Fiscal 2006
Annual Report
President Letter to Shareholders
April 27, 2007
Fellow Shareholders:
The fiscal year ended October 31, 2006, was a record year. We delivered our thirteenth consecutive year
of profitability and increasing revenue in an industry that has undergone tremendous changes during the past
decade.
For the fourth quarter of FY 2006, sales increased 20% to a record $4,123,000, compared to sales of
$3,429,000 in the same period last year. Net income for the fourth quarter was also a record $473,000, or $0.13
per diluted share, compared to a loss of $119,000 or $0.04 per diluted share, in the same period last year. That
loss in the fourth quarter last year, FY 2005, included a one-time expense of $551.000 related to the purchase and
retirement, by RF Industries, of my options to acquire 100,000 shares of common stock. This expense reduced
fourth quarter of FY 2005 after-tax income by approximately $0.08 per diluted share.
For the fiscal year ended October 31, 2006 sales increased 15% to a record $15,188,000 compared to
sales of $13,151,000 in fiscal 2005. Net income was $1,541,000 or $0.42 per diluted share, compared to
$445,000, or $0.12 per diluted share, for fiscal 2005. RFI's record net income benefited from higher sales,
selective increases in product prices, tight cost controls and targeted reductions in corporate overhead expenses.
These efforts improved our fiscal 2006 gross margin to 48% of sales, compared to 45% of sales in fiscal 2005.
Let me provide some brief examples to demonstrate how each of our divisions are contributing to RFI's
success.
RF Connector and Cable Assembly Division
The Connector and Cable Assembly Division, our largest business segment, consists of two operations:
RF Connector, which distributes connectors; and Cable and Assembly, which manufactures a variety of cable
assemblies.
The Connector group offers a wide variety of RoHS (Restriction of Hazardous Substances or simply
"lead-free") complaint, competitively priced coaxial connectors and adapters. These types of connectors have
helped RFI to expand its North American and European business into markets where RoHS compliance is
required. The Connector group has also increased its selection of pre-packaged RF Connector "kits", which are
used by field repair, test engineers and lab technicians for Radio Frequency applications. Connectors, kits and
adapters are sold world-wide through RF Industries' extensive distribution network and directly to OEM,
government and military customers. Target markets include, but are not limited to, WiFi, WLAN and microwave
applications.
The Cable Assembly Division provides value-added services, which serves to strengthen our product
offerings and broadens our target markets. The Cable Assembly group provides over 100,000 different product
offerings, manufactures RoHS compliant cable assemblies and produces cable assemblies, incorporating flexible
or to semi-rigid cables in various configurations. Cable Assembly uses coaxial connectors from RF Connectors,
enabling Cable Assembly to provide competitive prices for its end products. Cable Assembly has recently
installed new, state-of-the-art manufacturing equipment to minimize its labor expenses. We believe that this
combination of Company-sourced connectors and reduced labor expenses will enable RF Cable Assembly, one of
our fastest growing operations, to become even more competitive and expand its market in the coming years.
RF Neulink Division
RF Neulink has increased its product line of telemetry and data radio modems with the recent addition of
the NL-5000, a high-performance, lower-cost radio modem similar to Neulink's flagship NL-6000 wireless data
modem. This wireless transceiver is designed to target water management, SCADA Telemetry, and public utility
markets. We believe that this product's applications for cost-effective wireless transmission of seismic, metering
and flow valve data will position Neulink for increasing sales in the current fiscal year.
Bioconnect Division
Bioconnect has added 'Neuroleads' to its already broad range of FDA compliant cables. These leads are
designed for non-invasive cutaneous neurological assessment with active Electromyography (EMG),
Electroencephalograph (EEG), and Evoked Potential monitoring and recording equipment. The addition of his
new product line will help Bioconnect to continue its double-digit sales growth and remain the fastest growing
division at RF Industries.
Aviel Electronics Division
Aviel engineers and manufactures innovative interconnect solutions for various radio frequency
connectors and adapters, with interfaces conforming to Military and Industrial specifications. Aviel's in-house
manufacturing capabilities supply USA made production quantities to both small and large customers. All of
Aviel's products conform to specialty metals regulations and EU directive 20052/95/EC (RoHS). Aviel's ability
to provide personalized support, respond with short lead times and supply custom engineered connectors,
adapters, cable assemblies and other components enables our customers keep their project deadlines on schedule.
