R F INDUSTRIES LTD - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
FOR
ANNUAL AND TRANSITION REPORTS
PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended October 31, 2008
or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to ________________.
Commission
File Number 0-13301
RF
INDUSTRIES, LTD.
(Name of
small business issuer in its charter)
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Nevada
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88-0168936
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(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer Identification No.)
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7610
Miramar Road, Bldg. 6000, San Diego, California 92126-4202
(Address
of principal executive offices) (Zip Code)
(858)
549-6340
(Issuer’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $.01 par value.
Securities
registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well known seasoned issuer, as defined in
Rule 405 of the Securities Act. ¨
Yes ý No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ¨
Yes ý No
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. ý
Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K (§229.405 of this chapter) is not contained herein, and will not
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-K
or any amendment to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company in
Rule 12b-2 of the Exchange Act.
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Large
Accelerated Filer
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¨ |
Accelerated
Filer
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o | |
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Non-accelerated
Filer
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o |
(Do
not check if a smaller reporting company)
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Smaller
reporting company
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x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨
Yes ý No
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. $20,166,606
On
January 14, 2009, the Registrant had 3,076,264 outstanding shares of
Common Stock, $.01 par value.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
statements in this Annual Report on Form 10-K, and other oral and written
statements made by the Company from time to time are “forward looking
statements” within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including those that discuss strategies, goals, outlook or
other non-historical matters, or projected revenues, income, returns or other
financial measures. In some cases forward-looking statements can be identified
by terminology such as “may,” “will,” “should,” “except,” “plan,” “anticipate,”
“believe,” “estimate,” “predict,” “potential” or “continue,” the negative of
such terms or other comparable terminology. These forward-looking statements are
subject to numerous risks and uncertainties that may cause actual results to
differ materially from those contained in such statements. Among the most
important of these risks and uncertainties are the ability of the Company to
continue to source its raw materials and products from its suppliers and
manufacturers, the market demand for its products, which market demand is
dependent to a large part on the state of the telecommunications industry, the
Company’s dependence on the success of its largest division, and
competition.
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-K, 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 devices and
wireless digital transmission systems. For internal operational purposes, and
for marketing purposes, the Company currently classifies its operations into the
following six related divisions: (i) The Connector and Cable Assembly Division
designs, manufactures and distributes coaxial connectors and cable assemblies
that are integrated with coaxial connectors; (ii) the Aviel Electronics Division
designs, manufactures and distributes specialty and custom RF connectors
primarily for aerospace and military customers, (iii) Worswick Division sells
coaxial and other connectors and cable assemblies primarily on a retail basis to
local multi-media and communications customers; (iv) the Bioconnect Division
manufactures and distributes cabling and interconnect products to the medical
monitoring market; (v) the Neulink Division is engaged in the design,
manufacture and sales of RF data links and wireless modems for receiving and
transmitting control signals for remote operation and monitoring of equipment,
personnel and monitoring services; and (vi) the RadioMobile Division is an
original equipment manufacturer (OEM) provider of end-to-end mobile management
solutions implemented over wireless networks that supplement the operations of
the Company’s Neulink division.
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.
The
Company maintains an Internet website at http://www.rfindustries.com. The
Company’s annual reports (previously on Form 10-KSB), quarterly reports (on Form
10-QSB and hereafter on Form 10-Q), current reports on Form 8-K and amendments
to such reports filed or furnished pursuant to section 13(a) or 15(d) of the
Securities and Exchange Act of 1934, as amended, and other information related
to the Company, are available, free of charge, on our website as soon as we
electronically file those documents with, or otherwise furnish them to, the
Securities and Exchange Commission. The Company’s Internet website and the
information contained therein, or connected thereto, are not and are not
intended to be incorporated into this Annual Report on Form 10-K.
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Operating
Divisions
Connector and Cable
Division The Connector and Cable Division is engaged in the
design, manufacture and distribution of coaxial connector solutions for
companies that design, build, operate, maintain and use wireless voice, data,
messaging, and location tracking systems. Coaxial connector products consist
primarily of connectors which, when attached to a coaxial cable, facilitate the
transmission of analog and digital signals in various frequencies. Although most
of the connectors are designed to fit standard products, the Company also sells
custom connectors specifically designed and manufactured to suit its customers’
requirements such as the Wi-Fi and broadband wireless markets. The Company
typically carries approximately 1,500 different SKUs of RF connectors that are
offered by the Connector and Cable Division. The Company’s RF
connectors are used in thousands of different devices, products and types of
equipment. While the models and types of devices, products and equipment may
change from year to year, the demand for the types of connectors used in such
products and offered by the Company does not fluctuate with the changes in the
end product incorporating the connectors. In addition, since the Company’s
standard connectors can be used in a number of different products and devices,
the discontinuation of one product does not make the Company’s connectors
obsolete. Accordingly, most connectors carried by the Company can be marketed
for a number of years and are only gradually phased out. Furthermore, because
the Company’s connector products are not dependent on any line of products or
any market segment, the Company’s overall sales of connectors do not fluctuate
materially when there are changes to any product line or market segment. Sales
of the Company’s connector products are more dependent upon the overall economy,
infrastructure build out by large telecommunications firms and on the Company’s
ability to market its products. However, the Company’s sales of connectors and
cable assemblies have increased in the past five out of six years as the overall
market demand for wireless products that use the Company’s connectors has
increased. Sales of connectors and cable assemblies increased in fiscal year
2008 compared to 2007 sales. The Company believes that the continuing growth in
new wireless products will result in an overall increase in the demand for the
radio frequency connectors and cable assemblies that the Company
distributes.
Third
party foreign manufacturers located in Asia manufacture the Company’s RF
connectors for the Company. The Company has been designing, producing and
selling coaxial connectors since 1987 and the Connector and Cable Division
therefore represents the Company’s oldest and most established division. The
Connector and Cable Division has during all of the recent fiscal years,
generated the majority of the Company’s revenues.
Cable
assembly products consist of various types of coaxial cables that are attached
to connectors (usually the Company’s connectors) for use in a variety of
communications applications. Cable assemblies are manufactured at the Company’s
California facilities using state of the art automation equipment and are sold
through distributors or directly to major OEM accounts. Cable assemblies consist
of both standard cable assemblies and assemblies that are custom manufactured
for the Company’s clients. The Company offers a line of cable assemblies with
over 100,000 cable products. The Company launched its cable assembly operations
in 2000, and cable assembly products constituted the second largest source of
revenues for the Company during the fiscal year ended October 31,
2008.
Aviel Electronics
Division The Company acquired the business and all of the
assets of Aviel Electronics in August 2004. Aviel has a 50 year history of
serving the microwave transmission industries, and is an approved vendor to
leading aerospace, electronics, OEM’s and government agencies in the United
States and abroad. Aviel complements the Company’s Connector and Cable
Division’s capabilities by providing additional custom design and manufacturing
capabilities, thereby expanding the Company’s products in the military and
commercial aerospace markets, and expanding the Company’s overall client
base. Aviel’s operations are based in Las Vegas,
Nevada.
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Worswick
Division The Company acquired the assets of Worswick
Industries, Inc., a privately held 20 year old California company based in San
Diego, in September 2005 as another complementary operation to the Connector and
Cable Division. Worswick Industries sells coaxial connector solutions and
manufactures RF cable assemblies for both individual customers and companies
that design, build, operate, and maintain personal and private multi-media,
wireless voice, data and messaging systems. Worswick Industries primarily sells
its products on a retail basis at its retail outlet in San Diego,
California. Worswick, however, also sells its products on-line under
the e-commerce brand OddCables.com.
Bioconnect
Division The Bioconnect Division is engaged in product
development, design, manufacture and sale of cables and interconnects for
medical monitoring applications, such as disposable ECG cables, EEG leads,
infant apnea monitors in hospitals, patient leads, snap leads and connecting
wires. The Company acquired the Bioconnect operations in
2000.
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 since 1984. These radio modems and receivers provide
high-speed wireless connections over longer distances where wire connections may
not be desirable or feasible. In addition to selling its own radio modem, RF
Neulink also distributes antennas, transceivers and related products of other
manufacturers. The RF Neulink Division also offers complete turn-key packages
for numerous remote data transmission applications.
RadioMobile
Division The Company acquired substantially all of the assets
and assumed certain liabilities of RadioMobile Inc., a privately held San Diego,
California on September 1, 2007. The RadioMobile Division is an OEM provider of
end-to-end mobile management solutions implemented over wireless networks.
Although the RadioMobile Division operates as a separate division, its
operations supplement the operations of the Company’s Neulink
division.
For
financial reporting purposes, the Company aggregates its operations into three
segments. Connector and Cable Assembly, Aviel Electronics, and
Worswick divisions are aggregated into one reporting segment (the RF Connector
and Cables Assembly segment) because they have similar economic characteristics,
while RF Neulink and RadioMobile are aggregated in the RF Wireless
segment. Bioconnect makes up the Company’s newest segment, the
Medical Cabling and Interconnector segment.
Product
Description
The
Company produces a broad range of interconnect products and assemblies. The
products that are offered and sold by the Company’s various divisions consist of
the following:
Connector
and Cable Products
The
Company’s Connector and Cable Division designs and distributes coaxial
connectors for the numerous products, devices and instruments. Coaxial
connectors have applications in commercial, industrial, automotive, scientific
and military markets. The types of connectors offered by the RF Connector
Division include 2.4mm and 3.5mm, 7-16 DIN, BNC, MCX, MHV, Mini-UHF, MMCX, N,
SMA, SMB, TNC, QMA and UHF. These connectors are offered in several
configurations for both plugs and jacks. There are hundreds of applications for
these connectors, some of which include digital applications, cellular and PCS
telephones, Wi-Fi and broadband wireless applications, cellular and PCS
infrastructure, GPS (Global Positioning Systems), mobile radio products,
aircraft, video surveillance systems, cable assemblies and test equipment. Users
of the Company’s connectors include telecommunications companies, circuit board
manufacturers, OEM, consumer electronics manufacturers, audio and video product
manufacturers and installers, and satellite companies. The Connector Division
markets approximately 1,500 types of connectors, which range in price from $0.40
to $125.00 per unit.
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The cable
assembly component of the Connector and Cable Division markets and manufactures
cable assemblies in a variety of sizes and combinations of RF coaxial connectors
and coax cabling. Cabling is purchased from a variety of major unaffiliated
suppliers and is assembled with the Company’s connectors as complete cable
assemblies. Coaxial cable assemblies have thousands of applications including
local area networks, wide area networks, Internet systems, PCS/cellular systems,
TV/dish network systems, test equipment, military/aerospace (mil-standard and
COTS (Commercial Off The Shelf)) and entertainment systems. Most cable
assemblies are manufactured to the purchaser’s specifications.
The
Connector and Cable Division also designs and sells a variety of connector tools
and hand tools that are assembled into kits used by lab and field technicians,
R&D technicians and engineers. The Company also designs and now offers some
of its own tools, which differ from those offered elsewhere in the market. These
tools are manufactured for the Company by outside contractors. Tool products are
carried as an accommodation to the Company’s customers and have not materially
contributed to the Company’s revenues.
Aviel
Electronics Products
The Aviel
Electronics Division designs, manufactures and sells specialized and custom
designed RF coaxial connectors. Aviel’s standard configuration and custom
connectors include connectors ranging from standard, miniature, sub-miniature
and unique interfaces. Aviel also specializes in the design and manufacture of
custom and non-standard configurations required for specific applications as
well as hard to locate and discontinued connectors for commercial, aerospace,
military and other unique applications.
Worswick
Products
Worswick
sells coaxial connectors and cable assemblies for numerous multi-media products,
devices and instruments in the local San Diego area. Worswick also produces and
markets cable assemblies in a variety of sizes and combinations of RF coaxial
connectors and coax cabling. Cabling is purchased from a variety of major
unaffiliated suppliers and is assembled with the Company’s connectors or third
party connectors as complete cable assemblies. Coaxial cable assemblies have
thousands of applications including local area networks, wide area networks,
Internet systems, PCS/cellular systems, TV/dish network systems, test equipment,
military/aerospace (mil-standard and COTS (Commercial Off The Shelf)) and
entertainment systems. Most cable assemblies are manufactured to the purchaser’s
specifications.
Bioconnect
Products
Bioconnect
designs, manufactures and sells and provides product development services to
OEMs for 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.
RF
Neulink Products
The
wireless data products available from the RF Neulink Division come in a variety
of configurations to satisfy the requirements of certain high-speed wireless
connection markets. Transmitter and receiver modules come in a wide range of
power output and frequency ranges and are used to transmit data, video or voice
information 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 Company is continuing to develop new wireless modems and
expects to release at least one new product during the fiscal year ending
October 31, 2009.
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The
products sold by the RF Neulink Division include both its own products and
products of other manufacturers that are distributed by the Neulink Division.
The products offered by the Neulink Division include:
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NL5000
– (replaced the RF 9600) as a cost effective, high performance telemetry
modem
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NL6000
UHF and VHF feature, high performance wireless
modems
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NL900
and NL2400 Spread Spectrum point to point wireless
modems
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Ornnex
Control Systems 900mhz Spread-Spectrum wireless modems and I/O
modules
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Teledesign
high-speed wireless modems in VHF, UHF and 900 MHz
frequencies
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BlueWave,
Maxrad, and Antenex antennas
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Custom
Design and Engineering services
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NL
900S – High-speed, high performance wireless data modem 900 MHz
frequency
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Current
applications in use worldwide for Neulink products are various and include
seismic and volcanic monitoring, industrial remote censoring/control in oil
fields, pipelines and warehousing, lottery remote terminals, various military
applications, remote camera control and tracking, perimeter and security system
control/monitoring, water and waste management, inventory control, HVAC remote
control and monitoring, biomedical hazardous material monitoring, fish farming
automation of food dispensing, water aeration and monitoring, remote emergency
generator startup and monitoring, and police usage for mobile warrant database
access.
In 2004
fiscal year, the Neulink Division introduced a new radio modem that it
developed. The NL6000 radio modem was repositioned within the marketplace to
compete against a more upscale market segment and was designed to meet the FCC’s
2004 mandatory requirement to provide narrow-band channels. This product is a
high-speed narrow band compliant radio modem that operates on a 12.5 KHz channel
at a 12 Kbps data transfer rate. In 2005, Neulink was chosen to develop a
different version of the NL6000 for the Stanford Research Institute and the U.S.
Marine Corps.
RadioMobile
Products
RadioMobile
provides complete hardware and software solutions for wireless mobile data
management application. Most of RadioMobile systems are custom engineered and
designed for specific markets. Accordingly, RadioMobile sales consist
of both hardware/software products and design and installation
services. The primary markets include public safety (police, fire,
and emergency medical services) and utilities and transportation (rail, bus,
taxi and courier services). Software applications for both host and mobile
environments are developed by in house engineers and contractors. Current and
new RadioMobile products include:
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IQ
Mobile V4, V5 – a mobile or client application that supports computing
needs for receiving priority messages, sending timely status’s, text
messages, file transfers and location data. IQ Mobile can
utilize any wireless network facility via IP or private
protocols.
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IQ
Map is an option that works with IQ Mobile to provide the mobile operator
map functions to show current location, destination or a combination of
both.
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IQ
Locator – a host based mapping application allowing agencies to track and
oversee fleet location and status.
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IQ
CAD – a call taking and dispatching application currently under
development for 911 and similar agencies that is designed to interface
with IQ Locator and the IQ Mobile client software. This product
is scheduled to be released for testing during the third quarter of the
current fiscal year.
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IQ
Gateway and Link – a host based networking concentrator and manager for
all wireless network interfaces including the customer’s private
conventional data channels. The Gateway is capable of routing data between
sites on the conventional network as well as other WIFI and broadband
public facilities.
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MCT8000-
a rugged mobile computing platform that utilizes all off the shelf
components for cpu, display, keyboard and network modules maintaining full
upgradeability for all elements.
