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, 2002
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, 2002 were $8,916,000.
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 31, 2002, based on the average
of the closing price of one share of the Common Stock of the Company, as
reported on December 31, 2002 was $7,226,213. As of January 28, 2003, the
registrant had 3,441,054 outstanding shares of common stock, $.01 par value.
Certain portions of the registrant's Proxy Statement for the 2003 annual meeting
of shareholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A, not later than 120 days after the close of the registrant's
fiscal year, are incorporated by reference under Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes X No
This Form 10-KSB consists of a total of 26 pages. The Index to Exhibits can be
found on page 23.
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 raw materials from its suppliers, and the market demand for
its products, which market demand is dependent to a large part on 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. Since December 2000, the
Company has also been a manufacturer and seller of specialized electrical
cabling and interconnect products to the medical monitoring market. The Company
currently conducts its operations through three divisions known as (i) the RF
Connector Division, (ii) the Neulink Division, and (iii) the Bioconnect
Division. For financial accounting purposes, the Company considers these
Divisions to be three separate business units.
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 and
wholly-owned subsidiary.
RF Connector Division
The RF Connector Division is engaged in the design, manufacture and
distribution of coaxial connectors used in radio frequency (RF) wireless and
digital transmission communication applications, including cellular telephones,
personal computers (PCs), televisions, VCRs, computer monitors, laptop
computers, test instruments, LANs (Local Area Networks), base stations, and
antenna devices. 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. The
Company's RF connectors are manufactured for the Company by third party foreign
manufacturers located in Asia. The Company has been designing, producing and
selling coaxial connectors since 1987. In 2000 the RF Connector Division
introduced fiber optic connectors.
The RF Connector Division also is engaged in the manufacture and distribution of
RF cable assemblies. These cable assemblies consist of various types of coaxial
cable 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 offices 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 standard
line of cable assemblies with over 60,000 cable products. RF Cable Assembly
generated $1,398,000 approximately 18.4% of the RF Connector Division's net
revenues during the fiscal year ended October 31, 2002.
The Company's connectors and cable assemblies 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. While the Company's sales of connectors and cable assemblies have
fluctuated in the past few years the Company believes that the continuing
increase in new wireless products being introduced will result in an overall
increase in the demand for the radio frequency connectors and cable assemblies
that the Company distributes.
The RF Connector Division generated $7,604,000, approximately 85.3% of the
Company's net revenues during the fiscal year ended October 31, 2002.
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 is now able to offer complete turnkey packages for numerous
remote data transmission applications. A few of the many applications for these
products include industrial monitoring and control of remote sensors and devices
(SCADA ), wireless linking of remote weather and seismic sites, multipoint
military training range information systems, infrastructure linking of public
safety communications networks and automatic vehicle location systems. The RF
Neulink Division generated $865,000, approximately 9.7% of the Company's net
revenues during the fiscal year ended October 31, 2002.
Bioconnect Division
The Bioconnect division was acquired by the Company in December 2000. This
division is engaged in the design, manufacture and sale of cables and
interconnects for medical monitoring applications, such as the disposable ECG
cables, infant apnea monitors in hospitals, patient leads, snap leads and
connecting wires.
Bioconnect's cable assembly design and manufacturing capabilities
contribute significantly to the high volume coaxial cable assembly operation of
the RF Connector Division. Bioconnect's design and manufacturing expertise has
enabled the Company to bid, win and ship the high volume coaxial cable orders
required by the RF Connector Division's customers. Revenues attributable to the
sale of coaxial cable assemblies that are manufactured at Bioconnect's
facilities are included in the revenues of the RF Connector Division.
The Bioconnect Division generated $696,000, approximately 7.8% of the
Company's net revenues during the fiscal year ended October 31, 2002. Bioconnect
also generated a net loss of $661,000 during the fiscal year ended October 31,
2002, including an operating loss of $440,000 and a $221,000 charge for the
impairment of goodwill. The Company has decided to close the Bioconnect
facilities and to merge the operations into the RF Connector division. The
Bioconnect product line will continue to be manufactured and offered, and the
Bioconnect name will continue to be used in the operations of this division. In
connection with the merger of the Bioconnect operations into RF Connectors, the
Company did not renew the employment agreements of the principal executive
officers of Bioconnect, which expired in December 2002. In February 2003,
Bioconnect's Lake Elsinore facilities will be closed and moved to the Company's
main facilities in San Diego, California in February 2003. The Company has
leased an additional 3180 square feet of manufacturing space adjacent to its
existing facilities for the Bioconnect operations. These actions, including the
reduction in Bioconnect's rental expense, the elimination of duplicate employee
and other administrative expenses, the elimination of certain officer salaries,
and other cost cutting steps in connection with closing of the Bioconnect
facilities are expected to significantly reduce the Company's Bioconnect losses
in the coming year.
Product Description:
The Company produces a broad range of interconnect products and assemblies.
The products that are offered and sold by the Company's three divisions consist
of the following:
RF Connector Division:
The Company's RF 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 RF connectors offered by RF Industries include 2.4mm and
3.5mm, 7-16 DIN, BNC, MCX, MHV, Mini-UHF, MMCX, N, SMA, SMB, TNC 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, cellular and PCS base stations, GPS
(Global Positioning Systems), cable and dish radio/TV systems, VCRs, computer
monitors, computers, DVD audio players, mobile radio products, aircraft, video
surveillance systems, home theatre systems, cable assemblies and test equipment.
Users of the Company's connectors include telecommunications companies, circuit
board manufacturers, cable TV companies, consumer electronics manufacturers,
audio and video product manufacturers and installers, and satellite companies.
The RF Connector Division markets approximately 1500 types of connectors, which
range in price from $0.40 to $125.00 per unit.
The RF Connectors Division also designs, and manufactures through outside
contractors, a variety of connectors and hand tools, that are assembled into
kits, used by lab and field technicians, R&D technicians and engineers. To date,
these products have consisted of third party products that are carried as an
accommodation to its customers. The Company is now designing and offering some
of its own tools, which tools differ from those offered elsewhere in the market.
Although sales of these products have not yet materially contributed to the
division's sales, revenues from tool sales are expected to increase as the
Company releases its own products.
The RF Connector Division is developing a standard line of 75 Ohm
connectors which are commonly found in high-speed digital application like HDTV,
cable modems and cable connectors. The RF Connector Division has also commenced
development of a new line of SMB connectors, which support data
telecommunications and voice-over commercial broadcast applications like the
wireless microphone devices employed by football referees. The Company believes
there is a growing demand in digital applications for 75 Ohm connectors.
Other connector products that the Company has released during the past few
years in response to market demands include a full line of MMCX connectors,
which are used for applications restricted by minimal space such as cellular
telephones, PCS telephones, miniature transmitters and receivers, and mobile
radio systems. Additionally, the RF Connector Division enhanced its line of
reverse polarity and reverse thread connectors, specifically designed to meet
the requirements of the new government regulations for part 15 of the FCC.
Applications for these connectors include non-licensed, low wattage transmitters
used convention center broadcast systems; MHV connectors; 75 Ohm SMB connectors
used in areas such as microwave telephone and other non-defense applications. In
addition, the Company also offers connectors used in precision military
applications, satellite and other high frequency applications.
