SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JANUARY 31, 2006
Commission file number: 0-13301
RF INDUSTRIES, LTD.
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(Exact name of registrant as specified in its charter)
Nevada 88-0168936
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(State of Incorporation) (I.R.S. Employer Identification No.)
7610 Miramar Road, Bldg. 6000, San Diego, California 92126-4202
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(Address of principal executive offices) (Zip Code)
(858) 549-6340 FAX (858) 549-6345
(Issuer's telephone and fax numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
stock at the latest practicable date. As of March 12, 2006, the registrant had
3,209,484 shares of Common Stock, $.01 par value, issued.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RF INDUSTRIES, LTD.
CONDENSED BALANCE SHEETS
(UNDAUDITED)
ASSETS JANUARY 31, 2006 OCTOBER 31, 2005
---------------------- --------------------
CURRENT ASSETS
Cash and cash equivalents $4,664,153 $4,507,219
Investments in available-for-sale securities 1,021,824
Trade accounts receivable, net of allowance for doubtful
accounts of $30,723 and $14,898 1,389,147 1,890,700
Notes receivable 2,500
Inventories 4,012,695 4,180,500
Income tax refund receivable 218,731 306,131
Other current assets 230,221 97,356
Deferred tax assets 136,000 136,000
---------------------- --------------------
TOTAL CURRENT ASSETS 11,672,771 11,120,406
---------------------- --------------------
EQUIPMENT AND FURNISHINGS:
Equipment and tooling 1,568,412 1,543,120
Furniture and office equipment 366,177 364,063
---------------------- --------------------
1,934,589 1,907,183
Less accumulated depreciation 1,499,387 1,441,448
---------------------- --------------------
TOTAL 435,202 465,735
---------------------- --------------------
Goodwill 200,848 200,848
Amortizable intangible asset 103,333 113,333
Notes receivable from related parties 29,750
Note receivable from stockholder 66,980 66,980
Other assets 28,087 28,087
---------------------- --------------------
TOTAL ASSETS $12,507,221 $12,025,139
====================== ====================
2
ITEM 1: FINANCIAL STATEMENTS (continued)
RF INDUSTRIES, LTD.
CONDENSED BALANCE SHEETS
(UNDAUDITED)
JANUARY 31, 2006 OCTOBER 31, 2005
---------------------- ----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $229,857 $334,749
Accrued expenses 454,030 377,986
---------------------- ---------------------
TOTAL CURRENT LIABILITIES 683,887 712,735
Deferred tax liabilities 106,000 106,000
---------------------- ---------------------
TOTAL LIABILITIES 789,887 818,735
---------------------- ---------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - authorized 10,000,000 shares of $0.01
par value; 3,166,534 and
3,082,521 shares issued and outstanding 31,665 30,825
Additional paid-in capital 4,117,740 3,872,983
Retained earnings 7,567,929 7,302,596
---------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY
11,717,334 11,206,404
---------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$12,507,221 $12,025,139
====================== =====================
See Notes to Condensed Unaudited Financial Statements
3
ITEM 1: FINANCIAL STATEMENTS (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED JANUARY 31
(UNAUDITED)
2006 2005
----------------- -----------------
Net sales $3,374,912 $2,868,102
Cost of sales 1,814,343 1,450,445
----------------- -----------------
Gross profit 1,560,569 1,417,657
----------------- -----------------
Operating expenses:
Engineering 149,346 137,240
Selling and general 1,020,402 958,800
----------------- -----------------
Totals 1,169,748 1,096,040
----------------- -----------------
Operating income 390,821 321,617
Other income 73,012 16,468
----------------- -----------------
Income before provision for income taxes 463,833 338,085
Provision for income taxes 198,500 131,600
----------------- -----------------
NET INCOME $265,333 $206,485
================= =================
Basic earnings per share $0.09 $0.07
================= =================
Diluted earnings per share $0.07 $0.05
================= =================
Basic weighted average shares outstanding 3,107,732 3,008,765
================= =================
Diluted weighted average shares outstanding 3,656,857 3,837,828
================= =================
See Notes to Condensed Unaudited Financial Statements
4
ITEM 1: FINANCIAL STATEMENTS (continued)
RF INDUSTRIES, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31
(UNAUDITED)
