Fiscal 2005
Annual Report
President’s Letter to Shareholders
April 26th, 2006
Fellow Shareholders
Fiscal Year 2005, which ended October 31st, 2005, was another solid year for RF Industries. We
delivered our twelfth (12th) year of revenue growth and profitability in an industry that continues to
undergo tremendous change. In today’s communications landscape, Internet companies are offering
phone service, cable companies are offering broadband access to the Internet and traditional telecom
companies are offering video clips in the palm of your hand. As a result, RF Industries is navigating into
new market terrains, which translates into new challenges and exciting opportunities for you, our
shareholders and for our employees.
Our ability to continue to deliver solid results in this ever-changing market environment can be attributed
foremost to the talent of our employees. They have worked tirelessly during the years transforming our
company so that we can better serve the needs of our customers. Thanks to them, our customer loyalty
scores are the highest they have ever been.
Let me provide some brief examples from each of our divisions how they are contributing to our success.
RF Connector and Cable Assembly Division
The Connector and Cable Assembly Division – our largest division, consists of two units; one that
distributes connectors, and a unit that assembles cables using various connectors. The Connector unit of
the Connector and Cable Division now offers a wide variety of RoHS (lead-free) compliant,
competitively priced coaxial connectors and adapters. These various types of connectors expand both our
North American market place as well as our European customer base where RoHS compliance is
essential. The Connector Division has expanded its selection of kits that are used by field repair/test
engineers and lab technicians. Connectors, kits and adapters are sold world wide through distributors as
well as directly to OEM and government/military customers. The target markets include, but are not
limited to, WiFi, WLAN and microwave applications. The value added service provided by the cable
assembly portion of the Connector and Cable Division strengthens RF Industries’ product offerings,
which in turn broadens their target markets. The RoHS compliant cable assemblies offered range from
flexible cables to semi-rigid in all different types to make up over 100,000 configurations. The fact that
the cable assembly unit profits by connectors supplied primarily from the Connector unit allows the cable
assembly unit to be very competitive in their offerings. They have designed/organized the latest state-of-
the-art equipment thereby keeping labor costs to a minimum. The combination of connectors supplied by
the Connector unit of the Connector and Cable Division and lower automated labor costs makes the cable
assembly unit very competitive and one of our fastest growing divisions in the past few years.
RF Neulink Division
The RF Neulink Division has a complete line of point-to-point telemetry and mobile data radio modems
that it offers. The RF NL6000 wireless data modem, that the Neulink Division developed, has set new
standards for the wireless mobile data and telemetry industry. RF Neulink has also recently announced
the NL900LAN, which provides a complete hardware and software solution for adding wireless network
connectivity to serial based applications. The Transceiver serves as a conduit between the user and
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multiple destination devices via a local area network or the Internet. Worldwide applications for RF
Neulink products include, but are not limited to, industrial remote censoring and control, seismic and
volcanic monitoring, oil field and pipeline data monitoring, lottery remote data terminals, military
applications, remote camera control and tracking, perimeter and security system control and monitoring,
water and waste management, inventory control, HVAC remote control and monitoring, biomedical
hazardous material monitoring, automation of feed dispensing, water aeration and monitoring, remote
emergency generator monitoring, computer aided dispatching to mobile computers and wireless database
access used by Public Safety Agencies. We recently have received some significant interest in our
NL6000 radio modem and expect to increase sales of this unit this year.
Bioconnect Division
The Bioconnect Division has developed a broad range of FDA compliant cables. These cables are
targeted to the medical field by providing custom cables for numerous medical monitoring devices. In the
past months Bioconnect has designed and manufactured four lead atrial catheter cables, three lead
veterinary cables, three lead EEG telemetry unit cables, an expanded range of ribbon cables and their own
custom pinch grabber for ease and improved connection in heart monitoring equipment. Although the
Bioconnect Division currently is still a small contributor to our revenues, with the increased sales volume
that the division has been generating, a technically cross-trained work force and perfected work flow,
Bioconnect is the fastest growing division in RF Industries.
Aviel Electronics Division
Aviel Electronics, with innovative manufacturing and design capabilities, fabricates connectors, adapters
and antennas, with interfaces conforming to Military and Industrial specifications. Aviel provides
specialized products for various applications from OEM’s prototype development to connector
modifications to meet specific applications to the re-manufacturing of obsolete connectors in support of
equipment refurbishing. With its in-house manufacturing capabilities, Aviel can supply USA-made
production quantities to small and large customers in a timely manner. Aviel products conform to
Domestic and European Specialty Metals Regulations (RoHS). Aviel has transferred numerous
customers to the RF Connector and Cable Assembly division for the larger production quantity orders,
therefore, complimenting the total connector/cable assembly product line.
Worswick Electronics Division
The Worswick Electronics Division acquisition by RF Industries in September of 2005 represents an
unparalleled opportunity for sales growth in a niche sector. We have identified sales areas where margins
for this new division can be increased significantly; including in the division’s custom harnesses, multi-
conductor cables, and over-the-counter sales of purchased products. The strengths of Worswick lie in
providing customized work for engineering firms in the R&D sector. The small sales orders for quick
turn around capability has relieved the RF Cable Assembly unit from the need to service such orders so
that the Cable Assembly unit can continue to focus on the high volume production sales orders.
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Fiscal 2005 Results:
For fiscal year ended October 31st, 2005, sales increased 17% to a record $13,152,000, compared to sales
of $11,227,000 in fiscal 2004. Net income was $445,000, or $0.12 per diluted share, compared to
$1,224,000, or $0.33 per diluted share, for fiscal 2004. Results for fiscal 2005 include expenses of
$551,000 for the retirement of stock options and expenses of approximately $400,000 for the
implementation of controls and procedures of compliance with the Sarbanes-Oxley Act. Since the
majority of the investment in the Sarbanes-Oxley compliance made in Fiscal year 2005 represented the
cost of establishing these procedures, we anticipate that future on-going compliance expenditures will be
significantly less than this year, if the ground rules stay the same.
Fiscal 2006 First Quarter Results:
The fiscal year 2006 first quarter was a record first quarter. Sales for the first quarter, ended January 31st,
2006, increased 18% to a record $3,375,000, compared to $2,868,000 in the same quarter last year. Net
income increased 29% to $265,000, or $0.07 per diluted share, compared to $206,000, or $0.05 per
diluted share in the first quarter last year. Operating income for the quarter increased 22% with lower
general and administrative expenses.
At January 31st, 2006, RF Industries reported cash and cash equivalents of $4,664,000, investments in
available-for-sale securities of $1,022,000, working capital of $10,989,000, a 17 to 1 current ratio, no
long-term debt and stockholders’ equity of $11,717,000, or $3.70 per share.
Looking Ahead:
Overall, we have made solid progress during fiscal 2005, but we have more to do. As we look to build on
the solid foundation we have established, we will continue to position ourselves to meet our customer’s
needs, seek new business growth opportunities through potential merger(s) and acquisitions, drive
profitable growth and create long-term shareholder value. Along the way, we intend to maintain the
highest standards of corporate governance and business ethics while continuing to support opportunities
around the world.
RF Industries’ Board of Directors and employees are unsurpassed in the industry in terms of experience
and expertise. It is our goal to continue to execute our strategy, live our core values, use our innovation to
overcome our most difficult challenges, and seize the most promising opportunities that lie ahead.
We thank you for the continued trust you have placed in us to steward your company.
Sincerely,
Howard F. Hill
President/CEO
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Abridged and Edited Copy of Annual Report
(Form 10-KSB)
For the fiscal year ended October 31, 2005
Commission File Number 0-13301
RF INDUSTRIES, LTD.
7610 Miramar Road, Bldg. 6000, San Diego, California 92126-4202
(858) 549-6340 FAX (858) 549-6345
Revenues for the year ended October 31, 2005 were $13,151,000.
The approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of
October 31, 2005, based on the closing price of $4.94 for the Common Stock of the Company, as reported
on October 31, 2005, was $15,227,654. As of October 31, 2005, the registrant had 3,082,521 outstanding
shares of common stock, $.01 par value.