RF Connectors plans to introduce new products addressing the digital and
home entertainment markets with new connector product offerings for fiber optic
and speed-end coaxial cable assemblies.
The RF Connector Division also produces and markets the Company's cable
assemblies. Cable assemblies are made with a variety of sizes and combinations
of RFI coaxial connectors and coax cabling. Cabling is purchased from a variety
of major unaffiliated suppliers and are assembled with the Company 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 and
entertainment systems.
Cable assembly sales enable the Company to offer an additional product line
to its customers and increases the number of connectors sold, (as virtually all
cable assemblies are manufactured using the Company's connectors). The cable
assembly operations generated almost $2,000,000 in the fiscal year ended October
31, 2001, and approximately $1,398,000 in the fiscal year ended October 31,
2002. The Company anticipates that cable assembly sales in the future will
continue to grow and constitute a larger percentage of the Company's overall
revenues.
The Company's ability to design and manufacture cable assemblies increased
significantly with the acquisition of the Bioconnect Division in December 2000.
Since the acquisition, most cable assemblies have been manufactured at the
facilities of the Bioconnect Division in Lake Elsinore, California. Once the
Lake Elsinore facilities are closed and moved to the Company's headquarters, in
February 2003, cable assemblies will only be manufactured at the Company's
corporate headquarters in San Diego, California.
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, including both its own products
and products of other manufacturers that are distributed 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 Zeus Wireless 2.4 Ghz Spread-Spectrum wireless modems requiring no user FCC
licensing
o Omnex 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 Maxrad and Antenex antennas
Current applications in use worldwide for Neulink products are various and
include:
o seismic and volcanic monitoring
o industrial remote censoring/control in oil fields, pipelines and
warehousing
o lottery remote terminals
o various military applications
o remote camera control and tracking
o perimeter and security system control/monitoring
o water and waste management
o inventory control
o HVAC remote control and monitoring
o biomedical hazardous material monitoring
o fish farming automation of food dispensing, water aeration and monitoring
o remote emergency generator startup and monitoring
The Company also is marketing its Neulink wireless data products for use in
oil and gas field monitoring, electrical control and distribution and industrial
automation and plant security. In addition, the Neulink Division's standard RF
9600 radio modem which is used to monitor seismic and volcanic activity, is
designed to prevent loss of life by early warning of impending disaster.
In addition to its own products, the Neulink Division also is the
nationwide distributor for Zeus Wireless data spreadspectrum transceivers. These
units are true frequency hoppers @ 2.4GHz offering point-to-point, point-to-
multipoint, Broadcast and TCP/IP operational modes. The Neulink Division has
agreed to handle lower volume customers of this product. Under this agreement,
the Neulink Division provides system design, tech support and service for sales
of 2500 units.
In 2002, the Neulink Division added the Antenex line of antennas to its
product line. As a distributor for both Maxrad and Antenex antennas, the Neulink
Division is now able to offer two complimentary lines of antennas, thereby
addressing most antenna needs.
In 2002, the Neulink Division also was named as a distributor of Omnex
Control System's wireless modems, therby enabling the Neulink Division to
increase its line of products to include a 900 Mhz spread spectrum transceiver
to customers who need a license-free system. The Omnex line of products have
multiple transceivers with numerous options.
Design efforts have been completed for the software and hardware products
which, in combination with existing products, are designed to enable Neulink to
market complete wireless solutions for control and monitoring of remote sites
via radio modem links. New software enables RF Neulink's RF9600 wireless modems,
in conjunction with our I/O modules, to configure a SCADA system. The software,
named EZ-SCADA, creates a simple user-defined graphics screen that visually
displays the status, analogue values and trends. EZ-SCADA software allows remote
polling via base stations of SCADA units such as water, oil or gas tanks.
Hardware changes include addition of Analogue `C' module, allowing system design
for a full range of sensing and monitoring devices, digital, analogue and relay
control.
The Neulink Division also added several other new products to its line.
With over-the-air rates of 19.2 Kbps the Teledesign Systems TS4000 series offers
enhanced features such as dual RS-232 data ports and higher RF power levels. The
TS4000 series offer increased range for remote SCADA systems, as well as dual
RS232 port options for multiple unit control. In addition, the new TPL
amplifiers for licensed systems enable increased range of communications between
radios. The TPL line of high-speed switched amplifiers compliment Neulinks
high-speed radio modems.
Bioconnect Division:
The Bioconnect Division 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.
Since the acquisition of Bioconnect in December 2000, Bioconnect has
continued to operate at its separate facilities with its own officers and
employees. In order to reduce Bioconnect's losses, the Company has decided to
close the separate facilities of Bioconnect and to merge the operations of
Bioconnect into the Company's RF Connector division. The Bioconnect product line
will continue to be manufactured and offered, and the Bioconnect name will
continue to be used in the operations of this division. Effective February 2003,
the Bioconnect Division will operate from the Company's main facilities in San
Diego, California.
Foreign Sales:
Direct export sales by the Company to customers in South America, Canada,
Mexico, Europe, Australia, the Middle East, and the Orient accounted for
approximately 16% of Company sales for the fiscal year ended October 31, 2001
and approximately 18% of Company sales for the fiscal year ended October 31,
2002. The majority of the export sales during these period 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 the three divisions.
RF Connector presently sells its products primarily through warehousing
distributors and OEM (Original Equipment Manufacturer) customers who utilize
coaxial connectors and cable assemblies in the manufacture of their products.
The OEM market accounted for approximately 30% of RF Connector sales in fiscal
2001, and 25% for the fiscal year ended October 31, 2002. The balance of RF
Connector Division's sales were generated through independent distributors.
Since there are many OEMs who are not served by any of the Company's
disturbutors, the Company's goal is to increase the number of OEMs that purchase
connectors directly from the Company. At the end of the 2002 fiscal year, the
Company employed 73 independent distributors and of six manufacturer's
representatives who market t OEM customers.
RF Neulink 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 turn-key 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.
The Bioconnect Division markets its products both directly to hospitals and
indirectly to the medical market through hospital dealers and distributors. The
division also sells its products to OEMs who incorporate the leads and cables
into their product offerings.
Manufacturing:
The Company contracts with outside third parties for the manufacture 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, 2002
were manufactured by the Company at its facilities in California. RF Connector
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 testing and assembly of connectors and the Neulink
products is performed by outside manufacturers, while the testing of cable
assemblies is conducted by the Company.
The Bioconnect Division has designed and manufactured its own products for
over 20 years. The manufacturing process includes all aspects of the product,
from the design to mold design, mold fabrication, assembly and testing. The
Bioconnect Division produces its medical interconnect products in both high
volume manufacturing and for custom or low volume uses.
There are certain risks associated with the Company's dependence on third
party manufacturers for 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 almost all of its connector products from contract
manufacturers located in Taiwan 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's manufacturing sources.
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.
Personnel:
As of December 31, 2002, the Company employed 54 full-time employees, of
which 17 were in management, 16 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:
During the past two fiscal years, the Company spent approximately $200,000
on research and development. 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 $950,000 during the
past two fiscal years on engineering. Engineering activities consist of the
design and development of new products for specific customers and the design and
engineering of new 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.