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CMX6000-
a status and short message terminal capable of stand alone interface to
the network facilities.
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IQ
Liberator – a software defined modem capable of emulating legacy protocols
as well as generic IP packets operating at data rates from 2400 to
22,000bps.
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Foreign
Sales
Direct
export sales by the Company to customers in South America, Canada, Mexico,
Europe, Australia, the Middle East, and Asia accounted for $2,724,000 or
approximately 15% of Company’s sales for the fiscal year ended October 31,
2008. Foreign sales accounted for $2,273,000 of Company’s sales for
the prior fiscal year ended October 31, 2007. The majority of the
export sales during these periods were to Israel, Canada and
Mexico.
The
Company does not own, or directly operate any manufacturing operations or sales
offices in foreign countries.
Distribution,
Marketing and Customers
Sales
methods vary greatly between its divisions. The Connector and Cable Assembly
Divisions currently sell their products primarily through warehousing
distributors and OEM customers who utilize coaxial connectors and cable
assemblies in the manufacture of their products. Since there are many OEMs who
are not served by any of the Company’s distributors, the Company’s goal is to
increase the number of OEMs that purchase connectors directly from the
Company. OEM sales increased substantially during the past
fiscal year.
The Aviel
Division sells its products to its current customer base with the addition of
customers referred through the Connector and Cable Division. The Aviel and
Connector and Connector divisions sell to similar customer market segments and
combine marketing efforts where economically advantageous.
The
Worswick Division operates from a single location in San Diego and sells
primarily to walk-in or local multi-media (video, voice, gaming, etc.) and
communications systems customers. This division also operates an e-commerce
website called OddCables.com that it launched in 2007 for the distribution of
its products.
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The
Bioconnect group markets its products to the medical market through major
hospital suppliers, dealers and distributors. The Bioconnect Division also sells
its products to OEMs who incorporate the leads and cables into their product
offerings.
The
Neulink Division sells its products directly or through manufacturers
representatives, system integrators and OEM’s. System integrators and OEMs
integrate and/or mate Company’s products with their hardware and software to
produce turnkey wireless systems. These systems are then either sold or leased
to other companies, including utility companies, financial institutions,
petrochemical companies, government agencies, and irrigation/water management
companies.
The
RadioMobile division sells its products direct and through value added resellers
and dealers. Customers include police, fire, emergency medical services, rail,
bus, taxi and courier services.
Manufacturing
The
Company contracts with outside third parties for the manufacture of all its
coaxial connectors and for the components of its Neulink
products. However, virtually all of RF cable assemblies sold by the
Company during the fiscal year ended October 31, 2008 were manufactured by the
Company at its facilities in California, and the Neulink products are assembled
at the Company’s California facilities. The Connector and Cable Division has its
manufacturing performed at numerous International Standards Organization (ISO)
approved factories with plants in Japan, Korea, the United States and Taiwan.
The Company is dependent on a few manufacturers for its coaxial connectors and
cable assemblies. Although the Company does not have manufacturing agreements
with these manufacturers for its connectors, cable and Neulink products, the
Company does have long-term purchasing relationships with these manufacturers.
The Company has in-house design engineers who create the engineering drawings
for fabrication and assembly of connectors and cable assemblies and certain of
the components of its Neulink products. Accordingly, the manufacturers are not
primarily responsible for design work related to the manufacture of the
connectors and cable assemblies. However, the third party manufacturers of the
Neulink products are solely responsible for design work related to the
manufacture of the Neulink Division’s products. Neulink’s products
are manufactured by numerous manufacturers in the United States, and the Company
is not dependent on one or a few manufacturers for its Neulink
products.
The
Bioconnect Division has designed and manufactured its own products for over 20
years (including as an unaffiliated company before being acquired by the Company
in 2000). Bioconnect’s products are manufactured by the Company at
its own California facilities. The manufacturing process for the
Bioconnect medical cables includes all aspects of the product, from the design
to mold design, mold fabrication, assembly and testing. The Bioconnect product
line produces its medical interconnect products in both high volume
manufacturing and for custom or low volume uses.
The Aviel
Electronics Division manufactures all its connectors at its Las Vegas, Nevada
manufacturing facility. The Aviel Electronics Division has designed and
manufactured its own products for 50 years (including as an unaffiliated company
before being acquired by the Company in August 2004). The manufacturing process
for the Aviel connectors includes all aspects of the product from design,
tooling, fabrication, assembly and testing. The Aviel Electronics product line
produces its connector products for low volume custom manufacturing uses, for
the military, aerospace, communications and other unique
applications. During the past fiscal year, the Company acquired
additional equipment for this division that will enable Aviel to increase the
volume of connectors that it is able to manufacture.
The
Worswick Division designs and produces low to medium volume connector and cable
assemblies for local and niche customers, as well as a few medium and large
market customers. These services are conducted in San Diego,
California.
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The
RadioMobile division products are purchased from various U.S. and overseas
suppliers. Some products are designed and manufactured by third party
manufactures to RadioMobile specifications. The Company designs much
of the software used in RadioMobile’s systems.
There are
certain risks associated with the Company’s dependence on third party
manufacturers for some of its products, including reduced control over delivery
schedules, quality assurance, manufacturing costs, and the potential lack of
adequate capacity during periods of excess demand and increases in prices. See
“Risk Factors, below.”
Raw
Materials
Connector
materials are typically made of commodity metals such as copper, brass and zinc
and include small applications of precious materials, including silver and gold.
The Connector and Cable Division purchases most of its connector products from
contract manufacturers located in Asia and the United States. The Company
believes that the raw materials used in its products are readily available and
that the Company is not currently dependent on any supplier for its raw
materials. The Company does not currently have any long-term purchase or supply
agreements with its connector or Neulink product suppliers. The RF Connector and
Cable assembly division obtains coaxial connectors from RF Connector. The
Company believes there are numerous domestic and international suppliers of
coaxial connectors.
Neulink
purchases its electronic products from various U.S. suppliers, and all Neulink
wireless modem transceivers are built in the United States. The Company believes
electronic components used in these products are readily available from a number
of domestic suppliers and from other foreign suppliers.
Aviel
connector materials are typically made of commodity metals and include some
application of precious materials, including silver and gold. The Aviel
Electronic Division purchases almost all of its connector material from vendors
in Asia and the United States. The Company believes the connector materials used
in the manufacturing of its connector products are readily available from a
number of foreign and domestic suppliers.
Worswick
connectors and cable are typically acquired from the Connector and Cable
Division or purchased from other high quality manufacturers and
distributors.
Bioconnect
cable assembly materials are typically made of commodity materials such as
plastics, rubber, resins and wire. The Company believes materials and components
used in these products are readily available from a number of domestic suppliers
and from other foreign suppliers.
RadioMobile
purchases its electronic products from various U.S. and overseas
suppliers.
Employees
As of
October 31, 2008, the Company employed 94 full-time employees, of whom 36 were
in accounting, administration, sales and management, 55 were in manufacturing,
distribution and assembly, and three were engineers engaged in design,
engineering and research and development. The Company also occasionally hires
part-time employees. The Company believes that it has a good relationship with
its employees and, at this time, no employees are represented by a
union.
Research
and Development
The
Company has significantly increased its research and development activities
intended to produce new proprietary products that it can market to the wireless
connectivity industry. The Company engaged in approximately $256,000
of research and development activities in fiscal year ended October 31, 2008,
primarily related to the RF Wireless segment. Research and development expense
during fiscal 2008 increased as a result of the acquisition of the Radiomobile
division at the end of fiscal 2007 and the increased expenses related to the
development of new wireless products that are expected to be commercially
released by the end of the current fiscal year. During the fiscal year ended
October 31, 2007, the Company engaged in approximately $61,000 of research and
development activities.
- 8
-
In
addition to research and development activities, the Company also invested
approximately $1,304,000 during the past two fiscal years on engineering.
Engineering activities consist of the design and development of new products for
specific customers, as well as the design and engineering of new or redesigned
products for in the industry in general. Engineering work often is
carried out in collaboration with the Company’s customers.
The
increase in business in the military/aerospace sector has encouraged the Company
to develop an ISO 9000-like tracking system to improve its competitive edge, and
is exploring future ISO certification.
Patents,
Trademarks and Licenses
The
Company does not own any patents on any of its products, nor has it registered
any product trademarks. Because the Company carries thousands of separate types
of connectors and other products, most of which are available to the Company’s
customers from other sources, the Company does not believe that its business or
competitive position is dependent on patent protection.
Warranties
and Terms
The
Company warrants its products to be free from defects in material and
workmanship for varying warranty periods, depending upon the product. Products
are generally warranted to the dealer for one year, with the dealer responsible
for any additional warranty it may make. Certain Neulink products are sold
directly to end-users and are warranted to those purchasers. The RF Connector
products are warranted for the useful life of the connectors. Although the
Company has not experienced any significant warranty claims to date, there can
be no assurance that it will not be subjected to such claims in the
future.
The
Company usually sells to customers on 30-day terms pursuant to invoices and does
not generally grant extended payment terms. Sales to some foreign customers are
made on cash terms at time of shipment. Customers may delay, cancel, reduce, or
return products after shipment subject to a restocking charge.
Competition
Management
estimates that the Connector and Cable Division has over 50 competitors in the
approximately $2.0 billion worldwide annual RF connector market. Management
believes no one competitor has over 15% of the total market, while the three
leaders hold no more than 35% of the total market. Many of the competitors of
the Connector and Cable Division have significantly greater financial resources
and broader product lines. The Connector and Cable division competes on the
basis of product quality, product availability, price, service, delivery time
and value-added support to its distributors and OEM customers. Since the
Company’s strategy is to provide a broad selection of products in the areas in
which it competes and to have a ready supply of those products available at all
times, the Company normally has a significant amount of inventory of its
connector products. The Bioconnect division competes with numerous other
companies in all areas of its operations, including the manufacture of OEM
custom products and medical cable products. Most of the competitors of
Bioconnect are larger and have significantly greater financial resources than
Bioconnect.
There are
numerous small privately held manufacturers and marketers of connectors, but
Aviel Electronics has specialized in microwave and radio frequency (RF) custom
connectors which lowers the number of its direct competitors. Because Aviel
Electronics is an approved vendor of leading aerospace, electronics, OEM and
government agencies in the United States and abroad, competition is limited to
those manufacturers who have received formal certification or
approval.
- 9
-
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.
RadioMobile
competitors include Motorola, Intergraph, Northrup Gumman, Panasonic, and
cellular providers including Verizon Wireless and AT&T. Radiomobile’s
strategy is focusing on providing cost effective mobile data solutions to small
to medium size customers.
Government
Regulations
The
Company’s products are designed to meet all known existing or proposed
governmental regulations. Management believes that the Company currently meets
existing standards for approvals by government regulatory agencies for its
principal products. Because the products designed and sold by the Aviel
Electronics Division are used in commercial and military aerospace products, its
products are regulated by various government agencies in the United States and
abroad.
Neulink
products are subject to the regulations of the Federal Communications Commission
(FCC) in the United States, the Department of Communications (D.O.C.) in Canada,
and the future E.C.C. Radio Regulation Division in Europe. The Company’s present
equipment is “type-accepted” for use in the United States and Canada. Neulink
offers products that comply with current FCC, Industry Canada, and some European
Union regulations. The system integrator, or end user, is responsible for
compliance with applicable government regulations.
Bioconnect
products are subject to the regulations of the U.S. Food and Drug
Administration.
ITEM
1.A
RISK FACTORS
Investors
should carefully consider the risks described below and all other information in
this Form 10-K. The risks and uncertainties described below are not the only
ones facing the Company. Additional risks and uncertainties not presently known
to the Company or that it currently deems immaterial may also impair the
Company’s business and operations.
If any of
the following risks actually occur, the Company’s business, financial condition
or results of operations could be materially adversely affected. In such case,
the trading price of the Company’s common stock could decline and investors may
lose all or part of the money they paid to buy the Company’s common
stock.
Dependence
On The Connector and Cable Assembly Division
Of the
Company’s six operating divisions, the Connector and Cable Assembly division is
the largest, accounting for approximately 79% of the Company’s total sales for
the fiscal year ended October 31, 2008. Although the percentage of the Company’s
sales generated by the Connector and Cable Assembly division has decreased as
revenues from its other divisions has increased, the Company expects the
Connector and Cable Assembly 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 that division could materially adversely affect the
Company’s business, operating results and financial condition. Factors that
could adversely affect the Connector and Cable Division are described
below.
- 10
-
The
Company Depends On Third-Party Contract Manufacturers For A Majority Of Its
Connector Manufacturing Needs. If They Are Unable To Manufacture A Sufficient
Quantity Of High-Quality Products On A Timely And Cost-Efficient Basis, The
Company’s Net Revenue And Profitability Would Be Harmed And Its Reputation May
Suffer.
Substantially
all of the Company’s RF Connector products are manufactured by third-party
contract manufacturers. The Company relies on them to procure components for RF
Connectors and in certain cases to design, assemble and test its products on a
timely and cost-efficient basis. If the Company’s contract manufacturers are
unable to complete design work on a timely basis, the Company will experience
delays in product development and its ability to compete may be harmed. In
addition, because some of the Company’s manufacturers have manufacturing
facilities in Taiwan and Korea, their ability to provide the Company with
adequate supplies of high-quality products on a timely and cost-efficient basis
is subject to a number of additional risks and uncertainties, including
earthquakes and other natural disasters and political, social and economic
instability. If the Company’s manufacturers are unable to provide it with
adequate supplies of high-quality products on a timely and cost-efficient basis,
the Company’s operations would be disrupted and its net revenue and
profitability would suffer. Moreover, if the Company’s third-party contract
manufacturers cannot consistently produce high-quality products that are free of
defects, the Company may experience a higher rate of product returns, which
would also reduce its profitability and may harm the Company’s reputation and
brand.
The
Company does not currently have any agreements with any of its contract
manufacturers, and such manufacturers could stop manufacturing products for the
Company at any time. Although the Company believes that it could locate
alternate contract manufacturers if any of its manufacturers terminated their
business, the Company’s operations could be impacted until alternate
manufacturers are found.
The
Company’s Dependence On Third-Party Manufacturers Increases The Risk That It
Will Not Have An Adequate Supply Of Products Or That Its Product Costs Will Be
Higher Than Expected.
The risks
associated with the Company’s dependence upon third parties which develop and
manufacture and assemble the Company’s products, include:
|
·
|
reduced
control over delivery schedules and
quality;
|
|
·
|
risks
of inadequate manufacturing yields and excessive
costs;
|
|
·
|
the
potential lack of adequate capacity during periods of excess demand;
and
|
|
·
|
potential
increases in prices due to raw material and/or labor
costs.
|
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 of 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.
- 11
-
Dependence
Upon Independent Distributors To Sell And Market The Company’s
Products
The
Company’s sales efforts are primarily affected through independent distributors,
of which there were more than 70 as of the end of fiscal 2008. Sales through
independent distributors accounted for approximately 48% the net sales of the
Company for the fiscal year ended October 31, 2008. Although the Company has
entered into written agreements with most of the distributors, the agreements
are nonexclusive and generally may be terminated by either party upon 30-60
days’ written notice. The Company’s distributors are not within the control of
the Company, are not obligated to purchase products from the Company, and may
also sell other lines of products. There can be no assurance that these
distributors will continue their current relationships with the Company or that
they will not give higher priority to the sale of other products, which could
include products of competitors. A reduction in sales efforts or discontinuance
of sales of the Company’s products by its distributors would lead to reduced
sales and could materially adversely affect the Company’s financial condition,
results of operations and business. Selling through indirect channels such as
distributors may limit the Company’s contact with its ultimate customers and the
Company’s ability to assure customer satisfaction.