Worswick Electronics Division
Worswick Industries has been a leader in the production and supply of custom, standard computer cables
and custom wiring harnesses for the retail, wholesale and OEM markets for the past 21 years. We are pleased to
announce Worswick's new eCommerce website: www.OddCables.com. Worswick will use the Internet to
expand its sales of hundreds of Audio Video cables, Adapters, keyboard & mouse extensions, Serial, Parallel,
Network, Coaxial, S-Video, VGA, DVI, SCSI, USB, KVM auto-switch boxes and "Fire wire" components to
national and global customers. The site has been designed not only to sell these products, but provide consumer
education in order to reduce the level of product returns.
Worswick's 2007 goals are to increase sales to the governmental and military markets. Contractors
serving these markets, that constantly purchase large quantities of quality cable assemblies, coax adapters and
hand tools, have shown substantial interest in Worswick's higher-end product lines. We are confident that
Worswick's unique position in the connector market will be an asset for RF Industries in the coming years.
Looking Ahead
Our focus on cash generation has delivered proven results during the past few years, and we will
continue to make this one of our highest priorities. With over $6,800,000 in liquid and short-term near-liquid
resources, working capital of $12,810,000, no long-term debt, and stockholder's equity of $13,464,000, or a
$4.14 per share book value, we have the resources to pursue any number of growth opportunities. Because of our
cash position, in March 2007 we declared our first cash dividend. In addition to our recently announced
quarterly dividend, we are evaluating additional investments to enhance productivity, develop new products and
make strategic acquisitions.
We remain focused and committed to the task at hand, and will continue to place special emphasis on
achieving sustainable long term growth in our markets. We are proud of our progress, and are energized to
deliver even more for our shareholders, customers and employees. Thank you for the trust you have placed in us.
Sincerely,
Howard F. Hill
President/ CEO
Abridged and Edited Copy of Annual Report
(Form 10-KSB)
Annual Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended October 31, 2006
Commission File Number 0-13301
RF INDUSTRIES, LTD.
7610 Miramar Road, Bldg. 6000, San Diego, California 92126-4202
(Address of principal executive offices) (Zip Code)
(858) 549-6340 FAX (858) 549-6345
The Company’s revenues for the year ended October 31, 2006 were $15,187,893.
The approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of January 3,
2007 based on the closing price of $7.33 for the Common Stock of the Company was $23,841,653. As of January 3,
2007, the registrant had 3,252,613 outstanding shares of common stock, $.01 par value.
Forward-Looking Statements:
Certain statements in this abridged 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” contained in the Form 10-KSB on file with the Securities and
Exchange Commission, 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 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 RF data links and wireless modems 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 Wi-Fi and
broadband wireless markets. The Company’s RF connectors are used in thousands of different devices, products and
types of equipment. While the models and types of devices, products and equipment may change from year to year,
the demand for the types of connectors used in such products and offered by the Company does not fluctuate with
the changes in the end product incorporating the connectors. In addition, since the Company’s standard connectors
can be used in a number of different products and devices, the discontinuation of one product does not make the
Company’s connectors obsolete. Accordingly, most connectors carried by the Company can be marketed for a
number of years and are only gradually phased out. Furthermore, because the Company’s connector products are not
dependent on any line of products or any market segment, the Company’s overall sales of connectors do not
fluctuate materially when there are changes to any product line or market segment. Sales of the Company’s
connector products are more dependent upon the overall economy and on the Company’s ability to market its
products. However, the Company’s sales of connectors and cable assemblies have increased in the past four 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.
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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, 2006.
Aviel Electronics Division - The Company acquired the business and all of the assets of Aviel Electronics in August
2004. Aviel has a 49 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 expanding
the Company’s client base.
Worswick Division - The Company acquired the assets of Worswick Industries, Inc., a privately held 20 year old
California company based in San Diego, in September 2005 as another complimentary operation to the Connector
and Cable Division. Worswick Industries sells coaxial connector solutions and also manufacturers RF cable
assemblies for both individuals and companies that design, build, operate, and maintain personal and private multi-
media, wireless voice, data and messaging systems.