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.
Backlog, Warranties and Terms:
The Company does not typically receive long-term fixed orders that
constitute sales backlog. The Company does, however, receive non-binding
purchase projections from its clients, which the Company uses for planning and
parts manufacturing purposes. As of October 31, 2002, the Company had
non-binding purchase projections from its clients of approximately $10,900,000,
of which approximately 90% is expected to be delivered in the current fiscal
year. These purchase projections are only informal indications of future
customer demands are not firm purchase order commitments. Accordingly, the
actual amount of purchases from these customers will change during the current
year depending on general business conditions.
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 RF Connector has over 50 competitors in a
$800,000,000 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 availability, service and
value-added support to its distributors and OEM customers. In its connector
operations, the Company competes on the basis of service, product availability
and delivery time. 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.
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. For
example, the Company provides design, applications engineering, and telephone
assistance to its Neulink Division customers.
Bioconnect 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.
Government Regulations:
The Company's products are designed to meet all known existing or proposed
governmental regulations. Management believes that the Company should be able to
meet existing standards for approvals by government regulatory agencies for its
principal products.
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 RF Connector Division Products
Although the Company has three operating divisions, sales of RF Connector
division products accounted for approximately 85% of the Company's total sales
for the fiscal year ended October 31, 2002. The Company expects the RF Connector
division products will continue to account for the majority of the Company's
revenues for the near future. Accordingly, an adverse change in the operations
of the RF Connector division could materially adversely affect the Company's
business, operating results and financial condition. Factors that could
adversely affect the RF Connector division are described below.
International Sales And Operations
Sales to customers located outside the United States, either directly or
through U.S. and foreign distributors, accounted for approximately 18% of the
net sales of the Company in the year ended October 31, 2002. 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 and the burdens of complying with a wide variety of foreign laws.
The Company's foreign sales are also affected by general economic
conditions in its international markets. A prolonged economic downturn in its
foreign markets could have a material adverse effect on the Company's business.
There can be no assurance that the factors described above will not have an
adverse material effect on the Company's future international revenues and,
consequently, on the financial condition, results of operations and business of
the Company.
Since sales made to foreign customers or foreign distributors have
historically been in U.S. dollars, the Company has not been exposed to the risks
of foreign currency fluctuations. However, if the Company in the future is
required to accept sales denominated in the currencies of the countries where
sales are made, the Company thereafter also be exposed to currency fluctuation
risks.
Dependence Upon Independent Distributors To Sell And Market The Company's
Products
The Company's sales efforts are primarily effected through independent
distributors, 73 as of the end of fiscal 2002. Sales through independent
distributors accounted for approximately 75% the net sales of the Company for
the fiscal year ended October 31, 2002. Although the Company has enterend 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.
The Company Depends On Third-Party Contract Manufacturers For Substantially All
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 On Principal Customer
One customer accounted for approximately 17% of the total sales of the
Company's RF Connector division for the fiscal year ended October 31, 2002.
Although this customer has been an on-going major customer of the Company during
the past five years, the Company does not have a written agreement with this
customer. Therefore, this customer does not have any minimum purchase
obligations and could stop buying the Company's products at any time. A
reduction, delay or cancellation of orders from this customer or the loss of
this customer could significantly reduce the Company's revenues and profits. The
Company cannot provide assurance that this customer or any of its current
customers will continue to place orders, that orders by existing customers will
continue at current or historical levels or that the Company will be able to
obtain orders from new customers.
Certain of The Company's Markets Are Subject To Rapid Technological Change, So
the Company's Success In These Markets Depends On Its Ability To Develop And
Introduce New Products.
Although most of the Company's products have a stable market and are only
gradually phased out, certain of the new and emerging market, such as the
wireless digital transmission markets, are characterized by:
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
connector and communications industries. Any significant downturn in the
Company's customers' markets, in particular, or in general economic conditions
which result in the cut back of budgets would likely result in a reduction in
demand for the Company's products and services and could harm the Company's
business. Historically, the communications industry has been cyclical, affected
by both economic conditions and industry-specific cycles. Depressed general
economic conditions and cyclical downturns in the communications industry have
each had an adverse effect on sales of communications equipment, OEMs and their
suppliers, including the Company. No assurance can be given that the connector
industry will not experience a material downturn in the near future. Any
cyclical downturn in the connector and/or communications industry could have a
material adverse effect on the Company.
Control By Principal Stockholders
Officers and directors, as of January 28, 2003, own or could own, upon
exercise of options which are immediately exercisable, approximately 19% of the
outstanding common stock of the Company. Also, Hytek International, Inc.
("Hytek") owns approximately 22% of the Company's common stock as of December
31, 2002 and is therefore considered an affiliate. Accordingly, Hytek acting
alone 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, directors and Hytek
International.
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. 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.
The Company May Make Future Acquisitions, Which Will Involve Numerous Risks.
Although the Company is not currently engaged in the potential acquisition
of any other company, 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.
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. The rapid growth of both divisions of the Company required the leasing
of an additional building to house the Neulink Division in 1996. The building is
located adjacent to our corporate headquarters at 7606 Miramar Road, Building
7200. The building consists of approximately 2,400 square feet which houses the
production and sales staff of the Neulink Division. In addition, effective
February 2003, the operations of Bioconnect are being moved to a new 3180 square
foot facility adjacent to the Company's existing facilities in San Diego. The
leases on these facilities will terminate in May 31, 2005. After the termination
of the recently terminated Bioconnect lease and the commencement of the new
space, the aggregate monthy rental for all the Company's facilities will be
approximately $13,000 per month, plus utilities, maintenance and insurance.
Since the acquisition of Bioconnect in December 2000, the Company's
Bioconnect Division has operated in a 5,000 square foot facility located in Lake
Elsinore, California. The lease for this facility has now expired, and these
facilities are being closed effective February 2003.
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.
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 PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Market information: The Company's Common Stock is listed and trades on the
NASDAQ Small Cap Market under the "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, mark-down or commission and may not
necessarily represent actual transactions.
Quarter High Low
------------------------------------------------------ ------------ -------------
Fiscal 2001
November 1, 2000 - January 31, 2001.................. 5.25 2.75
February 1, 2001 - April 30, 2001.................... 3.938 2.125
May 1, 2001 - July 31, 2001.......................... 3.98 2.90
August 1, 2001 - October 31, 2001.................... 3.07 2.20
Fiscal 2002
November 1, 2001 - January 31, 2002.................. 2.90 2.62
February 1, 2002 - April 30, 2002.................... 2.92 2.601
May 1, 2002 - July 31, 2002.......................... 2.85 2.031
August 1, 2002 - October 31, 2002.................... 2.22 2.569
On December 31, 2002, the closing sales price of the Company's Common Stock
was $2.10.
As of December 31, 2002, there were 736 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.
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 2002.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition:
The following table presents the key measures of consolidated financial
condition as of October 31, 2002 and 2001:
2002 2001
---------------------- ----------------------
% Total % Total
Amount Assets Amount Assets
--------- ---------- ---------- ---------
Cash and cash equivalents......... $3,939,299 38.8% $915,538 9.3%
Investments in available-for-sale
securities........................ 0 0 1,744,851 17.8%
Current assets.................... 9,573,351 94.4% 8,883,423 91.7%
Current liabilities............... 442,659 4.4% 435,552 4.4%
Working capital................... 9,130,692 90.0% 8,447,871 87.2%
Property and equipment - net......