Dependence
On Principal Customer
One
customer accounted for approximately 15% of the total sales of the Company for
the fiscal year ended October 31, 2008. Although this customer has been an
on-going major customer of the Company for at least the past ten years and the
Company has entered into a written distributor agreement with this customer,
this customer does not have any minimum purchase obligations and could stop
buying the Company’s products at any time. A reduction, delay or cancellation of
orders from this customer or the loss of this customer could significantly
reduce the Company’s revenues and profits. The Company cannot provide assurance
that this customer or any of its current customers will continue to place
orders, that orders by existing customers will continue at current or historical
levels or that the Company will be able to obtain orders from new
customers.
Certain
of The Company’s Markets Are Subject To Rapid Technological Change, So the
Company’s Success In These Markets Depends On Its Ability To Develop And
Introduce New Products.
Although
most of the Company’s products have a stable market and are only gradually
phased out, certain of the new and emerging markets, such as the wireless
digital transmission markets, are characterized by:
|
·
|
rapidly
changing technologies;
|
|
·
|
evolving
and competing industry standards;
|
|
·
|
short
product life cycles;
|
|
·
|
changing
customer needs;
|
|
·
|
emerging
competition;
|
|
·
|
frequent
new product introductions and enhancements;
and
|
|
·
|
rapid
product obsolescence.
|
To
develop new products for the connector and wireless digital transmission
markets, the Company must develop, gain access to and use new technologies in a
cost-effective and timely manner. In addition, the Company must maintain close
working relationship with key customers in order to develop new products that
meet customers’ changing needs. The Company also must respond to changing
industry standards and technological changes on a timely and cost-effective
basis.
- 12
-
Products
for connector applications are based on industry standards that are continually
evolving. The Company’s ability to compete in the future will depend on its
ability to identify and ensure compliance with these evolving industry
standards. If the Company is not successful in developing or using new
technologies or in developing new products or product enhancements, its future
revenues may be materially affected. The Company’s attempt to keep up with
technological advances may require substantial time and expense.
The
Markets In Which The Company Competes Are Highly Competitive.
The
markets in which the Company operates are highly competitive and the Company
expects that competition will increase in these markets. In particular, the
connector and communications markets in which the Company’s products are sold
are intensely competitive. Because the Company does not own any proprietary
property that can be used to distinguish the Company from its competitors, the
Company’s ability to compete successfully in these markets depends on a number
of factors, including:
|
·
|
success
in subcontracting the design and manufacture of existing and new products
that implement new technologies;
|
|
·
|
product
quality;
|
|
·
|
reliability;
|
|
·
|
customer
support;
|
|
·
|
time-to-market;
|
|
·
|
price;
|
|
·
|
market
acceptance of competitors’ products;
and
|
|
·
|
general
economic conditions.
|
In
addition, the Company’s competitors or customers may offer enhancements to its
existing products or offer new products based on new technologies, industry
standards or customer requirements that have the potential to replace or provide
lower-cost or higher performance alternatives to the Company’s products. The
introduction of enhancements or new products by the Company’s competitors could
render its existing and future products obsolete or unmarketable.
Many of
the Company’s competitors have significantly greater financial and other
resources. In certain circumstances, the Company’s customers or potential
customers have internal manufacturing capabilities with which the Company may
compete.
If
The Industries Into Which The Company Sells Its Products Experience Recession Or
Other Cyclical Effects Impacting The Budgets Of Its Customers, The Company’s
Operating Results Could Be Negatively Impacted.
The
primary customers for the Company’s coaxial connectors are in the 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.
- 13
-
International
Sales, Operations and Foreign Currency Exposure.
Sales to
customers located outside the United States, either directly or through U.S. and
foreign distributors, accounted for approximately 15% of the net sales of the
Company during each of the past two fiscal years. International revenues are
subject to a number of risks, including:
|
·
|
longer
accounts receivable payment cycles;
|
|
·
|
difficulty
in enforcing agreements and in collecting accounts
receivable;
|
|
·
|
tariffs
and other restrictions on foreign
trade;
|
|
·
|
economic
and political instability; and the
|
|
·
|
burdens
of complying with a wide variety of foreign
laws.
|
The
Company’s foreign sales are also affected by general economic conditions in its
international markets. A prolonged economic downturn in its foreign markets
could have a material adverse effect on the Company’s business. There can be no
assurance that the factors described above will not have an adverse material
effect on the Company’s future international revenues and, consequently, on the
financial condition, results of operations and business of the
Company.
Since
sales made to foreign customers or foreign distributors have historically been
in U.S. dollars, the Company has not been exposed to the risks of foreign
currency fluctuations. However, if the Company in the future is required to
accept sales denominated in the currencies of the countries where sales are
made, the Company will thereafter also be exposed to currency fluctuation
risks.
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’s employment agreement with Mr.
Hill expires by its terms on June 20, 2011. If the Company lost the services of
Mr. Hill or one or more of the Company’s key executives or employees (including
if one or more of the Company’s officers or employees decided to join a
competitor or otherwise compete directly or indirectly with the Company), this
could materially adversely affect the Company’s business, operating results, and
financial condition.
Changes
in Stock Option Accounting Rules have Adversely Affected The Company’s Reported
Operating Results, And Therefore May Adversely Affect The Company’s Stock Price
And The Company’s Ability To Attract And Retain Employees
Since
November 1, 2006, the Company is subject to the rules of the Financial
Accounting Standards Board, Statement of Financial Accounting Standards No. 123
I, “Share-Based Payment,” which rules require it to record all stock-based
employee compensation as an expense. These financial accounting rules apply to
stock options grants, as well as a wide range of other share-based compensation
arrangements. Historically, the Company has compensated almost all of its
full-time employees, and all of its officers and directors, with such share-
based compensation awards in order to limit its cash expenditures and to attract
and retain its employees, officers and directors. Accordingly, if the Company
continues to grant stock options or other share-based compensation awards to its
officers, directors, employees, and consultants, its future earnings, if any,
will be reduced (or the Company’s future losses will be increased) by the
expenses recorded for those grants. Since the Company is a small company, the
expenses it will have to record as a result of future options grants may be
significant and may materially negatively affect its reported financial results.
This may have an adverse effect on the Company’s future financial statements,
may reduce the Company’s stock price, and may make it more difficult for the
Company to attract new investors.
- 14
-
The
Company May Make Future Acquisitions, Which Will Involve Numerous
Risks.
Since
August 2004, the Company has purchased the operations of three smaller
businesses (Aviel Electronics in Las Vegas, Nevada, in August 2004; Worswick
Industries Inc. in San Diego, California, in September 2005; and Radiomobile,
Inc. in San Diego, California, in September 2007). The Company periodically
considers potential acquisitions of other companies that could expand the
Company’s product line or customer base and may in the future make additional
acquisitions. Accordingly, the Company may in the future acquire one or more
additional companies. The risks involved with such future acquisitions
include:
|
·
|
diversion
of management’s attention;
|
|
·
|
the
effect on the Company’s financial statements of the amortization of
acquired intangible assets;
|
|
·
|
the
cost associated with acquisitions and the integration of acquired
operations;
|
|
·
|
the
Company may not be able to secure capital to finance future acquisitions
to the extent additional debt or equity is needed;
and
|
|
·
|
assumption
of unknown liabilities, or other unanticipated events or
circumstances.
|
Any of
these risks could materially harm the Company’s business, financial condition
and results of operations. There can be no assurance that any business that the
Company acquires will achieve anticipated revenues or operating
results.
The
Company Has No Exclusive Intellectual Property Rights In The Technology Employed
In Its Products, Which May Limit the Company’s Ability To Compete.
The
Company does not hold any United States or foreign patents and does not have any
patents pending. In addition, the Company does not have any other exclusive
intellectual property rights in the technology employed in its products. The
Company does not actively seek to protect its rights in the technology that it
develops or that the Company’s third-party contract manufacturers develop. In
addition, these parties share the technologies with other parties, including
some of the Company’s competitors. Accordingly, competitors can and do sell the
same products as the Company, and the Company cannot prevent or restrict such
competition.
Volatility
of Trading Prices
In the
past several years the market price of the Company’s common stock has varied
greatly, and the volume of the Company’s common stock traded has fluctuated
greatly as well. These fluctuations often occur independently of the Company’s
performance or any announcements by the Company. Factors that may result in such
fluctuations include:
|
·
|
any
shortfall in revenues or net income from revenues or net income expected
by securities analysts
|
- 15
-
|
·
|
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
|
|
·
|
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
|
|
·
|
general
conditions in the connector and communications
industries
|
|
·
|
changes
in the Company’s revenue growth rates or the growth rates of the Company’s
competitors
|
|
·
|
sales
of large blocks of the Company’s common
stock
|
|
·
|
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
1B. UNRESOLVED
STAFF COMMENTS
Not
applicable.
ITEM
2. DESCRIPTION
OF PROPERTY
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 its corporate administration, sales and
marketing, and engineering plus production and warehousing for the Company’s
Connector and Cable Assembly and Bioconnect Divisions. The lease for this
facility expires on May 31, 2010. In addition, the Company also leases the
following facilities:
|
|
(i)
|
The
cable assembly manufacturing portion of the Connector and Cable Assembly
Division operates in a separate 3,180 square foot facility that is located
adjacent to the Company’s corporate headquarters. The lease for this space
expires on May 31, 2010.
|
|
|
(ii)
|
The
Neulink and Radiomobile Divisions operate from a separate building that is
located near the Company’s corporate headquarters at 7606 Miramar Road,
Building 7200. Neulink’s building consists of approximately 2,500 square
feet of administrative and manufacturing space and houses the production
and sales staff of the Neulink Division. The lease for this space expires
on May 31, 2010.
|
|
|
(iii)
|
The
Aviel Electronics Division currently leases approximately 3,000 square
feet of a facility located at 5530 S. Valley View Blvd., Suite 103, Las
Vegas, Nevada. The Company renewed the lease for the Las Vegas offices,
which will now expire March 31,
2010.
|
|
|
(iv)
|
The
Worswick Division currently leases an approximately 6,000 square foot
facility located at 7352 Convoy Court, San Diego, California. The Company
renewed the lease, which will now expire May 31,
2009.
|
The
aggregate monthly rental for all the Company’s facilities currently is
approximately $35,000 per month, plus utilities, maintenance and insurance as of
October 31, 2008.
- 16
-
The
Company currently believes that its facilities are sufficient to meet its
foreseeable needs. However, should the Company require additional space; the
Company believes that suitable additional space is available near the Company’s
current facilities. In addition, the Company believes that it will be able to
renew its existing leases upon the expiration of the current leases or, if
desirable or necessary, relocate to alternate facilities on substantially
similar terms.
ITEM
3.
LEGAL PROCEEDINGS
From time
to time, the Company is involved in legal proceedings that are related to its
business operations. The Company is not currently a party to any legal
proceedings that could have a material adverse effect upon its financial
position or results of operations.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did
not submit any matters to the vote of our shareholders in the fourth quarter of
fiscal 2008.
PART
II
|
ITEM5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
The
Company’s Common Stock is listed and trades on the NASDAQ Capital Market under
the symbol “RFIL.”
For the
periods indicated, the following tables sets forth the high and low sales prices
per share of Common Stock. These prices represent inter-dealer quotations
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.
|
Quarter
|
High
|
Low
|
||||||
|
Fiscal
2008
|
||||||||
|
November
1, 2007 – January 31, 2008
|
$ | 7.53 | $ | 5.20 | ||||
|
February
1, 2008 – April 30, 2008
|
6.26 | 5.20 | ||||||
|
May
1, 2008 – July 31, 2008
|
8.50 | 5.69 | ||||||
|
August
1, 2008 – October 31, 2008
|
8.98 | 2.66 | ||||||
|
Fiscal
2007
|
||||||||
|
November
1, 2006 – January 31, 2007
|
$ | 9.57 | $ | 6.15 | ||||
|
February
1, 2007 – April 30, 2007
|
8.38 | 5.33 | ||||||
|
May
1, 2007 – July 31, 2007
|
6.25 | 5.20 | ||||||
|
August
1, 2007 – October 31, 2007
|
7.67 | 5.40 | ||||||
Stockholders. As
of October 31, 2008 there were 450 holders of the Company’s Common Stock
according to the records of the Company’s transfer agent, Continental Stock
Transfer & Trust Company, New York, New York, not including holders who hold
their stock in “street name”.
Dividends. The
Company paid dividends of $.12 per share (a total of $394,343) during fiscal
2008. The Board of Directors may declare dividends in the future depending on
the Company’s financial condition and its financial needs.
- 17
-
Recent Sales of Unregistered
Securities. There were no previously unreported sales of
equity securities by the Company that were not registered under the Securities
Act during fiscal 2008.
Repurchase of
Securities. In September 2008, the Company announced that our
Board of Directors had authorized a stock repurchase program to repurchase up to
100,000 shares of the Company’s common stock. In October 2008,
Company announced that our Board of Directors had authorized a stock repurchase
program to repurchase up to an additional 100,000 shares of the Company’s common
stock. The repurchases were to be made from time to time in the open market or
in privately negotiated transactions in compliance with the Securities Exchange
Act of 1934, or the Exchange Act, Rule 10b-18.
|
Period:
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans of
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs (1)
|
||||||
|
September
1, 2008 through September 30, 2008
|
21,675
|
$
|
5.66
|
21,675
|
$
|
943,000
|
||||
|
October
1, 2008 through October 31, 2008
|
78,325
|
$
|
5.23
|
78,325
|
$
|
533,000
|
||||
|
Total:
|
100,000
|
100,000
|
||||||||
_________________________________
|
(1)
|
Represents
weighted average price paid per share during the quarter ended October 31,
2008.
|
EQUITY
COMPENSATION PLAN INFORMATION
The
following table provides information as of October 31, 2008 with respect to the
shares of Company common stock that may be issued under the Company’s existing
equity compensation plans.
|
A
|
B
|
C
|
|||||
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding
Options
|
Weighted
Average Exercise Price of Outstanding Options ($)
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected in Column
A)
|
||||
|
Equity
Compensation Plans Approved by Stockholders (1)
|
566,170
|
$
|
5.75
|
540,474
|
|||
|
Equity
Compensation Plans Not Approved by Stockholders (2)
|
500,871
|
$
|
1.53
|
0
|
|||
|
Total
|
1,067,041
|
$
|
3.77
|
540,474
|
|||
|
(1)
|
Consists
of options granted under the R.F. Industries, Ltd. (i) 2000 Stock Option
Plan, (ii) the 1990 Incentive Stock Option Plan, and (iii) the 1990
Non-qualified Stock Option Plan. The 1990 Incentive Stock Option Plan and
Non-qualified Stock Option Plan have expired, and no additional options
can be granted under these plans. Accordingly, all 540,474 shares
remaining available for issuance represent shares under the 2000 Stock
Option Plan.
|
|
(2)
|
Consists
of options granted to six officers and/or key employees of the Company
under employment agreements entered into by the Company with each of these
officers and employees.
|
- 18
-
ITEM
6.
SELECTED FINACIAL DATA
Not
applicable.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make significant estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, expenses and related
disclosure of contingent assets and liabilities. We evaluate our estimates,
including those related to bad debts, inventory reserves and contingencies on an
ongoing basis. We base our estimates on historical experience and on various
other assumptions that are believed to be appropriate under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
One of
the accounting policies that involves significant judgments and estimates
concerns our inventory valuation. Inventories are valued at the weighted average
cost value. Certain items in the inventory may be considered obsolete or excess
and, as such, we establish an allowance to reduce the carrying value of these
items to their net realizable value. Based on estimates, assumptions and
judgments made from the information available at the time, we determine the
amounts of these allowances. Because inventories have, during the past few
years, represented over one-third of our total assets, any reduction in the
value of our inventories would require us to take write-offs that would affect
our net worth and future earnings.
Another
accounting policy that involves significant judgments and estimates is our
accounts receivable allowance valuation. The Company routinely assesses the
financial strength of its customers and maintains an allowance for doubtful
accounts that management believes will adequately provide for credit
losses.
The
Company uses the Black-Scholes model to value the stock option grants which
involves significant judgments and estimates.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
For
recently issued accounting pronouncements that may affect us, see Note 1 of
Notes to Financial Statements.