Forward-Looking Statements:
Certain statements in this Annual Report on Form 10-KSB, and other oral and written statements made by
the Company from time to time are “forward looking statements” within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, including those that discuss strategies, goals, outlook
or other non-historical matters, or projected revenues, income, returns or other financial measures. In
some cases forward-looking statements can be identified by terminology such as “may,” “will,” “should,”
“except,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of
such terms or other comparable terminology. These forward-looking statements are subject to numerous
risks and uncertainties that may cause actual results to differ materially from those contained in such
statements. Among the most important of these risks and uncertainties are the ability of the Company to
continue to source its raw materials and products from its suppliers and manufacturers, and the market
demand for its products, which market demand is dependent to a large part on the state of the
telecommunications industry.
Important factors which may cause actual results to differ materially from the forward looking statements
are described in the Section entitled “Risk Factors” in the Form 10-KSB, and other risks identified from
time to time in the Company’s filings with the Securities and Exchange Commission, press releases and
other communications. The Company assumes no obligation to update these forward-looking statements
to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.
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PART I
ITEM 1.
BUSINESS
General:
RF Industries, Ltd. (hereinafter the “Company”) is a provider of interconnect products and
systems for radio frequency (RF) communications products and wireless digital transmission systems.
For internal operational purposes, and for marketing purposes, the Company currently classifies its
operations into the following five related divisions: (i) The RF 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 custom RF
connectors primarily for aerospace and military customers, (iii) Worswick Division distributes and sells
coaxial and other connectors and cable assemblies primarily for local multi-media and communications
customers; (iv) the Bioconnect Division manufactures and distributes cabling and interconnect products to
the medical monitoring market; and (v) the 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.
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 on Form 10-KSB, quarterly reports on Form 10-QSB, 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, is not and is not intended to be incorporated into this Annual
Report on Form 10-KSB.
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 WiFi and broadband wireless markets. The
Company’s RF connectors are used in thousands of different devices, products and types of equipment.
While the models and types of devices, products and equipment may change from year to year, the
demand for the types of connectors used in such products and offered by the Company does not fluctuate
with the changes in the end product incorporating the connectors. In addition, since the Company’s
standard connectors can be used in a number of different products and devices, the discontinuation of one
product does not make the Company’s connectors obsolete. Accordingly, most connectors carried by the
Company can be marketed for a number of years and are only gradually phased out. Furthermore,
because the Company’s connector products are not dependent on any line of products or any market
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segment, the Company’s overall sales of connectors do not fluctuate materially when there are changes to
any product line or market segment. Sales of the Company’s connector products are more dependent
upon the overall economy and on the Company’s ability to market its products. However, the Company’s
sales of connectors and cable assemblies have increased in the past three years as the overall market
demand for wireless products that use the Company’s connectors has increased. The Company believes
that the continuing growth in new wireless products as well as its increased sales in the military/aerospace
markets will result in an overall increase in the demand for the radio frequency connectors and cable
assemblies that the Company distributes.
Third party foreign manufacturers located in Asia manufacture the Company’s RF connectors for
the Company. The Company has been designing, producing and selling coaxial connectors since 1987
and the Connector 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 and are sold through distributors or
directly to major OEM (Original Equipment Manufacturer) accounts. Cable assemblies consist of both
standard cable assemblies and assemblies that are custom manufactured for the Company’s clients. The
Company offers a line of cable assemblies with over 100,000 cable products. The Company launched its
cable assembly operations in 2000, and cable assembly products constituted the second largest generator
of revenues for the Company during the fiscal year ended October 31, 2005.
Aviel Electronics Division The Company acquired the business and all of the assets of Aviel
Electronics in August 2004. Aviel has a 48 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 capabilities, expanding the Company’s products in the
military and commercial aerospace markets, and expanded the Company’s client base.
Worswick Division
In September 2005, the Company acquired the assets of Worswick
Industries, Inc., a privately held 20 year old California company based in San Diego, that sells coaxial
connector solutions and also manufacturers RF cable assemblies for individuals and companies that
design, build, operate, and maintain personal and private multi-media, wireless voice, data and messaging
systems. Another complimentary operation to Connector and Cable Division it contributed very nominal
revenues during the fiscal year ended October 31, 2005.
Bioconnect Division The Bioconnect Division is engaged in the design, manufacture and sale
of cables and interconnects for medical monitoring applications, such as disposable ECG cables, infant
apnea monitors in hospitals, patient leads, snap leads and connecting wires. The Company acquired the
Bioconnect division in December 2000.
RF Neulink Division The RF Neulink Division designs and manufactures, through outside
contractors, wireless data products commonly known as RF data links and wireless modems. These radio
modems and receivers provide high-speed wireless connections over longer distances where wire
connections may not be desirable or feasible. In addition to selling its own radio modem, RF Neulink
also distributes antennas, transceivers and related products of other manufacturers. The RF Neulink
Division also offers complete turnkey packages for numerous remote data transmission applications. The
Company established the RF Neulink Division in 1984.
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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 Connector
and Cable 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, WiFi and broadband wireless applications, cellular and PCS
infrastructure, GPS (Global Positioning Systems), mobile radio products, aircraft, video surveillance
systems, cable assemblies and
include
telecommunications companies, circuit board manufacturers, OEM, consumer electronics manufacturers,
audio and video product manufacturers and installers, and satellite companies. The Connector and Cable
Division markets approximately 1,500 types of connectors, which range in price from $0.40 to $125.00
per unit.
the Company’s connectors
test equipment. Users of
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, research and development 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.
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.
Aviel Electronics Products:
The Aviel Electronics Division designs, manufactures and sells specialized connectors. Standard
configuration and custom connectors include connectors ranging from subminiature to type “L” to Nan-
Hex, SMA, SMB, SMC, TNC, BNC, SC and NL. Aviel also specializes in the design and manufacture of
non-standard configurations required for specific applications, hard to locate and discontinued connectors
for 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
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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:
The Bioconnect group designs, manufactures and sells specialized electrical cabling and
interconnect products used in the medical monitoring market. These products consist primarily of patient
monitoring cables, ECG cables, snap leads, and molded safety leads for neonatal monitoring electrodes.
The products, which are used in hospitals, clinics, doctor offices, ambulances and at home are replaced
frequently in order to ensure maximum performance.
RF Neulink Products:
The wireless data products available from the RF Neulink Division come in a variety of
configurations to satisfy the requirements of the various vertical markets. Transmitter and receiver
modules come in a wide range of power output and frequency ranges and are used to convey data or voice
from point to point. Additionally, dumb or smart programmable modems are available in a wide range of
speeds and frequency/price ranges. Accessory modules have been developed for remotely controlling and
monitoring electrical devices.
The products sold by the RF Neulink Division include both its own products and products of
other manufacturers that are distributed by the Neulink Division. The products offered by the Neulink
Division include:
• RF9600 UHF and VHF wireless modems.
• DAC9600'S incorporating RF9600's with Digital, Analogue, and Relay I/O modules
• NL6000 UHF and VHF wireless moderns
• NL900 and NL2400 Spread Spectrum point to point wireless modems
• Ornnex Control Systems 900mhz Spread-Spectrum wireless modems and I/O modules
• Teledesign high-speed wireless modems in VHF, UHF and 900 MHz frequencies
• BlueWave, Maxrad. and Antenex antennas
• Custom Design and Engineering services
Current applications in use worldwide for Neulink products are various and include seismic and
volcanic monitoring, industrial remote censoring/control in oil fields, pipelines and warehousing, lottery
remote terminals, various military applications, remote camera control and tracking, perimeter and
security system control/monitoring, water and waste management, inventory control, HVAC remote
control and monitoring, biomedical hazardous material monitoring, fish farming automation of food
dispensing, water aeration and monitoring, remote emergency generator startup and monitoring, police
usage for mobile warrant database access
In 2004 fiscal year, the Neulink Division introduced a new radio modem that it developed. The
new NL6000 radio modem was repositioned within the marketplace to compete against a more upscale
market segment and was designed to meet the FCC’s new mandatory requirement to provide narrow-band
channels that became effective in January 2004. 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.
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Marine Corps and is currently completing the non-recurring engineering for this product and has
an initial purchase order for 300 units for delivery in fiscal year 2006.
Foreign Sales:
Direct export sales by the Company to customers in South America, Canada, Mexico, Europe,
Australia, the Middle East, and Asia accounted for approximately 10% of Company sales for the fiscal
year ended October 31, 2005. The majority of the export sales during these periods were to Canada and
Mexico. The Company is attempting to expand its foreign distribution efforts under its “RFI” logo, and is
attempting to obtain additional foreign private label customers.
The Company does not own, or directly operate any manufacturing operations or sales offices in
foreign countries.