434,823 4.3% 557,000 5.8%
Total Assets...................... 10,146,150 100.0% 9,684,946 100.0%
Stockholders' equity.............. 9,595,691 94.6% 9,184,531 94.8%
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 ended October 31, 2003. 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, 2002, the amount of cash and cash equivalents was equal
to $3,939,000 in the aggregate. This amount represented more than all of
the Company's operating expenses that the Company has ever incurrred in any
one fiscal year, and approximately 133% of the selling, general and
administrative expenses of the Company for the entire fiscal year ended
October 31, 2002. Accordingly, the Company has sufficient cash available to
operate for an entire year even if it did not generate any revenues or
profits.
o As of October 31, 2002, the Company had approximately $9,573,000 in current
assets, and only $443,000 of current liabilities.
o As of October 31, 2002, the Company had only $108,000 of outstanding
indebtedness (other than accounts payable and other current liabilities).
o As of October 31, 2002, the total amount of fixed commitments of the
Company (such as lease payments for its properties and equipment, and other
non-cancelable obligations) was $390,000.
In addition, the Company currently does not believe it will need to make
any material acquisitions in fiscal 2003. Management also believes that based on
the Company's financial condition at October 31, 2002, the absence of
outstanding bank debt, and its 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 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, 2002 were $4,144,000, a $602,000 decrease
from October 31, 2001. As part of its business strategy, and because of its
off-shore 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. Since
net sales declined during fiscal year ended October 31, 2002, the Company
allowed its inventory levels to decrease. By reducing the amount of new products
that the Company ordered to maintain its inventory during fiscal 2002, the
Company generated in excess of $602,000 of additional cash, which has increased
the Company's liquidity. The Company continuously monitors its inventory levels
and, depending on its sales expectations, may commence purchasing additional
inventory.
Although the net income for the current year was $380,000, net cash
provided by operating activities for the year ended October 31, 2002 was
$1,415,000. For the prior year ended October 31, 2001, net income was $874,000,
while cash provided by operating activities was only $505,000. The primary
reasons for the improved cash returns from operations for the 2002 fiscal year
included (i) the aforementioned $602,000 decrease in the amount spent on
purchasing additional inventories during fiscal 2002, and (ii) a $221,000
non-cash expense taken in fiscal 2002 as a result of the write-off of goodwill
associated with the Bioconnect acquisition.
Net cash provided by investing activities was $1,653,000 during fiscal 2002
compared to $66,000 for the previous year. The increase in the amount of cash
provided by investing activities is due to the liquidation of short-term money
market securities that the Company had purchased last year.
Net cash used in financing activities was $45,000 in the current year
compared to net cash used in financing activities of $213,000 for the previous
year. Net cash used in financing activities in both years represents payments on
loans payable.
Results of Operations:
The following summarizes the key components of the consolidated results of
operations for the years ended October 31, 2002 and 2001:
2002 2001
-------------------------------------- -------------------------------------
Amount % of Sales Amount % of Total Sales
---------------- ------------------ ---------------- ------------------
Net sales......................... $8,915,935 100.0% $9,481,889 100.0%
Cost of sales..................... 4,669,673 52.3% 4,700,546 49.6%
Gross profit...................... 4,246,262 47.6% 4,781,343 50.4%
Engineering expenses.............. 644,120 7.2% 505,426 5.3%
Selling and general expenses......
2,964,072 33.2% 2,876,983 30.3%
Impairment of goodwill........... 220,509 2.5% --- ---
Operating income.................. 417,561 4.7% 1,398,934 14.8%
Other income...................... 354,423 4.0% 159,575 1.7%
Income before income taxes........
771,984 8.7% 1,558,509 16.4%
Income taxes...................... 392,300 4.4% 684,000 7.2%
Net income........................ 379,684 4.3% 874,509 9.2%
Net sales of the Company decreased by $566,000, or 6%, for the fiscal year
ended October 31, 2002 compared to the fiscal year ended October 31, 2001. The
decrease in fiscal 2002 is attributable to an $886,000 decrease in sales at the
Company's RF Connector Division to $7,604,000 in fiscal 2002 from $8,490,000 in
fiscal 2001. The decrease in net sales in the RF Connector Division was
partially offset by an increase in sales at the Company's other two divisions.
For the October 31, 2002 fiscal year, net sales of Neulink Division increased by
$117,000 to $865,000 from $748,000 the previous year, and net sales for the
Bioconnect division increased by $380,000 to $697,000 from $317,000 in fiscal
2001.
The decrease in sales at the RF Connector division is attributable to a
decrease in connectors sold to the telecommunications industry. For the fiscal
year ended October 31, 2001, sales of connectors in the RF Connector Division
increased slightly compared to fiscal 2000. However, most of the increase
occurred during the first six months of fiscal 2001 when sales industry-wide
were still strong. Commencing with the second half of fiscal 2001 and continuing
through fiscal 2002, the connector industry as a whole experienced a decrease in
orders due to the retrenchment by many of the telecommunications companies. The
decrease in purchases from the telecommunications industry resulted in a
$886,000 decrease in connector sales in fiscal 2002 compared to fiscal 2001. In
fiscal 2001, the modest increase in connector sales was supplemented by
significant sales of cable assemblies, with sales of cable assemblies
representing almost $2,000,000 of net sales in fiscal 2001. During fiscal 2002,
cable assembly sales were only $1,398,000, a decrease of almost $600,000 from
fiscal 2001. The decrease in cable assembly revenues is due, in part, to a
mid-year cancellation of a connector sales order.
Net sales for the Neulink Division increased by $117,000 in fiscal 2002
compared to fiscal 2001. The primary reason for the increase is Neulink began to
offer consulting and engineering assistance to its customers. Neulink also
offered its customers cables, antennas and radio modems to optimize their end
use performance, thus increasing sales.
Net sales at Bioconnect for fiscal 2002 were $697,000 compared to net sales
of $317,000 in fiscal 2001. However, net sales for fiscal 2001 only represent
approximately 10 months of sales since Bioconnect was acquired during the 2001
fiscal year. The principal factor contributing to the net sales growth of
Bioconnect in fiscal 2002 is $249,000 of inter-company sales of cable assemblies
that Bioconnect manufactured for the RF Connector Division. The Bioconnect
division also made modest increases in sales of its core medical products during
fiscal 2002.
The Company's gross profit decreased by $566,000 to $4,246,000 in 2002 from
$4,781,000 in 2001 due to the decrease in net sales. As a percent of sales,
gross profit decreased to 47.6% in fiscal 2002 from 50.4% of sales in fiscal
2001. The decrease in the gross profit percentage is due primarily to a mid-year
cancellation of an order for cable assemblies. Since the Company had already
manufactured the custom made cable assemblies at the time of the cancellation,
the costs associated with the cancelled products is included in the cost of
sales, which thereby reduced gross profits for fiscal 2002. The Company received
a payment of $272,000 in connection with the cancellation of the order, which
payment is reflected as "Other Income" in the statement of income.