Bioconnect Division - The Bioconnect Division is engaged in product development, design, manufacture and sale of
cables and interconnects for medical monitoring applications, such as disposable ECG cables, infant apnea monitors
in hospitals, patient leads, snap leads and connecting wires.
RF Neulink Division - The RF Neulink Division designs and manufactures, through outside contractors, wireless
data products commonly known as RF data links and wireless modems since 1984. These radio modems and
receivers provide high-speed wireless connections over longer distances where wire connections may not be
desirable or feasible. In addition to selling its own radio modem, RF Neulink also distributes antennas, transceivers
and related products of other manufacturers. The RF Neulink Division also offers complete turn-key packages for
numerous remote data transmission applications.
Product Description :
The Company produces a broad range of interconnect products and assemblies. The products that are offered and
sold by the Company’s various divisions consist of the following:
Connector and Cable Products:
The Company’s Connector and Cable Division designs and distributes coaxial connectors for the numerous
products, devices and instruments. Coaxial connectors have applications in commercial, industrial, automotive,
scientific and military markets. The types of connectors offered by the RF Connector Division include 2.4mm and
3.5mm, 7-16 DIN, BNC, MCX, MHV, Mini-UHF, MMCX, N, SMA, SMB, TNC, QMA and UHF. These
connectors are offered in several configurations for both plugs and jacks. There are hundreds of applications for
these connectors, some of which include digital applications, cellular and PCS telephones, Wi-Fi and broadband
wireless applications, cellular and PCS infrastructure, GPS (Global Positioning Systems), mobile radio products,
aircraft, video surveillance systems, cable assemblies and test equipment. Users of the Company’s connectors
include telecommunications companies, circuit board manufacturers, OEM, consumer electronics manufacturers,
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audio and video product manufacturers and installers, and satellite companies. The Connector Division markets
approximately 1,500 types of connectors, which range in price from $0.40 to $125.00 per unit.
The Connector and Cable Division also designs and sells a variety of connector tools and hand tools that are
assembled into kits used by lab and field technicians, R&D technicians and engineers. The Company also designs
and now offers some of its own tools, which differ from those offered elsewhere in the market. These tools are
manufactured for the Company by outside contractors. Tool products are carried as an accommodation to the
Company’s customers and have not materially contributed to the Company’s revenues.
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. Aviel’s 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 custom and non-
standard configurations required for specific applications as well as hard to locate and discontinued connectors for
commercial, aerospace, military and other unique applications.
Worswick Products:
Worswick sells coaxial connectors and cable assemblies for numerous multi-media products, devices and
instruments in the local San Diego area. Worswick also produces and markets cable assemblies in a variety of sizes
and combinations of RF coaxial connectors and coax cabling. Cabling is purchased from a variety of major
unaffiliated suppliers and is assembled with the Company’s connectors or third party connectors as complete cable
assemblies. Coaxial cable assemblies have thousands of applications including local area networks, wide area
networks, Internet systems, PCS/cellular systems, TV/dish network systems, test equipment, military/aerospace
(mil-standard and COTS (Commercial Off The Shelf)) and entertainment systems. Most cable assemblies are
manufactured to the purchaser’s specifications.
Bioconnect Products:
Bioconnect designs, manufactures and sells and provides product development services to OEM’s for specialized
electrical cabling and interconnect products used in the medical monitoring market. These products consist primarily
of patient monitoring cables, ECG cables, snap leads, and molded safety leads for neonatal monitoring electrodes.
The products, which are used in hospitals, clinics, doctor offices, ambulances and at home are replaced frequently in
order to ensure maximum performance.
RF Neulink Products:
The wireless data products available from the RF Neulink Division come in a variety of configurations to satisfy the
requirements of certain high-speed wireless connection markets. Transmitter and receiver modules come in a wide
range of power output and frequency ranges and are used to 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.
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The products sold by the RF Neulink Division include both its own products and products of other manufacturers
that are distributed by the Neulink Division. The products offered by the Neulink Division include:
• NL5000 - (replaced the RF 9600) as a cost effective, high performance telemetry modem
• NL6000 UHF and VHF feature rich, high performance wireless modems
• 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 2004 mandatory requirement to provide narrow-band channels. This product is a high-
speed narrow band compliant radio modem that operates on a 12.5 KHz channel at a 12 Kbps data transfer rate. In
2005, Neulink was chosen to develop a different version of the NL6000 for the Stanford Research Institute and the
U.S. Marine Corps. The Neulink Division delivered over 300 units of this version of the NL6000 to the U.S. Marine
Corps in fiscal year 2006 with follow on orders of between 500 to 3,000 units expected in fiscal 2007.