2006 2005
---------------------- ------------------
OPERATING ACTIVITIES:
Net income $265,333 $206,485
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for bad debts 13,344 732
Depreciation and amortization 67,784 52,439
Income tax benefit on non-qualified stock options 111,100 42,200
Changes in operating assets and liabilities:
Trade accounts receivable 488,209 (13,833)
Inventories 167,805 (488,994)
Income tax refund receivable 87,400 (131,502)
Other current assets (132,865) (69,240)
Other assets (7,920)
Accounts payable (104,892) 233,621
Accrued expenses 76,044 (65,333)
---------------------- ------------------
Net cash provided by (used in) operating
activities 1,039,262 (241,345)
---------------------- ------------------
INVESTING ACTIVITIES:
Purchase of available-for-sale securities (1,021,824)
Capital expenditures (27,251) (14,999)
Payment of notes receivable 2,500 6,100
Payments of notes receivable from related parties 29,750
---------------------- ------------------
Net cash used in investing activities
(1,016,825) (8,899)
---------------------- ------------------
FINANCING ACTIVITIES - exercise of stock options 134,497 123,433
---------------------- ------------------
Net increase (decrease) in cash and cash equivalents 156,934 (126,811)
Cash and cash equivalents at the beginning of the period
4,507,219 4,497,322
---------------------- ------------------
Cash and cash equivalents at the end of the period $4,664,153 $4,370,511
====================== ==================
See Notes to Condensed Unaudited Financial Statements
5
RF INDUSTRIES, LTD.
NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments have been included in order to make the
information not misleading. Information included in the balance sheet, as of
October 31, 2005 has been derived from, and certain terms used herein are
defined in, the audited financial statements of the Company as of October 31,
2005 included in the Company's Annual Report on Form 10-KSB ("10-KSB") for the
year ended October 31, 2005 that was previously filed with the Securities and
Exchange Commission. Operating results for the three month period ended Janaury
31, 2006, are not necessarily indicative of the results that may be expected for
the year ending October 31, 2006. The unaudited condensed financial statements
should be read in conjunction with the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended October 31, 2005.
Certain amounts in the 2005 unaudited condensed financial statements have
been reclassified to conform to the 2006 presentation.
NOTE 2 - INVESTMENTS
Pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities, " the
Company's investments in U.S. Treasury Bills were classified as
available-for-sale securities and, accordingly, were valued at fair value at the
end of each period. If there is an other than temporary decline in fair value,
the cost basis of the individual security would have been written down to fair
value via a charge to earnings. Unrealized holding gains and losses as of
January 31, 2006 were not material.
NOTE 3 - COMPONENTS OF INVENTORY
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.
January 31, 2006 October 31, 2005
---------------------- ---------------------
(Unaudited)
Raw materials and supplies $971,964 $845,313
Work in process 60,230 63,242
Finished goods 3,026,849 3,318,293
Inventory reserve (46,348) (46,348)
---------------------- --------------------
Total $4,012,695 $4,180,500
====================== ====================
Purchases of connector products from two major vendors in the three month
period ended January 31, 2006, represented 43% and 16% compared to 34% and 28%
of the total inventory purchases for the same period in fiscal year 2005. The
Company has arrangements with these vendors to purchase product based on
purchase orders periodically issued by the Company.
6
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding increased by the effects of assuming that
other potentially dilutive securities (such as stock options) outstanding during
the period had been exercised and the treasury stock method had been applied. At
January 31, 2006, the effects of the assumed exercise of options to purchase
77,366 shares of the Company's common stock, at prices ranging from $5.12 to
$6.38 per share, were not included in the computation of diluted per share
amounts because they were anti-dilutive for that purpose. During the period
ended January 31, 2005, all options were considered dilutive and included in the
calculation of diluted earnings per share.