Engineering expenses increased by $139,000 from $505,000 in fiscal 2001 to
$644,000 in fiscal 2002. As a percent of sales, engineering expenses increased
from 5.3% in fiscal 2001 to 7.2% in fiscal 2002. The increase in engineering
expenses is attributable to an increase in the design and development of new
products that are expected to be released during the current fiscal year, to the
design of a new hand tool that the Company recently introduced, and to expenses
incurred by the Bioconnect division. The material portion of the increase was in
the Bioconnect Division was incurred in connection with the new cable assemblies
produced by the division.
During fiscal 2002, the Company wrote down the goodwill it had previously
recorded in connection with the acquisition of Bioconnect, which write down is
reflected as a $221,000 operating expense. No such write down occurred in fiscal
2001.
Selling and general expenses increased by $87,000, or by 3%, from
$2,877,000 in fiscal 2001 to $2,964,000 in fiscal 2002. The increase is
primarily due to increased travel and trade show expenses that were incurred in
an attempt to boost sales.
Operating income decreased by $981,000 from $1,399,000 in fiscal 2001 to
$418,000, in the previous year. The decrease in operating income is primarily
attributable to $440,000 operating loss incurred by the Bioconnect Division, the
$221,000 impairment to goodwill, and increases in both engineering and selling
and general expenses.
Other income increased by $195,000 due, as mentioned above to the $272,000
payment that the Company received in fiscal as payment for the cancellation of
an order. No such payment was received in fiscal 2001. Other income in both
fiscal 2001 and 2002 was offset in part by losses realized from the sale of
available-for-sale securities (a loss of $8,000 in fiscal 2002 and $107,000 in
the prior fiscal year). The Company has liquidated all of its securities
holdings and is no longer exposed to fluctuations in the value of such
securities. In addition, interest income decreased during the 2002 fiscal year
due to lower interest rates. In fiscal 2001, the Company received $171,000 of
commissions compared to only $23,000 of such commissions in fiscal 2002. The
commissions received by the Company represent payments received by the Company's
Neulink Division under an agreement with a third party. Under the third party
agreement, Neulink received a percentage of all sales revenues received by the
third party from a specified client of the third party. This contract with the
third party has expired, and the Company will no longer receive any such
commissions.
For fiscal 2001, the Company's overall tax rate was 43.9%. The Company's
overall tax rate in fiscal 2002 increased to 50.8% even though its taxable
income decreased. The tax rate increased in fiscal 2002 because the $221,000
impairment of goodwill that reduced the Company's operating income is not
deductible for tax purposes.
Net income decreased by $495,000 to $380,000, compared to net income of
$875,000 in fiscal 2001. The decrease in net income is due to the overall
decrease in net sales coupled with an increase in operating expenses, and a
material loss incurred by the Bioconnect Division.
ITEM 7. FINANCIAL STATEMENTS
The following Financial Statements of the Company with related Notes and
Accountants' Report are attached hereto as pages F-1 to F-20 and filed as part
of this Annual Report:
o Report of J.H. Cohn LLP, Independent Public Accountants
o Consolidated Balance Sheet as of October 31, 2002
o Consolidated Statements of Income for the years ended October 31, 2002 and
2001
o Consolidated Statements of Stockholders' Equity for the years ended October
31, 2002 and 2001
o Consolidated Statements of Cash Flows for the years ended October 31, 2002
and 2001
o Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference to the
information under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Exchange Act" of the Registrant's definitive Proxy
Statement and notice of the Company's 2003 Annual Meeting of Shareholders which
the Company will file with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this report.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" of the Registrant's
definitive Proxy Statement and notice of the Company's 2003 Annual Meeting of
Shareholders which the Company will file with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
report.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" of the Registrant's definitive Proxy Statement and notice of the
Company's 2003 Annual Meeting of Shareholders which the Company will file with
the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
of the Registrant's definitive Proxy Statement and notice of the Company's 2003
Annual Meeting of Shareholders which the Company will file with the Securities
and Exchange Commission within 120 days after the end of the fiscal year covered
by this report.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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)
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
--------------------------------
(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.
Reports on Form 8-K
None
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. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Sections 13a-14(c)
and 15d-14(c) of the Securities Exchange Act of 1934, as amended). Based upon
that evaluation, the Company's Chief Executive Officer and its Chief Financial
Officer concluded that the Company's disclosure controls and procedures, for a
company of its size, are adequate to ensure material information and other
information requiring disclosure are identified and communicated in a timely
fashion.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
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: January 28, 2003 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: January 28, 2003 By: /s/ Terrie A. Gross
----------------------------
Terrie A. Gross,
Chief Financial Officer
(Principal Accounting Officer)
Dated: January 28, 2003 By: /s/ Howard F. Hill
-----------------------------
Howard F. Hill,
Chief Executive Officer
Dated: January 28, 2003 By: /s/ John Ehret
-----------------------------
John Ehret, Director
Dated: January 28, 2003 By: /s/ Marvin Fink
-----------------------------
Marvin Fink, Director
Dated: January 28, 2003 By: /s/ Henry Hooper
-----------------------------
Henry Hooper, Director
Dated: January 28, 2003 By: /s/ Robert Jacobs
-----------------------------
Robert Jacobs, Director
Dated: January 28, 2003 By: /s/ Linde Kester
-----------------------------
Linde Kester, Director
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Howard F. Hill, certify that:
1. I have reviewed this annual report on Form 10-KSB of RF Industries, Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and l5d-14) for the registrant and we have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
o presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 28, 2003
/s/ Howard F. Hill
---------------------------
Name: Howard F. Hill
Its: Chief Executive Officer
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Terrie Gross, certify that:
1. I have reviewed this annual report on Form 10-KSB of RF Industries, Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and l5d-14) for the registrant and we have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
o presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 28, 2003
/s/ Terrie Gross
---------------------------
Name: Terrie Gross
Its: Chief Financial Officer
RF INDUSTRIES, LTD. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[ATTACHMENT TO ITEM 7]
PAGE
------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................................ F-2
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 2002 ...................................................... F-3
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2002 AND 2001 ................................. F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2002 AND 2001 ................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2002 AND 2001 ................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................... F-7/20
* * *
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
RF Industries, Ltd.
We have audited the accompanying consolidated balance sheet of RF INDUSTRIES,
LTD. AND SUBSIDIARY as of October 31, 2002, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
October 31, 2002 and 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RF
Industries, Ltd. and Subsidiary as of October 31, 2002, and their consolidated
results of operations and cash flows for the years ended October 31, 2002 and
2001, in conformity with accounting principles generally accepted in the United
States of America.