Distribution, Marketing and Customers:
Sales methods vary greatly between its divisions.
The Connector and Cable Assembly Divisions currently sell their products primarily through
warehousing distributors and OEM customers who utilize coaxial connectors and cable assemblies in the
manufacture of their products. Since there are many OEMs who are not served by any of the Company’s
distributors, the Company’s goal is to increase the number of OEMs that purchase connectors directly
from the Company.
The Aviel Division will continue to sell products to its customer base with the addition of
customers referred through the Connector and Cable Division. The Aviel 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. A proactive
marketing plan is currently in development to enhance and expand the current customer base.
The Bioconnect group markets its products to the medical market through hospital dealers and
distributors. The Bioconnect Division also sells its products to OEMs who incorporate the leads and
cables into their product offerings.
The Neulink Division sells its products directly or through manufacturers representatives, system
integrators and OEM’s. System integrators and OEMs integrate and/or mate Company’s products with
their hardware and software to produce turnkey wireless systems. These systems are then either sold or
leased to other companies, including utility companies, financial institutions, petrochemical companies,
government agencies, and irrigation/water management companies.
Manufacturing:
The Company contracts with outside third parties for the manufacture of all its coaxial
connectors, and Neulink products. However, virtually all of RF cable assemblies sold by the Company
during the fiscal year ended October 31, 2005 were manufactured by the Company at its facilities in
California. 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 not dependent on any one or only a few manufacturers for its coaxial
connectors and cable assemblies. The Company does have purchase agreements with manufacturers for
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its connectors, cable and Neulink products. RF Industries has in-house design engineers who
create the engineering drawings for fabrication and assembly of connectors and cable assemblies.
Accordingly, the manufacturers are not primarily responsible for design work related to the manufacture
of the connectors and cable assemblies. However, the third party manufacturers of the Neulink products
are solely responsible for design work related to the manufacture of the Neulink Division’s products.
Neulink’s products are manufactured by numerous manufacturers in the United States, and the Company
is not dependent on one or a few manufacturers for its Neulink products.
The Bioconnect Division has designed and manufactured its own products for over 20 years
(including as an unaffiliated company before being acquired by the Company in 2000). The
manufacturing process for the Bioconnect medical cables includes all aspects of the product, from the
design to mold design, mold fabrication, assembly and testing. The Bioconnect product line produces its
medical interconnect products in both high volume manufacturing and for custom or low volume uses.
The Aviel Electronics Division manufactures all its connectors at its Las Vegas, Nevada
manufacturing facility. The Aviel Electronics Division has designed and manufactured its own products
for 48 years (including as an unaffiliated company before being acquired by the Company in August
2005). The manufacturing process for the Aviel connectors includes all aspects of the product from
design, tooling, fabrication, assembly and testing. The Aviel Electronics product line produces its
connector products for low volume custom manufacturing uses, for the military, aerospace and other
unique applications.
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.
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.”
Raw Materials:
Connector materials are typically made of commodity metals 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 Connector
and Cable Division obtains coaxial connectors from RF Connector. The Company believes there are
numerous domestic and international suppliers of coaxial connectors. Nevertheless, should the Company
experience a material delay in obtaining raw materials and component parts from its existing suppliers,
until alternate arrangements are made, the Company’s ability to meet its customer’s needs may be
adversely affected.
Neulink purchases its electronic products from various U.S. suppliers, and all Neulink wireless
modem transceivers are built in the United States. The Company believes electronic components used in
these products are readily available from a number of domestic suppliers and from other foreign suppliers.
Aviel connector materials are typically made of commodity metals and include some application
of precious materials, including silver and gold. The Aviel Electronic Division purchases almost all of its
connector products from vendors in Asia and the United States. The Company believes the connector
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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.
Personnel:
As of December 31, 2005, the Company employed 88 full-time employees, of whom 17 were in
administration, sales and management, 68 were in manufacturing and assembly, and 3 were engineers
engaged in design, 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 spent approximately $45,000 and $40,000 on research and development in the
fiscal years ended October 31, 2005 and 2004, respectively. A significant portion of research and
development expenses during the past two years were spent on the development of the Neulink Division's
NL6000 radio modem. Since the development of the NL6000 has now been completed, research and
development expenses decreased significantly. Research and development activities of the Company
consist of activities intended to produce new products not marketed by others that can be marketed to the
industry in general.
In addition to research and development activities, the Company also spent approximately
$1,000,000 during the past two fiscal years on engineering. Engineering activities consist of the design
and development of new products for specific customers, the design and engineering of new products and
the redesign of existing products to keep up with changes in the industry and products offered by the
Company's competitors. Engineering work often is carried out in collaboration with the Company's
customers.
The increase in business in the military/aerospace sector has encouraged the Company to pursue
the development of an ISO 9000 system thereby improving its’ competitive edge.
Patents, Trademarks and Licenses:
The Company does not own any patents on any of its products, nor has it registered any product
trademarks. Because of the Company carries thousands of separate types of connectors and other
products, most of which are available to the Company’s customers from other sources, the Company does
not believe that its business or competitive position is dependent on patent protection.
Warranties and Terms:
The Company warrants its products to be free from defects in material and workmanship for
varying warranty periods, depending upon the product. Products are generally warranted to the dealer for
one year, with the dealer responsible for any additional warranty it may make. Certain Neulink products
are sold directly to end-users and are warranted to those purchasers. The RF Connector products are
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warranted for the useful life of the connectors. Although the Company has not experienced any
significant warranty claims to date, there can be no assurance that it will not be subjected to such claims
in the future.
The Company usually sells to customers on 30-day terms pursuant to invoices and does not
generally grant extended payment terms. Sales to most foreign customers are made on cash terms at time
of shipment. Customers may delay, cancel, reduce, or return products after shipment subject to a
restocking charge.
Competition:
Management estimates that the Connector and Cable Division has over 50 competitors in the
approximately $1.4 billion 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. RF Connector competes on the basis of product quality, product availability, price,
service, delivery time and value-added support to its distributors and OEM customers. Since the
Company’s strategy is to provide a broad selection of products in the areas in which it competes and to
have a ready supply of those products available at all times, the Company normally has a significant
amount of inventory of its connector products. The Bioconnect group competes with numerous other
companies in all areas of its operations, including the manufacture of OEM custom products and medical
cable products. Most of the competitors of Bioconnect are larger and have significantly greater financial
resources than Bioconnect.
There are numerous small privately held manufacturers and marketers of connectors, but Aviel
Electronics has specialized in microwave and radio frequency (RF) custom connectors which lowers the
number of its direct competitors. Because Aviel Electronics is an approved vendor of leading aerospace,
electronics, OEM and government agencies in the United States and abroad, competition is limited to
those manufacturers who have been approved.
Major competitors for Neulink include Microwave Data Systems and Data Radio. Although a
number of larger firms could enter Neulink’s markets with similar products, Neulink’s strategy is focused
on serving and providing specific hardware and software combinations with the goal of maintaining a
strong position in selected “niche” wireless applications. While the Neulink Division’s competitors offer
products that are substantially similar to Neulink’s radio modems, the Neulink Division tries to enhance
its competitive position by offering additional service before, during, and after the sale.
Government Regulations:
The Company’s products are designed to meet all known existing or proposed governmental
regulations. Management believes that the Company currently meets existing standards for approvals by
government regulatory agencies for its principal products. Because the products designed and sold by the
Aviel Electronics Division are used in commercial and military aerospace products, its products are
regulated by various government agencies in the United States and abroad.
Neulink products are subject to the regulations of the Federal Communications Commission
(FCC) in the United States, the Department of Communications (D.O.C.) in Canada, and the future
E.C.C. Radio Regulation Division in Europe. The Company’s present equipment is “type-accepted” for
use in the United States and Canada. Neulink offers products that comply with current FCC, Industry
Canada, and some European Union regulations. The system integrator, or end user, is responsible for
compliance with applicable government regulations.
12
Bioconnect’s products are subject to the regulations of the U.S. Food and Drug Administration.
ITEM 2.
PROPERTIES:
The Company leases its corporate headquarters building at 7610 Miramar Road, Building 6000,
San Diego, California. The building consists of approximately 11,000 square feet which houses
administrative, sales and marketing, engineering, production and warehousing for the Company’s
Connector and Bioconnect Divisions. The lease for this facility expires on May 31, 2010. In addition,
the Company also leases the following facilities:
(i)
(ii)
(iii)
(iv)
The cable assembly facilities of the Connector and Cable Division operates in a 3,180
square foot facility that is located adjacent to the Company’s corporate headquarters. The
lease for this space expires on May 31, 2010.
