon 30-60
days' written notice. The Company's distributors are not within the control of
the Company, are not obligated to purchase products from the Company, and may
also sell other lines of products. There can be no assurance that these
distributors will continue their current relationships with the Company or that
they will not give higher priority to the sale of other products, which could
include products of competitors. A reduction in sales efforts or discontinuance
of sales of the Company's products by its distributors would lead to reduced
sales and could materially adversely affect the Company's financial condition,
results of operations and business. Selling through indirect channels such as
distributors may limit the Company's contact with its ultimate customers and the
Company's ability to assure customer satisfaction. Dependence On Principal
Customer
One customer accounted for approximately 16% of the total sales of the Company's
RF Connector division for the fiscal year ended October 31, 2004. Although this
customer has been an on-going major customer of the Company for at least the
past six 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 markets, such as the
wireless digital transmission markets, are characterized by:
o rapidly changing technologies;
o evolving and competing industry standards;
o short product life cycles;
o changing customer needs;
o emerging competition;
o frequent new product introductions and enhancements; and
o rapid product obsolescence.
To develop new products for the connector and wireless digital transmission
markets, the Company must develop, gain access to and use new technologies in a
cost-effective and timely manner. In addition, the Company must maintain close
working relationship with key customers in order to develop new products that
meet customers' changing needs. The Company also must respond to changing
industry standards and technological changes on a timely and cost-effective
basis.
Products for connector applications are based on industry standards that are
continually evolving. The Company's ability to compete in the future will depend
on its ability to identify and ensure compliance with these evolving industry
standards. If the Company is not successful in developing or using new
technologies or in developing new products or product enhancements, its future
revenues may be materially affected. The Company's attempt to keep up with
technological advances may require substantial time and expense.
The Markets In Which The Company Competes Are Highly Competitive.
The markets in which the Company operates are highly competitive and the Company
expects that competition will increase in these markets. In particular, the
connector and communications markets in which the Company's products are sold
are intensely competitive. Because the Company does not own any proprietary
property that can be used to distinguish the Company from its competitors, the
Company's ability to compete successfully in these markets depends on a number
of factors, including:
o success in subcontracting the design and manufacture of existing and new
products that implement new technologies;
o product quality;
o reliability;
o customer support;
o time-to-market;
o price;
o market acceptance of competitors' products; and
o general economic conditions.
In addition, the Company's competitors or customers may offer enhancements to
its existing products or offer new products based on new technologies, industry
standards or customer requirements that have the potential to replace or provide
lower-cost or higher performance alternatives to the Company's products. The
introduction of enhancements or new products by the Company's competitors could
render its existing and future products obsolete or unmarketable.
Many of the Company's competitors have significantly greater financial and other
resources. In certain circumstances, the Company's customers or potential
customers have internal manufacturing capabilities with which the Company may
compete.
If The Industries Into Which The Company Sells Its Products Experience Recession
Or Other Cyclical Effects Impacting The Budgets Of Its Customers, The Company's
Operating Results Could Be Negatively Impacted.
The primary customers for the Company's coaxial connectors are in the
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.
International Sales And Operations
Sales to customers located outside the United States, either directly or through
U.S. and foreign distributors, accounted for approximately 9% of the net sales
of the Company in the year ended October 31, 2004. International revenues are
subject to a number of risks, including:
o longer accounts receivable payment cycles;
o difficulty in enforcing agreements and in collecting accounts receivable;
o tariffs and other restrictions on foreign trade;
o economic and political instability; and
o 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 will thereafter also be exposed to currency fluctuation risks.
Control By Principal Stockholders
Officers and directors, as of January 9, 2005, own or could own, upon exercise
of options, which are immediately exercisable, approximately 22.2% of the
outstanding common stock of the Company. Accordingly, these officers and
directors, in their capacities as stockholders, will be able to influence the
outcome of any corporate or other matter submitted to the Company's stockholders
for approval, including any merger, consolidation sale of all or substantially
all of the Company's assets. Such concentrated share ownership may prevent or
discourage potential bids to acquire the Company unless the terms are approved
by such officers and directors.
Dependence On Key Personnel
The Company's success will depend to a significant extent on the continued
service of the Company's senior executives including Howard Hill, its President
and Chief Executive Officer, and certain other key employees, including certain
technical and marketing personnel. The Company has an employment agreement with
Mr. Hill for a term, which expires on February 24, 2005. The Company plans to
sign a new agreement with Mr. Hill prior to expiration. If the Company lost the
services of Mr. Hill or one or more of the Company's key executives or employees
(including if one or more of the Company's officers or employees decided to join
a competitor or otherwise compete directly or indirectly with the Company), this
could materially adversely affect the Company's business, operating results, and
financial condition.
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 this 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.
The Company May Make Future Acquisitions, Which Will Involve Numerous Risks.
The Company periodically considers potential acquisitions of other companies
that could expand the Company's product line or customer base. Accordingly, the
Company may in the future acquire one or more additional companies. The risks
involved with such future acquisitions include:
o diversion of management's attention;
o the affect on the Company's financial statements of the amortization of
acquired intangible assets;
o the cost associated with acquisitions and the integration of acquired
operations; and
o assumption of unknown liabilities, or other unanticipated events or
circumstances.
Any of these risks could materially harm the Company's business, financial
condition and results of operations. There can be no assurance that any business
that the Company acquires will achieve anticipated revenues or operating
results.
The Company Has No Exclusive Intellectual Property Rights In The Technology
Employed In Its Products, Which May Limit the Company's Ability To Compete.
The Company does not hold any United States or foreign patents and does not have
any patents pending. In addition, the Company does not have any other exclusive
intellectual property rights in the technology employed in its products. The
Company does not actively seek to protect its rights in the technology that it
develops or that the Company's third-party contract manufacturers develop. In
addition, these parties share the technologies with other parties, including
some of the Company's competitors. Accordingly, competitors can and do sell the
same products as the Company, and the Company cannot prevent or restrict such
competition.
Volatility of Trading Prices
In the past several years the market price of the Company's common stock has
varied greatly, and the volume of the Company's common stock traded has
fluctuated greatly as well. These fluctuations often occur independently of the
Company's performance or any announcements by the Company. Factors that may
result in such fluctuations include:
o any shortfall in revenues or net income from revenues or net income
expected by securities analysts
o fluctuations in the Company's financial results or the results of other
connector and communications-related companies, including those of the
Company's direct competitors
o changes in analysts' estimates of the Company's financial performance, the
financial performance of the Company's competitors, or the financial
performance of connector and communications-related public companies in
general
o general conditions in the connector and communications industries
o changes in the Company's revenue growth rates or the growth rates of the
Company's competitors
o sales of large blocks of the Company's common stock
o conditions in the financial markets in general
In addition, the stock market may from time to time experience extreme price and
volume fluctuations, which may be unrelated to the operating performance of any
specific company. Accordingly, the market prices of the Company's common stock
may be expected to experience significant fluctuations in the future.
ITEM 2. PROPERTIES:
The Company leases its corporate headquarters building at 7610 Miramar Road,
Building 6000, San Diego, California. The building consists of approximately
11,000 square feet which houses administrative, sales and marketing,
engineering, production and warehousing for the Company's Connector Division. In
addition, the Company also leases the following facilities:
(i) The Bioconnect Division operates in a 3,180 square foot facility that
is located adjacent to the Company's corporate headquarters. The lease for
this space expires on May 31, 2005.
(ii) The Neulink Division operates from a separate building that is located
near the Company's corporate headquarters at 7606 Miramar Road, Building
7200. RF Neulink's building consists of approximately 2,400 square feet of
administrative and manufacturing space and houses the production and sales
staff of the Neulink Division. The lease for this space expires on May 31,
2005.
(iii) In August 2004, the Company established its Aviel Electronics
Divisions through its acquisition of the assets and the lease of Aviel
Electronics in Las Vegas, Nevada. Accordingly, the Aviel Electronics
division currently leases an approximately 3,000 square feet facility
located at 5530 S. Valley View Blvd., Suite 103, Las Vegas, Nevada. The
lease for the Las Vegas offices will expire on March 31, 2005.
The aggregate monthly rental for all the Company's facilities currently is
approximately $13,500 per month, plus utilities, maintenance and insurance.
The Company currently believes that its facilities are sufficient to meet its
foreseeable needs. However, should the Company require additional space, the
Company believes that suitable additional space is available near the Company's
current facilities. In addition, the Company believes that it will be able to
renew its existing leases upon the expiration of the current leases or, if
desirable or necessary, locate alternate facilities on substantially similar
terms.
ITEM 3. LEGAL PROCEEDINGS:
The Company is not currently a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's Common Stock is listed and trades on the NASDAQ Small Cap Market
under the symbol "RFIL."