OVERVIEW
The
Company markets connectors and cables to numerous industries for use in
thousands of products, primarily for the wireless market. The largest business
unit consists of the Connector and Cable Assembly Division which, together with
the Aviel Electronics Division and the Worswick Industries Division, markets and
sells RF cables and connectors. The Bioconnect Division operates in the medical
connector product market, while the Neulink and RadioMobile Divisions operate in
the high-speed wireless data connection market. During fiscal year 2008 ended
October 31, 2008 the RF cable and connector products represented 79% of the
Company’s sales, while the medical connector division and the wireless data
connection operations represented 9% and 12%, respectively, of the Company’s
total sales.
- 19
-
Historically,
over 79% of the Company’s revenues are generated from the sale of RF connector
products and connector cable assemblies. Sales of connectors are expected to
continue to be the largest portion of revenues in the future, despite the
purchase of the RadioMobile wireless division in September 2007. Accordingly,
Company revenues are heavily dependent upon sales of RF connectors and cable
assemblies. However, the Company sells thousands of connector products for uses
in thousands of end products and sales are not dependent upon any one industry
sector or any single product. As a result, the Company’s revenues and expenses
are typically not subject to major fluctuations. During the fiscal year ended
October 31, 2008, net sales increased by 19% over the net sales in the prior
year.
The net
income generated by the Company for the fiscal year ended October 31, 2008
represented the 15th consecutive year that the Company has been
profitable.
The
Company generated cash from operations of $1,144,000, used $691,000 in financing
activities, and used $461,000 for capital expenditures. The amount of cash and
cash equivalents, and investments in available-for-sale securities held by the
Company as of October 31, 2008 remained substantially unchanged at $7,925,000,
compared to $7,932,000 in the prior year. Since the Company has no debt other
than normal accounts payable, accrued expenses, and other long-term liabilities,
the Company will continue to have sufficient cash to fund all of its anticipated
financing and liquidity needs for the foreseeable future.
Financial
Condition
The
following table presents certain key measures of financial condition as of
October 31, 2008 and 2007:
|
2008
|
2007
|
|||||||||||||||
|
Amount
|
%
Total Assets
|
Amount
|
%
Total Assets
|
|||||||||||||
|
Cash
and cash equivalents and investments available for sale
|
$ | 7,924,549 | 44.6 | % | $ | 7,932,246 | 49.2 | % | ||||||||
|
Current
assets
|
16,705,149 | 94.0 | % | 15,351,272 | 95.2 | % | ||||||||||
|
Current
liabilities
|
1,323,198 | 7.5 | % | 1,069,700 | 6.6 | % | ||||||||||
|
Working
capital
|
15,381,951 | 86.5 | % | 14,281,572 | 89.0 | % | ||||||||||
|
Property
and equipment - net
|
565,860 | 3.2 | % | 255,693 | 1.6 | % | ||||||||||
|
Total
assets
|
17,767,773 | 100.0 | % | 16,128,158 | 100.0 | % | ||||||||||
|
Stockholders’
equity
|
16,121,690 | 90.7 | % | 14,940,793 | 92.6 | % | ||||||||||
Liquidity
and Capital Resources
Management
believes that its existing current assets and the amount of cash it anticipates
it will generate from current operations will be sufficient to fund the
anticipated liquidity and capital resource needs of the Company for the fiscal
year ending October 31, 2009. 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 based on the
following:
|
·
|
As
of October 31, 2008, the amount of cash and cash equivalents and
short-term investments available-for-sale was equal to $7,924,549 in the
aggregate. Accordingly, the Company believes that it has sufficient cash
available to operate its current business and fund its currently
anticipated capital expenditure for the upcoming
year.
|
|
·
|
As
of October 31, 2008, the Company had $16,705,149 in current assets, and
only $1,323,198 in current
liabilities.
|
Management
believes that based on the Company’s financial condition at October 31, 2008,
the absence of outstanding bank debt, and its recent operating results there are
sufficient capital resources to fund its operations and future acquisitions for
at least the next twelve months. Should the Company need to obtain additional
funds for its unexpected acquisitions of assets or other expansion activities,
based on its balance sheet and its history of profitability, the Company
believes that it would be able to obtain bank loans to finance these
expenditures. However, there can be no assurance any bank loan would be
obtainable, or if obtained, would be on favorable terms or
conditions.
- 20
-
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.
As part
of its business strategy, and because of its offshore manufacturing
arrangements, the Company normally maintains a high level of inventory. As
described elsewhere in this Annual Report, one of the Company’s competitive
advantages and strategies is to maintain customer satisfaction by having
sufficient inventory on hand to fulfill most customer orders on short notice.
Accordingly, the Company maintains a significant amount of inventory, which
increases or decreases to reflect the Company’s sales and lead times for
products. Because sales increased by 19% during fiscal 2008, the Company
increased its inventories 20% compared to the prior year inventory balance. The
Company continuously monitors its inventory levels and product costs, and
because of continued increases in sales or raw material costs, may continue
increasing its inventory levels.
Net cash
provided by operating activities for the year ended October 31, 2008 was
$1,144,000. The Company’s net cash from operations was less than its
net income of $1,559,000 due to $994,000 increase in inventory, which reduction
of net cash was partially offset by noncash stock-based compensation expense of
$500,000 and noncash depreciation and amortization of $211,000. In fiscal year
ended October 31 2007, net cash provided by operating activities was $1,733,000
primarily due to net income of $1,135,000, plus noncash stock-based compensation
expense of $572,000, and non cash depreciation and amortization of
$269,000.
During
fiscal 2008, net cash used in investing activities was $2,793,000, of which
$2,332,000 was for the purchase of treasury bills and other available-for-sale
securities. The balance represents $461,000 invested in additional capital
equipment (primarily for the Aviel division). During fiscal 2007, net cash used
in investing activities was $2,545,000 of which $2,284,000 was used for the
purchase of treasury bills and other available-for-sale securities. The balance
represented $94,000 invested in additional capital equipment and $167,000 used
for the acquisition of the RadioMobile division.
In fiscal
2008, financing activities decreased the Company’s net cash by $691,000 due to
dividends paid of $394,000, $533,000 used to repurchase 100,000 shares of its
own common stock of which expenditures were partially offset by the receipt of
$190,000 from the exercise of stock options, and $46,041 of excess tax benefits
from stock-based compensation. In fiscal 2007, financing activities decreased
the Company’s net cash by $401,000 due to dividends paid of $196,000 and
$600,000 used to repurchase 103,308 shares of its own common stock, which
expenditures were partially offset by the receipt of $198,000 from the exercise
of stock options, and $198,000 of excess tax benefits from stock-based
compensation.
Results
of Operations
The
following summarizes the key components of the results of operations for the
fiscal years ended October 31, 2008 and 2007:
|
2008
|
2007
|
|||||||||||||||
|
Amount
|
%
of Net Sales
|
Amount
|
%
of Net Sales
|
|||||||||||||
|
Net
sales
|
$ | 17,695,146 | 100 | % | $ | 14,853,039 | 100 | % | ||||||||
|
Cost
of sales
|
8,789,604 | 50 | % | 7,937,251 | 53 | % | ||||||||||
|
Gross
profit
|
8,905,542 | 50 | % | 6,915,788 | 47 | % | ||||||||||
|
Engineering
expenses
|
1,050,574 | 6 | % | 571,237 | 4 | % | ||||||||||
|
Selling
and general expenses
|
5,341,576 | 30 | % | 4,625,065 | 31 | % | ||||||||||
|
Operating
income
|
2,513,392 | 14 | % | 1,719,486 | 12 | % | ||||||||||
|
Other
income
|
258,381 | 1 | % | 359,113 | 2 | % | ||||||||||
|
Income
before income taxes
|
2,771,773 | 16 | % | 2,078,599 | 14 | % | ||||||||||
|
Income
taxes
|
1,212,540 | 7 | % | 943,376 | 6 | % | ||||||||||
|
Net
income
|
1,559,233 | 9 | % | 1,135,223 | 8 | % | ||||||||||
- 21
-
Net sales
of the Company increased by approximately $2,842,000 or 19%, for the fiscal year
ended October 31, 2008 (“fiscal 2008”) compared to the fiscal year ended October
31, 2007 (“fiscal 2007”). Net sales increased in fiscal 2008 due to
increases in net sales at all three of the Company’s financial reporting
segments. Net sales at the Connector and Cable Assembly segment
increased from fiscal 2007 by approximately $1,123,000. The Company
believes that the increase was primarily due to an increase in infrastructure
projects that commenced during the second half of fiscal 2007 and continued on
throughout fiscal 2008. Approximately $744,000 of the total increase in net
sales related to an increase in net sales at the Medical Cabling and
Interconnector segment, which increase was due to increased orders from its
primary customer. The remaining approximate $975,000 increase in total fiscal
2008 net sales related to an increase in net sales at the RF Wireless segment,
and was attributable to sales generated during the entire fiscal year by the
Radiomobile Division. Since RadioMobile was acquired in the fourth
quarter of fiscal 2007, only two months of Radiomobile sales were included in
total net sales in fiscal 2007.
The
Company’s gross profit increased $1,990,000 or by 29% to $8,906,000 in 2008 from
$6,916,000 in 2007 due to the increase in net sales and higher gross margins
attributable to economies of scale. As a percentage of net sales, gross profit
increased to 50% in fiscal 2008, up from 47% in fiscal 2007. At the Connector
and Cable Assembly segment, gross profit as a percentage of net sales increased
by 4% to 53% in fiscal 2008 from 49% in fiscal 2007. This decrease in costs was
attributable to economies of scale as certain fixed costs were spread over a
greater amount of sales. At the Medical Cabling & Interconnector segment,
gross profit as a percentage of net sales increased by 20% to 35% in fiscal 2008
from 15% in fiscal 2007 as a result of an increase in sales and the segment’s
ability to reduce its fixed labor costs. At the RF Wireless segment, gross
profit as a percentage of net sales remained substantially unchanged with an
increase of 1% to 47% in fiscal 2008 from 46% in fiscal 2007.
Engineering
expenses, which include research and development expenses, incurred at the
Company’s three segments and relating to the design, re-design or development of
products for specific customers increased substantially by $480,000 to
$1,051,000 in fiscal 2008 from $571,000 in fiscal 2007. As a percentage of net
sales, engineering expenses increased to 6% in fiscal 2008 from 4% in fiscal
2007. Most of the increase in engineering expenses was attributable to the RF
Wireless segment. Engineering expense (including research and
development) during fiscal 2008 increased as a result of the acquisition of the
Radiomobile division at the end of fiscal 2007 and the increased expenses
related to the development of new wireless products that are expected to be
commercially released by the end of the current fiscal
year. RadioMobile and Neulink, which constitute the RF Wireless
segment, collectively incurred approximately $256,000 of research and
development expenses in fiscal 2008 in the development of new products; the
entire Company only incurred $61,000 of research and development expenses in
fiscal 2007.
Selling
and general expenses increased by $717,000 or 15%, to $5,342,000 during fiscal
2008 from $4,625,000 in fiscal 2007. The increase is the result of
the 19% increase in revenues. Stock based compensation expense decreased by
$72,000 to $500,000 in fiscal 2008 from $572,000 in fiscal 2007 primarily due to
fewer options being expensed in fiscal 2008 compared to fiscal 2007. Sales
commission expense increased by $44,000 to $141,000 in fiscal 2008 from $97,000
in fiscal 2007 due to the significant increase in sales from fiscal 2007.
Accounting and legal fees increased by $215,000 to $550,000 in fiscal 2008 from
$335,000 in fiscal 2007 primarily due to fees related to management’s assessment
and testing on internal controls over financial reporting incurred in fiscal
2008 but not incurred in fiscal 2007. Advertising costs increased by $26,000 to
$198,000 in fiscal 2008 from $172,000 in fiscal 2007 due to an increase in
marketing efforts in fiscal 2008 compared to prior year.
- 22
-
Despite
the increase in sales and the increase of $1,990,000 in gross profit, operating
income only increased 46% or by $794,000 to $2,513,000 in fiscal 2008 as a
result of the $1,196,000 increase in total operating expenses from prior year of
which $717,000 related to selling and general administrative expenses and
$479,000 related to engineering expenses.
Interest
income decreased by approximately $101,000 from prior year due to decreasing
interest rates on the funds held by the Company in its interest bearing accounts
as a result of investing primarily in CD’s and money market funds during fiscal
2008 as compared to investing primarily in auction rate securities during fiscal
2007.
Income
before taxes in fiscal 2008 increased by 33% or by $693,000 to $2,772,000
compared to income before taxes of $2,079,000 in fiscal 2007. Net income for
fiscal year ended October 31, 2008 increased 37% or by $424,000 to $1,559,000
compared to $1,135,000 in fiscal year ended October 31, 2007 for the reasons
discussed above.
ITEM
7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
following Financial Statements of the Company with related Notes and Report of
Independent Registered Public Accounting Firm are attached hereto as pages F-1
to F-19 and filed as part of this Annual Report:
|
·
|
Report
of J.H. Cohn LLP, Independent Registered Public Accounting
Firm
|
|
·
|
Balance
Sheets as of October 31, 2008 and
2007
|
|
·
|
Statements
of Income for the years ended October 31, 2008 and
2007
|
|
·
|
Statements
of Stockholders’ Equity for the years ended October 31, 2008 and
2007
|
|
·
|
Statements
of Cash Flows for the years ended October 31, 2008 and
2007
|
|
·
|
Notes
to Financial Statements
|
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
ITEM
9A.
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a
15(e)) that are designed to assure that information required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms, and that such information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosures.
- 23
-
In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide reasonable assurance only of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
weighting the costs and benefits of possible new or different controls and
procedures. Limitations are inherent in all control systems, so no
evaluation of controls can provide absolute assurance that all control issues
and any fraud have been detected.
As
required by Exchange Act Rule 13a 15(b), as of the end of the period covered by
this report, management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures. Based on this evaluation,
management concluded that our disclosure controls and procedures were effective
as of that date.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, and for performing an assessment of the
effectiveness of internal control over financial reporting as of October 31,
2008. Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Our
system of internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors ; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have conducted an evaluation
of the effectiveness of our internal control over financial reporting based on
the framework in “Internal Control—Integrated Framework” issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Based on
the above evaluation, our management has concluded that, as of October 31, 2008,
we did not have any material weaknesses in our internal control over financial
reporting and our internal control over financial reporting was
effective.
This annual report does not include an
attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
Changes
in Internal Controls
During
the fourth quarter of the fiscal year ended October 31, 2008, the Company
completed certain improvements to its internal control over financial reporting.
The remedial actions were conducted throughout fiscal 2008 and included a
comprehensive internal control review and assessment conducted by outside
consultants. The changes made to the Company’s internal controls over financial
reporting consisted of the Company hiring additional outside consultants to help
with non-recurring complex accounting transactions and implemented an accounting
software program related to stock options. Changes have been implemented and
have been in operation for a sufficient period of time in order for the Company
to determine that the material weakness has been remediated. Management has
taken steps to remediate the material weakness.
- 24
-
Other
than the foregoing changes, there were no other changes in the Company’s
internal control over financial reporting during the most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, internal control over financial reporting.
ITEM
9B.
OTHER INFORMATION
On
January 29, 2008, the Company issued a press release announcing its financial
results for the fourth fiscal quarter of fiscal year ending October 31, 2008 and
for the fiscal year then ended. A copy of the press release is attached to this
Annual Report on Form 10-K as Exhibit 99.1.