The Neulink Division operates from a separate building that is located near the
Company’s corporate headquarters at 7606 Miramar Road, Building 7200. RF Neulink’s
building consists of approximately 2,500 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.
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 lease
for the Las Vegas offices expires November 30, 2007.
The Worswick Division currently leases an approximately 6,000 square foot facility
located at 7352 Convoy Court, San Diego, California. The current lease expires January
31, 2007.
The aggregate monthly rental for all the Company’s facilities currently is approximately $27,800
per month, plus utilities, maintenance and insurance.
The Company currently believes that its facilities are sufficient to meet its foreseeable needs.
However, should the Company require additional space, the Company believes that suitable additional
space is available near the Company’s current facilities. In addition, the Company believes that it will be
able to renew its existing leases upon the expiration of the current leases or, if desirable or necessary,
locate alternate facilities on substantially similar terms.
ITEM 3.
LEGAL PROCEEDINGS:
The Company is not currently a party to any pending legal proceedings.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
13
PART II
ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
The Company’s Common Stock is listed and trades on the NASDAQ Small Cap Market under
the symbol “RFIL.”
For the periods indicated, the following tables sets forth the high and low sales prices per share of
Common Stock. These prices represent inter-dealer quotations without retail mark-up, markdown or
commission and may not necessarily represent actual transactions.
Quarter
Fiscal 2005
High
Low
November 1, 2004 - January 31, 2005 ...............
February 1, 2005 - April 30, 2005......................
May 1, 2005 - July 31, 2005...............................
August 1, 2005 - October 31, 2005 ....................
Fiscal 2004
November 1, 2003 - January 31, 2004 ...............
February 1, 2004 - April 30, 2004......................
May 1, 2004 - July 31, 2004...............................
August 1, 2004 - October 31, 2004 ....................
$13.02
9.09
6.35
6.15
$ 9.04
8.48
10.39
8.44
$ 6.30
5.25
5.04
4.70
$ 3.85
5.95
7.35
6.20
As of April 11, 2006, there were 620 holders of the Company’s Common Stock according to the
records of the Company’s transfer agent, Continental Stock Transfer & Trust Company, New York, New
York, not including holders who hold their stock in “street name”.
The Company has not paid any dividends to date. Although the Company does not presently
intend to pay cash dividends on its Common Stock in the foreseeable future, depending on the Company’s
financial condition and its financial needs, the Board of Directors may consider issuing dividends in the
future.
There were no sales of equity securities by the Company that were not registered under the
Securities Act during fiscal 2005.
The Company did not repurchase any of its shares during the fourth quarter of the fiscal year
covered by this report.
ITEM 6.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and
14
related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to
bad debts, inventories and contingencies on an ongoing basis. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions. One of the accounting policies that involve significant judgments
and estimates concerns our inventory valuation. Inventories are valued at the weighted average cost
value. Certain items in the inventory may be considered obsolete or excess and, as such, we may
establish an allowance to reduce the carrying value of these items to their net realizable value. Based on
estimates, assumptions and judgments made from the information available at the time, we determine the
amounts of these allowances. Because inventories have, during the past few years, represented over one-
third of our total assets, any reduction in the value of our inventories would require us to take write-offs
that would affect our net worth and future earnings. Another accounting policy that involves significant
judgments and estimates is our accounts receivable allowance valuation. The Company routinely assesses
the financial strength of its customers and maintains an allowance for doubtful accounts that management
believes will adequately provide for credit loses.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (R), “Accounting for Stock-Based
Compensation.” SFAS 123 (R) establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. SFAS No. 123 (R) focuses primarily on
accounting for transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123 (R) requires that the fair value of such equity instruments be recognized as
expense in the historical financial statements as services are performed. Prior to SFAS 123 (R), only
certain pro forma disclosures of fair value were required. SFAS 123 (R) shall be effective for all of the
Company’s interim and annual reporting periods commencing on November 1, 2006 and is expected to
have a material impact on the financial statements of the Company during the fiscal year 2007 and
thereafter.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting for certain
financial
that, under previous
pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS
No. 150 requires that those instruments be classified as liabilities in the balance sheet.
instruments with characteristics of both
liabilities and equity
SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial
instruments. One type is mandatory redeemable shares, which the issuing company is obligated to buy
back in exchange for cash or other assets. A second type included put options and forward purchase
contracts, which involves instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are liabilities under SFAS No. 150
are obligations that can be settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as market index, or varies inversely with the value of the issuers’ shares.
SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its
entirety.
Most of the provisions of SFAS No. 150 are consistent with the existing definition of liabilities in
FASB Concepts Statement No. 6, “Elements of Financial Statements.” The remaining provisions of SFAS
No. 150 are consistent with the FASB’s proposal to revise that definition to encompass certain obligations
that a reporting entity can or must settle by issuing its own shares. SFAS No. 150 was effective for
15
financial instruments entered into or modified after May 31, 2003 and otherwise was effective at
the beginning of the first interim period beginning after June 15, 2003. The adoption of this new
accounting pronouncement did not have a material impact on the Company’s financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Pricing." SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) that previously stated that ". . . under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, SFAS
No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The adoption of this new accounting pronouncement did not
have a material impact on the Company’s financial statements.
In December 2004, the FASB issued SFAS No. 153, “Accounting for Nonmonetary
Transactions.” SFAS No. 153 is based on the principle that exchanges of no monetary assets should be
measured based on the fair value of the assets exchanged. The guidance in APB Opinion 29, however,
included certain exceptions to that principle. SFAS No. 153 amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The adoption of this new accounting pronouncement did not have a material
impact on the Company’s financial statements.
In May 2005, the FASB issued SFAS No. 154 (R) “Accounting Changes and Reporting
Accounting Changes in Interim Financial Statements” for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 (R) applies to all voluntary changes in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. Under the provisions of APB Opinion 20,
most accounting changes were recognized by including in net income of the period of the change the
cumulative effect of changing to the newly adopted accounting principle. SFAS No. 154 (R) improves
financial reporting because its requirement to report voluntary changes in accounting principles via
retrospective application, unless impracticable, enhances the consistency of financial information between
periods. That improved consistency enhances the usefulness of the financial information, especially by
facilitating analysis and understanding of comparative accounting data.
Also, in instances in which full retrospective application is impracticable, SFAS NO. 154 (R)
improves consistency of financial information between periods by requiring that a new accounting
principle be applied as of the earliest date practicable.
SFAS No. 154 (R) also requires that a change in depreciation, amortization or depletion methods
for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is affected by
a change in accounting principle. The provisions of SFAS No. 154 (R) better reflect the fact that an entity
should change its depreciation, amortization or depletion methods only in recognition of changes in
estimated future benefits of an asset, in the pattern of consumption of those benefits, or in the information
available to the entity about those benefits. The adoption of this new accounting pronouncement did not
have a material impact on the Company’s financial statements.
16
OVERVIEW
Historically, over 85% of the Company’s revenues are generated by the Connector and Cable
Assembly Division from the sale of connector products and connector cable assemblies. Sales of
connectors are expected to continue be the largest portion of revenues in the future since the Company
acquired the Aviel Electronics Division in August 2004 and the Worswick Division in September 2005,
both of which also sell connectors and cable assemblies. Because the Company sells thousands of
connector products for uses in thousands of end products, sales are relatively stable and not dependent
upon any one industry sector or 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, 2005, net sales
did, however, increase by 17% over the net sales in the prior year due to an overall increase in the
economy (in particular, a rebound in the telecommunications and wireless industries, which resulted in
increased sales to those industries) and from the acquisition of the Aviel and Worswick divisions.
The Company’s financial results were adversely affected for the fiscal year ended October 31,
2005 due to approximately $400,000 of expenses the Company incurred in implementing new Sarbanes-
Oxley related controls and procedures, and the repurchase of 100,000 stock options (at a cost of
$551,000) from Howard Hill the Company’s Chief Executive Officer. Neither of these expenses is
expected to re-cur in future periods.
As a result of our increased net sales and continued management of normal operating expenses,
the Company generated net income for the 12th consecutive year.