J.H. COHN LLP
San Diego, California
December 6, 2002
F-2
RF INDUSTRIES, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 2002
ASSETS
------
Current assets:
Cash and cash equivalents ................................... $ 3,939,299
Trade accounts receivable, net of allowance for
doubtful accounts of $84,806 ............................ 1,146,439
Notes receivable ............................................ 12,000
Inventories ................................................. 4,143,617
Other current assets ........................................ 169,396
Deferred tax assets ......................................... 162,600
-----------
Total current assets ................................. 9,573,351
-----------
Property and equipment:
Equipment and tooling ....................................... 1,082,813
Furniture and office equipment .............................. 251,514
-----------
1,334,327
Less accumulated depreciation ............................... 899,504
-----------
Total ................................................ 434,823
Notes receivable from related parties ........................... 56,505
Note receivable from stockholder ................................ 70,000
Other assets .................................................... 11,471
-----------
Total ................................................ $10,146,150
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable ........................................... $ 70,806
Notes payable .............................................. 44,582
Accrued expenses ........................................... 327,271
------------
Total current liabilities ........................... 442,659
Deferred tax liabilities ....................................... 107,800
------------
Total liabilities ................................... 550,459
------------
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 10,000,000 shares of $.01
par value; 3,441,054 shares issued ..................... 34,410
Additional paid-in capital ................................. 4,695,147
Retained earnings .......................................... 4,923,060
Receivables from sales of stock ............................ (1,715)
Treasury stock, at cost - 31,700 shares .................... (55,211)
------------
Total stockholders' equity .......................... 9,595,691
------------
Total ............................................... $ 10,146,150
============
See Notes to Consolidated Financial Statements
F-3
RF INDUSTRIES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2002 AND 2001
2002 2001
------------ ------------
Net sales ......................................... $ 8,915,935 $ 9,481,889
Cost of sales ..................................... 4,669,673 4,700,546
----------- -----------
Gross profit ...................................... 4,246,262 4,781,343
----------- -----------
Operating expenses:
Engineering ................................... 644,120 505,426
Selling and general ........................... 2,964,072 2,876,983
Impairment of goodwill ........................ 220,509
----------- -----------
Totals .................................... 3,828,701 3,382,409
----------- -----------
Operating income .................................. 417,561 1,398,934
----------- -----------
Other income:
Realized loss from sale of available-for-
sale securities ............................. (8,192) (107,185)
Commissions ................................... 23,101 171,229
Contract settlement ........................... 272,031
Interest ...................................... 67,483 95,531
----------- -----------
Totals .................................... 354,423 159,575
----------- -----------
Income before provision for income taxes .......... 771,984 1,558,509
Provision for income taxes ........................ 392,300 684,000
----------- -----------
Net income ........................................ $ 379,684 $ 874,509
=========== ===========
Earnings per share:
Basic ......................................... $ .11 $ .26
=========== ===========
Diluted ....................................... $ .09 $ .22
=========== ===========
See Notes to Consolidated Financial Statements
F-4
RF INDUSTRIES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2002 AND 2001
Accumulated
Other Total
Additional Unearned Compre- Receivables Stock-
Common Stock Paid-In Retained Compen- hensive from Sale Treasury holders'
Shares Amount Capital Earnings sation Loss of Stock Stock Equity
-------- --------- ------------ ----------- ---------- ----------- ----------- ---------- ---------
Balance,
October 31, 2001 ... 3,402,054 $34,021 $4,686,161 $3,668,867 $(117,546) $(40,890) $ (1,715) $(52,853) $8,176,045
Net income .......... 874,509 874,509
Effect of change in
fair value of available
-for-sale securities,
net of deferred taxes
of $21,900............ 32,904 32,904
---------
Comprehensive income.. 907,413
Purchase of treasury
stock .............. (2,358) (2,358)
Shares issued on
exercise of stock
options ............. 39,000 389 8,986 9,375
Amortization of
unearned compensation 94,056 94,056
--------- -------- ---------- ---------- --------- -------- -------- --------- -----------
Balance,
October 31, 2001 3,441,054 34,410 4,695,147 4,543,376 (23,490) (7,986) (1,715) (55,211) 9,184,531
Net income .......... 379,684 379,684
Effect of change in
fair value of available
for-sale securities,net
of deferred taxes
of $5,105 .......... 7,986 7,986
--------
Comprehensive income.. 387,670
Amortization of
unearned compensation 23,490 23,490
--------- -------- ---------- ---------- --------- -------- --------- --------- -----------
Balance,
October 31, 2002 .... 3,441,054 $34,410 $4,695,147 $4,923,060 $ $ $ (1,715) $(55,211) $9,595,691
========== ======== ========== ========== ========= ======== ========= ======== ===========
See Notes to Consolidated Financial Statements.
F-5
RF INDUSTRIES, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2002 AND 2001
2002 2001
---------- ---------
Operating activities:
Net income .............................................. $ 379,684 $ 874,509
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debts .............................. 60,000 11,702
Depreciation and amortization ........................ 162,226 143,760
Inventory deposit write-offs ......................... 30,294
Amortization of unearned compensation ................ 23,490 94,056
Deferred income taxes ................................ 12,700 124,000
Realized loss on sale of available-for-sale securities 8,192 107,185
Impairment of goodwill ............................... 220,509
Changes in operating assets and liabilities, net of
acquisition in 2001:
Trade accounts receivable ......................... (224,636) 396,767
Inventories ....................................... 602,508 (540,927)
Other assets ...................................... 158,010 (168,186)
Accounts payable .................................. (36,339) (324,371)
Accrued expenses .................................. 48,864 (243,763)
----------- -----------
Net cash provided by operating activities ..... 1,415,208 505,026
----------- -----------
Investing activities:
Proceeds from sale of securities ........................ 1,780,598 2,218,647
Investments in securities ............................... (30,910) (1,823,221)
Payment for acquisition, net of cash acquired ........... (147,078)
Capital expenditures .................................... (40,049) (182,405)
Loans to related parties ................................ (56,505)
----------- -----------
Net cash provided by investing activities ..... 1,653,134 65,943
----------- -----------
Financing activities:
Purchase of treasury stock .............................. (2,358)
Payments on loans payable ............................... (44,581) (220,371)
Proceeds from exercise of stock options ................. 9,375
----------- -----------
Net cash used in financing activities ......... (44,581) (213,354)
----------- -----------
Net increase in cash and cash equivalents ................... 3,023,761 357,615
Cash and cash equivalents at beginning of year .............. 915,538 557,923
----------- -----------
Cash and cash equivalents at end of year .................... $ 3,939,299 $ 915,538
=========== ===========
Supplemental cash flow information:
Income taxes paid ....................................... $ 91,000 $ 1,095,000
=========== ===========
See Notes to Consolidated Financial Statements.
F-6
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 is engaged in the design and distribution of coaxial
connectors used primarily in radio and other professional
communications applications (the "RF CONNECTOR Business Unit")
the design, manufacture and sale of radio links for receiving and
transmitting control signals for remote operation and monitoring
of equipment (the "NEULINK Business Unit") and the design,
manufacturing and distribution of electric cabling and
interconnect products to the medical monitoring market (the
"BIOCONNECT Business Unit"). Management considers each business
unit to be a separate business segment (see Note 6).
Principles of consolidation:
The consolidated financial statements include the accounts of RF
Industries, Ltd. (the "Parent") and its wholly-owned subsidiary,
Bioconnect, Inc. (collectively, the "Company"). All significant
intercompany accounts and transactions are eliminated in
consolidation.
Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts and disclosures.
Accordingly, actual results may differ from those estimates.