Foreign Sales :
Direct export sales by the Company to customers in South America, Canada, Mexico, Europe, Australia, the Middle
East, and Asia accounted for $1,447,000 or approximately 10% of Company sales for the fiscal year ended October
31, 2006. The majority of the export sales during these periods were to Israel, 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 sells its products to its current 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 underway
to enhance and expand the current customer base which includes the launch of an e-Commerce web-site in 2007.
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The Bioconnect group markets its products to the medical market through major hospital suppliers, dealers and
distributors. The Bioconnect Division also sells its products to OEMs who incorporate the leads and cables into their
product offerings.
The Neulink Division sells its products directly or through manufacturers representatives, system integrators and
OEM’s. System integrators and OEMs integrate and/or mate Company’s products with their hardware and software
to produce turnkey wireless systems. These systems are then either sold or leased to other companies, including
utility companies, financial institutions, petrochemical companies, government agencies, and irrigation/water
management companies.
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, 2006 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 dependent on a few manufacturers for its coaxial
connectors and cable assemblies. Although the Company does not have manufacturing agreements with these
manufacturers for its connectors, cable and Neulink products, it does have long-term purchasing relationships with
these manufacturers. 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 49 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, communications 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 such as copper and zinc and include small applications
of precious materials, including silver and gold. The RF Connector and Cable Division purchases most of its
connector products from contract manufacturers located in Asia and the United States. The Company believes that
the raw materials used in its products are readily available and that the Company is not currently dependent on any
supplier for its raw materials. The Company does not currently have any long-term purchase or supply agreements
with its connector or Neulink product suppliers. The RF Connector and Cable assembly division obtains coaxial
connectors from RF Connector. The Company believes there are numerous domestic and international suppliers of
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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 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, 2006, the Company employed 87 full-time employees, of whom 24 were in accounting,
administration, sales and management, 60 were in manufacturing, distribution 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 incurs research and development expenses from time to time when developing new products. The
Company did not engage in any research and development activities in fiscal year ended October 31, 2006. During
the fiscal year ended October 31, 2005, the Company only spent $45,000 on research and development. Since the
completion of the development of the Neulink Division's NL6000 radio modem in fiscal 2004, the Company has
only engaged in a minimal amount of research and development activities intended to produce new products not
marketed by others and can be marketed to the wire-less connectivity industry in general.
In addition to research and development activities, the Company also invested over $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 develop an ISO 9000-like
tracking system to improve its competitive edge, and is exploring future ISO certification.
Patents, Trademarks and Licenses:
The Company does not own any patents on any of its products, nor has it registered any product trademarks.
Because 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.
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Warranties and Terms:
The Company warrants its products to be free from defects in material and workmanship for varying warranty
periods, depending upon the product. Products are generally warranted to the dealer for one year, with the dealer
responsible for any additional warranty it may make. Certain Neulink products are sold directly to end-users and are
warranted to those purchasers. The RF Connector products are warranted for the useful life of the connectors.
Although the Company has not experienced any significant warranty claims to date, there can be no assurance that it
will not be subjected to such claims in the future.
The Company usually sells to customers on 30-day terms pursuant to invoices and does not generally grant extended
payment terms. Sales to most foreign customers are made on cash terms at time of shipment. Customers may delay,
cancel, reduce, or return products after shipment subject to a restocking charge.
Competition:
Management estimates that the Connector and Cable Divisions has over 50 competitors in the approximately $1.9
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 RF 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.
Bioconnect’s products are subject to the regulations of the U.S. Food and Drug Administration.
8
ITEM 2.
DESCRIPTION OF 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 its corporate administration,
sales and marketing, and engineering plus production and warehousing for the Company’s Connector and Cable
Assembly and Bioconnect Divisions. The lease for this facility expires on May 31, 2010. In addition, the Company
also leases the following facilities:
(i)
(ii)
(iii)
(iv)
The cable assembly facilities of the Connector and Cable Division operates in a separate 3,180
square foot facility that is located adjacent to the Company’s corporate headquarters. The lease
for this space expires on May 31, 2010.