Despite the one-time cash outlays related to the Sarbanes-Oxley compliance and the repurchase
of Mr. Hill’s options, the Company generated cash from our operations and, as a result, the amount of
cash and cash equivalents held by the Company as of October 31, 2005 increased to $4,507,000 from
$4,497,000 in the prior year. Since the Company has no debt other than normal accounts payable and
accrued expenses it will continue to have sufficient cash to fund all of its anticipated financing and
liquidity needs for the foreseeable future.
Financial Condition:
The following table presents the key measures of financial condition as of October 31, 2005 and 2003:
Amount
Cash and cash equivalents ..... $4,507,219
Current assets ......................... 11,120,406
Current liabilities ...................
712,735
Working capital...................... 10,407,671
Property and equipment -
net...........................................
465,735
Total assets............................. 12,025,139
Stockholders’ equity .............. 11,206,404
2005
2004
% Total
Assets
37.5%
92.5%
5.9%
86.6%
3.9%
100.0%
93.2%
Amount
$4,497,332
10,259,453
563,056
9,696,397
563,040
11,070,722
10,454,666
% Total
Assets
40.6%
92.7%
5.1%
87.6%
5.1%
100.0%
94.4%
17
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, 2006. The Company does not, however,
currently have any commercial banking arrangements providing for loans, credit facilities or similar
matters should the Company need to obtain additional capital. Management believes that its existing
assets and the cash it expects to generate from operations will be sufficient during the current fiscal year
are based on the following:
• As of October 31, 2005, the amount of cash and cash equivalents was equal to $4,507,000 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, 2005, the Company had approximately $11,120,000 in current assets, and only
$713,000 of current liabilities.
Management believes that based on the Company’s financial condition at October 31, 2005, 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.
The Company is not a party to off-balance sheet arrangements and does not engage in trading
activities involving non-exchange traded contracts. In addition, the Company has no financial guarantees,
debt or lease agreements or other arrangements that could trigger a requirement for an early payment or
that could change the value of the Company’s assets.
Inventories as of October 31, 2005 were $4,181,000, a $391,000 increase from October 31, 2004.
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 have been increasing, the Company has increased its inventory
levels to be able to meet anticipated demand. The Company continuously monitors its inventory levels
and, because of continued increases in sales, may continue increasing its inventory levels.
The net income for the fiscal year ended October 31, 2005 was $445,000. Net income from
operations was adversely impacted during the most recent fiscal year do to approximately $400,000 of
expenses incurred in establishing and supporting Sarbanes-Oxley compliant controls and procedures, and
net income from non-operations was impacted due to the repurchase of options by the Company for
100,000 shares of stock from the Chief Executive Officer for $551,000. Most of the Sarbanes-Oxley
expenditures represented one-time set-up costs, and the Company’s future Sarbanes-Oxley compliance
costs are not anticipated to be as large as during the past fiscal year. The Company does not anticipated
that it will repurchase options in the future. For the prior year ended October 31, 2004, net income was
$1,224,000.
18
Net cash provided by operating activities for the year ended October 31, 2005 was $171,000
primarily due to the reduction on net income and increase in net Accounts Receivable of $375,000 and
additional investment in inventories of $391,000. In fiscal 2004, net cash provided from operations of
$1,464,000 exceeded net income due to the non-cash depreciation and amortization expenses certain other
factors.
Net cash used in investing activities was $334,000 of which $225,000 was used for the
acquisition of the Worswick Industries Division in September 2005 and the purchase of $118,000 of
additional capital equipment. In September 2005, the Company purchased all of the assets of Worswick
Industries, an established connector seller and cable assembler and marketer located in San Diego,
California. The purchase price paid for the acquisition was $237,500, of which $225,000 was paid in cash
to the seller at the closing and $12,500 was paid in 2,212 shares of the Company’s common stock. Of the
purchase price, $25,000 is being held in escrow for one year as security for certain representations made
by the seller. In fiscal 2004, net cash used in investing activities was $650,000, consisting primarily of
the acquisition of the Aviel Division and some capital expenditures made during that year.
Financing activities increased the Company’s net cash by $173,000 in the current year due to the
receipt of funds from the exercise of stock options by the Company’s employees. In fiscal 2004, financing
activities increased the Company’s net cash by $999,000 as a result of the exercise of stock options by the
Company’s employees.
Results of Operations:
The following summarizes the key components of the results of operations for the years ended
October 31, 2005 and 2004:
2005
2004
Amount
% of Net Sales
Amount
% of Net Sales
Net sales ...............................
Cost of sales .........................
Gross profit ..........................
Engineering expenses...........
Selling and general
expenses ...............................
Operating income.................
Other income
Income before income
taxes .....................................
Income taxes ........................
Net income ...........................
$13,151,576
6,966,101
6,185,475
553,542
4,890,002
741,931
96,729
838,660
394,000
444,660
100.0%
53.0%
47.0%
4.2%
37.2%
5.6%
.7%
6.4%
3.0%
3.4%
$11,227,242
5,539,945
5,687,297
486,202
3,154,074
2,047,021
17,110
2,064,131
840,000
1,224,131
100.0%
49.3%
50.7%
4.3%
28.1%
18.2%
.2%
18.4%
7.5%
10.9%
Net sales of the Company increased by $1,924,000 or 17%, for the fiscal year ended October 31,
2005 compared to the fiscal year ended October 31, 2004. The increase in fiscal 2005 is attributable to an
increase in sales of $1,089,000 for connector and cable assembly products as the overall market demand
increased, particularly for wireless applications during the fiscal year. In addition to an increase in
demand in the Company’s connector and cable assembly products, Neulink Division’s radio and antenna
products sales also increased $155,000 during the October 31, 2005 fiscal year. Finally, the acquisition of
the Aviel Division in August 2004 contributed approximately $700,000 in additional revenues during the
entire fiscal year. Aviel will continue to supplement the Company’s connector sales in the future. The
increase in revenues at the Company’s five other divisions were partly offset by a decrease in revenues of
19
$56,000 in the Bioconnect Division due to a hold put on additional product purchases from its primary
customer.
The Company’s gross profit increased by $498,000 to $6,185,000 in 2005 from $5,687,000 in
2004 due to the increase in net sales. As a percent of net sales, gross profit decreased to 47% in fiscal
2005 from 50.7% of sales in fiscal 2004. The decrease in the gross profit percentage is primarily due to
manufacturing start-up costs on new products by Bioconnect and an increase in its Connector landed
product costs.
Engineering expenses, which include research and development expenses, increased by $68,000
from $486,000 in fiscal 2004 to $554,000 in fiscal 2005. However, because of the 17% increase in net
sales, as a percent of net sales, engineering expenses decreased from 4.3% in fiscal 2004 to 4.2% in fiscal
2005. The increase in engineering expenses is attributable to the design and development activities
related new connector design development and modifications and enhancements to the design of the
Neulink modem.
Selling and general expenses increased by $1,736,000, or by 55%, from $3,154,000 in fiscal 2004
to $4,890,000 in fiscal 2005. A substantial portion of the increased selling and general expenses is due to
the expenses overall of $400,000 incurred in the implementation of controls and procedures mandated
under Section 404 of the Sarbanes-Oxley Act of 2002 and the associated costs of additional audit and
legal expenses. Other additional selling and general expenses include an entire year of Aviel selling and
general expenses of $74,000 versus $16,000 for the last quarter of 2004 when Aviel was acquired and the
one-time $551,000 expense incurred as a result of the repurchase of 100,000 stock options from the
Company’s Chief Executive Officer. Nominal additional marketing and general and administrative
expenses of $45,000 was incurred for the new Worswick Industries Division as it was acquired in
September 2005. Selling, general and administrative expenses are, however, expected to decrease during
the next fiscal year because the initial implementation costs of the Sarbanes-Oxley Act are expected to be
much higher than the on-going Sarbanes-Oxley costs and no further purchases of stock options. As a
result of these expenses, operating income decreased by $1,305,000 from $2,047,000 in fiscal 2004 to
$742,000 in fiscal 2005.
Net income decreased by $779,000 to $445,000, compared to net income of $1,224,000 in fiscal
2004. The decrease in net income is due to lower operating income offset by an increase of $80,000 in
interest income in fiscal 2005 from fiscal 2004.
ITEM 7.