For the periods indicated, the following tables sets forth the high and low
sales prices per share of Common Stock. These prices represent inter-dealer
quotations without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.
Quarter High Low
------------------------------------------------------ ---------------- -----------------
Fiscal 2004
November 1, 2003 - January 31, 2004.................. $9.04 $3.85
February 1, 2004 - April 30, 2004.................... 8.48 5.95
May 1, 2004 - July 31, 2004.......................... 10.49 7.35
August 1, 2004 - October 31, 2004.................... 8.44 6.20
Fiscal 2003
November 1, 2002 - January 31, 2003.................. $3.85 $2.69
February 1, 2003 - April 30, 2003.................... 5.95 2.87
May 1, 2003 - July 31, 2003.......................... 7.35 3.78
August 1, 2003 - October 31, 2003.................... 6.20 4.50
On January 24, 2005, the closing sales price of the Company's Common Stock was
$8.52.
As of January 9, 2005, there were 556 holders of the Company's Common Stock
according to the records of the Company's transfer agent, Continental Stock
Transfer & Trust Company, New York, New York, not including holders who hold
their stock in "street name".
The Company has not paid any dividends to date and does not presently intend to
pay cash dividends on its Common Stock in the foreseeable future.
There were no sales of equity securities by the Company that were not registered
under the Securities Act during fiscal 2004.
The Company did not repurchase any of its shares during the fourth quarter of
the fiscal year covered by this report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make significant estimates and judgments
that affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosure of contingent assets and liabilities. We evaluate our
estimates, including those related to bad debts, inventories and contingencies
on an ongoing basis. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. One of the accounting policies that involve
significant judgments and estimates concerns our inventory valuation.
Inventories are valued at the weighted average cost value. Certain items in the
inventory may be considered obsolete or excess and, as such, we may establish an
allowance to reduce the carrying value of these items to their net realizable
value. Based on estimates, assumptions and judgments made from the information
available at the time, we determine the amounts of these allowances. Because
inventories have, during the past few years, represented over one-third of our
total assets, any reduction in the value of our inventories would require us to
take write-offs that would affect our net worth and future earnings. Another
accounting policy that involves significant judgments and estimates is our
accounts receivable allowance valuation. The Company routinely assesses the
financial strength of its customers and maintains an allowance for doubtful
accounts that management believes will adequately provide for credit losses.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (R), "Accounting for Stock-Based
Compensation." SFAS 123 (R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. SFAS No. 123 (R) focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS 123 (R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS 123 (R), only certain pro forma disclosures of fair
value were required. SFAS 123 (R) shall be effective for small business issuers
such as this Company as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The adoption of this new
accounting pronouncement is expected to have a material impact on the financial
statements of this Company during the fiscal year 2006.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
changes the accounting for certain financial instruments with characteristics of
both liabilities and equity that, under previous pronouncements, issuers could
account for as equity. The new accounting guidance contained in SFAS No. 150
requires that those instruments be classified as liabilities in the balance
sheet.
SFAS No. 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is mandatory redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets. A
second type included put options and forward purchase contracts, which involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under SFAS No. 150 are obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as market index, or varies inversely with the value of the issuers' shares.
SFAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety.
Most of the provisions of SFAS No. 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements." The remaining provisions of SFAS No. 150 are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. SFAS No. 150 shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of this
new accounting pronouncement is not expected to have a material impact on the
Company's financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal". In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 shall be applied
prospectively and are effective for inventory costs incurred during fiscal years
beginning after the date this Statement was issued. The adoption of SFAS No. 151
is not expected to have a material impact on our financial position and results
of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29. The guidance in APB Opinion No 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on our financial position and
results of operations.
OVERVIEW
Historically, over 87% of the Company's revenues are generated by the Connector
Divisions from the sale of connector products and connector cable assemblies.
Sales of connectors are expected to constitute an even larger portion of
revenues in the future since the Company acquired the Aviel Electronics Division
in August 2004. Because the Company sells thousands of connector products for
uses in thousands of end products, sales are relatively stable and not dependent
upon any one industry sector or product line. As a result, the Company's
revenues and expenses are typically not subject to major fluctuations. During
the fiscal year ended October 31, 2004, sales did, however, increase by 14% over
the sales in the prior year due to an overall increase in the economy and, in
particular, a rebound in the telecommunications and wireless industries, which
resulted in increased sales to those industries. In addition, revenues increased
due to the acquisition of the Aviel Division during the fourth quarter.
The Company also continued to manage its operating costs by reducing its selling
and general expenses as a percentage of net sales during fiscal 2004.
As a result of our increased sales and control of our operating expenses, the
Company generated net income for the 11th consecutive year.
During the 2004 fiscal year. the Company generated $1,464,000 of cash from our
operations. As a result, the amount of cash and cash equivalents held by the
Company as of October 31, 2004 increased to $4,497,000 from $2,684,000 in the
prior year. Since the Company has no debt, other than normal accounts payable
and accrued expenses, it will continue to have sufficient cash to fund all of
its anticipated financing and liquidity needs for the foreseeable future.
Financial Condition:
The following table presents the key measures of financial condition as of
October 31, 2004 and 2003:
2004 2003
------------------------------------- --------------------------------------
Amount % Total Assets Amount % Total Assets
---------------- ----------------- ----------------- ------------------
Cash and cash equivalents......... $4,497,322 40.6% $2,683,896 31.2%
Current assets.................... 10,259,453 92.7% 8,146,211 94.6%
Current liabilities............... 563,056 5.1% 509,992 5.9%
Working capital................... 9,696,397 87.6% 7,636,219 88.7%
Property and equipment - net......
563,040 5.1% 328,124 3.8%
Total assets...................... 11,070,722 100.0% 8,608,090 100.0%
Stockholders' equity.............. 10,454,666 94.4% 8,058,098 93.6%
Liquidity and Capital Resources:
Management believes that its existing current assets and the amount of cash it
anticipates it will generate from current operations will be sufficient to fund
the anticipated liquidity and capital resource needs of the Company for the
fiscal year ending October 31, 2005. The Company does not, however, currently
have any commercial banking arrangements providing for loans, credit facilities
or similar matters should the Company need to obtain additional capital.
Management believes that its existing assets and the cash it expects to generate
from operations will be sufficient during the current fiscal year are based on
the following:
o As of October 31, 2004, the amount of cash and cash equivalents was equal
to $4,497,000 in the aggregate. This amount exceeds the amount of the
selling and general expenses of the Company for the entire fiscal year
ended October 31, 2004. Accordingly, the Company believes that it has
sufficient cash available to operate for an entire year even if it did not
generate any profits.
o As of October 31, 2004, the Company had approximately $10,259,000 in
current assets, and only $563,000 of current liabilities.
The principal expenditures that the Company currently anticipates for fiscal
2005 that will negatively affect the Company's liquidity and financial results
will be the additional costs it expects to incur in order to comply with the new
Sarbanes-Oxley Act of 2002 requirements that go into effect this year,
particularly those related to implementing and verifying new internal financial
control systems. The Company estimates that these additional compliance costs
could be approximately $800,000 during the fiscal year ended October 31, 2005.
These additional expenditures will reduce the amount of cash and cash
equivalents that the Company has in reserves. Nevertheless, management believes
that based on the Company's financial condition at October 31, 2004, the absence
of outstanding bank debt, and its recent operating results, it has sufficient
capital resources to fund its operations (including the new Sarbanes-Oxley Act
of 2002 compliance costs) for at least the next twelve months. Should the
Company need to obtain additional funds for its unexpected acquisitions of
assets or other expansion activities, based on its balance sheet and its history
of profitability, the Company believes that it would be able to obtain bank
loans to finance these expenditures. However, there can be no assurance any bank
loan would be obtainable, or if obtained, would be on favorable terms or
conditions.
The Company is not a party to off-balance sheet arrangements and does not engage
in trading activities involving non-exchange traded contracts. In addition, the
Company has no financial guarantees, debt or lease agreements or other
arrangements that could trigger a requirement for an early payment or that could
change the value of the Company's assets.
Inventories as of October 31, 2004 were $3,790,000, a $335,000 increase from
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. As described elsewhere in this Annual Report, one of the Company's
competitive advantages and strategies is to maintain customer satisfaction by
having sufficient inventory on hand to fulfill most customer orders on short
notice. Accordingly, the Company maintains a significant amount of inventory,
which amount it increases or decreases to reflect its sales. The Company
continuously monitors its inventory levels and, because of recent increases in
sales, may commence increasing its inventory levels. Because sales have been
increasing, the Company has increased its inventory levels to be able to meet
anticipated demand.