PART
III
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Set forth
below is information regarding the Company’s directors, including information
furnished by them as to their principal occupations for the last five years, and
their ages as of October 31, 2008. A majority of the Directors are “independent
directors” as defined by the listing standards of the Nasdaq Stock Market, and
the Board of Directors has determined that such independent directors have no
relationship with the Company that would interfere with the exercise of their
independent judgment in carrying out the responsibilities of a director. The
independent Directors are Messrs. Ehret, Fink, Jacobs, Kester and
Reynolds.
|
Name
|
Age
|
Director
Since
|
||
|
John
R. Ehret
|
71
|
1991
|
||
|
Marvin
H. Fink
|
72
|
2001
|
||
|
Howard
F. Hill
|
68
|
1979
|
||
|
William
Reynolds
|
73
|
2005
|
||
|
Robert
Jacobs
|
56
|
1997
|
||
|
Linde
Kester
|
63
|
2001
|
John R.
Ehret has been the President of TPL Electronics of Los Angeles, California,
since 1982. He holds a B.S. degree in Industrial Management from the University
of Baltimore. He has been in the electronics industry for over 34
years.
Marvin H.
Fink served as the Chief Executive Officer, President and Chairman of the Board
of Recom Managed Systems, Inc. from October 2002 to March 2005. Prior thereto,
Mr. Fink was President of Teledyne’s Electronics Group. Mr. Fink was employed at
Teledyne for 39 years. He holds a B.E.E. degree from the City College of New
York, an M.S.E.E. degree from the University of Southern California and a J.D.
degree from the University of San Fernando Valley. He is a member of the
California Bar.
Howard F.
Hill, a founder of the Company in 1979, has credits in Manufacturing
Engineering, Quality Engineering and Industrial Management. He has been the
President of the Company since July 1993. He has held various positions in the
electronics industry over the past 41 years.
Robert
Jacobs has been an Account Executive at Neil Berkman Associates since 1988. Neil
Berkman Associates is the Company’s investor relations firm, and Mr. Jacobs is
the Account Executive for the Company. He holds an MBA from the University of
Southern California and has been in the investor relations industry for over 26
years.
- 25
-
Linde
Kester has been the Proprietor of Oregon’s Chateau Lorane Winery since 1992. He
was formerly Chairman and CEO of Xentek, an electronics power conversion
manufacturer that he co-founded in 1972. Mr. Kester was also a co-founder of
Hidden Valley National Bank in Escondido, California. He holds an A.A. in
Electron-Mechanical Design from Fullerton College and has over two decades of
experience in the electronics industry.
William
Reynolds joined the Board of Directors on April 26, 2005. He was the former VP
of Finance and Administration for Teledyne Controls from 1994 until his
retirement in 1997. Prior thereto, for 22 years he was the
Vice-President of Finance and Administration of Teledyne Microelectronics. Mr.
Reynolds also was a program finance administrator of Teledyne Systems Company
for five years. He has a B.B.A. degree in Accounting from Woodbury
University.
Management
Howard F.
Hill is the President and Chief Executive Officer of the Company. He co-founded
the Company in 1979. Mr. Hill has credits in Manufacturing Engineering, Quality
Engineering and Industrial Management. He has been the President of the Company
since July 1993. He has held various positions in the electronics industry over
the past 41 years.
Effective
February 1, 2007, RF Industries appointed James Doss as Acting Chief Financial
Officer and Corporate Secretary. Mr. Doss was appointed to Chief Financial
officer on January 25, 2008. Mr. Doss joined the Company as its full-time
Director of Accounting on February 13, 2006. Mr. Doss, 40, was most recently a
private consultant to a number of Software and High-Tech companies, providing
Sarbanes-Oxley compliance and general accounting support. Previously, he was
Director of Finance for San Diego-based HomeRelay Communications, Inc., an
Internet Service Provider (ISP). From 1996 to 2000, Doss was Controller for
CliniComp, International, a San Diego medical software developer and hardware
manufacturer of hospital critical care units. In 1995 Mr. Doss joined
Denver-based Merrick & Company as Senior Staff Accountant. Mr. Doss received
his B.S. in Finance and Economics from San Diego State University in 1993 and
completed graduate and advanced financial management studies, receiving his MBA
from San Diego State University in 2005.
Board
of Director Meetings
During
the fiscal year ended October 31, 2008, the Board of Directors held five
meetings. All members of the Board of Directors hold office until the next
Annual Meeting of Stockholders or the election and qualification of their
successors. Executive officers serve at the discretion of the Board of
Directors.
During
the fiscal year ended October 31, 2008, each Board of Directors member other
than John Ehret attended at least 50% of the meetings of the Board of Directors
and at least 50% of the meetings of the committees on which he served. Mr. Ehret
attended three of the five meetings held by the Board during fiscal
2008.
Board
Committees
During
fiscal 2008, the Board of Directors maintained two committees, the Compensation
Committee and the Audit Committee.
The Audit
Committee meets periodically with the Company’s management and independent
registered public accounting firm to, among other things, review the results of
the annual audit and quarterly reviews and discuss the financial statements. The
audit committee also hires the independent registered public accounting firm,
and receives and considers the accountant’s comments as to controls, adequacy of
staff and management performance and procedures. The Audit Committee is also
authorized to review related party transactions for potential conflicts of
interest. As of the end of fiscal 2008, the Audit Committee was composed of Mr.
Reynolds, Mr. Ehret and Mr. Fink. Each of these individuals were non-employee
directors and independent as defined under the Nasdaq Stock Market’s listing
standards. Each of the members of the Audit Committee has significant knowledge
of financial matters, and Mr. Reynolds currently serves as the “audit committee
financial expert” of the Audit Committee. The Company believes
that the current members of the Audit Committee can competently perform the
functions required of them as members of the Audit Committee. The Audit
Committee met four times during fiscal 2008. The Audit Committee operates under
a formal charter that governs its duties and conduct.
- 26
-
The
Compensation Committee currently consists of Messrs. Ehret, Fink, and Kester,
each of whom is non-employee director and is independent as defined under the
Nasdaq Stock Market’s listing standards. The Compensation Committee is
responsible for considering and authorizing remuneration arrangements for senior
management. The Compensation Committee held one formal meeting during fiscal
2008, which was attended by all committee members.
Code
Of Business Conduct And Ethics
The
Company has adopted a Code of Business Conduct and Ethics (the “Code”) that
applies to all of the Company’s Directors, officers and employees, including its
principal executive officer and principal financial officer. The Code is posted
on the Company’s website at www.rfindustries.com
. The Company intends to disclose any amendments to the Code by posting such
amendments on its website. In addition, any waivers of the Code for Directors or
executive officers of the Company will be disclosed in a report on Form
8-K.
Compliance
With Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s executive
officers and directors, and persons who own more than 10% of a registered class
of the Company’s equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (“SEC”). Executive
officers, directors and greater than 10% stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based
solely on its review of the copies of reporting forms received by the Company,
the Company believes that during its most recent fiscal year ended October 31,
2008, its officers and directors complied with the filing requirements under
Section 16(a).
ITEM
11. EXECUTIVE
COMPENSATION
Summary of Cash and Other
Compensation. The following table sets forth compensation for
services rendered in all capacities to the Company for each person who served as
an executive officer during the fiscal year ended October 31, 2008 (the “Named
Executive Officers”). No other executive officer of the Company received salary
and bonus, which exceeded $100,000 in the aggregate during the fiscal year,
ended October 31, 2008:
|
Annual
Compensation
|
Long-Term
Compensation Awards
|
|||||||||||
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Securities
Underlying Options/SARs (#)
|
Any
Other
Compensation
|
|||||||
|
Howard
F. Hill, President
Chief
Executive Officer, Director
|
2008
|
211,730
|
50,000
|
4,000
|
$
|
24,366
|
(1) | |||||
|
2007
|
175,000
|
0
|
6,000
|
$
|
15,703
|
|||||||
|
James
S. Doss,
Chief
Financial Officer
|
2008
|
111,458
|
6,000
|
2,000
|
$
|
9,914
|
(2) | |||||
|
2007
|
96,685
|
6,000
|
32,916
|
$
|
11,775
|
|||||||
(1) Mr.
Hill’s other compensation consisted of $12,931 of accrued vacation not taken in
fiscal 2008 and $11,435 for vehicle and apartment rental costs. Because Mr. Hill
does not live in San Diego, the Company has maintained an apartment in San Diego
for Mr. Hill and some of the other managers since 1994. The compensation
attributable to the use of a Company vehicle represents the value of his
personal use of a Company vehicle.
(2) Mr.
Doss’s other compensation consisted of $421 of accrued vacation not taken in
fiscal 2008 and $9,493 for vehicle costs.
Option Grants. The
following table contains information concerning the stock option grants to the
Company’s Named Executive Officers for the fiscal year ended October 31,
2008.
- 27
-
Option Grants in Last Fiscal
Year
|
Name
|
Securities
Underlying Options Granted (#)
|
%
of Total Options Granted to Employees in Fiscal Year
|
Base
Price
($/Share)
|
Expiration
Date
|
|||||||||
|
Howard
F. Hill, President
Chief
Executive Officer
Incentive
Stock Option
|
4,000 | 3.15 | $ | 4.50 |
October
2013
|
||||||||
|
James
S. Doss,
Chief
Financial Officer
Incentive
Stock Option
|
2,000 | 1.57 | $ | 4.50 |
October
2013
|
||||||||
Option Exercises and
Holdings. The following table sets forth information
concerning option exercises and option holdings and the value, at October 31,
2008, of unexercised options held by the Named Executive Officers:
Aggregated Options/SAR
Exercises in Last Fiscal Year
and Fiscal Year-End
Option/SAR Values
|
Shares
Acquired
|
Value
Realized Market Price at Exercise Less Exercise Price
|
Number
of Unexercised Options/SARs at Fiscal Year-End (#)
|
Value
of Unexercised In-the-Money Options/SARs at Fiscal Year-End ($)
Exercisable/
|
|||||||||||||||||
|
Name
|
Exercise
#
|
($)
|
Exercisable
|
Unexercisable
|
Unexercisable
(1)
|
|||||||||||||||
|
Howard
F. Hill, President, Chief Executive Officer
|
0 | $ | 0 | 251,871 | 4,000 | $ | 1,133,420/18,000 | |||||||||||||
|
James
S. Doss, Chief Financial Officer
|
0 | $ | 0 | 32,916 | 2,000 | $ | 148,122/9,000 | |||||||||||||
(1) Represents
the closing price per share of the underlying shares on the last day of the
fiscal year less the option exercise price multiplied by the number of shares.
The closing value per share was $4.50 on the last trading day of the fiscal year
as reported on the Nasdaq Capital Market.
- 28
-
During
the fiscal year ended October 31, 2008, the Company did not adjust or amend the
exercise price of stock options awarded to the Named Executive
Officers.
Employment
Agreement
The
Company has no employment or severance agreements with any of its executive
officers other than with Mr. Howard Hill, the Company’s President and Chief
Executive Officer. Mr. Hill has been the President/Chief Executive Officer of
the Company since 1994. On June 6, 2008 the Company entered into a new
employment agreement with Mr. Hill. Under the new employment agreement, Mr. Hill
agreed to serve as the Company’s President and Chief Executive Officer for up to
three one-year periods. The new employment agreement provides for an annual
salary of $210,000. Either Mr. Hill or the Company can terminate the employment
agreement at each of the first and second anniversaries of the agreement. The
employment agreement will expire on June 20, 2011.
Compensation
of Directors
The
Company compensates its directors with an annual grant of options to purchase
2,000 shares of common stock. Previously, all such options were granted on the
last day of the fiscal year, and the exercise price of the options was equal to
the closing price of the common stock on that day, or if the grant occured after
the end of the fiscal year, the closing price on the date of
grant. During fiscal 2008, the Company changed the date on which it
will grant options to its directors in the future. Accordingly, no
options were granted to directors during fiscal 2008. Under the new director
option grant schedule, options to purchase 2,000 shares of common stock will be
granted to each of the directors on January 15 of each year (or the first
business day thereafter, if such date is not a business day). The
Chairman of the Board will be granted an option for 4,000
shares. Accordingly, options to purchase 2,000 shares will be granted
to each of the directors on January 15, 2009, and Mr. Fink, the Chairman of the
Board, will be granted options to purchase 4,000 shares on January 15, 2009 and
these options will be immediately vested upon grant. The exercise price of these
options will be the closing stock price on January 15, 2009. The directors are
also eligible for reimbursement of expenses incurred in connection with
attendance at Board meetings and Board committee meetings.
In
addition to the foregoing grant of options, all non-employee members of the
Board of Directors receive an annual cash payment of $5,000 per director, and
the non-employee Chairman of the Board receives an annual payment of
$10,000.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth certain information regarding the ownership of the
Company’s Common Stock as of October 31, 2008 for each director; (ii) the
executive officer named in the Summary Compensation Table in Executive
Compensation; (iii) all executive officers and directors of the Company as a
group; and (iv) all those known by the Company to be beneficial owners of more
than 5% of the Common Stock.
|
Name
and Address of Beneficial Owner
|
Number
of Shares (1)
Beneficially Owned
|
Percentage
Beneficially Owned
|
||||||
|
Howard
H. Hill
7610
Miramar Road, Ste. 6000
San
Diego, CA 92126-4202
|
255,371 | (2) | 6.9 | % | ||||
|
James
Doss
7610
Miramar Road, Ste. 6000
San
Diego, CA 92126-4202
|
32,916 | (3) | 0.9 | % | ||||
- 29
-
|
Name
and Address of Beneficial Owner
|
Number
of Shares (1)
Beneficially Owned
|
Percentage
Beneficially Owned
|
||||||
|
John
R. Ehret
7610
Miramar Road, Ste. 6000
San
Diego, CA 92126-4202
|
30,000 | (4) | 0.8 | % | ||||
|
Robert
Jacobs
7610
Miramar Road, Ste. 6000
San
Diego, CA 92126-4202
|
10,000 | (5) | 0.3 | % | ||||
|
Marvin
H. Fink
7610
Miramar Road, Ste. 6000
San
Diego, CA 92126-4202
|
34,165 | (6) | 0.9 | % | ||||
|
Linde
Kester
7610
Miramar Rd., Ste. 6000
San
Diego, CA 92126-4202
|
95,472 | (7) | 2.6 | % | ||||
|
William
Reynolds
7610
Miramar Rd., Ste. 6000
San
Diego, CA 92126-4202
|
24,300 | (8) | 0.7 | % | ||||
|
All
Directors and Officers as a Group (7 Persons)
|
482,224 | (9) | 12.1 | % | ||||
|
Hytek
International, Ltd
PO
Box 10927 APO
George
Town
Cayman
Islands
|
450,930 | (10) | 12.1 | % | ||||
|
Walrus
Partners, LLC
8014
Olson Memorial, #232
Golden
Valley, MN 55427
|
284,583 | (11) | 7.7 | % | ||||
|
Citigroup,
Inc.
399
Park Avenue
New
York, NY 10043
|
216,175 | (12) | 5.8 | % | ||||
(1) Shares
of Common Stock, which were not outstanding but which could be acquired upon
exercise of an option within 60 days from the date of this filing, are
considered outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned. However, such shares are not considered
to be outstanding for any other purpose.
(2) Includes
251,871 shares that Mr. Hill has the right to acquire upon exercise of options
exercisable within 60 days.
(3) Includes
32,916 shares that Mr. Doss has the right to acquire upon exercise of options
exercisable within 60 days.
(4) Includes
20,000 shares that Mr. Ehret has the right to acquire upon exercise of options
exercisable within 60 days.
- 30
-
(5) Consists
of 10,000 shares, which Mr. Jacobs have the right to acquire upon exercise of
options exercisable within 60 days.
(6) Includes
29,165 shares that Mr. Fink has the right to acquire upon exercise of options
exercisable within 60 days.
(7) Includes
34,170 shares that Mr. Kester has the right to acquire upon exercise of options
exercisable within 60 days.
(8) Consists
of 20,000 shares, which Mr. Reynolds has the right to acquire upon exercise of
options exercisable within 60 days plus 4,300 shares purchased on the open
market.
(9) Includes
398,122 shares, which the directors and officers have the right to acquire upon
exercise of options exercisable within 60 days.