FINANCIAL STATEMENTS
The following Financial Statements of the Company with related Notes and Report of
Independent Registered Public Accounting Firm are attached hereto as pages F-1 to F-17 and filed as part
of this Annual Report:
•
•
•
•
•
•
Report of J.H. Cohn LLP, Independent Registered Public Accounting Firm
Balance Sheets as of October 31, 2005 and 2004
Statements of Income for the years ended October 31, 2005 and 2004
Statements of Stockholders’ Equity for the years ended October 31, 2005 and 2004
Statements of Cash Flows for the years ended October 31, 2005 and 2004
Notes to Financial Statements
20
PART II.
INDEX – Audit and Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets
October 31, 2005 and 2004
Statements of Income
Years Ended October 31, 2005 and 2004
Statements of Stockholders’ Equity
Years Ended October 31, 2005 and 2004
Statements of Cash Flows
Years Ended October 31, 2005 and 2004
Notes to Financial Statements
* * *
Page
F-2
F-3
F-4
F-5
F-6
F-7/19
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, 2005 and 2004,
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, 2005 and 2004, and its results of operations and cash flows
for the years then ended, in conformity with accounting principles generally accepted in the United States of
America.
San Diego, California
January 20, 2006
F-2
RF INDUSTRIES, LTD.
BALANCE SHEETS
OCTOBER 31, 2005 AND 2004
ASSETS
Current assets:
Cash and cash equivalents
Trade accounts receivable, net of allowance for
doubtful accounts of $14,898 and $38,513
Notes receivable
Inventories
Income tax refund receivable
Other current assets
Deferred tax assets
Total current assets
Equipment and furnishings:
Equipment and tooling
Furniture and office equipment
Less accumulated depreciation
Total
Goodwill
Amortizable intangible asset
Notes receivable from related parties
Note receivable from stockholder
Other assets
2005
2004
$ 4,507,219
$ 4,497,322
1,890,700
2,500
4,180,500
306,131
97,356
136,000
11,120,406
1,516,035
12,000
3,789,958
200,131
103,007
141,000
10,259,453
1,543,120
364,063
1,907,183
1,441,448
465,735
200,848
113,333
29,750
66,980
28,087
1,489,297
299,423
1,788,720
1,225,680
563,040
137,328
29,750
66,980
14,171
Totals
$ 12,025,139
$ 11,070,722
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Deferred tax liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 10,000,000 shares at $.01
par value; 3,082,521 and 2,996,937 shares issued
and outstanding
Additional paid-in capital
Retained earnings
Total stockholders' equity
Totals
See Notes to Financial Statements
F-3
$
$
334,749
377,986
712,735
106,000
818,735
209,956
353,100
563,056
53,000
616,056
30,825
3,872,983
7,302,596
11,206,404
29,970
3,566,760
6,857,936
10,454,666
$ 12,025,139
$ 11,070,722
RF INDUSTRIES, LTD.
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2005 AND 2004
Net sales
Cost of sales
Gross profit
Operating expenses:
Engineering
Selling and general
Totals
Operating income
Other income - interest
Income before income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
2005
2004
$ 13,151,576
6,966,101
$ 11,227,242
5,539,945
6,185,475
5,687,297
553,542
4,890,002
5,443,544
486,202
3,154,074
3,640,276
741,931
2,047,021
96,729
17,110
838,660
2,064,131
394,000
840,000
444,660
$ 1,224,131
.15
.12
$
$
.42
.33
$
$
$
See Notes to Financial Statements
F-4
RF INDUSTRIES, LTD.
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED OCTOBER 31, 2005 AND 2004
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Total
Stockholders'
Equity
Balance, November 1, 2003
2,692,683
$ 26,927
$ 2,418,033
$ 5,633,805
$
(20,667)
$ 8,058,098
Net income
Tax benefit on non-qualified stock
options
173,000
Exercise of stock options
311,554
3,116
996,321
1,224,131
1,224,131
173,000
999,437
Retirement of common stock
(7,300)
(73)
(20,594)
20,667
Balance, October 31, 2004
2,996,937
29,970
3,566,760
6,857,936
-
10,454,666
Net income
Tax benefit on non-qualified stock
options
Exercise of stock options
Stock issued for acquisition
83,372
2,212
833
22
444,660
122,000
171,745
12,478
444,660
122,000
172,578
12,500
Balance, October 31, 2005
3,082,521
$ 30,825
$ 3,872,983
$ 7,302,596
$ -
$ 11,206,404
See Notes to Financial Statements.
4/12/2006 2:35 PM
F-5
RF INDUSTRIES, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2005 AND 2004
Operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Income tax benefit on non-qualified stock options
Changes in operating assets and liabilities:
Trade accounts receivable
Inventories
Income tax refund receivable
Other current assets
Other assets
Accounts payable
Accrued expenses
Net cash provided by operating activities
Investing activities:
Payment for acquisition
Capital expenditures
Payment of note receivable
Payments of note receivable from related party
Net cash used in investing activities
2005
2004
$
444,660
$ 1,224,131
222,435
58,000
122,000
(374,665)
(336,562)
(106,000)
5,651
(13,916)
124,793
24,886
171,282
(225,000)
(118,463)
9,500
(333,963)
168,136
7,600
173,000
185,583
(202,928)
(240,600)
55,072
28,319
65,214
1,463,527
(510,000)
(162,392)
22,854
(649,538)
Financing activities - exercise of stock options
172,578
999,437
Net increase in cash and cash equivalents
9,897
1,813,426
Cash and cash equivalents at beginning of year
4,497,322
2,683,896
Cash and cash equivalents at end of year
$ 4,507,219
$ 4,497,322
Supplemental cash flow information - income taxes paid
$
320,000
$
900,000
Noncash investing and financing activities:
Stock issued for acquisition
$
12,500
Retirement of common stock
$
20,667
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
The Company’s business is comprised of the design, manufacture and/or sale of
communications equipment primarily
radio and other professional
to
communications related industries. The Company currently conducts its operations
through five related 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 (see Note 10); (iv)
Bioconnect Division is engaged in the design, manufacture and sales of medical cable
interconnects for medical monitoring applications; and (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.
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:
Revenue from product sales is usually recognized when the product is shipped and
collectability is reasonably assured. At times, the Company manufactures custom
connectors and cable assemblies for aerospace or military customers. Product
acceptance is also a criterion for revenue recognition.
Inventories:
Inventories, consisting of materials, labor and manufacturing overhead, are stated at
the lower of cost or market. Cost has been determined using the weighted average cost
method.
Equipment and furnishings:
Equipment, tooling and furniture are recorded at cost and depreciated over their
estimated useful lives (generally 3 to 7 years) using the straight-line method.
Goodwill:
The Company follows Statement of Financial Accounting Standards No. 142 (“SFAS
142”), “Goodwill and Other Intangible Assets”, which requires that goodwill and certain
intangible assets, including those recorded in past business combinations, no longer be
amortized against earnings, but instead be tested for impairment at least annually.
There was no impairment of goodwill or other intangible assets as a result of
impairment tests performed according to SFAS 142 in 2005 and 2004.
F-7
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
Long-lived assets:
The Company assesses potential impairments to its long-lived assets when there is evidence
that events or changes in circumstances indicate that the carrying amount of an asset may not
be recovered. An impairment loss is recognized when the undiscounted cash flows expected to
be generated by an asset (or group of assets) is less than its carrying amount. Any required
impairment loss is measured as the amount by which the assets carrying value exceeds its fair
value, and is recorded as a reduction in the carrying value of the related asset and a charge to
operations.
Amortizable intangible assets:
As of October 31, 2005, other intangible assets consist of a covenant not to compete
agreement in the amount of $120,000 which is amortized over a three year life with
accumulated amortization of $6,667. Amortization expense will be $40,000, $40,000 and
$33,333 in the years ending October 31, 2006, 2007 and 2008, respectively.
Advertising:
The Company expenses the cost of advertising and promotions as incurred. Advertising costs
charged to operations were $135,000 and $115,000 in 2005 and 2004, 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
$45,000 and $40,000 in 2005 and 2004, 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.
Stock options:
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” as amended by
Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-
Based Compensation-Transition Disclosure.” The Company follows Accounting Principles
Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and related
interpretations, in accounting for its employee stock options. Under APB 25, the Company
accounts for stock options using the intrinsic value method and no compensation expense is
recognized when the exercise price of stock options equals or exceeds the market price of the
underlying stock on the date of grant. Options granted to non-employees are recorded at fair
value in accordance with SFAS 123.