The net income for the current year was $1,224,000, and net cash provided by
operating activities for the year ended October 31, 2004 was $1,464,000. For the
prior year ended October 31, 2003, net income was $711,000, and cash provided by
operating activities was $1,129,000. Net cash provided by operating activities
exceeded net income as a result of non-cash depreciation and amortization
expenses, and a reduction in trade accounts receivable, the collection of which
increased cash without affecting net income. In fiscal 2003, net cash provided
from operations exceeded net income due to the reduction in inventories (which
enabled the Company to generate sales and increase accounts receivable without
having to expend cash to purchase or replenish those inventories), non-cash
depreciation and amortization expenses, and certain other factors.
Net cash used in investing activities was $650,000 as a result of the
acquisition of the Aviel Electronics Division in August 2004 and the purchase of
additional equipment. In August 2004, the Company purchased all of the assets of
Aviel Electronics, an established connector manufacturer and marketer located in
Las Vegas, Nevada. The purchase price paid for the acquisition was $510,000, of
which $410,000 was paid in cash to the seller at the closing and $100,000 is
being held in escrow for one year as security for certain representations made
by the seller. In fiscal 2003, net cash used in investing activities was only
$44,000, consisting primarily of capital expenditures made during that year.
Financing activities increased the Company's net cash by $999,000 in the current
year due to the receipt of funds from the exercise of stock options by the
Company's employees. In fiscal 2003, financing activities reduced the Company's
net cash by $2,340,000 primarily as a result of the repurchase of 752,167 of its
outstanding shares of common stock.
Results of Operations:
The following summarizes the key components of the results of operations for the
years ended October 31, 2004 and 2003:
2004 2003
-------------------------------------- --------------------------------------
Amount % of Sales Amount % of Total Sales
---------------- ------------------ ---------------- ------------------
Net sales......................... $11,227,242 100.0% $9,875,499 100.0%
Cost of sales..................... 5,539,945 49.3% 5,079,307 51.4%
Gross profit...................... 5,687,297 50.7% 4,796,192 48.6%
Engineering expenses.............. 486,202 4.3% 753,562 7.6%
Selling and general expenses......
3,154,074 28.1% 2,849,506 28.9%
Operating income.................. 2,047,021 18.2% 1,193,124 12.1%
Other income...................... 17,110 .2% 22,321 .2%
Income before income taxes........
2,064,131 18.4% 1,215,445 12.3%
Income taxes...................... 840,000 7.5% 504,700 5.1%
Net income........................ 1,224,131 10.9% 710,745 7.2%
Net sales of the Company increased by $1,352,000, or 14%, for the fiscal year
ended October 31, 2004 compared to the fiscal year ended October 31, 2003. The
increase in fiscal 2004 is attributable to an increase in sales as the overall
market demand for connector products increased, particularly for wireless
applications during the fiscal year. In addition to an increase in demand in the
Company's connector and cable assembly products as a result of an increase in
the wireless market, sales of the Bioconnect Division's medical products also
increased during the October 31, 2004 fiscal year. Finally, the acquisition of
the Aviel Division in August 2004 contributed revenues during the last fiscal
quarter of the October 31, 2004 fiscal year. Since the Company did not own or
operate the Aviel Division in fiscal 2003, the addition of Aviel Division
improved revenues in 2004 and will continue to supplement the Company's
connector sales in the future. The increase in revenues at the Company's four
other divisions were partly offset by a decrease in revenues in the Neulink
Division. Revenues in the Neulink Division decreased due to the loss of a
primary customer.
The Company's gross profit increased by $891,000 to $5,687,000 in 2004 from
$4,796,000 in 2003 due to the increase in net sales and a reduction in cost of
sales as a percentage of sales. As a percent of sales, gross profit increased to
50.7% in fiscal 2004 from 48.6% of sales in fiscal 2003. The increase in the
gross profit percentage is primarily due to product mix, and increased sales
volume, which increased volume enabling the Company to obtain better pricing on
its product purchases and reduce its per unit labor costs.
Engineering expenses, which include research and development expenses, decreased
by $268,000 from $754,000 in fiscal 2003 to $486,000 in fiscal 2004. As a
percent of sales, engineering expenses decreased from 7.6% in fiscal 2003 to
4.3% in fiscal 2004. The decrease in engineering expenses is attributable to
termination of the design and development activities related the development of
the new Neulink modem.
Selling and general expenses increased by $304,000, or by 10.7%, from $2,850,000
in fiscal 2003 to $3,154,000 in fiscal 2004. The increase is primarily due to
additional costs related to increased sales and increased marketing activities,
as well as the addition of the Aviel Division and the costs related to operating
a new office in a different state. However, as a percentage of net sales,
selling and general expenses decreased in fiscal 2004 to 28% from 29% in fiscal
2003. The decrease in selling and general expenses reflects the Company's
continuing emphasis on cost controls. General and administrative expenses are,
however, expected to significantly increase during the next fiscal year due to
the additional costs the Company expects to incur in order to comply with the
new Sarbanes-Oxley Act of 2002 requirements that go into effect this year,
particularly those related to implementing and verifying new internal financial
control systems. The Company estimates that these additional compliance costs
could be approximately $800,000 during the fiscal year ending October 31, 2005.
Operating income increased by $854,000 from $1,193,000 in fiscal 2003 to
$2,047,000 in fiscal 2004. The increase in operating income is primarily
attributable to increased sales, the higher gross margins.
Net income increased by $513,000 to $1,224,000, compared to net income of
$711,000 in fiscal 2003. The increase in net income is due to the overall
increase in net sales.
ITEM 7. FINANCIAL STATEMENTS
The following Financial Statements of the Company with related Notes and Report
of Independent Registered Public Accounting Firm are attached hereto as pages
F-1 to F-17 and filed as part of this Annual Report:
o Report of J.H. Cohn LLP, Independent Registered Public Accounting Firm
o Balance Sheets as of October 31, 2004 and 2003
o Statements of Income for the years ended October 31, 2004 and 2003
o Statements of Stockholders' Equity for the years ended October 31, 2004 and
2003
o Statements of Cash Flows for the years ended October 31, 2004 and 2003
o Notes to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 8A CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that the information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in the reports that a company files or submits under the
Exchange Act is accumulated and communicated to the company's management,
including its Principal Executive Officer and Principal Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Under the supervision of our Chief Executive Officer and our Chief Financial
Officer, the Company evaluated the effectiveness of its disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that as of October 31, 2004, those disclosure controls and procedures were not
effective to ensure that management is alerted to material information required
to be disclosed by the Company in the reports it files with the SEC and that
such material information is recorded and reported within the time periods
specified in the SEC's rules and forms. However, since the date of that
evaluation, management is beginning to implement changes to improve certain
aspects of its disclosures controls and procedures.
In connection with its audit of the Company's financial statements for the
fiscal year ended October 31, 2004, J.H. Cohn LLP, the Company's independent
registered public accounting firm, advised the Company's Audit Committee that it
had identified material weaknesses in the Company's accounting function that
needed to be re-evaluated and strengthened. J.H. Cohn informed the Audit
Committee that, due to the growth of the Company, the acquisition of the Aviel
Electronics division, the expansion of operations to Nevada and the
ever-increasing complexities of standards of financial reporting, the Company's
technical accounting capabilities needed to be expanded to ensure that the
Company had the internal capabilities necessary to produce financial statements
that would be compliant with accounting principles generally accepted in the
United States and the reporting requirements of the SEC. In addition, J.H. Cohn
notified the Company of certain material adjustments that were made to the
October 31, 2004 financial statements due to a clerical error identified in the
Company's accounting records pertaining to sales and accounts receivable. As a
result, J.H. Cohn stated that it believed that the Company's accounting
department needed additional personnel who have the appropriate financial
accounting background and training in the preparation of GAAP and SEC compliant
financial statements. In addition to identifying the foregoing material
weakness, J.H. Cohn also made certain other suggestions to improve the Company's
financial information and internal control procedures.
Since October 31, 2004, the Company has undertaken a number of remediation
actions, including the following:
o Replaced its legacy computer accounting system with a new system.
o Commenced its search for a full or part-time Chief Financial Officer who is
experienced in SEC reporting.
o Replaced the Company's prior stock option record system with a new software
system.
o Commenced replacing certain of its accounting department personnel.
(b) Changes In Internal Controls Over Financial Reporting. No changes were made
in the Company's internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth fiscal quarter of
the fiscal year ended October 31, 2004 that has materially affected, or is
likely to materially affect, our internal control over financial reporting.
However, as noted above, the Company has implemented certain procedures since
October 31, 2004.
(c) Limitations On Disclosure Controls And Procedures. The Company, including
its Principal Executive Officer and Principal Financial Officer, does not expect
that its disclosure controls or internal controls over financial reporting will
prevent all errors or all instances of fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company can be detected.