(10) Represents
shares owned by Hytek International, Ltd is a Cayman Islands holding company
which is deemed to possess sole voting and dispositive power over securities
held.
(11) Information
is based on a report on Schedule 13G filed in February 14, 2008. Represents
shares owned by clients of Walrus Partners, LLC, which is an investment adviser.
Walrus Partners, LLC is deemed to possess sole voting and dispositive power over
securities held by its clients. Walrus Partners, LLC disclaims beneficial
ownership of these securities held by these clients.
(12) Represents
shares owned by Citigroup, Inc., which is deemed to possess sole voting and
dispositive power over securities held.
|
ITEM
13..
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
On April
1, 1997, the Company loaned to Howard Hill, its President and Chief Executive
Officer, $70,000 pursuant to a Promissory Note which provides for interest at
the rate of 6% per annum and which has no specific due date for principal. The
principal balance still outstanding on the loan is $66,980. Mr. Hill pays
interest on the loan annually. The loan is evidenced by a promissory note that
is secured by a lien on certain of Mr. Hill’s personal property.
Mr.
Jacobs, a director of the Company, is an employee of the Company’s public
relations firm. For the fiscal years ended October 31, 2008 and 2007, the
Company paid the firm $52,781 and $40,409, respectively, for services
rendered.
ITEM
14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit-Related
Fees
The
following is a summary of the fees billed to the Company by J.H. Cohn LLP for
professional services rendered related to the fiscal years ended October 31,
2008 and 2007:
|
Fee
Category
|
2008
|
2007
|
||||||
|
Audit
Fees
|
$ | 173,500 | $ | 206,163 | ||||
|
Audit-Related
Fees
|
21,100 | 30,950 | ||||||
|
Total
Fees
|
$ | 194,600 | $ | 237,113 | ||||
Audit
Fees. Consists of fees billed and estimated for professional
services rendered for the audit of the Company financial statements and review
of the interim financial statements included in quarterly reports and services
that are normally provided by J.H. Cohn LLP in connection with statutory and
regulatory filings or engagements.
- 31
-
Audit-Related
Fees. Consists of fees billed and estimates for assurance and
related services that are reasonably related to the performance of the audit and
review of the Company’s financial statements and are not reported under “Audit
Fees.” These services include professional services requested by the Company in
connection with its preparation for compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, accounting consultations in connection with
acquisitions and consultations concerning financial accounting and reporting
standards.
ITEM
15.
EXHIBITS
The
following exhibits are filed as part of this report:
|
3.1
|
Articles
of Incorporation, as amended (1)
|
|
3.2.1
|
Company
Bylaws as Amended through August, 1985 (2)
|
|
3.2.2
|
Amendment
to Bylaws dated January 24, 1986 (2)
|
|
3.2.3
|
Amendment
to Bylaws dated February 1, 1989 (3)
|
|
3.2.4
|
Amendment
to Bylaws dated June 9, 2006(6)
|
|
3.2.5
|
Amendment
to Bylaws dated September 7, 2007(7)
|
|
10.1
|
Form
of 2000 Stock Option Plan (4)
|
|
10.2
|
Directors’
Nonqualified Stock Option Agreements (2)
|
|
10.3
|
Employment
Agreement, dated June 5, 2008, between the Company and Howard
Hill
|
|
14.1
|
Code
of Ethics (5)
|
|
23.1
|
Consent
of J.H. Cohn LLP
|
|
31.1
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section
1350
|
|
32.2
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section
1350
|
|
99.1
|
Press
Release dated January 29, 2009 announcing the financial results for the
fiscal year ending October
31, 2008.
|
(1) Previously
filed as an exhibit to the Company’s Form 10-KSB for the year ended October 31,
2000, which exhibit is hereby incorporated herein by reference.
(2) Previously
filed as an exhibit to the Company’s Form 10- KSB for the year ended October 31,
1987, which exhibit is hereby incorporated herein by reference.
(3) Previously
filed as an exhibit to the Company’s Form 10- KSB for the year ended October 31,
1992, which exhibit is hereby incorporated herein by reference.
(4) Previously
filed as an exhibit to the Company’s Form 10-QSB for the quarter ended January
31, 2001, which exhibit is hereby incorporated herein by reference.
(5) Previously
filed as an exhibit to the Company’s Form 10- KSB for the year ended October 31,
2003, which exhibit is hereby incorporated herein by reference.
(6) Previously
filed as an exhibit to the Company’s Form 8-K, dated June 9, 2006, which exhibit
is hereby incorporated herein by reference.
(7) Previously
filed as an exhibit to the Company’s Form 10- KSB for the year ended October 31,
2007, which exhibit is hereby incorporated herein by reference.
Shareholders
of the Company may obtain a copy of any exhibit referenced in this 10-K Report
by writing to: Secretary, RF Industries, Ltd., 7610 Miramar Road, Bldg. 6000,
and 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 forty-one cents ($.41) per page will be made
to cover Company expenses in furnishing the requested documents.
- 32
-
Index
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Balance
Sheets
|
||
|
October
31, 2008 and 2007
|
F-3
|
|
|
Statements
of Income
|
||
|
Years
Ended October 31, 2008 and 2007
|
F-4
|
|
|
Statements
of Stockholders’ Equity
|
||
|
Years
Ended October 31, 2008 and 2007
|
F-5
|
|
|
Statements
of Cash Flows
|
||
|
Years
Ended October 31, 2008 and 2007
|
F-6
|
|
|
Notes
to Financial Statements
|
F-7-F-20
|
* * *
F-1
Report of Independent
Registered Public Accounting Firm
To the
Stockholders
RF
Industries, Ltd.
We have
audited the accompanying balance sheets of RF Industries, Ltd. as of October 31,
2008 and 2007, and the related statements of income, stockholders’ equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of RF Industries, Ltd. as of October
31, 2008 and 2007, and its results of operations and cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
As
discussed in Note 1 to the financial statements, effective November 1, 2007, the
Company changed its method of accounting for uncertain tax positions to conform
with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”
Also, as discussed in Note 1, effective November 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123(Revised 2004), “Share-Based
Payment.”
/s/ J.H.
COHN LLP
San
Diego, California
January
26, 2009
F-2
RF
INDUSTRIES, LTD.
BALANCE
SHEETS
OCTOBER
31, 2008 AND 2007
|
ASSETS
|
||||||||
|
2008
|
2007
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,060,838 | $ | 3,400,566 | ||||
|
Investments
in available-for-sale securities
|
6,863,711 | 4,531,680 | ||||||
|
Trade
accounts receivable, net of allowance for doubtful accounts of $46,775 and
$43,459
|
2,071,349 | 1,900,029 | ||||||
|
Inventories
|
5,949,708 | 4,955,302 | ||||||
|
Other
current assets
|
217,443 | 241,995 | ||||||
|
Deferred
tax assets
|
542,100 | 321,700 | ||||||
|
Total
current assets
|
16,705,149 | 15,351,272 | ||||||
|
Equipment
and furnishings:
|
||||||||
|
Equipment
and tooling
|
2,205,525 | 1,780,154 | ||||||
|
Furniture
and office equipment
|
377,286 | 341,590 | ||||||
| 2,582,811 | 2,121,744 | |||||||
|
Less
accumulated depreciation
|
2,016,951 | 1,866,051 | ||||||
|
Totals
|
565,860 | 255,693 | ||||||
|
Goodwill
|
347,091 | 308,479 | ||||||
|
Amortizable
intangible assets, net
|
54,311 | 114,800 | ||||||
|
Note
receivable from stockholder
|
66,980 | 66,980 | ||||||
|
Other
long-term assets
|
28,382 | 30,934 | ||||||
|
Totals
|
$ | 17,767,773 | $ | 16,128,158 | ||||
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 329,509 | $ | 205,136 | ||||
|
Accrued
expenses
|
760,762 | 696,939 | ||||||
|
Income
taxes payable
|
232,927 | 167,625 | ||||||
|
Total
current liabilities
|
1,323,198 | 1,069,700 | ||||||
|
Deferred
tax liabilities
|
105,700 | 70,000 | ||||||
|
Other
long-term liabilities
|
217,185 | 47,665 | ||||||
|
Total
liabilities
|
1,646,083 | 1,187,365 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock - authorized 10,000,000 shares at $.01 par value; 3,226,264 and
3,285,969 shares issued and outstanding
|
32,263 | 32,860 | ||||||
|
Additional
paid-in capital
|
6,411,810 | 5,700,362 | ||||||
|
Retained
earnings
|
9,677,617 | 9,207,571 | ||||||
|
Total
stockholders' equity
|
16,121,690 | 14,940,793 | ||||||
|
Totals
|
$ | 17,767,773 | $ | 16,128,158 | ||||
See Notes
to Financial Statements.
F-3
RF
INDUSTRIES, LTD.
STATEMENTS
OF INCOME
YEARS
ENDED OCTOBER 31, 2008 AND 2007
|
2008
|
2007
|
|||||||
|
Net
sales
|
$ | 17,695,146 | $ | 14,853,039 | ||||
|
Cost
of sales
|
8,789,604 | 7,937,251 | ||||||
|
Gross
profit
|
8,905,542 | 6,915,788 | ||||||
|
Operating
expenses:
|
||||||||
|
Engineering
|
1,050,574 | 571,237 | ||||||
|
Selling
and general
|
5,341,576 | 4,625,065 | ||||||
|
Totals
|
6,392,150 | 5,196,302 | ||||||
|
Operating
income
|
2,513,392 | 1,719,486 | ||||||
|
Other
income – interest
|
258,381 | 359,113 | ||||||
|
Income
before income taxes
|
2,771,773 | 2,078,599 | ||||||
|
Provision
for income taxes
|
1,212,540 | 943,376 | ||||||
|
Net
income
|
$ | 1,559,233 | $ | 1,135,223 | ||||
|
Earnings
per share:
|
||||||||
|
Basic
|
$ | .47 | $ | .35 | ||||
|
Diluted
|
$ | .42 | $ | .30 | ||||
See Notes
to Financial Statements.
F-4
RF
INDUSTRIES, LTD.
STATEMENTS
OF STOCKHOLDERS’ EQUITY
YEARS
ENDED OCTOBER 31, 2008 AND 2007
|
Common
Stock
|
Additional
Paid-In
|
Retained
|
Accumulated Other
Comprehensive
|
Total
Stockholders’
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Equity
|
|||||||||||||||||||
|
Balance,
November 1, 2006
|
3,252,613 | $ | 32,526 | $ | 4,582,897 | $ | 8,843,268 | $ | 5,308 | $ | 13,463,999 | |||||||||||||
|
Net
income
|
1,135,223 | 1,135,223 | ||||||||||||||||||||||
|
Reclassification
adjustment for gain on short-term investment included in net
income
|
(5,308 | ) | (5,308 | ) | ||||||||||||||||||||
|
Stock-based
compensation expense
|
572,471 | 572,471 | ||||||||||||||||||||||
|
Excess
tax benefits from stock-based compensation
|
198,000 | 198,000 | ||||||||||||||||||||||
|
Exercise
of stock options
|
105,745 | 1,057 | 197,098 | 198,155 | ||||||||||||||||||||
|
Dividends
|
(196,375 | ) | (196,375 | ) | ||||||||||||||||||||
|
Shares
issued - acquisition
|
30,919 | 309 | 174,691 | 175,000 | ||||||||||||||||||||
|
Treasury
stock purchased and retired
|
(103,308 | ) | (1,032 | ) | (24,795 | ) | (574,545 | ) | (600,372 | ) | ||||||||||||||
|
Balance,
October 31, 2007
|
3,285,969 | 32,860 | 5,700,362 | 9,207,571 | 14,940,793 | |||||||||||||||||||
|
Adoption
of FIN 48 – November 1, 2007
|
(187,075 | ) | (187,075 | ) | ||||||||||||||||||||
|
Net
income
|
1,559,233 | 1,559,233 | ||||||||||||||||||||||
|
Stock-based
compensation expense
|
499,564 | 499,564 | ||||||||||||||||||||||
|
Excess
tax benefits from stock-based compensation
|
46,041 | 46,041 | ||||||||||||||||||||||
|
Exercise
of stock options
|
40,295 | 403 | 189,843 | 190,246 | ||||||||||||||||||||
|
Dividends
|
(394,343 | ) | (394,343 | ) | ||||||||||||||||||||
|
Treasury
stock purchased and retired
|
(100,000 | ) | (1,000 | ) | (24,000 | ) | (507,769 | ) | (532,769 | ) | ||||||||||||||
|
Balance,
October 31, 2008
|
3,226,264 | $ | 32,263 | $ | 6,411,810 | $ | 9,677,617 | $ | — | $ | 16,121,690 | |||||||||||||
See Notes
to Financial Statements.
F-5
RF
INDUSTRIES, LTD.
STATEMENTS
OF CASH FLOWS
YEARS
ENDED OCTOBER 31, 2008 AND 2007
|
2008
|
2007
|
|||||||
|
Operating
activities:
|
||||||||
|
Net
income
|
$ | 1,559,233 | $ | 1,135,223 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Bad
debt expense adjustment
|
6,781 | (4,393 | ) | |||||
|
Depreciation
and amortization
|
211,389 | 268,707 | ||||||
|
Deferred
income taxes
|
(184,700 | ) | (146,243 | ) | ||||
|
Stock-based
compensation expense
|
499,564 | 572,471 | ||||||
|
Excess
tax benefits from stock based compensation
|
(46,041 | ) | (198,000 | ) | ||||
|
Changes
in operating assets and liabilities (net of acquisition):
|
||||||||
|
Trade
accounts receivable
|
(178,101 | ) | 184,819 | |||||
|
Inventories
|
(994,406 | ) | 429,145 | |||||
|
Income
taxes payable
|
111,340 | (354,239 | ) | |||||
|
Other
current assets
|
24,552 | (23,899 | ) | |||||
|
Other
long-term assets
|
2,552 | |||||||
|
Accounts
payable
|
124,373 | (236,067 | ) | |||||
|
Accrued
expenses
|
63,824 | 105,588 | ||||||
|
Other
long-term liabilities
|
(56,166 | ) | ||||||
|
Net
cash provided by operating activities
|
1,144,194 | 1,733,112 | ||||||
|
Investing
activities:
|
||||||||
|
Payment
for acquisition
|
(166,667 | ) | ||||||
|
Purchases
of available-for-sale securities
|
(11,779,828 | ) | (4,832,399 | ) | ||||
|
Proceeds
from sales of available-for-sale securities
|
9,447,797 | 2,548,000 | ||||||
|
Capital
expenditures
|
(461,066 | ) | (93,823 | ) | ||||
|
Net
cash used in investing activities
|
(2,793,097 | ) | (2,544,889 | ) | ||||
|
Financing
activities:
|
||||||||
|
Proceeds
from exercise of stock options
|
190,246 | 198,155 | ||||||
|
Purchases
of treasury stock
|
(532,769 | ) | (600,372 | ) | ||||
|
Dividends
paid
|
(394,343 | ) | (196,375 | ) | ||||
|
Excess
tax benefits from stock based compensation
|
46,041 | 198,000 | ||||||
|
Net
cash used in financing activities
|
(690,825 | ) | (400,592 | ) | ||||
|
Net
decrease in cash and cash equivalents
|
(2,339,728 | ) | (1,212,369 | ) | ||||
|
Cash
and cash equivalents at beginning of year
|
3,400,566 | 4,612,935 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 1,060,838 | $ | 3,400,566 | ||||
|
Supplemental
cash flow information - income taxes paid
|
$ | 1,283,000 | $ | 1,438,631 | ||||
|
Noncash
investing and financing activities:
|
||||||||
|
Stock
issued for acquisition
|
$ | 175,000 | ||||||
|
Present
value of minimum guaranteed payments
|
$ | 35,665 | ||||||
|
Retirement
of treasury stock
|
$ | 532,769 | $ | 600,372 | ||||
|
Additional
Goodwill related to acquisition
|
$ | 38,612 | ||||||
See Notes
to Financial Statements.