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 expire January 30, 2007. The Company and the landlord are considering entering into a
new lease. The landlord has informed the Company that it can continue to occupy the space on a
month-to-month basis at the current monthly lease rate.
The Worswick Division currently leases an approximately 6,000 square foot facility located at
7352 Convoy Court, San Diego, California. The lease expired January 27, 2007. However, the
Company is engaged in discussions with the landlord regarding a new lease. The Company
currently continues to occupy the facility on a month-to-month basis at the same monthly rate as
in effect on January 27, 2007.
The aggregate monthly rental for all the Company’s facilities currently is approximately $23,200 per month, plus
utilities, maintenance and insurance as of October 31, 2006.
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:
From time to time, the Company is involved in legal proceedings that are related to its business operations. The
Company is not currently a party to any legal proceedings that could have a material adverse effect upon its financial
position or results of operations.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
9
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 Capital Market under the symbol “RFIL.”
For the periods indicated, the following tables sets forth the high and low sales prices per share of Common Stock.
These prices represent inter-dealer quotations without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.
Quarter
Fiscal 2006
High
Low
November 1, 2005 - January 31, 2006
February 1, 2006 - April 30, 2006
May 1, 2006 - July 31, 2006
August 1, 2006 - October 31, 2006
Fiscal 2005
November 1, 2004 - January 31, 2005
February 1, 2005 - April 30, 2005
May 1, 2005 - July 31, 2005
August 1, 2005 - October 31, 2005
$
$
5.67 $
6.81
6.45
8.64
13.02 $
9.09
6.35
6.15
4.55
4.72
5.49
5.12
6.30
5.25
5.04
4.70
As of October 31, 2006 there were 610 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 2006.
The Company did not repurchase any of its shares during the fourth quarter of the fiscal year covered by this report.
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make significant estimates and judgments
that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets
and liabilities. We evaluate our estimates, including those related to bad debts, inventories and contingencies on an
ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. One of the accounting policies that involve significant
judgments and estimates concerns our inventory valuation. Inventories are valued at the weighted average cost
10
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 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. Since the Company has, to
date, only made the pro forma disclosures of options grants and has not recognized any expenses in connection with
its option grants, the implementation of SFAS 123 (R) is expected to have a material impact on the financial
statements of the Company during the fiscal year 2007 and thereafter.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) . FIN 48
applies to all tax positions related to income taxes subject to SFAS No. 109, Accounting for Income Taxes (SFAS
109). Under FIN 48, a company would recognize the benefit from a tax position only if it is more-likely-than-not
that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48
clarifies how a company would measure the income tax benefits from the tax position that are recognized, provides
guidance as to the timing of the derecognition of previously recognized tax benefits and describes the methods for
classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48
also addresses when a company should record interest and penalties related to tax positions and how the interest and
penalties may be classified within the income statement and presented in the balance sheet. FIN 48 is effective for
fiscal years beginning after December 15, 2006. For the Company, FIN 48 will be effective for our 2008 fiscal year.
Differences between the amounts recognized in the statement of operations prior to and after the adoption of FIN 48
would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. The
Company is currently evaluating FIN 48 and its possible impacts on the Company’s financial statements. Upon
adoption, there is a possibility that the cumulative effect would result in a charge or benefit to the beginning balance
of retained earnings, increases or decreases in future effective tax rates, and/or increases in future effective tax rate
volatility.
In September 2006, the SEC staff issued SAB No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). In SAB 108, the SEC staff established
an approach that requires quantification of financial statement misstatements based on the effects of the
misstatements on each of the company’s financial statements and the related financial statement disclosures. SAB
108 permits public companies to initially apply its provisions either by (i) restating prior financial statements or
(ii) recording the cumulative effect as adjustments to the carrying values of assets and liabilities with an offsetting
adjustment recorded to the opening balance of retained earnings. The Company is required to adopt SAB 108 by the
end of fiscal 2007 and will early adopt during the first quarter of fiscal 2007. The Company has not completed its
analysis but does not expect adoption to have a significant impact on the Company’s results of operations or
financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in accounting principles generally accepted in the United
States of America, and expands disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the
impact SFAS 157 will have on its financial statements.