ITEM 8B OTHER INFORMATION
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below is information regarding the Company's directors, including
information furnished by them as to their principal occupations for the last
five years, and their ages as of October 31, 2004. A majority of the Directors
are "independent directors" as defined by the listing standards of the Nasdaq
Stock Market, and the Board of Directors has determined that such independent
directors have no relationship with the Company that would interfere with the
exercise of their independent judgment in carrying out the responsibilities of a
director. The independent Directors are Messrs. Ehret, Fink, Hooper, Jacobs, and
Kester.
Name
Age Director Since
John R. Ehret 67 1991
Marvin H. Fink 68 2001
Howard F. Hill 64 1979
Henry E. Hooper 51 1998
Robert Jacobs 52 1997
Linde Kester 59 2001
John R. Ehret has been the President of TPL Electronics of Los Angeles,
California, since 1982. He holds a B.S. degree in Industrial Management from the
University of Baltimore. He has been in the electronics industry for over 33
years.
Marvin H. Fink has served as the Chief Executive Officer, President and Chairman
of the Board of Recom Managed Systems, Inc. since October 2002. Prior thereto,
Mr. Fink was President of Teledyne's Electronics Group. Mr. Fink was employed at
Teledyne for 39 years. He holds a B.E.E. degree from the City College of New
York, a M.S.E.E. degree from the University of Southern California and a J.D.
degree from the University of San Fernando Valley. He is a member of the
California Bar.
Howard F. Hill, a founder of the Company in 1979, has credits in Manufacturing
Engineering, Quality Engineering and Industrial Management. He has been the
President of the Company in July 1993. He has held various positions in the
electronics industry over the past 40 years.
Henry E. Hooper has been the General Partner of the D3 Family Fund, LP, a
partnership that invests in small capitalization growth stocks, since 2001.
Previously, Mr. Hooper worked in the telecommunications industry, serving in
various leadership capacities for TESSCO Technologies, a distributor of wireless
communications products and services. He holds a bachelor's degree and an MBA
from Yale University. Mr. Hooper has been in the telecommunications industry for
over 16 years.
Robert Jacobs has been an Account Executive at Neil Berkman Associates since
1988. Neil Berkman Associates is the Company's investor relations firm, and Mr.
Jacobs is the Account Executive for the Company. He holds an MBA from the
University of Southern California and has been in the investor relations
industry for over 21 years.
Linde Kester has been the Proprietor of Oregon's Chateau Lorane Winery since
1992. He was formerly Chairman and CEO of Xentek, an electronics power
conversion manufacturer that he co-founded in 1972. Mr. Kester was also a
co-founder of Hidden Valley National Bank in Escondido, California. He holds an
A.A. in Electron-Mechanical Design from Fullerton College and has over two
decades of experience in the electronics industry.
Management
Howard F. Hill is the President and Chief Executive Officer of the Company.
Terrie Gross joined the Company in January 1992 as Accounting Manager. She was
elected to Corporate Secretary in February 1995, and elected to Chief Financial
Officer in May 1997.
Board of Director Meetings
During the fiscal year ended October 31, 2004, the Board of Directors held four
meetings. All members of the Board of Directors hold office until the next
Annual Meeting of Stockholders or the election and qualification of their
successors. Executive officers serve at the discretion of the Board of
Directors.
During the fiscal year ended October 31, 2004, each Board of Directors member
attended at least 75% of the meetings of the Board of Directors and at least 75%
of the meetings of the committees on which he served.
Board Committees
During fiscal 2004, the Board of Directors maintained two committees, the
Compensation Committee and the Audit Committee. The Board of Directors also
intends to form a Nominating Committee. Each member will be "independent" as
defined in the Nasdaq Stock Market's listing standards. The functions of the
Nominating Committee will be to assist the Board of Directors by identifying
individuals qualified to become members, and to recommend to the Board of
Directors the director nominees for the next annual meeting of stockholders, and
to recommend to the Board of Directors corporate governance guidelines and
changes thereto.
The Audit Committee meets periodically with the Company's management and
independent registered public accounting firm to, among other things, review the
results of the annual audit and quarterly reviews and discuss the financial
statements. The audit committee also hires the independent registered public
accounting firm, and receives and considers the accountant's comments as to
controls, adequacy of staff and management performance and procedures. The Audit
Committee is also authorized to review related party transactions for potential
conflicts of interest. As of the end of fiscal 2004 the Audit Committee was
composed of Mr. Hooper, Mr. Ehret and Mr. Kester. Each of these individuals were
non-employee directors and independent as defined under the Nasdaq Stock
Market's listing standards. While each of the members of the Audit Committee has
significant knowledge of financial matters (two of the members have received a
Masters of Business Administration degree), none of the Audit Committee members
has been designated as an "audit committee financial expert" as defined under
Item 401(h)(2) of Regulation S-K of the Securities Exchange Act of 1934, as
amended The Company believes that the current members of the Audit Committee can
competently perform the functions required of them as members of the Audit
Committee. The Audit Committee met four times during fiscal 2004. The Audit
Committee operates under a formal charter that governs its duties and conduct.
The Compensation Committee currently consists of Messrs. Ehret, Fink, and
Kester, each of whom is non-employee director and is independent as defined
under the Nasdaq Stock Market's listing standards. The Compensation Committee is
responsible for considering and authorizing remuneration arrangements for senior
management. The Compensation Committee held one formal meeting during fiscal
2004, which was attended by all committee members.
Code Of Business Conduct And Ethics
The Company has adopted a Code of Business Conduct and Ethics (the "Code") that
applies to all of the Company's Directors, officers and employees, including its
principal executive officer and principal financial officer. The Code is posted
on the Company's website at www.rfindustries.com. The Company intends to
disclose any amendments to the Code by posting such amendments on its website.
In addition, any waivers of the Code for Directors or executive officers of the
Company will be disclosed in a report on Form 8-K.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation. The following table sets forth
compensation for services rendered in all capacities to the Company for each
person who served as the Company's Chief Executive Officer during the fiscal
year ended October 31, 2004 (the "Named Executive Officer"). No other executive
officer of the Company received salary and bonus, which exceeded $100,000 in the
aggregate during the fiscal year ended October 31, 2004.
Annual Compensation Long-Term Compensation Awards
Securities
Underlying
Name and Principal Position Year Salary Bonus Options/SARs (#)
--------------------------- ---- ------ ----- ----------------
($) ($)
Howard F. Hill, President 2004 165,000 50,000 6,000
Chief Executive Officer, Director
2003 140,000 25,000 4,000
2002 125,000 30,000 4,000
As permitted by rules established by the SEC, no other annual compensation is
shown because perquisites and other non-cash benefits provided by the Company do
not exceed the lesser of 10% of bonus plus salary or $50,000 for the last three
fiscal years.
Option Grants. The following table contains information concerning the stock
option grants to the Company's Named Executive Officer for the fiscal year ended
October 31, 2004.
Option Grants in Last Fiscal Year
% of Total Options
Granted to Employees in
Securities Underlying Fiscal Year Base Price Expiration
Name Options Granted (#) ($/Share) Date
------------------- --------- ----
Howard F. Hill, President
Incentive Stock Option 2,000 9.2% $6.38 October 2014
Non-Qualified Option 4,000 11.1% $5.42 October 2014
Option Exercises and Holdings. 8,000 options were exercised by Mr. Hill, the
Named Executive Officer, during the fiscal year ended October 31, 2004. The
following table sets forth information concerning option exercises and option
holdings and the value, at October 31, 2004, of unexercised options held by the
Named Executive Officer:
Aggregated Options/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Value of
Unexercised
Value Realized Number of Unexercised In-the-Money
Shares Acquired Market Price at Options/SARs at Fiscal Options/SARs at
Exercise Less Year-End (#) Fiscal
Year-End ($)
Name Exercise # Exercise Price ($) Exercisable Unexercisable Exercisable/
---- ---------- ------------------ ----------- ------------- ------------
Unexercisable (1)
-------------
Howard F. Hill, 8,000 $24,280 460,000 6,000 $2,821,680/
President $38,280
(1) Represents the closing price per share of the underlying shares on the last
day of the fiscal year less the option exercise price multiplied by the
number of shares. The closing value per share was $6.38 on the last trading
day of the fiscal year as reported on the Nasdaq Small Cap Market.
During the fiscal year ended October 31, 2004, the Company did not adjust or
amend the exercise price of stock options awarded to the Named Executive
Officers.