The following table summarizes the computation of basic and diluted
weighted average shares outstanding:
----------------------------------------
Three Months Ended January 31
----------------------------------------
2006 2005
------------------- -----------------
Weighted average shares outstanding for basic
earnings per share 3,107,732 3,008,765
Add effects of potentially dilutive
securities-assumed exercised of stock
options 549,125 829,063
------------------- -----------------
Weighted average shares for diluted net
earnings per share 3,656,857 3,837,828
=================== =================
NOTE 5 - STOCK OPTION PLAN
During the three month period ended January 31, 2006, no stock options
were granted and 84,013 with a weighted average share price of $1.60 were
exercised.
The Company continues to measure compensation cost related to stock
options issued to employees using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," as amended by Statement of Financial
Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation - Transaction Disclosure." Accordingly, no earned or unearned
compensation cost was recognized in the accompanying condensed financial
statements for the stock options granted by the Company to its employees since
all of those options have been granted at exercise prices that equaled or
exceeded the market value at the date of grant. The Company's historical net
income and earnings per common share and pro forma net income and earnings per
share assuming compensation cost had been determined based on the fair value at
the grant date for all awards by the Company consistent with the provisions of
SFAS 123 are set forth below:
7
------------------------------------------
Three Months Ended Janaury 31
------------------------------------------
2006 2005
----------------- --------------------
Net income - as reported $265,333 $206,485
Deduct total stock-based employee compensation
expense determined under fair
value-based method for all awards
- net of income tax effects (35,244) (52,201)
----------------- --------------------
Net income - pro forma $230,089 $154,284
================= ====================
Basic earnings per share -
as reported $0.09 $0.07
Basic earnings per share -
pro forma $0.07 $0.05
Diluted earnings per share - as reported $0.07 $0.05
Diluted earnings per share - pro forma $0.06 $0.04
NOTE 6 - CONCENTRATION OF CREDIT RISK
One customer accounted for approximately 16% and 14% of the Company's net
sales for the three month periods ended January 31, 2006 and 2005, respectively.
Although this customer has been an on-going major customer of the Company during
the past five years, the written agreement with this customer does not have any
minimum purchase obligations and the customer could stop buying the Company's
products at any time for any reason. A reduction, delay or cancellation of
orders from this customer or the loss of this customer could significantly
reduce the Company's revenues and profits. The Company cannot provide assurance
that this customer or any of its current customers will continue to place
orders, that orders by existing customers will continue at current or historical
levels or that the Company will be able to obtain orders from new customers.
NOTE 7 - GEOGRAPHICAL INFORMATION
The Company attributes sales to geographic areas based on the location of
the customers. The following table presents the sales of the Company by
geographic area for the three month period ended January 31, 2006 and 2005:
-------------------------------------
Three Months Ended January 31
----------------- -- ----------------
2006 2005
----------------- ----------------
United States $3,013,718 $2,532,925
Foreign countries 361,194 335,177
----------------- ----------------
$3,374,912 $2,868,102
================= ================
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements. These statements relate
to future events or the Company's future financial performance. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "except," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company, nor any other person, assumes responsibility for the accuracy and
completeness of the forward-looking statements. The Company is under no
obligation to update any of the forward-looking statements after the filing of
this Quarterly Report on Form 10-QSB to conform such statements to actual
results or to changes in its expectations.
The following discussion should be read in conjunction with the Company's
financial statements and the related notes and other financial information
appearing elsewhere in this Form 10-QSB. Readers are also urged to carefully
review and consider the various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the Company's business,
including without limitation the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," under the caption "Risk Factors," and the audited financial
statements and related notes included in the Company's Annual Report filed on
Form 10-KSB for the year ended October 31, 2005 and other reports and filings
made with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
The financial statements of RF Industries are prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). The preparation of these financial statements requires our management
to make estimates and assumptions about future events that affect the amounts
reported in the financial statements and related notes. Future events and their
effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. The Company
believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of financial statements. The
Company's significant accounting policies are summarized in Note 1 to the
financial statements contained in its Annual Report on Form 10-KSB filed for the
fiscal year ended October 31, 2005.