Cash equivalents:
The Company considers all highly-liquid investments with an
original maturity of three months or less when purchased to be
cash equivalents.
Revenue recognition:
Revenue from product sales is recognized when the product is
shipped. In addition, the Company has a strategic alliance with a
supplier where the Company recognizes commission income when
payment is received.
Investments:
Pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company's investments in mutual fund units 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 will be written down to fair value via a
charge to earnings. Unrealized holding gains and losses arising
from such valuation are excluded from income and recognized, net
of applicable income taxes, in accumulated other comprehensive
income until realized. The Company uses the specific
identification method to determine the cost basis for realized
gains or losses included in income.
F-7
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED 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.
Property and equipment:
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:
In June 2001, the Financial Accounting Standards Board issued
SFAS No. 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. The Company has elected early adoption of SFAS
No. 142 on November 1, 2001. At October 31, 2002, due to
recurring losses generated by its BIOCONNECT Business Unit, the
Company did not believe that there was sufficient projected cash
flows to support the net book value of the goodwill. AS a result,
the Company wrote off $220,509 of goodwill as of October 31,
2002.
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
approximately $78,440 and $76,000 in 2002 and 2001, respectively.
F-8
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED 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:
In accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), the Company will recognize compensation costs as a result
of the issuance of stock options based on the excess, if any, of
the fair value of the underlying stock at the date of grant or
award (or at an appropriate subsequent measurement date) over the
amount the employee must pay to acquire the stock. Therefore, the
Company is not required to recognize compensation expense as a
result of any grants of stock options at an exercise price that
is equivalent to or greater than fair value at the date of grant.
The Company also makes pro forma disclosures, as required by SFAS
No. 123, "Accounting for Stock-Based Compensation", of net income
as if a fair value based method of accounting for stock options
had been applied.
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-9
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(concluded):
Earnings per share (concluded):
The following table summarizes the calculation of basic and
diluted earnings per share:
2002 2001
---------- ----------
Numerators:
Net income (A) ................... $ 379,684 $ 874,509
========== ==========
Denominators:
Weighted average shares
outstanding for basic
earnings per share (B) ........ 3,441,054 3,383,030
Add effects of potentially
dilutive securities -
assumed exercise of
stock options ............... 609,584 600,469
---------- ----------
Weighted average shares
for diluted earnings
per share (C) .............. 4,050,638 3,983,499
========== ==========
Basic net earnings per share (A)/(B) ... $ .11 $ .26
========== ==========
Diluted net earnings per share (A)/(C) .. $ .09 $ .22
========== ==========
Comprehensive income:
Comprehensive income or loss is presented pursuant to SFAS No.
130, "Reporting Comprehensive Income," and, accordingly, has been
displayed for each year in the accompanying statements of
stockholders' equity and includes the net income or loss, plus or
minus the effect of the net change in the fair value of
available-for-sale securities each year, net of deferred income
taxes.
Reclassifications:
Certain 2001 amounts in the consolidated financial statements
have been reclassified to conform to the 2002 presentation.
F-10
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002, the balance exceeded the Federal
Deposit Insurance Corporation limitation for coverage of $100,000 by
$30,512. As of October 31, 2002, the Company had two unsecured money
market accounts totaling $2,052,803. 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 17% and 14% of total sales in 2002
and 2001, 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.
Note 3 - Investments:
Realized losses from sales of investments were $8,192 and $107,185 in
2002 and 2001, respectively.
The reclassification adjustment included in comprehensive income
during 2002 and 2001 consisted of net unrealized holding gains
(losses) arising during the year, net of deferred taxes of $206 and
($31,407), and adjustment for realized loss, net of deferred taxes
included in net earnings of $7,986 and $64,311, respectively.
Note 4 - Inventories:
Inventories consisted of the following as of October 31, 2002:
Raw materials and supplies ..................... $ 655,746
Finished goods ................................. 3,487,871
----------
Total ....................................... $4,143,617
==========
F-11
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Commitments:
The Company leases its facilities in San Diego, California under a
noncancelable operating lease. The lease expires in May 2005 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, 2002. The 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 October
2004.
Total rent expense under all operating leases totaled approximately
$174,000 and $165,000 in 2002 and 2001, respectively.
Minimum lease payments under these operating leases for years
subsequent to October 31, 2002 are as follows:
Year Ending
October 31, Amount
----------- ------------
2003 ......................... $157,700
2004 ......................... 151,700
2005 ......................... 80,300
--------
Total ...................... $389,700
========
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 provided for over the remaining term
of the agreement amounted to $311,000 at October 31, 2002.
Note 6 - Segment information:
The Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information. Pursuant to
the provisions of SFAS No. 131, the Company reports segment sales in
the same format reviewed by the Company's management (the "management
approach").
F-12
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Segment information (continued):
Management identifies the Company's segments based on strategic
business units that are, in turn, based along market lines. These
strategic business units offer products and services to different
markets in accordance with their customer base and product usage.
Accordingly, the Company's three business segments are centered on the
operations associated with the RF CONNECTOR Business Unit, the NEULINK
Business Unit and the BIOCONNECT Business Unit. Substantially all of
the Company's operations are conducted in the United States; however,
the Company derives a portion of its revenue from export sales. The
Company evaluates the performance of each segment based on income or
loss before income taxes. The Company allocates depreciation and
amortization and other indirect expenses at the rate of 92.5% to the
RF CONNECTOR Business Unit and 7.5% to the NEULINK Business Unit. The
basis for this allocation is based upon the number of personnel
employed in the Business Unit. During 2001, the Company reduced its
allocation of depreciation and other indirect expenses relating to the
NEULINK Business Unit. The change in the allocation of expenses was
due to a decrease in operating overhead relating to the NEULINK
Business Unit, as compared to the prior year.
Subsequent to year-end, the Company plans to incorporate the
Bioconnect Business Unit into its current Connector Business Unit.
The Company attributes revenues to geographic areas based on the
location of the customers. The following table presents the revenues
of the Company by geographic area for the years ended October 31, 2002
and 2001:
2002 2001
---------- ----------
United States ........................ $7,321,967 $7,807,112
Foreign countries .................... 1,593,968 1,674,777
---------- ----------
Totals ............................ $8,915,935 $9,481,889
========== ==========
During 2002, one customer of the RF CONNECTOR Business Unit generated
approximately 17% of total revenues. During 2001, the customer
generated approximately 14% of total revenues.