Employment Agreement
The Company has no employment or severance agreements with any of its executive
officers for payments of more than $100,000, other than with the President/Chief
Executive Officer. On June 1, 1994, the Company entered into a six-year,
renewable employment contract with the President calling for annual
compensation, which compensation was increased to $165,000 in 2004, plus a bonus
to be determined by the Board. The employment contract was renewed effective
January 1998 and the current term expires in 2005. In the event Mr. Hill is
terminated for a material breach of the employment contract, he shall be paid
one years' initial base salary. In addition, the employment contract granted the
President options to acquire 500,000 shares of common stock at $.10 per share.
Such options vested ratably over the first six-year term of the initial
agreement and are now fully vested. Upon the termination of his employment, Mr.
Hill must exercise his options within one year of written notice. The shares
underlying his options may be sold to the Company at an agreed upon price, and
the Company has a right of first refusal to purchase such shares.
Compensation of Directors
The Company compensates its directors with an annual grant of options to
purchase 2,000 shares of common stock. The exercise price of the options is set
at 85% of the closing price of the common stock on the last day of the fiscal
year. During the fiscal year ended October 31, 2004, options to purchase 2,000
shares of common stock were granted to each of the following directors: Mr.
Ehret, Mr. Fink, Mr. Hooper, and Mr. Jacobs. Mr. Kester and Mr. Hill received a
grant for 4,000 shares. All options granted were at a strike price $5.42 per
share. The directors are also eligible for reimbursement of expenses incurred in
connection with attendance at Board meetings and Board committee meetings. For
the fiscal years ending after October 31, 2004, the Board has voted to
compensate all non-employee directors, in addition to the foregoing options,
with an annual cash payment of $5,000 per director, and to pay the non-employee
Chairman of the Board an additional annual payment of $10,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the ownership of
the Company's Common Stock as of January 31, 2005 by: ( i ) each director and
nominee for director; (ii) the executive officer named in the Summary
Compensation Table in Executive Compensation; (iii) all executive officers and
directors of the Company as a group; and (iv) all those known by the Company to
be beneficial owners of more than 5% of the Common Stock.
Name and Address of Number of Shares (1) Percentage Beneficially
Beneficial Owner Beneficially Owned Owned
------------------ ------------------ -----
Howard H. Hill 440,000(2) 12.8%
7610 Miramar Road, Ste. 6000
San Diego, CA 92126-4202
John R. Ehret 22,000(3) *
7610 Miramar Road, Ste. 6000
San Diego, CA 92126-4202
Robert Jacobs 2,000(4) *
7610 Miramar Road, Ste. 6000
San Diego, CA 92126-4202
Henry E. Hooper 2,000(5) *
7610 Miramar Road, Ste. 6000
San Diego, CA 92126-4202
Marvin H. Fink 19,165(6) *
7610 Miramar Rd., Ste. 6000
San Diego, CA 92126-4202
Linde Kester 62,072(7) 2.0%
7610 Miramar Rd., Ste. 6000
San Diego, CA 92126-4202
All Directors and Officers as a Group
(7 persons) 655,237(8) 18.26%
(1) Shares of Common Stock, which were not outstanding but which could be
acquired upon exercise of an option within 60 days from the date of this
filing, are considered outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned. However, such shares
are not considered to be outstanding for any other purpose. (2) Represents
the 440,000 shares that Mr. Hill has the right to acquire upon exercise of
options exercisable within 60 days. (3) Consists of 12,000 shares, which
Mr. Ehret has the right to acquire upon exercise of options exercisable
within 60 days. (4) Consists of 2,000 shares, which Mr. Jacobs has the
right to acquire upon exercise of options exercisable within 60 days. (5)
Consists of 2,000 shares, which Mr. Hooper has the right to acquire upon
exercise of options exercisable within 60 days. (6) Consists of 19,165
shares, which Mr. Fink has the right to acquire upon exercise of options
exercisable within 60 days. (7) Includes 20,170 shares, which Mr. Kester
has the right to acquire upon exercise of options exercisable within 60
days. (8) Includes 591,135 shares, which the directors and officers have
the right to acquire upon exercise of options exercisable within 60 days. *
Represents less than 1% of the outstanding shares.
There is no arrangement known to the Company, the operation of which may at a
subsequent date result in a change of control of the Company.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of October 31, 2004 with respect to
the shares of Company common stock that may be issued under the Company's
existing equity compensation plans.
A B C
------------------ --------------- -----------------------
Number of Securities Weighted Average Number of Securities
to be Issued Upon Exercise Price Remaining Available for
Exercise of of Outstanding Future Issuance Under
Outstanding Options Options ($) Equity Compensation Plans
-------------------- ----------------- (Excluding Securities
Plan Category Reflected in Column A)
-------------------------------------- --------------------------
Equity Compensation Plans Approved by
Stockholders (1) 208,714 $3.82 108,851
Equity Compensation Plans Not Approved by
Stockholders (2) 827,000 $1.08 -0-
Total 1,035,714 $1.63 108,851
(1) Consists of options granted under the R.F. Industries, Ltd. (i) 2000 Stock
Option Plan, (ii) the 1990 Incentive Stock Option Plan, and (iii) the 1990
Non-qualified Stock Option Plan. The 1990 Incentive Stock Option Plan and
Non-qualified Stock Option Plan have expired, and no additional options can
be granted under these plans. Accordingly, the 108,851 shares remaining
available for issuance represent shares under the 2000 Stock Option Plan.
(2) Consists of options granted to six executive officers and/or key employees
of the Company under employment agreements entered into by the Company with
each of these officers and employees.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Executive officers, directors and greater than 10% stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of reporting forms received by the
Company, the Company believes that during its most recent fiscal year ended
October 31, 2004, that its officers and directors complied with the filing
requirements under Section 16(a).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 1, 1997, the Company loaned to Howard Hill, its President and Chief
Executive Officer, $70,000 pursuant to a Promissory Note which provides for
interest at the rate of 6% per annum and which has no specific due date for
principal. The principal balance of the loan is still outstanding. Mr. Hill pays
interest on the loan annually. The loan is evidenced by a promissory note that
is secured by a lien on certain of Mr. Hill's personal property.
Mr. Jacobs, a director of the Company, is an employee of Neil Berkman
Associates, the Company's public relations firm. For the fiscal years ended
October 31, 2003 and October 31, 2004, the Company paid to Neil Berkman
Associates $39,360 and $43,050, respectively, for services rendered.
ITEM 13. EXHIBITS
The following exhibits are filed as part of this report:
3.1 Articles of Incorporation, as amended (1)
3.2.1 Company Bylaws as Amended through August, 1985 (2)
3.2.2 Amendment to Bylaws dated January 24, 1986(2)
3.2.3 Amendment to Bylaws dated February 1, 1989(3)
10.1 Form of 2000 Stock Option Plan(4)
10.2 Directors' Nonqualified Stock Option Agreements (2)
10.3 Lease Agreement - San Diego, CA Facility (3)
10.4 Employment Contract - Howard Hill (4)
10.5 Employment Contract-Terrie Gross(4)
10.6 Lease Agreement-Neulink Division - San Diego, CA Facility (3)
14.1 Code of Ethics(5)
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350
--------------------------------
(1) Previously filed as an exhibit to the Company's Form 10-KSB for
the year ended October 31, 2000, which exhibit is hereby incorporated
herein by reference.
(2) Previously filed as an exhibit to the Company's Form 10-KSB for
the year ended October 31, 1987, which exhibit is hereby incorporated
herein by reference.
(3) Previously filed as an exhibit to the Company's Form 10-KSB for
the year ended October 31, 1992, which exhibit is hereby incorporated
herein by reference.
(4) Previously filed as an exhibit to the Company's Form 10-QSB for
the quarter ended January 31, 2001, which exhibit is hereby
incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Form 10-KSB for
the year ended October 31, 2003, which exhibit is hereby incorporated
herein by reference.
Shareholders of the Company may obtain a copy of any exhibit referenced in this
10-KSB Report by writing to: Secretary, RF Industries, Ltd., 7610 Miramar Road,
Bldg. 6000, San Diego, CA 92126. The written request must specify the
shareholder's good faith representation that such shareholder is a stockholder
of record of common stock of the Company. A charge of twenty cents ($.20) per
page will be made to cover Company expenses in furnishing the requested
documents.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit-Related Fees
The following is a summary of the fees billed to RF Industries, Ltd. by J.H.
Cohn LLP for professional services rendered for the fiscal years ended October
31, 2004 and 2003:
Fee Category Fiscal 2004 Fees Fiscal 2003 Fees
-------------------------------- ----------------------------------- -------------------------------
Audit Fees $ 79,654 $ 61,453
Audit-Related Fees 19,506 1,666
Tax Fees 14,815 12,317
----------------------------------- -------------------------------
Total Fees $ 113,975 $ 75,436
=================================== ===============================
Audit Fees. Consists of fees billed for professional services rendered for the
audit of RF Industries, Ltd. financial statements and review of the interim
financial statements included in quarterly reports and services that are
normally provided by J.H. Cohn LLP in connection with statutory and regulatory
filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit and review of RF
Industries' financial statements and are not reported under "Audit Fees." These
services include professional services requested by RF Industries in connection
with its preparation for compliance with Section 404 of the Sarbanes-Oxley Act
of 2002, accounting consultations in connection with acquisitions and
consultations concerning financial accounting and reporting standards.