Investments:
Pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities, " the
Company's investments in U.S. Treasury Bills were classified as
available-for-sale securities, and, accordingly, were valued at fair value at
the end of each period. If there is an other than temporary decline in fair
value, the cost basis of the individual security would have been written down to
fair value via a charge to earnings. Unrealized holding gains and losses as of
January 31, 2006 were not material.
EXECUTIVE OVERVIEW
RF Industries markets connectors and cables to numerous industries for use
in thousands of products, primarily for the wireless marketplace. In addition,
to a limited extent, the Company also markets wireless products that incorporate
connectors and cables. In the past, RF Industries has reported results of
operations in three segments that, in general terms, defined the primary
markets. However, since sales of connectors and cable assemblies represent over
89% of the Company's net sales during the three month period ended January 31,
2006, and since the operations to all of the Company's smaller business units
effectively operate as subunits of the Company's principal business unit, the
Company no longer reports the results of these other, smaller business units as
separate business segments.
9
LIQUIDITY AND CAPITAL RESOURCES
Management believes that existing current assets and the amount of cash it
anticipates it will generate from current operations will be sufficient to fund
the anticipated liquidity and capital resource needs of the Company for at least
twelve months. The Company does not, however, currently have any commercial
banking arrangements providing for loans, credit facilities or similar matters
should the Company need to obtain additional capital. Management's beliefs that
its existing assets and the cash expected to be generated from operations will
be sufficient during the current fiscal year are based on the following:
o As of January 31, 2006, the amount of cash and cash equivalents was
equal to $4,664,153 in the aggregate.
o As of January 31, 2006, the Company had $11,672,771 in current
assets, and $683,887 in current liabilities.
o As of January 31, 2006, the Company had no outstanding indebtedness
(other than accounts payable and accrued expenses).
The Company does not believe it will need material additional capital
equipment in the next twelve months. In the past, the Company has financed some
of its equipment and furnishings requirements through capital leases. No
additional capital equipment purchases have been currently identified that would
require significant additional leasing or capital expenditures during the next
twelve months. Management also believes that based on the Company's current
financial condition, the absence of outstanding bank debt and recent operating
results, the Company would be able to obtain bank loans to finance its
expansion, if necessary, although there can be no assurance any bank loan would
be obtainable or, if obtained, would be on favorable terms or conditions.
The Company recognized net income of $265,333 for the three months ended
January 31, 2006 and realized cash flow of $1,039,262 from its operating
activities. The Company's overall cash position increased by $156,934 during the
three month period ended January 31, 2006. Contributing to the amount of net
cash provided by operations were depreciation and decreases in accounts
receivable, inventories, and income tax refund receivable.
Trade accounts receivable (net of allowances for doubtful accounts) at
January 31, 2006 decreased approximately 27%, or by $501,553, to $1,389,147
compared to the October 31, 2005 balance of $1,890,700. The decrease in accounts
receivable in relation to the 18% increase in net sales for the first fiscal
quarter of 2006 compared with the same period in the prior year is due to
improved receivables management and collection efforts by the Company.
Inventories at January 31, 2006 decreased 4%, or $167,805 to $4,012,695
compared to $4,180,500 on October 31, 2005 due to increased sales of 18% for the
quarter compared to the same period last year. The Company maintains its
inventory levels based on anticipated customer demand for certain of its
products. Since the Company considers its ability to fill customer orders on
short notice to be an important aspect of its marketing strategy, the Company
normally increases inventory need. Accordingly, the Company may increase its
inventory levels in future periods if sales continue to rise.
The Company's cash increase of $156,934 was affected by an increase in
other current assets, including prepaid expenses and deposits, of $132,865 to
$230,221 as of January 31, 2006, from $97,356 on October 31, 2005. This increase
is in prepaid expenses and deposits was primarily due to annual payments made in
the quarter for all the Company's business insurances and worker's compensation
premiums.
10
Accounts payable at January 31, 2006 decreased $104,892 to $229,857 from
$334,749 on October 31, 2005 primarily due to lower inventory receipts during
the quarter from its overseas suppliers.