F-6
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
Note
1 - Business activities and summary of significant accounting
policies
Business
activities
The
Company’s business is comprised of the design, manufacture and/or sale of
communications equipment primarily to the radio and other professional
communications related industries. The Company currently conducts its operations
through six related business divisions: (i) RF Connector and Cable Division is
engaged in the design, manufacture and distribution of coaxial connectors and
cable assemblies used primarily in radio and other professional communications
applications; (ii) Aviel Division is engaged in the design, manufacture and
sales of radio frequency, microwave and specialized connectors and connector
assemblies for aerospace, original electronics manufacturers and military
electronics applications; (iii) Worswick Division is engaged in sales of
microwave and radio frequency connectors and cable assemblies to end users in
multi-media, radio and other communications applications; (iv) Bioconnect
Division is engaged in the design, manufacture and sales of cable interconnects
for medical monitoring applications; (v) Neulink Division is engaged in the
design, manufacture and sales of radio links for receiving and transmitting
control signals for remote operation and monitoring of equipment, personnel and
monitoring services; and (vi) RadioMobile Division is engaged as an OEM provider
of end-to-end mobile management solutions implemented over wireless networks.
RadioMobile Division operates as a separate division and supplements the
operations of the Company’s Neulink division (see Note 11).
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Actual results may differ from those estimates.
Cash
equivalents
The
Company considers all highly-liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Revenue
recognition
The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No.
104, “Revenue Recognition in Financial Statements” (“SAB 104”). SAB 104 requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectability
is reasonably assured. The Company recognizes revenue from product sales after a
purchase order is received which contains a fixed price and the products are
shipped. Most of the Company’s products are sold to continuing customers with
established credit histories.
Inventories
Inventories,
consisting of materials, labor and manufacturing overhead, are stated at the
lower of cost or market. Cost has been determined using the weighted average
cost method.
Equipment
and furnishings
Equipment,
tooling and furniture are recorded at cost and depreciated over their estimated
useful lives (generally 3 to 7 years) using the straight-line
method.
F-7
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
Investments
The
Company follows Statement of Financial Accounting Standards No. 115 (“SFAS
115”), “Accounting for Certain Investments in Debt and Equity Securities” which
requires the Company’s investments in U.S. Treasury Bills and Certificates of
Deposit (CD’s) to be classified as “available-for-sale securities” and valued at
fair market value at month end, which approximates the cost. If there is any
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.
Investments
consist of the following as of October 31:
|
2008
|
2007
|
|||||||
|
Certificates
of deposit
|
$ | 6,315,864 | $ | — | ||||
|
U.S.
treasury bills
|
547,847 | 4,531,680 | ||||||
|
Totals
|
$ | 6,863,711 | $ | 4,531,680 | ||||
Goodwill
The
Company follows Statement of Financial Accounting Standards No. 142 (“SFAS
142”), “Goodwill and Other Intangible Assets”, which requires that goodwill and
certain intangible assets, including those recorded in past business
combinations, no longer be amortized against earnings, but instead be tested for
impairment at least annually. There was no impairment of goodwill as a result of
impairment tests performed according to SFAS 142 in 2008 or 2007.
The
changes in the carrying amount of segment goodwill for fiscal 2008 and 2007 are
as follows:
|
RF
Connectors and
Cable
Assembly
|
RF
Wireless
|
Total
|
||||||||||
|
Balance
at November 1, 2006
|
$ | 200,848 | $ | — | $ | 200,848 | ||||||
|
Acquisitions
|
107,631 | 107,631 | ||||||||||
|
Balance
at October 31, 2007
|
200,848 | 107,631 | 308,479 | |||||||||
|
Addition
due to contingency earn out
|
38,612 | 38,612 | ||||||||||
|
Balance
at October 31, 2008
|
$ | 200,848 | $ | 146,243 | $ | 347,091 | ||||||
No
goodwill is allocated to the Medical Cabling and Interconnector
segment.
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 asset’s 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.
F-8
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
Amortizable
Intangible assets
Amortizable
intangible assets are amortized over their estimated useful lives of three
years. Amortization expense is expected to be $27,156 in each of the years
ending October 31, 2009 and 2010, respectively.
|
2008
|
2007
|
|||||||
|
Intangible
assets
|
||||||||
|
Non-compete
agreement
|
$ | 120,000 | $ | 120,000 | ||||
|
Accumulated
amortization
|
(120,000 | ) | (86,667 | ) | ||||
| — | 33,333 | |||||||
|
Software
|
47,522 | 47,522 | ||||||
|
Accumulated
amortization
|
(15,841 | ) | — | |||||
| 31,681 | 47,522 | |||||||
|
Customer
List
|
33,945 | 33,945 | ||||||
|
Accumulated
amortization
|
(11,315 | ) | — | |||||
| 22,630 | 33,945 | |||||||
|
Totals
|
$ | 54,311 | $ | 114,800 | ||||
Advertising
The
Company expenses the cost of advertising and promotions as incurred. Advertising
costs charged to operations were $198,000 and $172,000 in 2008 and 2007,
respectively.
Research
and development
The
Company expenses research and development costs as incurred. Research and
development costs charged to operations and included in engineering were
approximately $256,000 and $61,000 in 2008 and 2007, respectively.
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.
On
November 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting for uncertain tax positions. In accordance with its
accounting policy, the Company recognizes accrued interest and penalties related
to unrecognized tax benefits as a component of income tax expense. (See Note
6).
F-9
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
Stock
options
Effective
November 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). The
Company elected to use the modified prospective transition method. This method
requires compensation cost to be recognized in the financial statements over the
service period for the fair value of all awards (including awards to employees)
granted after the date of adoption as well as for existing awards for which the
requisite service had not been rendered as of the date of adoption and requires
that prior periods not be restated. The stock incentive plans provide for the
granting of qualified and nonqualified options to our officers, directors and
employees. Outstanding options are generally exercisable one year after the date
of the grant and expire no more than ten years after the grant. The Company
satisfies the exercise of options by issuing previously unissued common shares.
Prior to the adoption of SFAS 123R, the Company used the intrinsic value method
to account for stock options granted to employees and generally made no charges
against earnings with respect to those options at the date of grant since the
employee options had exercise prices that were equal to the market price of the
Company’s stock on the grant date.
The
Company follows Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires the calculation
of the historical pool of windfall tax benefits. This pool of
windfall tax benefits is needed to determine the treatment of "shortfalls" that
occur when the tax deduction received for a stock-based compensation award is
less than the cumulative compensation cost recognized for that award for
financial reporting purposes. The Company has elected to use the
"short-cut" method of Financial Accounting Standards Board Staff Position No.
SFAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards”, to calculate the historical pool of windfall tax
benefits.
For the
fiscal years ended October 31, 2008 and 2007, charges related to stock-based
compensation amounted to approximately $500,000 and $572,000, respectively.
Stock-based compensation is charged to cost of sales and selling and general
expenses.
Also, in
accordance with SFAS 123R, the Company presents the tax benefits from exercise
of stock options in excess of recognized expense as a cash flow from financing
activities in the statements of cash flows.
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. The greatest number of shares potentially issuable by the
Company upon the exercise of stock options in any period for the year ended
October 31, 2008 and 2007, that were not included in the computation because
they were anti-dilutive, totaled 237,183 and 163,923, respectively.
F-10
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
The
following table summarizes the calculation of basic and diluted earnings per
share:
|
2008
|
2007
|
|||||||
|
Numerators:
|
||||||||
|
Net
income (A)
|
$ | 1,559,233 | $ | 1,135,223 | ||||
|
Denominators:
|
||||||||
|
Weighted
average shares outstanding for basic earnings per share
(B)
|
3,293,820 | 3,263,695 | ||||||
|
Add
effects of potentially dilutive securities - assumed exercise of stock
options
|
421,670 | 491,754 | ||||||
|
Weighted
average shares for diluted earnings per share (C)
|
3,715,490 | 3,755,449 | ||||||
|
Basic
net earnings per share (A)÷(B)
|
$ | 0.47 | $ | 0.35 | ||||
|
Diluted
net earnings per share (A)÷(C)
|
$ | 0.42 | $ | 0.30 | ||||
New
accounting pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value in accounting principles
generally accepted in the United States of America, and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. For the Company, SFAS
157 will be effective for the 2009 fiscal year. The Company is currently
evaluating the impact SFAS 157 will have on its financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which is effective for fiscal years
beginning after November 15, 2007. This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. For the Company, SFAS 159 will be effective for the 2009
fiscal year. The Company is currently evaluating the impact SFAS 159 will have
on its financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations”
(“SFAS No. 141 (R)”), replacing SFAS No. 141, “Business Combinations” (“SFAS No.
141”). SFAS No. 141 (R) retains the fundamental requirements of SFAS No. 141,
broadens its scope by applying the acquisition method to all transactions and
other events in which one entity obtains control over one or more other
businesses, and requires, among other things, that assets acquired and
liabilities assumed be measured at fair value as of the acquisition date, that
liabilities related to contingent consideration be recognized at the acquisition
date and remeasured at fair value in each subsequent reporting period, that
acquisition-related costs be expensed as incurred, and that income be recognized
if the fair value of the net assets acquired exceeds the fair value of the
consideration transferred. SFAS No. 141 (R) is to be applied prospectively in
financial statements issued for fiscal years beginning after December 15, 2008.
We do not expect that the initial adoption of SFAS No. 141 (R) will have a
material effect on our financial statements.
F-11
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
The FASB and its Emerging Issues Task
Force had issued certain other accounting pronouncements as of October 31, 2008
that will become effective in subsequent periods; however, our management does
not believe that any of those pronouncements would significantly affect our
financial accounting measurements or disclosures.
Note
2 - Concentration of credit risk and sales to major customers
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company considers all highly liquid debt instruments with an original maturity
of three months or less when purchased to be cash equivalents. The Company
maintains its cash and cash equivalents with high-credit quality financial
institutions. At times, such amounts may exceed Federally insured
limits.
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 15% and 18% of total sales, and 10% and 13% of total
accounts receivable in 2008 and 2007, respectively. The Company has a standard
written distributor 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 - Inventories and major vendors
Inventories
consist of the following as of October 31:
|
2008
|
2007
|
|||||||
|
Raw
materials and supplies
|
$ | 1,496,364 | $ | 1,092,965 | ||||
|
Work-in-process
|
31,131 | 19,716 | ||||||
|
Finished
goods
|
4,502,890 | 3,966,681 | ||||||
|
Less
inventory reserve
|
(80,677 | ) | (124,060 | ) | ||||
|
Totals
|
$ | 5,949,708 | $ | 4,955,302 | ||||
Purchases
of connector products from four major vendors represented 23%, 11%, 7%, and 5%
of the total inventory purchases in 2008 and 19%, 5%, 16% and 10% in 2007,
respectively. The Company has arrangements with these vendors to purchase
product based on purchase orders periodically issued by the
Company.
Note
4 - Commitments
The
Company leases its facilities in San Diego, California and Las Vegas, Nevada
under non-cancelable operating leases. The Company amended its San Diego lease
in June 2005, adding additional square feet. The amended lease expires in May
2010 and requires minimum annual rental payments that are subject to fixed
annual increases. The minimum annual rentals under this lease are being charged
to expense on a straight-line basis over the lease term. Deferred rents were
$40,000 as of October 31, 2008 and $54,000 at October 31, 2007. The San Diego
lease also requires the payment of the Company's pro rata share of the real
estate taxes and insurance, maintenance and other operating expenses related to
the facilities. The Worswick division operations include a warehouse and retail
space. Approximately 15% of the space is subleased to other tenants. The Las
Vegas lease is a three year lease expiring in March 2010. The Company also
leases certain automobiles under operating leases which expire at various dates
through October 2013.
F-12
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
Rent
expense under all operating leases totaled approximately $440,000 and $391,000
in 2008 and 2007, which is net of sublease income of $16,000 and $29,000 in
fiscal 2008 and 2007 respectively.
Minimum
lease payments under these non-cancelable operating leases in each of the five
years subsequent to October 31, 2008 are as follows:
|
Year
Ending October 31,
|
Amount
|
|||
|
2009
|
$ | 392,000 | ||
|
2010
|
200,000 | |||
|
2011
|
17,000 | |||
|
2012
|
4,000 | |||
|
2013
|
4,000 | |||
|
Total
|
$ | 617,000 | ||
The
Company has an employment agreement with the President and Chief Executive
Officer for a term of up to three consecutive one year periods commencing on
June 20, 2008 (the “Commencement Date”), and ending on June 20, 2011, which
expires at the end of each Employment Year of June 19 and may be extended for an
additional Employment Year on the anniversary dates thereafter. The aggregate
amount of compensation to be provided over the remaining term of the agreement
amounted to approximately $555,000 at October 31, 2008.
Note
5 - 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”).
The
Company aggregates operating divisions into operating segments which have
similar economic characteristics and divisions are similar in the majority of
the following areas: (1) the nature of the product and services; (2) the nature
of the production process; (3) the type or class of customer for their products
and services; (4) the methods used to distribute their products or services; (5)
if applicable, the nature of the regulatory environment. The Company has three
segments - RF Connector and Cable Assembly, Medical Cabling and Interconnector
and RF Wireless based upon this evaluation.
The RF
Connector and Cable Assembly segment is comprised of three divisions, the
Medical Cabling and Interconnector is comprised of one division while the RF
Wireless segment is comprised of two. The three divisions that meet
the quantitative thresholds for segment reporting are Connector / Cable
Assembly, Bioconnect and RF Neulink. Each of the other divisions
aggregated into these segments that have similar products that are marketed to
their respective customer base; production and product development processes are
similar in nature. The specific customers are different for each division;
however, there is some overlapping of product sales to them. The methods used to
distribute products are similar within each division aggregated.
F-13
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
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. For segment reporting purposes, the Company aggregates Connector
and Cable Assembly, Aviel Electronics, and Worswick divisions into the RF
Connector Cables Assembly segment while RF Neulink and RadioMobile are part of
the RF Wireless segment. The Bioconnect Division makes up the Company’s new
Medical Cabling and Interconnector segment. The Company had previously
aggregated BioConnect within the RF Connector and Cables Assembly segment as it
represented only a small portion and had similar economic characteristics of the
overall segment. During Fiscal Year 2008, the BioConnect division met one of the
quantitative threshold required for separate segment reporting. Prior year’s
information has been revised to conform with the current year’s
presentation.
As
reviewed by the Company’s chief operating decision maker, the Company evaluates
the performance of each segment based on income or loss before income taxes. The
Company charges depreciation and amortization directly to each division within
the segment. All stock based compensation is attributed to the RF Connector
Cable Assembly segment. Inventories, fixed assets, goodwill and intangible
assets are the only assets identified by segment. Except as discussed above, the
accounting policies for segment reporting are the same as for the Company as a
whole.