11
OVERVIEW
The Company markets connectors and cables to numerous industries for use in thousands of products, primarily for
the wireless market. The largest business unit consists of the Connector and Cable Assembly Division, the Aviel
Electronics Division, and the Worswick Industries Division that delivers RF cables and connectors. The Bioconnect
Division operates in the medical connector product market, while the Neulink Division operates in the high-speed
wireless data connection market . During fiscal year 2006 ended October 31, 2006 the RF cable and connector
products represented 88% of the Company’s sales, while the medical connectors and wire-less data connection
represented 7% and 5%, respectively, of the Company’s total sales.
Historically, over 90% of the Company’s revenues are generated from the sale of RF connector products and
connector cable assemblies. Sales of connectors are expected to continue be the largest portion of revenues in the
future since the Company acquired Aviel Electronics in August 2004 and Worswick Industries in September 2005,
both of which also sell connectors and cable assemblies. Accordingly, the Company revenues are heavily dependent
upon sales of RF connectors and cable assemblies. However, 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, 2006, net sales did, however, increase by 16% over the net
sales in the prior year due to the continued rebound in the telecommunications and wireless industries, which
resulted in increased sales to those industries, and because of additional revenues generated from the acquisitions of
Aviel and Worswick (its first full year with the Company).
As a result of increased net sales and continued management of normal operating expenses, the Company generated
net income for the 13 th consecutive year.
The Company generated cash from operations of $2,182,000 and $280,000 from financing activities, and as a result,
the amount of cash and cash equivalents, and investments in available-for-sale securities held by the Company as of
October 31, 2006 increased to $6,866,000 from $4,507,000 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, 2006 and 2005:
Amount
2006
% Total Assets
Amount
2005
% Total Assets
Cash and cash equivalents and
Investments available for sale
Current assets
Current liabilities
Working capital
Property and equipment - net
Total assets
Stockholders’ equity
$
6,865,524
14,573,641
1,764,418
12,809,223
376,146
15,319,035
13,463,999
Liquidity and Capital Resources:
%
44.8
95.1%
11.5%
83.6%
%
2.5
100.0%
87.9%
$
4,507,219
11,120,406
712,735
10,407,671
465,735
12,025,139
11,206,404
37.5
%
92.5%
5.9%
86.6%
3.9
%
100.0%
93.2%
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, 2007. 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
12
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, 2006, the amount of cash and cash equivalents and short-term investments available-for-sale
was equal to $6,865,524 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, 2006, the Company had approximately $14,574,000 in current assets, and only $1,764,000 in
current liabilities.
Management believes that based on the Company’s financial condition at October 31, 2006, 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.
The Company’s liquidity was negatively impacted during fiscal 2006 by a $1,128,000 purchase of inventory in the
fourth quarter. Inventories as of October 31, 2006 were $5,250,000, a $1,070,000 increase from October 31, 2005.
The foregoing $1,128,000 purchase represents an estimated two-year supply of the connectors purchased. The
Company made the large purchase as a hedge against anticipated increases in copper prices, which would
significantly raise the future price of these connectors. 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 product costs, and because
of continued increases in sales or raw material costs, may continue increasing its inventory levels.
Net cash provided by operating activities for the year ended October 31, 2006 was $2,182,000 despite the inventory
increase of $1,070,000 primarily due to the increase of $1,096,012 in net income and increases in unpaid income tax
payable of $1,025,995, $288,000 in income tax benefit from non-qualified stock options exercised, and non-cash
depreciation and amortization of $271,000. In fiscal year ended October 31 2005, net cash provided by operating
activities was $171,000 due to net income of $445,000 plus $222,000 of non-cash depreciation and amortization
expenses and increases of $337,000 in inventories and $375,000 in trade accounts receivable and certain other
factors.
During fiscal 2006, net cash used in investing activities was $2,357,000 of which $2,247,000 was used for the
purchase of treasury bills and other available-for-sale securities. The balance represents amounts invested in the
acquisition of $142,000 in additional capital equipment for the Bioconnect and the Connector and Cable Assembly
divisions and for upgrading the Company IT systems. In fiscal 2005, net cash used in investing activities was
$334,000 consisting primarily of the acquisition of the Worswick Industries Division in September 2005 for
$225,000 and the purchase of $118,000 of additional capital equipment.