Net cash used in investing activities was $1,016,825 for the three months
ended January 31, 2006 as a result of payments of $2,500 of notes receivable,
$29,750 payments on notes receivable from related parties less $27,251 of
capital expenditures and purchases of $1,021,824 of available-for-sale
securities made by the Company.
Net cash provided by financing activities was $134,497 for the three
months ended January 31, 2006, and was attributable to proceeds received from
the exercise of stock options.
As of January 31, 2006, the Company had a total of $4,664,153 of cash and
cash equivalents compared to a total of $4,507,219 of cash and cash equivalents
on October 31, 2005. The $1,039,262 in cash provided by operating activities,
together with the use of cash of $1,016,825 for investing activities and an
increase in cash of $134,497 from financing activities resulted in the Company's
overall cash and cash equivalent position increasing by $156,934 during the past
three months.
RESULTS OF OPERATIONS
THREE MONTHS 2006 VS. THREE MONTHS 2005
Net sales in the current fiscal quarter ended January 31, 2006, increased
18%, or $506,810 to $3,374,912 from $2,868,102 in the comparable fiscal quarter
in the prior year, due to increased demand for the Company's connector, cable
assembly and Bioconnect products plus additional revenues of $132,000 generated
from the Worswick division acquired by the Company in September 2005. The
increase in sales reflects a general increase in demand for wireless connectors
and cable products. The Company believes this increase is due, in part, to a
revival in some sectors of the telecommunication industries and the continuing
overall market increase in the demand for wireless products plus additional
order demand for its Bioconnect products.
The Company's gross profit as a percentage of sales declined from 49% to
46% during the current fiscal quarter compared to the same fiscal quarter last
year. The decline in gross margins during the current quarter resulted from
higher labor costs in its Bioconnect division and also increased costs in
benefits for all divisions from the comparable period in 2005. Overall, the
Company's four smaller divisions have significantly lower gross margins than the
RF Connector and Cable Assembly division. Since the connector and cable assembly
products net sales decreased as a percentage of the Company's net sales (overall
connector and cable sales represented 89% of net sales in the current three
month period, compared with 90% in the comparable period of the prior year), the
increase in sales of lower margin divisions reduced the combined gross margins
in the current period.
Engineering expenses increased 9%, or $12,106, to $149,346 from $137,240
in the comparable quarter of the prior year due to development costs for new
product enhancements. Engineering expenses fluctuate based on design engineering
expenses incurred by the Company at the request of its customers.
Selling and general expenses increased 6% or $61,602 to $1,020,402 from
$958,800 in the comparable quarter of the prior fiscal year. Selling and general
expenses were higher in the first quarter of the current fiscal year due
primarily to a one time increase in administrative expense for year end audit
costs, plus amortization of intangible assets, additional bad debt reserve and
the increase in compensation expenses (including the salaries of the additional
personnel retained to improve the Company's reporting systems). Due to the
increase in net sales, the selling and general expenses for the current period
as a percentage of sales, were 30% compared with 33% in the prior year.
11
Other income for the first quarter of 2006 increased $56,544 over the same
period in the prior year due to higher investment interest income.
RISK FACTORS
Investors should carefully consider the risks described below and in the
Company's Annual Report on Form 10-KSB for the fiscal year ended October 31,
2005. The risks and uncertainties described below and in the Annual Report are
not the only ones facing the Company. If any of the following risks actually
occur, the Company's business, financial condition or results of operations
could be materially adversely affected.
Dependence On RF Connector and Cable Assembly Products
Of the Company's five operating divisions, the three RF Connector and
Cable Assembly product divisions account for approximately 83% of the Company's
net sales for the fiscal year ended October 31, 2005, and approximately 89% of
net sales during the three month period ended January 31, 2006, respectively.
The Company expects the RF Connector and Cable Assembly products will continue
to account for the majority of the Company's revenues for the near future.
Accordingly, an adverse change in the operations of the RF Connector and Cable
Assembly divisions could materially adversely affect the Company's business,
operating results and financial condition. Factors that could adversely affect
the RF Connector and Cable Assembly divisions are described below.