Tax Fees. Consists of fees billed for professional services for tax compliance,
tax advice and tax planning. These services include assistance regarding federal
and state tax compliance and assistance with tax reporting.
SIGNATURE
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RF INDUSTRIES, LTD.
Date: February 14, 2004 By: /s/ Howard F. Hill
-------------------------
Howard F. Hill, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Dated: February 14, 2005 By: /s/ Terrie A. Gross
--------------------------
Terrie A. Gross,
Chief Financial Officer
(Principal Accounting Officer)
Dated: February 14, 2005 By: /s/ Howard F. Hill
----------------------
Howard F. Hill,
Chief Executive Officer
Dated: February 14, 2005 By: /s/ John Ehret
--------------------
John Ehret, Director
Dated: February 14, 2005 By: /s/ Marvin Fink
--------------------
Marvin Fink, Director
Dated: February 14, 2005 By: /s/ Henry Hooper
---------------------
Henry Hooper, Director
Dated: February 14, 2005 By: /s/ Robert Jacobs
----------------------
Robert Jacobs, Director
Dated: February 14, 2005 By: /s/ Linde Kester
----------------------
Linde Kester, Director
Index
[Attachment to Item 7]
Page
Report of Independent Registered Public Accounting Firm ....... F-2
Balance Sheets
October 31, 2004 and 2003 ................................. F-3
Statements of Income
Years Ended October 31, 2004 and 2003 ..................... F-4
Statements of Stockholders' Equity
Years Ended October 31, 2004 and 2003 ..................... F-5
Statements of Cash Flows
Years Ended October 31, 2004 and 2003 ..................... F-6
Notes to Financial Statements ................................. F-7/17
* * *
F-1
Report of Independent Registered Public Accounting Firm
---------------------------------------------------------
To the Stockholders
RF Industries, Ltd.
We have audited the accompanying balance sheets of RF Industries, Ltd. as of
October 31, 2004 and 2003, and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RF Industries, Ltd. as of
October 31, 2004 and 2003, and its results of operations and cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
San Diego, California
December 9, 2004
F-2
RF INDUSTRIES, LTD.
BALANCE SHEETS
OCTOBER 31, 2004 AND 2003
ASSETS
----------
2004 2003
------------ ------------
Current assets:
Cash and cash equivalents ............................ $ 4,497,322 $ 2,683,896
Trade accounts receivable, net of allowance for
doubtful accounts of $38,513 and $55,322 ......... 1,516,035 1,701,618
Notes receivable ..................................... 12,000 12,000
Inventories .......................................... 3,789,958 3,455,018
Other current assets ................................. 303,138 158,079
Deferred tax assets .................................. 141,000 135,600
------------ ------------
Total current assets .......................... 10,259,453 8,146,211
------------ ------------
Equipment and furnishings:
Equipment and tooling ................................ 1,489,297 1,125,485
Furniture and office equipment ....................... 299,423 260,183
------------ ------------
1,788,720 1,385,668
Less accumulated depreciation ........................ 1,225,680 1,057,544
------------ ------------
Totals ........................................ 563,040 328,124
------------ ------------
Goodwill ................................................. 137,328
Notes receivable from related parties .................... 26,730 49,584
Note receivable from stockholder ......................... 70,000 70,000
Other assets ............................................. 14,171 14,171
------------ ------------
Totals ........................................ $ 11,070,722 $ 8,608,090
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 209,956 $ 181,637
Accrued expenses ..................................... 353,100 328,355
------------ ------------
Total current liabilities ..................... 563,056 509,992
Deferred tax liabilities ................................. 53,000 40,000
------------ ------------
Total liabilities ............................. 616,056 549,992
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 10,000,000 shares at $.01
par value; 2,996,937 and 2,692,683 shares issued . 29,970 26,927
Additional paid-in capital ........................... 3,566,760 2,418,033
Retained earnings .................................... 6,857,936 5,633,805
Treasury stock, at cost, 7,300 shares in 2003 ........ (20,667)
------------ ------------
Total stockholders' equity .................... 10,454,666 8,058,098
------------ ------------
Totals ........................................ $ 11,070,722 $ 8,608,090
============ ============
See Notes to Financial Statements.
F-3
RF INDUSTRIES, LTD.
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2004 AND 2003
2004 2003
----------- -----------
Net sales ................................... $11,227,242 $ 9,875,499
Cost of sales ............................... 5,539,945 5,079,307
----------- -----------
Gross profit ................................ 5,687,297 4,796,192
----------- -----------
Operating expenses:
Engineering ............................. 486,202 753,562
Selling and general ..................... 3,154,074 2,849,506
----------- -----------
Totals .............................. 3,640,276 3,603,068
----------- -----------
Operating income ............................ 2,047,021 1,193,124
Other income - interest ..................... 17,110 22,321
----------- -----------
Income before income taxes .................. 2,064,131 1,215,445
Provision for income taxes .................. 840,000 504,700
----------- -----------
Net income .................................. $ 1,224,131 $ 710,745
=========== ===========
Earnings per share:
Basic ................................... $ .42 $ .23
=========== ===========
Diluted$ ................................ $ .33 $ .19
=========== ===========
See Notes to Financial Statements.
F-4
RF INDUSTRIES, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2004 AND 2003
Common Stock Additional Receivables Total
--------------------- Paid-In Retained from Sale Treasury Stockholders'
Shares Amount Capital Earnings of Stock Stock Equity
--------- -------- ------------- ---------- ----------- ---------- --------------
Balance, November 1, 2002 3,441,054 $ 34,410 $ 4,695,147 $ 4,923,060 $ ( 1,715) $ (55,211) $ 9,595,691
Net income 710,745 710,745
Tax benefit on non-qualified
stock options 47,500 47,500
Repayments of receivables
from sale of stock 1,715 1,715
Exercise of stock options 73,296 733 89,962 90,695
Purchase of treasury stock (2,388,248) (2,388,248)
Retirement of common stock (821,667) (8,216) (2,414,576) 2,422,792
---------- --------- ------------ ------------ ----------- ----------- -----------
Balance, October 31, 2003 2,692,683 26,927 2,418,033 5,633,805 - (20,667) 8,058,098
Net income 1,224,131 1,224,131
Tax benefit on non-qualified
stock options 173,000 173,000
Exercise of stock options 311,554 3,116 996,321 999,437
Retirement of common stock (7,300) (73) (20,594) 20,667
---------- --------- ------------ ------------ ----------- ----------- ------------
Balance, October 31, 2004 2,996,937 $ 29,970 $ 3,566,760 $ 6,857,936 $ - $ - $10,454,666
========== ========= ============ =========== =========== =========== ============
See Notes to Financial Statements.
F-5
RF INDUSTRIES, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2004 AND 2003
2004 2003
----------- -----------
Operating activities:
Net income .................................................. $ 1,224,131 $ 710,745
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debts .................................. 2,000 54,000
Depreciation ............................................. 168,136 158,040
Deferred income taxes .................................... 7,600 (40,800)
Income tax benefit on non-qualified stock options ........ 173,000 47,500
Changes in operating assets and liabilities:
Trade accounts receivable ............................. 183,583 (609,179)
Inventories ........................................... (202,928) 688,599
Other assets .......................................... (145,059) 8,617
Accounts payable ...................................... 28,319 110,831
Accrued expenses ...................................... 24,745 1,084
----------- -----------
Net cash provided by operating activities ......... 1,463,527 1,129,437
----------- -----------
Investing activities:
Payment for acquisition ..................................... (510,000)
Capital expenditures ........................................ (162,392) (51,341)
Payments of note receivable from related party .............. 22,854 6,921
----------- -----------
Net cash used in investing activities ............. (649,538) (44,420)
----------- -----------
Financing activities:
Exercise of stock options ................................... 999,437 90,695
Purchase of treasury stock .................................. (2,388,248)
Payments on notes payable ................................... (44,582)
Repayments of receivables from sale of stock ................ 1,715
----------- -----------
Net cash provided by (used in) financing activities 999,437 (2,340,420)
----------- -----------
Net increase (decrease) in cash and cash equivalents ............ 1,813,426 (1,255,403)
Cash and cash equivalents at beginning of year .................. 2,683,896 3,939,299
----------- -----------
Cash and cash equivalents at end of year ........................ $ 4,497,322 $ 2,683,896
=========== ===========
Supplemental cash flow information - income taxes paid .......... $ 900,000 $ 514,700
=========== ===========
Noncash financing activities - retirement of common stock ....... $ 20,667 $ 2,422,792
=========== ===========
See Notes to Financial Statements.