F-13
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Segment information (concluded):
Net sales, income (loss) before provision for income taxes and other
related segment information as of October 31, 2002 and for the years
ended October 31, 2002 and 2001 follows:
Common/ Intercompany
Connector Neulink Bioconnect Corporate Sales Total
----------- ---------- ------------- ----------- ------------ ------------
2002
Net sales ............ $ 7,603,859 $ 864,877 $ 696,319 $ (249,120) $8,915,935
Income (loss) before
provision for income
taxes .............. 1,414,864 (41,323) (660,848) $ 59,291 771,984
Depreciation and
amortization ....... 88,594 20,131 53,501 162,226
Total assets ......... 8,837,947 983,106 325,097 10,146,150
Additions to property
and equipment ...... 25,478 14,571 40,049
2001
Net sales ............ 8,490,105 748,027 325,540 (81,783) 9,481,889
Income (loss) before
provision for income
taxes .............. 2,022,468 (3,380) (448,925) (11,654) 1,558,509
Depreciation and
amortization ....... 80,763 13,509 49,488 143,760
Total assets ......... 8,236,449 1,271,220 177,277 9,684,946
Additions to property
and equipment ...... 124,590 57,815 182,405
F-14
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Income taxes:
The provision for income taxes consists of the following:
2002 2001
-------- --------
Current:
Federal .......................... $290,400 $437,000
State ............................ 89,200 123,000
-------- --------
379,600 560,000
-------- --------
Deferred:
Federal .......................... 10,700 100,000
State ............................ 2,000 24,000
-------- --------
12,700 124,000
-------- --------
Totals ........................ $392,300 $684,000
======== ========
Income tax at the Federal statutory rate is reconciled to the
Company's actual net provision for income taxes as follows:
2002 2001
---------------------- --------------------
% of Pretax % of Pretax
Amount Income Amount Income
-------- ------------- -------- -----------
Income tax at Federal
statutory rate ............. $ 262,500 34.0% $ 530,000 34.0%
State tax provision, net
of Federal tax benefit ..... 60,200 7.8 91,000 5.8
Nondeductible differences ..... 80,100 10.4
Increase in valuation allowance 33,900 2.2
Tax effect on capital loss .... (33,900) (2.2)
Other ......................... (10,500) (1.4) 63,000 4.1
--------- ---- --------- ----
Provision for income
taxes ............... $ 392,300 50.8% $ 684,000 43.9%
========= ==== ========= ====
The Company's total deferred tax assets and deferred tax liabilities
at October 31, 2002 are as follows:
Assets:
--------
Allowance for doubtful accounts ...................... $ 36,300
Inventory obsolescence ............................... 25,600
Accrued vacation ..................................... 43,400
State income taxes ................................... 30,300
Other ................................................ 60,900
---------
Total .............................................. 196,500
Liabilities:
-------------
Depreciation ........................................ (107,800)
Valuation allowance .................................. (33,900)
----------
Net deferred tax assets ......................... $ 54,800
==========
F-15
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Income taxes (concluded):
The other temporary differences generating net current and noncurrent
deferred tax assets and liabilities were primarily related to deferred
compensation and capital loss carryforward.
Note 8 - 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, 2001, a total of
143,860 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, 2002, a total of
33,555 options were still outstanding under the 1990 Non-Qualified
Plan, all of which are currently exercisable.
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, 2002, the authorized number of shares of common
stock that could be issued under the 2000 Option Plan was 320,000, of
which 57,651 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.
F-16
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Stock options (continued):
Compensatory stock option plans:
The Company granted options to two executives to purchase a total of
180,000 shares of common stock at $.10 per share pursuant to the terms
of their employment contracts dated February 1, 1998. The options to
purchase 45,000 shares are scheduled to vest and become exercisable
annually from March 1, 1998 through February 28, 2002. The difference
of $376,200 between the market value and the aggregate purchase price
of the shares subject to option at the date of grant was initially
recorded as unearned compensation and deducted from stockholders'
equity, and is being amortized over the vesting period. A total of
$23,490 and $94,056 was amortized to compensation expense in 2002 and
2001, respectively.
Additional required disclosures related to stock option plans:
Since the Company has elected to continue to use the provisions of APB
25 in accounting for stock options, no earned or unearned compensation
cost was recognized in the accompanying consolidated financial
statements for stock options other than the amounts attributable to
the compensatory options granted to the executives described above.
Had compensation cost been determined based on the fair value at the
grant date for all awards consistent with the provisions of SFAS 123,
the Company's net income and earnings per share in 2002 and 2001 would
have been reduced to the pro forma amounts set forth below:
2002 2001
--------- ---------
Net income - as reported ................. $379,684 $874,509
Net income - pro forma ................... $ 82,013 $524,616
Basic earnings per share:
As reported ........................... $.11 $.26
Pro forma ............................. $.02 $.16
Diluted earnings per share:
As reported ........................... $.09 $.22
Pro forma ............................. $.02 $.13
F-17
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Stock options (continued):
Additional required disclosures related to stock option plans
(continued):
The fair value of each option granted in 2002 and 2001 was estimated
on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2002 2001
-------- --------
Dividend yield ...................... 0% 0%
Expected volatility .................. 94% 87%
Risk-free interest rate .............. 3.85% 4.9%
Expected lives ....................... 10 years 10 years
Additional information regarding all of the Company's outstanding
stock options at October 31, 2002 and 2001 and changes in outstanding
stock options in 2002 and 2001 follows:
2002 2001
-------------------------- --------------------------
Weighted Weighted
Shares Average Shares Average
or Price Exercise or Price Exercise
Per Share Price Per Share Price
----------- --------- ---------- -----------
Options outstanding at
beginning of year .................... 1,125,334 1.67 857,514 1.24
Options granted ........................ 120,430 2.03 323,075 2.76
Options exercised ...................... (39,000) .24
Options forfeited ...................... (16,255) 3.73
---------- ---------
Options outstanding at end of year .... 1,245,764 1.71 1,125,334 1.67
========= =========
Option price range at end of year ..... $.10-$5.75 $.10-$5.75
Option price range for options
exercised during the year ........... $.10-$2.50
Weighted average fair value of
options granted during the year ..... $ 1.80 $2.40
====== =====
F-18
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Stock options (concluded):
Additional required disclosures related to stock option plans
(concluded):
The following table summarizes information about stock options
outstanding at October 31, 2002, all of which are at fixed-prices:
Weighted Average
Remaining
Contractual Life Number
Exercise Number of Options of Options
Price Outstanding Outstanding Exercisable
---------- ------------ ------------------ -------------
$ .10 506,000 1 yr. after termination 506,000
$1.33 8,000 7 yrs. 8,000
$1.50 100,000 8 yrs. 100,000
$1.56 25,960 7 yrs. 25,960
$1.59 15,555 6 yrs. 15,555
$1.87 6,000 6 yrs. 6,000
$2.13 4,000 5 yrs. 4,000
$2.26 41,170 9 yrs. 41,170
$2.50 5,000 5 yrs. 5,000
$2.66 81,905 9 yrs. 81,905
$2.90 200,000 1 yr. after termination 40,000
$4.35 10,000 8 yrs. 10,000
$4.88 6,000 4 yrs. 6,000
$5.12 88,442 8 yrs. 88,442
$5.75 27,302 4 yrs. 27,302
$2.07 106,430 10 yrs. 106,430
$1.76 14,000 10 yrs. 14,000
---------- ----------
1,245,764 1,085,764
========= =========
Note 9 - 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 2002 or 2001.
Note 10- Related party transactions:
The note receivable from stockholder of $70,000 at October 31, 2002 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 $56,505 at October 31,
2002 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 two properties owned by the
employees.
F-19
RF INDUSTRIES, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- Related party transactions (concluded):
Receivables from sales of stock arose from advances made to assist
officers and employees in the exercise of stock options and,
accordingly, are reported as a reduction of stockholders' equity in
the accompanying balance sheet. The receivables are interest free.
* * *
F-20