The Company Depends On Third-Party Contract Manufacturers For Substantially All
Of Its Connector Manufacturing Needs.
Substantially all of the Company's RF Connector and Cable Assembly
products are manufactured by third-party contract manufacturers. The Company
relies on them to procure components for RF Connector and Cable Assembly and in
certain cases to design, assemble and test its products on a timely and
cost-efficient basis. If the Company's contract manufacturers are unable to
complete design work on a timely basis, the Company will experience delays in
product development and its ability to compete may be harmed. In addition,
because some of the Company's manufacturers have manufacturing facilities in
Taiwan and Korea, their ability to provide the Company with adequate supplies of
high-quality products on a timely and cost-efficient basis is subject to a
number of additional risks and uncertainties, including earthquakes and other
natural disasters and political, social and economic instability. If the
Company's manufacturers are unable to provide it with adequate supplies of
high-quality products on a timely and cost-efficient basis, the Company's
operations would be disrupted and its net revenue and profitability would
suffer. Moreover, if the Company's third-party contract manufacturers cannot
consistently produce high-quality products that are free of defects, the Company
may experience a higher rate of product returns, which would also reduce its
profitability and may harm the Company's reputation and brand.
The Company does not currently have any agreements with any of its
contract manufacturers, and such manufacturers could stop manufacturing products
for the Company at any time. Although the Company believes that it could locate
alternate contract manufacturers if any of its manufacturers terminated their
business, the Company's operations could be impacted until alternate
manufacturers are found.
The Company's Dependence On Third-Party Manufacturers Increases The Risk That It
Will Not Have An Adequate Supply Of Products Or That Its Product Costs Will Be
Higher Than Expected.
The risks associated with the Company's dependence upon third parties that
develop and manufacture and assemble the Company's products include:
o reduced control over delivery schedules and quality;
o risks of inadequate manufacturing yields and excessive costs;
12
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.
Dependence Upon Independent Distributors To Sell And Market The Company's
Products
The Company's sales efforts are primarily conducted through independent
distributors. Sales through independent distributors accounted for approximately
62% of the net sales of the Company for the fiscal year ended October 31, 2005,
and approximately 65% for the three month period ended January 31, 2006.
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 15% of the net sales of the
Company's RF Connector and Cable Assembly division for the fiscal year ended
October 31, 2005 and 16% of net sales for the three month period ended January
31, 2006. Although this customer has been an on-going major customer of the
Company during the past five years, the Company does have a written distributor
agreement with this customer. However, this customer does not have any minimum
purchase obligations and could stop buying the Company's products at any time.
Accordingly, the Company's largest customer could stop buying the Company's
products at any time. A reduction, delay or cancellation of orders from this
customer or the loss of this customer could significantly reduce the Company's
revenues and profits. The Company cannot provide assurance that this customer or
any of its current customers will continue to place orders, that orders by
existing customers will continue at current or historical levels or that the
Company will be able to obtain orders from new customers.
Certain Of The Company's Markets Are Subject to Rapid Technological Change, So
The Company's Success In These Markets Depends On Its Ability To Develop And
Introduce New Products.
Although most of the Company's products have a stable market and are only
gradually phased out, certain of the new and emerging market, such as the
wireless digital transmission markets, are characterized by:
o rapidly changing technologies;
o evolving and competing industry standards;
o short product life cycles;
o changing customer needs;
o emerging competition;
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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.
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If The Industries Into Which The Company Sells Its Products Experience Recession
Or Other Cyclical Effects Impacting The Budgets Of Its Customers, The Company's
Operating Results Could Be Negatively Impacted.
The primary customers for the Company's coaxial connectors are in the
connector and communications industries. Any significant downturn in the
Company's customers' markets, in particular, or in general economic conditions
that result in the cut back of budgets would likely result in a reduction in
demand for the Company's products and services and could harm the Company's
business. Historically, the communications industry has been cyclical, affected
by both economic conditions and industry-specific cycles. Depressed general
economic conditions and cyclical downturns in the communications industry have
each had an adverse effect on sales of communications equipment, OEMs and their
suppliers, including the Company. No assurance can be given that the connector
industry will not experience a material downturn in the near future. Any
cyclical downturn in the connector and/or communications industry could have a
material adverse effect on the Company.