F-8
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
Had the Company elected to recognize compensation expense based upon the fair value at the
grant dates for awards under these plans and amortized the cost over the vesting period, net
income would have been decreased to the pro forma amounts listed in the table below. The
Company’s pro forma information is as follows:
Net income:
As reported
Deduct total stock-based employee
compensation expense determined
under the fair value based method
for all awards - net of income tax
effects
2005
2004
$
444,660
$
1,224,131
(208,000)
(209,000)
Pro forma
$
236,660
$
1,015,131
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
$.15
$.08
$.12
$.06
$.42
$.35
$.33
$.27
F-9
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
Stock options (concluded):
The fair value of each option granted in 2005 and 2004 was estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted average
assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected lives
2005
2004
0%
56%
4.34%
4 years
0%
58%
4.03%
4 years
Earnings per share:
Basic earnings per share is calculated by dividing net income applicable to common
stockholders by the weighted average number of common shares outstanding during
the period. The calculation of diluted earnings per share is similar to that of basic
earnings per share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potentially dilutive
common shares, principally those issuable upon the exercise of stock options, were
issued and the treasury stock method had been applied during the period.
The following table summarizes the calculation of basic and diluted earnings per share:
Numerators:
2005
2004
Net income (A)
$ 444,660
$1,224,131
Denominators:
Weighted average shares outstanding for basic
earnings per share (B)
3,049,215
2,906,806
Add effects of potentially dilutive securities -
assumed exercise of stock options
744,273
844,475
Weighted average shares for diluted
earnings per share (C)
3,793,488
3,751,281
Basic net earnings per share (A)÷(B)
Diluted net earnings per share (A)÷(C)
$.15
$.12
$.42
$.33
F-10
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
New accounting pronouncements:
In December 2004, the FASB issued SFAS No. 123 (R), “Accounting for Stock-Based
for
Compensation.” SFAS 123 (R) establishes standards
transactions in which an entity exchanges its equity instruments for goods or services.
SFAS No. 123 (R) focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS 123 (R)
requires that the fair value of such equity instruments be recognized as expense in the
historical financial statements as services are performed. Prior to SFAS 123 (R), only
certain pro forma disclosures of fair value were required. SFAS 123 (R) shall be
effective for all of the Company’s interim and annual reporting periods commencing on
November 1, 2006 and is expected to have a material impact on the financial
statements of the Company during the fiscal year 2007 and thereafter.
the accounting
for
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes
the accounting for certain financial instruments with characteristics of both liabilities and
equity that, under previous pronouncements, issuers could account for as equity. The
new accounting guidance contained in SFAS No. 150 requires that those instruments
be classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial
instruments. One type is mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets. A second type included put
options and forward purchase contracts, which involves instruments that do or may
require the issuer to buy back some of its shares in exchange for cash or other assets.
The third type of instruments that are liabilities under SFAS No. 150 are obligations that
can be settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as market index, or varies inversely with the value of
the issuers’ shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of SFAS No. 150 are consistent with the existing definition of
liabilities in FASB Concepts Statement No. 6, “Elements of Financial Statements.” The
remaining provisions of SFAS No. 150 are consistent with the FASB’s proposal to
revise that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own shares. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003 and otherwise was effective at
the beginning of the first interim period beginning after June 15, 2003. The adoption of
this new accounting pronouncement did not have a material impact on the Company’s
financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Pricing." SFAS No.
151 clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) that previously stated that ". . . under
some circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as current
period charges. . . ." SFAS No. 151 requires that those items be recognized as current-
period charges regardless of whether they meet the criterion of "so abnormal." In
addition, SFAS No. 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production facilities. The
adoption of this new accounting pronouncement did not have a material impact on the
Company’s financial statements.
F-11
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
New accounting pronouncements (continued):
In December 2004, the FASB issued SFAS No. 153, “Accounting for Nonmonetary
Transactions.” SFAS No. 153 is based on the principle that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged. The
guidance in APB Opinion 29, however, included certain exceptions to that principle.
SFAS No. 153 amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The adoption of this
new accounting pronouncement did not have a material impact on the Company’s
financial statements.
In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Reporting
Accounting Changes in Interim Financial Statements” for the accounting for and
reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary
changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. Under the provisions of APB Opinion 20, most accounting
changes were recognized by including in net income of the period of the change the
cumulative effect of changing to the newly adopted accounting principle. SFAS No. 154
improves financial reporting because its requirement to report voluntary changes in
accounting principles via retrospective application, unless impractical, enhances the
consistency of financial information between periods. That improved consistency
enhances the usefulness of the financial information, especially by facilitating analysis
and understanding of comparative accounting data.
Also, in instances in which full retrospective application is impracticable, SFAS No. 154
improves consistency of financial information between periods by requiring that a new
accounting principle be applied as of the earliest date practicable.
SFAS No. 154 also requires that a change in depreciation, amortization or depletion
methods for long-lived, nonfinancial assets be accounted for as a change in accounting
estimate that is affected by a change in accounting principle.
The provisions of SFAS No. 154 better reflect the fact that an entity should change its
depreciation, amortization or depletion methods only in recognition of changes in
estimated future benefits of an asset, in the pattern of consumption of those benefits, or
in the information available to the entity about those benefits. The adoption of this new
accounting pronouncement did not have a material impact on the Company’s financial
statements.
Reclassifications:
Certain amounts in the 2004 financial statements have been reclassified to conform to
the 2005 presentation.
Note 2 - Concentration of credit risk and sales to major customers:
The Company maintains its cash balances primarily in one financial institution. As of
October 31, 2005, the balance exceeded the Federal Deposit Insurance Corporation
limitation for coverage of $100,000 by $385,566. As of October 31, 2005, the Company had
a money market account and several investment accounts totaling $4,212,386. These
accounts exceeded the $500,000 per account insurance coverage by $2,712,386. The
Company reduces its exposure to credit risk by maintaining such balances with financial
institutions that have high credit ratings.
F-12
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 2 - Concentration of credit risk and sales to major customers (continued):
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 14% of total sales in 2005 and 2004,
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, 2005 and 2004:
Raw materials and supplies
Work in process
Finished goods
Less inventory reserve
2005
2004
$
845,313
63,242
3,318,293
(46,348)
$
777,765
3,120,909
(108,716)
Totals
$ 4,180,500
$ 3,789,958
Purchases of connector products from two major vendors represented 35% and 24% of the
total inventory purchases in 2005 and 37% and 27% in 2004, 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 rentals were not material at October 31, 2005. The San Diego
lease also requires the payment of the Company's pro rata share of the real estate taxes
and insurance, maintenance and other operating expenses related to the facilities. The Las
Vegas lease is currently operating on a month-to-month basis while terms for a long-term
lease are being renegotiated. The Company also leases certain automobiles under
operating leases which expire at various dates through December 2008.
Rent expense under all operating leases totaled approximately $276,000 and $238,000 in
2005 and 2004, respectively.
F-13
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 4 - Commitments (continued):
Minimum lease payments under these operating leases in each of the five years subsequent
to October 31, 2005 are as follows:
Year Ending
October 31,
2006
2007
2008
2009
2010
Total
Amount
$
248,000
249,000
239,000
226,000
139,000
$ 1,101,000
The Company has an employment agreement with its President and Chief Executive Officer
for a term of up to three consecutive one year periods commencing on June 20, 2005 (the
“Commencement Date”), and ending on June 20, 2008, 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 $462,292 at October 31, 2005.
Note 5 - Geographical information:
The Company attributes sales to geographic areas based on the location of the customers.