F-6
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies:
Business activities:
The Company's business is comprised of the design, manufacture and/or
sale of communications equipment primarily to the radio and other
professional communications related industries. The Company currently
conducts its operations through four divisions (i) RF Connector
Division is engaged in the design and distribution of coaxial
connectors used primarily in radio and other professional
communications applications; (ii) Neulink Division is engaged in the
design, manufacture and sale of radio links for receiving and
transmitting control signals for remote operation and monitoring of
equipment; (iii) Bioconnect Division is engaged in the design,
manufacture and sales of medical cable interconnects for medical
monitoring applications; and (iv) Aviel Division is engaged in the
design, manufacture and sales of radio frequency, microwave and
specialized connectors for aerospace, original electronics
manufacturers and military electronics applications (see Note 10).
Prior to fiscal 2004, the Company had reported separate segment
information in its filings for the operations of its RF Connector,
Neulink and Bioconnect Divisions in the same format as reviewed by the
Company's management. The sales, operating income and assets of the
Neulink and Bioconnect Divisions no longer meet the thresholds that
require separate disclosures. Accordingly, commencing with fiscal
2004, the Company has discontinued reporting segment information on
the Neulink and Bioconnect segments separately.
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. 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
and collectibility is assured.
F-7
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(continued):
Inventories:
Inventories, consisting of materials, labor and manufacturing
overhead, are stated at the lower of cost or market. Cost has been
determined using the weighted average cost method.
Equipment and furnishings:
Equipment, tooling and furniture are recorded at cost and depreciated
over their estimated useful lives (generally 3 to 7 years) using the
straight-line method.
Goodwill:
The Company follows Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which
requires that goodwill and certain intangible assets, including those
recorded in past business combinations, no longer be amortized against
earnings, but instead be tested for impairment at least annually.
There was no impairment of goodwill or other intangible assets as a
result of impairment tests performed according to SFAS 142.
Long-lived assets:
The Company assesses potential impairments to its long-lived assets
when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. An
impairment loss is recognized when the undiscounted cash flows
expected to be generated by an asset (or group of assets) is less than
its carrying amount. Any required impairment loss is measured as the
amount by which the assets carrying value exceeds its fair value, and
is recorded as a reduction in the carrying value of the related asset
and a charge to operations.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were $114,558 and
$66,890 in 2004 and 2003, respectively.
Research and development:
The Company expenses the cost of research and development costs as
incurred. Research and development costs charged to operations and
included in engineering were approximately $40,000 and $234,000 in
2004 and 2003, respectively.
F-8
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(continued):
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities to be computed for temporary differences between the
financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in future periods based on
enacted laws and rates applicable to the periods in which the
temporary differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The income tax provision
is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Stock options:
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," as amended by Statement of Financial
Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation-Transition Disclosure." The Company follows Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees" and related interpretations, in accounting for
its employee stock options. Under APB 25, the Company accounts for
stock options using the intrinsic value method and no compensation
expense is recognized when the exercise price of stock options equals
or exceeds the market price of the underlying stock on the date of
grant. Options granted to non-employees are recorded at fair value in
accordance with SFAS 123.
Had the Company elected to recognize compensation expense based upon
the fair value at the grant dates for awards under these plans and
amortized the cost over the vesting period, net income would have been
decreased to the pro forma amounts listed in the table below. The fair
value of each option granted was estimated on the date of grant using
the Black-Scholes option pricing model. The Company's pro forma
information is as follows:
2004 2003
------------ ------------
Net income:
As reported .......................... $ 1,224,131 $ 710,745
Deduct total stock-based employee
compensation expense determined
under the fair value based method
for all awards ..................... (267,000) (297,665)
------------ -----------
Pro forma $ 957,131 $ 413,080
=========== ===========
F-9
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(continued):
Stock options (concluded):
2004 2003
------- ------
Basic earnings per share:
As reported ................... $ .42$ .23
Pro forma ..................... $ .33$ .14
Diluted earnings per share:
As reported ................... $ .33$ .19
Pro forma ..................... $ .26$ .11
The fair value of each option granted in 2004 and 2003 was
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions:
2004 2003
------- ------
Dividend yield .................... 0% 0%
Expected volatility ............... 76% 60%
Risk-free interest rate ........... 4.24% 4.33%
Expected lives .................... 4 years 10 years
Earnings per share:
Basic earnings per share is calculated by dividing net income
applicable to common stockholders by the weighted average number
of common shares outstanding during the period. The calculation
of diluted earnings per share is similar to that of basic
earnings per share, except that the denominator is increased to
include the number of additional common shares that would have
been outstanding if all potentially dilutive common shares,
principally those issuable upon the exercise of stock options,
were issued and the treasury stock method had been applied during
the period.
F-10
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(continued):
Earnings per share (concluded):
The following table summarizes the calculation of basic and
diluted earnings per share:
Numerators:
Net income (A)............................. $ 1,224,131 $ 710,745
============ ============
Denominators:
Weighted average shares outstanding for basic
earnings per share (B).................. 2,906,806 3,053,352
Add effects of potentially dilutive securities -
assumed exercise of stock options ...... 844,475 617,273
------------ ------------
Weighted average shares for diluted
earnings per share (C) ................. 3,751,281 3,670,625
============ ============
Basic net earnings per share (A)/(B).......... $.42 $.23
==== ====
Diluted net earnings per share (A)/(C)........ $.33 $.19
==== ====
Note 2 - Concentration of credit risk and sales to major customers:
The Company maintains its cash balances primarily in one financial
institution. As of October 31, 2004, the balance exceeded the Federal
Deposit Insurance Corporation limitation for coverage of $100,000 by
$270,800. As of October 31, 2004, the Company had two uninsured money
market accounts totaling $4,149,900. The Company reduces its exposure to
credit risk by maintaining such balances with financial institutions that
have high credit ratings.
Accounts receivable are financial instruments that also expose the Company
to concentration of credit risk. Such exposure is limited by the large
number of customers comprising the Company's customer base and their
dispersion across different geographic areas. In addition, the Company
routinely assesses the financial strength of its customers and maintains an
allowance for doubtful accounts that management believes will adequately
provide for credit losses.
Sales to one customer represented 14% and 16% of total sales in 2004 and
2003, respectively. The Company does not have a written agreement with this
customer and, therefore, this customer does not have any minimum purchase
obligations and could stop buying the Company's products at any time. A
reduction, delay or cancellation of orders from this customer or the loss
of this customer could significantly reduce the Company's revenues and
profits.
F-11
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 3 - Inventories:
Inventories consisted of the following as of October 31, 2004 and 2003:
2004 2003
----------- ------------
Raw materials and supplies ............. $ 777,765 $ 591,892
Finished goods ......................... 3,120,909 2,997,902
Less inventory reserve ................. (108,716) (134,776)
----------- -----------
Totals .............................. $ 3,789,958 $ 3,455,018
=========== ===========
Note 4 - Commitments:
The Company leases its facilities in San Diego, California and Las Vegas,
Nevada under noncancelable operating leases. The Company amended its San
Diego lease in November 2004, adding additional square feet. The amended
lease expires in May 2010 and requires minimum annual rental payments that
are subject to fixed annual increases. The minimum annual rentals under
this lease are being charged to expense on a straight-line basis over the
lease term. Deferred rentals were not material at October 31, 2004. The Las
Vegas lease expires on March 31, 2005. The San Diego lease also requires
the payment of the Company's pro rata share of the real estate taxes and
insurance, maintenance and other operating expenses related to the
facilities. The Company also leases certain automobiles under operating
leases which expire at various dates through December 2005.
Rent expense under all operating leases totaled approximately $238,000 and
$218,000 in 2004 and 2003, respectively.
Minimum lease payments under these operating leases in each of the five
years subsequent to October 31, 2004 and thereafter are as follows:
Year Ending
October 31, Amount
------------ ------------
2005 ................................ $ 197,000
2006 ................................ 240,000
2007 ................................ 240,000
2008 ................................ 232,000
2009 ................................ 235,000
Thereafter .......................... 139,000
----------
Total ........................... $1,283,000
==========
The Company has an employment agreement with its President and Chief
Executive Officer for a term which expires on February 24, 2005. The
aggregate amount of compensation to be provided over the remaining term of
the agreement amounted to $71,667 at October 31, 2004.