The Company May Make Future Acquisitions That Will Involve Numerous Risks.
Since August 2004, the Company has purchased the operations of two smaller
businesses (Aviel Electronics in Las Vegas, Nevada, August 2004, and Worswick
Industries, Inc. in San Diego, California, September 2005). The Company
periodically may make acquisitions of other companies that could expand the
Company's product line or customer base. The risks involved with both the recent
acquisitions and with any possible future acquisitions include:
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 the assumption of unknown liabilities, or other unanticipated events
or circumstances.
Any of these risks could materially harm the Company's business, financial
condition and results of operations. There can be no assurance that any business
that the Company acquires will achieve anticipated revenues or operating
results.
International Sales And Operations
Sales to customers located outside the United States, either directly or
through U.S. and foreign distributors, accounted for approximately 11% of net
sales during the three month period ended January 31, 2006, and approximately
12% for the comparable periods in 2005. However, the $26,017 increase in foreign
sales in the 2006 period was due to increased cooperative advertising, primarily
in Mexico. 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.
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The Company's foreign sales are also affected by general economic
conditions in its international markets. A prolonged economic downturn in its
foreign markets could have a material adverse effect on the Company's business.
There can be no assurance that the factors described above will not have an
adverse material effect on the Company's future international revenues and,
consequently, on the financial condition, results of operations and business of
the Company.
Since sales made to foreign customers or foreign distributors have
historically been in U.S. dollars, the Company has not been exposed to the risks
of foreign currency fluctuations. However, if the Company in the future is
required to accept sales denominated in the currencies of the countries where
sales are made, the Company thereafter may also be exposed to currency
fluctuation risks.
Changes in stock option accounting rules may adversely affect our reported
operating results, our stock price, and our ability to attract and retain
employees
In the first quarter of the fiscal year ending October 31, 2007 the
Company will be required, under the new rules of the Financial Accounting
Standards Board, SFAS No. 123, "Accounting for Stock-Based Compensation," 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. As a small company with limited financial resources,
the Company has depended upon compensating its officers, directors, employees
and consultants with such stock based compensation awards in the past in order
to limit its cash expenditures and to attract and retain officers, directors,
employees and consultants. Accordingly, if the Company continues to grant stock
options or other stock based compensation awards to its officers, directors,
employees, and consultants, its future earnings, if any, will be reduced (or our
future losses will be increased) by the expenses recorded for those grants.
Since the Company is a small company, the expenses it may have to record as a
result of future options grants may be significant and may materially negatively
affect its reported financial results. The adverse effects that the new
accounting rules may have on the Company's future financial statements, should
it continue to rely heavily on stock-based compensation, may reduce the
Company's stock price and make it more difficult for it to attract new
investors.
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
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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 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to this company's management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by Securities and Exchange Commission Rule 13a-15(b), we
carried out an evaluation, under the supervision and with the participation of
the Company's management, including our Chief Executive Officer and the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in ensuring that the information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms.
During the quarter ended January 31, 2006, the Company has undertaken
additional actions to improve the Company's internal controls over financial
reporting, including the following:
o Replaced certain of its accounting personnel.
o Hired a degreed Director of Accounting with experience with
accounting principles generally accepted in the United States and
Sarbanes-Oxley 404 compliance.
o Implemented additional internal control policies and procedures to
bring the Company's controls and procedures into compliance with
accounting principles generally accepted in the United States and
Section 404 of the Sarbanes-Oxley Act of 2002 within the time frame
required under the Act.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number
31.1: Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2: Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1: Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2: Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
RF INDUSTRIES, LTD.
Dated: March 17, 2006 By:/s/ Howard F. Hill
--------------------------
Howard F. Hill, President
Chief Executive Officer
Dated: March 17, 2006 By:/s/Victor H. Powers
--------------------------
Victor H. Powers
Chief Financial Officer
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