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
attributes sales to geographic areas based on the location of the customers. The
following table presents the sales of the Company by geographic area for the
years ended October 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
United
States
|
$ | 14,971,575 | $ | 12,579,555 | ||||
| Foreign countries: | ||||||||
|
Israel
|
911,031 | 1,096,612 | ||||||
|
All
other
|
1,812,540 | 1,176,872 | ||||||
|
Totals
|
$ | 17,695,146 | $ | 14,853,039 | ||||
F-14
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
Net
sales, income before income taxes and other related segment information as of
October 31, 2008 and 2007, and for the years then ended follows:
|
2008
|
RF
Connectors and Cable Assembly
|
Medical
Cabling and Interconnector
|
RF
Wireless
|
Corporate
|
Total
|
|||||||||||||||
|
Net
sales
|
$ | 13,936,241 | $ | 1,638,010 | $ | 2,120,895 | $ | 17,695,146 | ||||||||||||
|
Income
before income taxes
|
2,123,740 | 287,922 | 101,280 | $ | 258,831 | 2,771,773 | ||||||||||||||
|
Depreciation
and amortization
|
155,877 | 24,669 | 30,842 | 211,388 | ||||||||||||||||
|
Total
assets
|
5,355,248 | 441,946 | 1,119,775 | 10,850,804 | 17,767,773 | |||||||||||||||
|
Additions
to property and equipment
|
438,010 | 21,968 | 1,088 | 461,066 | ||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Net
sales
|
$ | 12,813,184 | 893,725 | $ | 1,146,130 | $ | $ | 14,853,039 | ||||||||||||
|
Income
before income taxes
|
1,368,605 | 125,103 | 225,778 | 359,113 | 2,078,599 | |||||||||||||||
|
Depreciation
and amortization
|
230,688 | 37,427 | 592 | 268,707 | ||||||||||||||||
|
Total
assets
|
4,645,092 | 152,895 | 836,287 | 10,493,884 | 16,128,158 | |||||||||||||||
|
Additions
to property and equipment
|
93,823 | 93,823 | ||||||||||||||||||
Note
6 - Income taxes
The
provision (benefit) for income taxes consists of the following:
|
2008
|
2007
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | 1,092,864 | $ | 842,619 | ||||
|
State
|
304,376 | 247,000 | ||||||
| 1,397,240 | 1,089,619 | |||||||
|
Deferred:
|
||||||||
|
Federal
|
(140,300 | ) | (119,343 | ) | ||||
|
State
|
(44,400 | ) | (26,900 | ) | ||||
| (184,700 | ) | (146,243 | ) | |||||
|
Totals
|
$ | 1,212,540 | $ | 943,376 | ||||
F-15
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
Income
tax at the Federal statutory rate is reconciled to the Company's actual net
provision for income taxes as follows:
|
2008
|
2007
|
|||||||||||||||
|
Amount
|
%
of Pretax Income
|
Amount
|
%
of Pretax Income
|
|||||||||||||
| Income tax at Federal statutory rate | $ | 942,600 | 34.0 | % | $ | 706,700 | 34.0 | % | ||||||||
|
State
tax provision, net of Federal tax benefit
|
171,584 | 6.2 | 145,200 | 7.0 | ||||||||||||
|
Nondeductible
expenses: ISO stock options
|
110,100 | 4.0 | 142,000 | 6.8 | ||||||||||||
|
Other
|
(11,744 | ) | (0.5 | ) | (50,524 | ) | (2.4 | ) | ||||||||
|
Provision
for income taxes
|
$ | 1,212,540 | 43.7 | % | $ | 943,376 | 45.4 | % | ||||||||
The
Company's total deferred tax assets and deferred tax liabilities at October 31,
2008 and 2007 are as follows:
|
2008
|
2007
|
|||||||
|
Assets:
|
||||||||
|
Allowance
for doubtful accounts
|
$ | 18,600 | $ | 17,300 | ||||
|
Inventory
obsolescence
|
32,100 | 49,400 | ||||||
|
Accrued
vacation
|
77,400 | 62,100 | ||||||
|
State
income taxes
|
100,300 | 85,600 | ||||||
|
Stock
based compensation awards
|
131,600 | 61,600 | ||||||
|
Section
263A costs
|
160,500 | 19,700 | ||||||
|
Other
|
21,600 | 26,000 | ||||||
|
Totals
|
542,100 | 321,700 | ||||||
|
Liabilities:
|
||||||||
|
Depreciation
|
(105,700 | ) | (70,000 | ) | ||||
|
Net
deferred tax assets
|
$ | 436,400 | $ | 251,700 | ||||
The Company adopted the provisions of
FIN 48, on November 1, 2007. A reconciliation of the beginning and ending amount
of unrecognized tax benefits is as follow:
|
2008
|
||||
|
Balance
at November 1, 2007
|
$ | 187,075 | ||
|
Gross
decrease – tax positions in prior period
|
(43,471 | ) | ||
|
Gross
increases – tax positions in current period
|
38,489 | |||
|
Balance
at October 31, 2008
|
$ | 182,093 | ||
As a
result of the implementation of FIN 48, the Company’s total gross liability for
unrecognized tax benefits was $187,075, including $54,000 of interest and
penalties. The Company recorded a change upon adoption to retained earnings on
November 1, 2007.
F-16
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
The
Company does not expect any material changes to the estimated amount of the
liability associated with its uncertain tax positions within the next 12 months.
During the year ended October 31, 2008, a reduction of $4,982 of interest
and penalties as a result of a revaluation of prior year balances was recorded
as a component of income tax expense in the statement of income. As of October
31, 2008, $50,100 of accrued interest and penalties are included in other
long-term liabilities in the balance sheet.
The
Company is currently not undergoing any tax examinations. Tax fiscal years ended
October 31, 2005 through 2008 remain subject to examinations.
Note
7 - Stock options
Incentive
and Non-Qualified Stock Option Plans
The Board
of Directors approved an Incentive Stock Option Plan (the "1990 Incentive Plan")
during fiscal 1990 that provides for grants of options to employees to purchase
up to 500,000 shares of common stock of the Company. Under its terms, the 1990
Incentive Plan terminated in 2000, and no additional options can be granted
under that option plan. However, options previously granted under the 1990
Incentive Plan remain outstanding and continue in effect until they either
expire or are forfeited or are exercised. As of October 31, 2008, a total of 313
options were still outstanding under the 1990 Incentive Plan, all of which are
currently exercisable.
The Board
of Directors also approved a Non-Qualified Stock Option Plan (the "1990
Non-Qualified Plan") during fiscal 1990 that provides for grants of options to
purchase up to 200,000 shares of common stock to officers, directors and other
recipients selected by the Board of Directors. Under its terms, the 1990
Non-Qualified Plan terminated in 2000, and no additional options can be granted
under that option plan. However, options previously granted under the 1990
Non-Qualified Plan remain outstanding and continue in effect until they expire,
are forfeited or are exercised. As of October 31, 2008, a total of 4,000 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. In May 2003, the Board of
Directors and Shareholders approved an increase to the 2000 Option Plan of
100,000 options. In June 2006, the Company’s shareholders approved an increase
to the 2000 Option Plan of 250,000 options. In May 2007, the shareholders
approved an increase to the 2000 Option Plan of 100,000 options. In May 2008,
the shareholders approved an increase to the 2000 Option Plan of 500,000
options. Accordingly, as of October 31, 2008, the authorized number of shares of
common stock that could be issued under the 2000 Option Plan was 1,310,000, of
which 566,170 are still outstanding and 540,474 options 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 and
non-qualified stock options are granted at an exercise price no less than the
fair value of the common stock on the date of grant.
F-17
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
Additional
required disclosures related to stock option plans
The fair
value of each option granted in 2008 and 2007 was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
2008
|
2007
|
|||||||
|
Dividend
yield
|
2.67 | % |
0%
to 1.06%
|
|||||
|
Expected
volatility
|
49.00 | % |
54%
to 58%
|
|||||
|
Risk-free
interest rate
|
1.80 | % |
4.16%
to 5.00%
|
|||||
|
Expected
lives
|
3.50
years
|
4.75
to 6 years
|
||||||
|
Weighted
average fair market value of options granted during the
year
|
$ | 1.42 | $ | 3.74 | ||||
|
Weighted
average fair market value of options vested during the
year
|
$ | 3.44 | $ | 3.41 | ||||
Expected
volatilities are based on historical volatility of the Company’s stock. The
Company used historical experience with exercise and post employment termination
behavior to determine the options’ expected life in 2007. During 2008, the
Company granted options with a vesting period of three years and an option life
of five years and since the Company has no historical experience in determining
the expected life of these new option terms the Company used the simplified
method to calculate the expected life of these option grants. The expected life
represents the period of time that options granted are expected to be
outstanding. The risk-free rate is based on the U.S. Treasury rate with a
maturity date corresponding to the options’ expected life. The dividend yield is
based upon the historical dividend yield. The Company estimates forfeiture rates
based upon historical exercise behavior.
Additional
information regarding all of the Company's outstanding stock options at October
31, 2008 and 2007 and changes in outstanding stock options in 2008 and 2007
follows:
|
2008
|
2007
|
|||||||||||||||
|
Shares
or Price Per Share
|
Weighted
Average Exercise Price
|
Shares
or Price Per Share
|
Weighted
Average Exercise Price
|
|||||||||||||
|
Options
outstanding at beginning of year
|
1,011,442 | $ | 3.81 | 974,122 | $ | 3.05 | ||||||||||
|
Options
granted
|
127,183 | 4.67 | 148,985 | 7.50 | ||||||||||||
|
Options
exercised
|
(40,295 | ) | 4.72 | (105,745 | ) | 1.87 | ||||||||||
|
Options
forfeited
|
(31,289 | ) | 7.22 | (5,920 | ) | 7.38 | ||||||||||
|
Options
outstanding at end of year
|
1,067,041 | $ | 3.77 | 1,011,442 | $ | 3.81 | ||||||||||
|
Options
exercisable at end of year
|
829,858 | $ | 3.84 | 712,457 | $ | 3.30 | ||||||||||
|
Option
price range at end of year
|
$ | .10 - $7.56 | $ | .10 - $7.56 | ||||||||||||
|
Aggregate
intrinsic value of options exercised during year:
|
$ | 108,472 | $ | 600,078 | ||||||||||||
|
Included
in the options outstanding are 500,871 in both 2008 and 2007 previously
granted to six officers and/or key employees of the Company under
employment agreements entered into by the Company with each of these
officers and employees.
|
||||||||
|
Weighted
average remaining contractual life of options outstanding at October 31,
2008: 5.53 years.
Weighted
average remaining contractual life of options exercisable at October 31,
2008: 5.85 years.
|
||||||||
|
Aggregate
intrinsic value of options outstanding at October 31, 2008:
$1,636,621.
|
||||||||
|
Aggregate
intrinsic value of options exercisable at October 31, 2008:
$1,398,421.
|
F-18
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
As of
October 31, 2008, $347,599 of expense with respect to nonvested stock-based
arrangements has yet to be recognized and is expected to be recognized over a
weighted average period of 1.67 years.
Note
8 - Retirement plan
The
Company sponsors a deferred savings and profit sharing plan under Section 401(k)
of the Internal Revenue Code. Substantially all of its employees may participate
in and make voluntary contributions to this defined contribution plan after they
meet certain eligibility requirements. The Board of Directors of the Company can
authorize additional discretionary contributions by the Company. The Company did
not make contributions to the plan in 2008 or 2007.
Note
9 - Related party transactions
The note
receivable from stockholder of $66,980 at October 31, 2008 and 2007 is due from
the President of the Company, bears interest at 6%, payable annually, and has no
specific due date. The note is collateralized by a lien on certain personal
property.
A
director of the Company is an employee of the Company’s public relations firm.
For the fiscal years ended October 31, 2008 and 2007, the Company paid the firm
$52,781 and $40,409, respectively, for services rendered to that
firm.
Note
10 - Legal proceedings
From time
to time, the Company is involved in legal proceedings that are related to its
business operations. The Company is not currently a party to any legal
proceedings that could have a material adverse effect upon its financial
position or results of operations.
Note
11 - Business acquisition
The
Company acquired substantially all of the assets and assumed certain liabilities
of RadioMobile Inc. (“RadioMobile”), a privately held San Diego, California
company on September 1, 2007. RadioMobile Inc. is an OEM provider of end-to-end
mobile management solutions implemented over wireless networks. RadioMobile has
developed software and hardware used by police departments and transportation
vehicles to receive and transfer electronic data. The RadioMobile purchase
agreement contains certain provisions containing contractual and/or legal rights
that could potentially create intangible assets apart from goodwill. The asset
purchase agreement has an earn out provision over three years based upon
revenues earned by RadioMobile operating as a separate division. The maximum
future consideration is $500,000. The purchase price for the RadioMobile asset
purchase included $166,667 in cash payments and $175,000 in stock issuance,
representing 30,919 shares at $5.66 and totaling $35,665 of guaranteed minimum
future consideration. Upon the resolution of a contingency based on earnings,
any additional consideration paid will be recorded by the acquiring enterprise
as an additional cost of the acquired enterprise. Minimum contingent
consideration amounts per the Asset Purchase Agreement were recorded upon
closing at their net present value, using an 8% discount rate. Any future
contingent consideration based on meeting certain earnings levels will be
accounted for as additional purchase consideration when the amounts are
determined.
F-19
RF
INDUSTRIES, LTD.
NOTES
TO FINANCIAL STATEMENTS
The
purpose of the acquisition was to combine Neulink’s industry leading modem
products, which enables the Company to enter and compete in the design and
marketing of mobile wireless communications systems. Goodwill recorded upon the
purchase acquisition is fully deductible for tax purposes.
The
acquisition of the RadioMobile assets has been accounted for as a purchase and,
accordingly, the net assets acquired were recorded at estimated fair values on
the date of acquisition. A summary of the allocation of the cost of the
acquisition to the net assets acquired as of September 1, 2007
follows:
|
Accounts
receivable
|
$ | 27,053 | ||
|
Inventory
|
133,963 | |||
|
Other
assets (prepaid, net fixed assets)
|
27,218 | |||
|
Intangible
assets:
|
||||
|
Software
|
47,522 | |||
|
Customer
list
|
33,945 | |||
|
Goodwill
|
107,631 | |||
|
Total
assets acquired
|
377,332 | |||
|
Assumed
liabilities
|
(164,000 | ) | ||
|
Net
assets acquired at closing
|
$ | 213,332 |
During
the year ended October 31, 2008, an additional amount of $38,612 was recorded as
goodwill, due to the division reaching the next level of sales beyond the
minimum contingent earn-out provision included in the Radiomobile Asset Sales
agreement. Total Radiomobile Goodwill at October 31, 2008 was
$146,243.
Assuming
the acquisition had taken place on the first day of the year ended October 31,
2007, unaudited net sales would have been approximately $15,600,000 while
unaudited net income and earnings per share information would not have been
materially different than the amounts shown on the accompanying statement of
income for the year ended October 31, 2007.
Note
12 – Dividends declaration
The
Company paid dividends of $0.12 and $0.06 per share for a total of $393,343 and
$196,375 during the fiscal years ended October 31, 2008 and 2007,
respectively.
Note 13 – Subsequent
events
In
November and December 2008, the Company repurchased an additional 100,000 shares
of the Company’s common stock in the open market. The average price of the
shares repurchased $4.99 per share.
In
December of 2008, the Company purchased 50,000 shares of common stock in a
privately negotiated transaction at a price of $4.13 per share.
On
December 15, 2008, the Board of Directors of the Company declared a quarterly
cash dividend of $0.03 per share. The dividend date of record is
December 31, 2008 and the payment date to stockholders will be January 15,
2008. Based on the Company’s current financial condition and its
current operations, the foregoing dividend payment is not expected to have a
material impact on the Company’s liquidity or capital resources.
F-20
SIGNATURE
In
accordance with Section 13 or 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.
|
By: |
/s/ Howard F. Hill
|
| Date: January 29, 2009 | Howard
F. Hill, President/CEO
(Principal
Executive Officer)
|
In
accordance with 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.
|
Date:
January 29, 2009
|
By: |
/s/ James S. Doss
|
| James
S. Doss, Chief Financial Officer
(Principal
Accounting Officer)
|
||
|
Date:
January 29, 2009
|
By: |
/s/ Howard F. Hill
|
| Howard
F. Hill, President/CEO
(Principal
Executive Officer)
|
||
|
Date:
January 29, 2009
|
By: |
/s/ John Ehret
|
| John Ehret, Director | ||
|
Date:
January 29, 2009
|
By: |
/s/ Marvin Fink
|
| Marvin Fink, Director | ||
|
Date:
January 29, 2009
|
By: |
/s/ William Reynolds
|
| William Reynolds, Director | ||
|
Date:
January 29, 2009
|
By: |
/s/ Robert Jacobs
|
| Robert Jacobs, Director | ||
|
Date:
January 29, 2009
|
By: |
/s/ Linde Kester
|
| Linde Kester, Director | ||