The following table presents the sales of the Company by geographic area for the years
ended October 31, 2005 and 2004:
2005
2004
United States
Foreign countries
$
11,818,019
1,333,557
$
10,226,766
1,000,476
Totals
$
13,151,576
$
11,227,242
Note 6 - Income taxes:
The provision for income taxes consists of the following:
Current:
Federal
State
Deferred:
Federal
State
2005
2004
$
256,000
80,000
336,000
56,000
2,000
58,000
$
651,400
181,000
832,400
2,600
5,000
7,600
Totals
$
394,000
$
840,000
F-14
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income taxes (concluded):
Income tax at the Federal statutory rate is reconciled to the Company's actual net provision
for income taxes as follows:
Income tax at Federal
statutory rate
State tax provision, net
of Federal tax benefit
Nondeductible differences
Change in valuation allowance
Other
Provision for income
taxes
2005
2004
Amount
Income Amount
% of Pretax
% of Pretax
Income
$ 285,000
34.0%
$ 702,000
34.0%
52,000
8,000
3,000
46,000
6.2
0.9
0.4
5.5
123,000
7,000
-
8,000
6.0
0.3
0.0
0.4
$ 394,000
47.0%
$ 840,000
40.7%
The Company's total deferred tax assets and deferred tax liabilities at October 31, 2005 and
2004 are as follows:
Assets:
Allowance for doubtful accounts
Inventory obsolescence
Accrued vacation
State income taxes
Capital loss carry-forwards
Other
Totals
Liabilities:
Depreciation
Less valuation allowance
2005
2004
$
6,000
18,000
59,000
30,000
37,000
23,000
$
16,000
47,000
48,000
62,000
34,000
5,000
173,000
212,000
(106,000)
(90,000)
(37,000)
(34,000)
Net deferred tax assets
$
30,000
$
88,000
A valuation allowance has been established for the capital loss carry-forward, due to the
Company no longer investing in assets to offset these losses in the foreseeable future.
F-15
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
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, 2005, a total of 4,313 options were still outstanding under
the 1990 Incentive Plan, all of which are currently exercisable.
The Board of Directors also approved a Non-Qualified Stock Option Plan (the "1990
Non-Qualified Plan") during fiscal 1990 that provides for grants of options to purchase
up to 200,000 shares of common stock to officers, directors and other recipients
selected by the Board of Directors. Under its terms, the 1990 Non-Qualified Plan
terminated in 2000, and no additional options can be granted under that option plan.
However, options previously granted under the 1990 Non-Qualified Plan remain
outstanding and continue in effect until they either expire, are forfeited, or are
exercised. As of October 31, 2005, 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. Accordingly, as of October 31,
2005, the authorized number of shares of common stock that could be issued under the
2000 Option Plan was 450,000, of which 204,821 are still outstanding and 3,867 shares
were still available to be granted. Under the 2000 Option Plan, the Company is
authorized to grant both incentive stock options and non-qualified stock options with a
one year vesting provision. Incentive stock options are granted at an exercise price no
less than the fair value of the common stock on the date of grant, while non-qualified
options are granted at no less than 85% of the fair value of the common stock on the
date of grant.
Other grants:
The Company also granted 1,000,000 options in prior years outside the 1990 and 2000
Option Plans to attract and retain key executives of which 692,963 remain outstanding
as of October 31, 2005.
F-16
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Incentive and Non-Qualified Stock Option Plans (concluded):
Additional required disclosures related to stock option plans:
Additional information regarding all of the Company's outstanding stock options at
October 31, 2005 and 2004 and changes in outstanding stock options in 2005 and 2004
follows:
2005
2004
Shares
or Price
Weighted
Average
Exercise
Per Share Price
Options outstanding-beginning of year 1,035,714 $ 1.63
5.34
Options granted
2.07
Options exercised
.10
*Options purchased for cash
Options forfeited
4.65
60,705
(83,372)
(100,000)
(6,950)
Weighted
Average
Exercise
Price
$1.67
5.75
3.21
Shares
or Price
Per Share
1,287,867
67,651
(311,554)
-
(8,250)
2.30
Options outstanding at end of year
906,097
1.99
1,035,714
1.63
Option price range at end of year
$.10 - $6.38
$.10-$6.38
Weighted average fair value of
options granted during the year
$2.34
$3.19
* This transaction consisted of the Company repurchase of 100,000 options from the
Company’s Chief Executive Officer for $551,000.
The following table summarizes information about stock options outstanding at
October 31, 2005, all of which are at fixed-prices:
Range of
Exercise
Price
$.10
$1.33 - $ 2.50
$2.66 - $3.95
$4.94 - $6.38
Number
Outstanding
344,950
234,206
205,535
121,406
906,097
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual Life
of Options
Outstanding *
Number
of Options
Exercisable
Weighted
Average
Exercise Price
of Options
Exercisable
$
.10
1.90
3.05
5.72
1.99
1yr. after termination
6yrs.
8yrs.
9yrs.
8yrs.
344,950
154,206
105,535
77,366
682,057
$
.10
1.79
3.19
6.16
1.65
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 2005 or 2004.
F-17
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 9 - Related party transactions:
The note receivable from stockholder of $66,980 at October 31, 2005 and 2004 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 the properties owned by the President.
The notes receivable from related parties of $29,750 at October 31, 2005 and 2004, are
due from an employee of the Company, bear interest at 6% and are due when shares of
the Company’s common stock are sold by the employee. The note is collateralized by
properties owned by the employee. The related party note was subsequently repaid with
accrued interest on December 23, 2005.
A director of the Company is an employee of the Company’s public relations firm. For the
fiscal years ended October 31, 2005 and 2004, the Company paid the firm $39,645 and
$43,050, respectively, for services rendered.
Note 10- Business acquisition:
On September 1, 2005, the Company purchased the business and substantially all of the
assets of Worswick Industries, Inc., a California based manufacturer and seller of
microwave and radio frequency connectors. Worswick Industries Inc. has been conducting
business under the name “Worswick Industries”. The purchase price of the assets was
$237,500, of which $200,000 was paid in cash at the closing and $12,500 in 2,212 shares
of the Company's common stock, and $25,000 was deposited into an escrow account for
one year as security for the seller’s representations, warranties and covenants. The
purpose of the acquisition was to increase the Company’s production capacity. In addition
it will complement the Company’s coaxial connector business with local governmental,
communications and aerospace customers. Goodwill recorded upon the purchase
acquisition is fully deductible for tax purposes.
The acquisition has been accounted for as a purchase and, accordingly, the net assets
acquired were recorded at estimated fair values on the date of acquisition. A summary of
the allocation of the cost of the acquisition to the net assets acquired as of September 1,
2005 follows:
Inventory
Non-compete agreement
Goodwill
Total assets acquired
Purchase price
$
55,000
120,000
62,500
$ 237,500
$ 237,500
Assuming the acquisition had taken place on the first day of the years ended October 31,
2005 and 2004, unaudited net sales would have been approximately $13,401,000 and
$11,477,000 while unaudited net income and earnings per share information would not
have been materially different than the amounts shown on the accompanying statements of
income for the years ended October 31, 2005 and 2004.
F-18
Board of Directors
Executive Staff
Service Providers
Independent Auditors
J.H. Cohn LLP
5415 Oberlin Drive
San Diego, CA 92121
(858) 535-2000
Securities Counsel
Troy and Gould
1801 Century Park E., 16th Floor
Los Angeles, CA 90067-2367
(310) 553-4441
Transfer Agent and Registrar
Continental Stock & Transfer Co.
17 Battery Place South, 8 th Floor
New York, NY 10004
(212) 509-4000
Linde Kester
Chairman
John R. Ehret
Director
Marvin H. Fink
Director
Manny Gutsche
VP Sales and Marketing
RF Industries
Robert Macias
VP Product Assurance
RF Industries
Howard F. Hill
Director, President and CEO.
Richard “Joe” LaFay
President/General Manager
RF Connectors Division
Robert Jacobs
Director
William L. Reynolds
Director
Conrad Neri
VP Operations
RF Cable Assemblies
George R. Marks
President/General Manager
Bioconnect/RF Neulink Divisions
Corporate Officers
Howard F. Hill
President and CEO.
David Lamb
Director of Operations
RF Neulink Division
Victor H. Powers
CFO & Corporate Secretary
Robert White
Director of Sales and Marketing
RF Neulink Division
Jack Kaufman
Acting President
Aviel Electronics Division
Jesse Fuller
Director of Operations
Worswick Industries Division
Common Stock
Nasdaq Small Cap Market
Symbol: RFIL
Annual Meeting
June 9, 2006
1:30 p.m., PST
Corporate Office
7610 Miramar Road
San Diego, CA 92126
(858) 549-6340
Annual reports, 10Ks, 10Qs and news releases are available by contacting Howard Hill
at (858) 549-6340 or (800) 233-1728 or e-mail: rfi@rfindustries.com. Website: www.rfindustries.com
RF INDUSTRIES
7610 MIRAMAR ROAD
SAN DIEGO, CA 92126-4202
(858) 549-6340 OR (800) 233-1728
FAX: (858) 549-6345
EMAIL: rfi@rfindustries.com
WEB: www.rfindustries.com