F-12
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 5 - 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 years ended October 31, 2004 and 2003:
2004 2003
------------- ------------
United States ........................ $ 10,226,766 $ 8,675,099
Foreign countries .................... 1,000,476 1,200,400
------------- ------------
Totals ............................ $ 11,227,242 $ 9,875,499
============= ============
Note 6 - Income taxes:
The provision for income taxes consists of the following:
2004 2003
------------- ------------
Current:
Federal ............................ $ 651,400 $ 426,500
State .............................. 181,000 119,000
------------ -----------
832,400 545,500
------------ -----------
Deferred:
Federal ............................ 2,600 (30,800)
State .............................. 5,000 (10,000)
------------ ------------
7,600 (40,800)
------------ ------------
Totals $ 840,000 $ 504,700
============ ============
Income tax at the Federal statutory rate is reconciled to the Company's
actual net provision for income taxes as follows:
2004 2003
------------------ ------------------
% of % of
Pretax Pretax
Amount Income Amount Income
-------- --------- -------- -------
Income tax at Federal
statutory rate .............. $702,000 34.0% $413,200 34.0%
State tax provision, net
of Federal tax benefit ...... 123,000 6.0 72,000 5.9
Nondeductible differences ...... 7,000 0.3 6,600 0.5
Other .......................... 8,000 0.4 12,900 1.1
-------- ---- -------- ----
Provision for income
taxes .................... $840,000 40.7% $504,700 41.5%
======== ==== ======== ====
F-13
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income taxes (concluded):
The Company's total deferred tax assets and deferred tax liabilities at
October 31, 2004 and 2003 are as follows:
2004 2003
--------- ---------
Assets:
Allowance for doubtful accounts ..... $ 16,000 $ 23,700
Inventory obsolescence .............. 47,000 57,700
Accrued vacation .................... 48,000 34,600
State income taxes .................. 62,000 36,900
Capital loss carryforwards .......... 34,000 33,900
Other ............................... 5,000 39,100
--------- ---------
Totals ......................... 212,000 225,900
Liabilities:
Depreciation ........................ (90,000) (96,400)
Less valuation allowance ................ (34,000) (33,900)
--------- ---------
Net deferred tax assets ........ $ 88,000 $ 95,600
========= =========
A valuation allowance has been established for the capital loss
carryforward due to the Company no longer investing in assets to offset
these losses in the foreseeable future.
Note 7 - Stock options:
Incentive and Non-Qualified Stock Option Plans:
The Board of Directors approved an Incentive Stock Option Plan (the
"1990 Incentive Plan") during fiscal 1990 that provides for grants of
options to employees to purchase up to 500,000 shares of common stock
of the Company. Under its terms, the 1990 Incentive Plan terminated in
2000, and no additional options can be granted under that option plan.
However, options previously granted under the 1990 Incentive Plan
remain outstanding and continue in effect until they either expire,
are forfeited or are exercised. As of October 31, 2004, a total of
8,313 options were still outstanding under the 1990 Incentive Plan,
all of which are currently exercisable.
The Board of Directors also approved a Non-Qualified Stock Option Plan
(the "1990 Non-Qualified Plan") during fiscal 1990 that provides for
grants of options to purchase up to 200,000 shares of common stock to
officers, directors and other recipients selected by the Board of
Directors. Under its terms, the 1990 Non-Qualified Plan terminated in
2000, and no additional options can be granted under that option plan.
However, options previously granted under the 1990 Non-Qualified Plan
remain outstanding and continue in effect until they either expire,
are forfeited or are exercised. As of October 31, 2004, a total of
12,000 options were still outstanding under the 1990 Non-Qualified
Plan, all of which are currently exercisable.
F-14
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (continued):
Incentive and Non-Qualified Stock Option Plans (concluded):
In May 2000, the Board of Directors adopted the Company's 2000 Stock
Option Plan (the "2000 Option Plan"). Under the 2000 Option Plan, the
Company may grant options to purchase shares of common stock to
officers, directors, key employees and others providing services to
the Company. The number of shares of common stock that the Company is
authorized to issue under options granted under the 2000 Option Plan
initially was 300,000, which number automatically increases on January
1 of each year by the lesser of (i) 4% of the total number of shares
of common stock then outstanding or (ii) 10,000 shares. Accordingly,
as of October 31, 2004, the authorized number of shares of common
stock that could be issued under the 2000 Option Plan was 440,000, of
which 108,851 shares were still available to be granted. Under the
2000 Option Plan, the Company is authorized to grant both incentive
stock options and non-qualified stock options. Incentive stock options
are granted at an exercise price no less than the fair value of the
common stock on the date of grant, while non-qualified options are
granted at no less than 85% of the fair value of the common stock on
the date of grant.
Additional required disclosures related to stock option plans:
Additional information regarding all of the Company's outstanding
stock options at October 31, 2004 and 2003 and changes in outstanding
stock options in 2004 and 2003 follows: 2004 2003
Weighted Weighted
Shares Average Shares Average
or Price Exercise or Price Exercise
Per Share Price Per Share Price
----------- --------- ------------ ------------
Options outstanding at beginning of year 1,287,867 $1.67 1,245,764 $1.71
Options granted 67,651 5.75 170,365 2.83
Options exercised (311,554) 3.21 (73,296) 1.23
Options forfeited (8,250) 2.30 (54,966) 3.39
------------ ------------
Options outstanding at end of year 1,035,714 1.63 1,287,867 1.67
============ ============
Option price range at end of year $.10 -$6.38 $.10-$5.75
Weighted average fair value of
options granted during the year $3.83 $2.05
===== =====
F-15
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (concluded):
Additional required disclosures related to stock option plans(concluded):
The following table summarizes information about stock options
outstanding at October 31, 2004, all of which are at fixed-prices:
Weighted Average Weighted
Weighted Remaining Average
Range of Average Contractual Life Number Exercise Price
Exercise Number Exercise of Options of Options of Options
Price Outstanding Price Outstanding * Exercisable Exercisable
--------- ----------- ----------- ----------------------- ----------- -----------
$0.10 460,000 $ 0.10 1 yr. after termination 460,000 $ 0.10
$1.33 - $2.50 273,943 1.87 6 yrs. 186,943 1.75
$2.66 - $3.95 235,870 3.12 9 yrs. 115,870 3.34
$5.12 - $6.38 65,901 6.03 10 yrs. 4,700 5.12
----------- ------------
1,035,714 1.63 8 yrs. 767,513 0.96
=========== ============
* Some of the options, in addition to the 460,000, expire 1-year after
employee's termination.
Note 8 - Retirement plan:
The Company sponsors a deferred savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code. Substantially all of its
employees may participate in and make voluntary contributions to this
defined contribution plan after they meet certain eligibility requirements.
The Board of Directors of the Company can authorize additional
discretionary contributions by the Company. The Company did not make
contributions to the plan in 2004 or 2003.
Note 9 - Related party transactions:
The note receivable from stockholder of $70,000 at October 31, 2004 and
2003 is due from the President of the Company, bears interest at 6%,
payable annually, and has no specific due date.
The notes receivable from related parties of $26,730 and $49,584 at October
31, 2004 and 2003, respectively, are due from employees of the Company,
bear interest at 6% and are due when shares of the Company's common stock
are sold by the employees. The notes are collateralized by properties owned
by the employees.
A director of the Company is an employee of Neil Berkman Associates, the
Company's public relations firm. For the fiscal years ended October 31,
2004 and October 31, 2003, the Company paid to Neil Berkman Associates
$43,050 and $39,360, respectively, for services rendered.
F-16
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 10- Business acquisition:
On August 16, 2004, the Company purchased the business and substantially
all of the assets of Jacelaine, Inc., a Nevada based designer, manufacturer
and seller of microwave and radio frequency connectors. Jacelaine, Inc. has
been conducting business under the name "Aviel Electronics." The purchase
price of the assets was $510,000, of which $410,000 was paid in cash at the
closing and $100,000 was deposited into an escrow account for one year as
security for the seller's representations, warranties and covenants. The
purpose of the acquisition was to complement the Company's coaxial
connector business with military, governmental and aerospace customers.
The acquisition has been accounted for as a purchase and, accordingly, the
net assets acquired were recorded at estimated fair values on the date of
acquisition. A summary of the allocation of the cost of the acquisition to
the net assets acquired as of August 16, 2004 follows:
Inventory ................................... $132,012
Property and equipment ...................... 240,660
Goodwill .................................... 137,328
--------
Total assets acquired ....................... $510,000
========
Purchase price .............................. $510,000
========
Assuming the acquisition had taken place on the first day of the years
ended October 31, 2004 and 2003, unaudited net sales would have been
approximately $11,748,000 and $10,836,000, respectively, while unaudited
net income and earnings per share information would not have been
materially different than the amounts shown on the accompanying statements
of income for the years then ended.
F-17