Financing activities increased the Company’s net cash by $280,000 in the current fiscal year due to the receipt of
funds from the exercise of stock options by the Company’s employees. In fiscal 2005, financing activities increased
the Company’s net cash by $173,000 as a result of the exercise of stock options by the Company’s employees.
13
Results of Operations:
The following summarizes the key components of the results of operations for the fiscal years ended October 31,
2006 and October 31, 2005:
$
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
Amount
15,187,893
7,932,097
7,255,796
516,498
4,311,515
2,427,783
335,604
2,763,387
1,222,715
1,540,672
2006
% of Net Sales
2005
Amount
13,151,576
7,202,863
5,948,713
553,542
4,653,240
741,931
96,729
838,660
394,000
444,660
% of Net Sales
100%
55%
45%
4%
%
6%
1%
6
%
3%
3%
35
100% $
52%
48%
4%
%
28
16%
2%
%
18
8%
10%
Net sales of the Company increased by $2,036,000 or 16%, for the fiscal year ended October 31, 2006 compared to
the fiscal year ended October 31, 2005 (“fiscal 2005”) due to increases in all five of the Company’s divisions. The
increase in fiscal 2006 is attributable to an increase in sales of $1,511,000 for RF connector and cable assembly
products as the market demand for connectors and cables increased, particularly for wireless applications. The
increase in demand in the Company’s RF connector and cable assembly products represents a $1,013,000 increase in
the Connector and Cable Assembly Division, increased sales for the Aviel Division of $37,000 and increased sales
for the Worswick Industries Division of $461,000. The increase in the Worswick Division represents 12 months of
sales during fiscal 2006 acquired in September 2005 and in fiscal 2005 included only 2 months of sales. To
complement the increase in revenues at the Company’s three RF cable and connector divisions, Bioconnect had an
increase of $433,000 in revenues due to the release of product purchases from its primary customer that were on
hold at the end of fiscal 2005 and other new orders in fiscal 2006. Finally, revenues from the Neulink Division also
increased by $92,000 as a result of the release of its new wireless modem.
The Company’s gross profit increased $1,307,000 or by 22% to $7,256,000 in 2006 from $5,948,000 in 2005 due to
the increase in net sales and improved gross margins. As a percent of net sales, gross profit increased to 48% in
fiscal 2006 from 45% of sales in fiscal 2005. The increase in the gross profit percentage is primarily due to increased
sales by the Connector and Cable assembly division and by the Bioconnect division fiscal 2005. The increased in
sales by Bioconnect improved labor efficiencies to lower its per unit costs and its cost of goods sold by 25%. Gross
Margins for the Connector and Cable Divisions remained at 48% despite increased costs such as the increases of in-
bound freight (fuel costs increases) and the cost of copper raw materials.
Engineering expenses, which include research and development expenses, decreased by $37,000 from $554,000 in
fiscal 2005 to $516,000 in fiscal 2006. However, because of the 16% increase in net sales, as a percent of net sales,
engineering expenses decreased from 4.2% in fiscal 2005 to 3.4% in fiscal 2006. Engineering expenses, which
consist of expenses incurred in the design, re-design or development of products for specific customers, remained
substantially unchanged in fiscal 2006 from fiscal 2005. However, the Company did not incur any research and
development expenses in fiscal 2006, compared to $45,000 of research and development expenses incurred in fiscal
2005.
Selling and general expenses decreased by $342,000 or by 7%, from $4,653,000 in fiscal 2005 to $4,312,000 in
fiscal 2006 despite the 16% increase in revenues. In fiscal 2005, the Company incurred a one-time expense of
$551,000 resulting from the repurchase and cancellation of stock options. No such costs were incurred in fiscal
2006. In addition, the Company also no longer incurred the expenses related to implementing the controls and
procedures mandated under Section 404 of the Sarbanes-Oxley Act of 2002. The foregoing decreases in selling and
general expenses were offset by slightly higher associated costs of additional audit and legal expenses resulting from
14
Sarbanes-Oxley Act compliance. Selling and general expenses also increased by $194,000 as a result of the full
year’s marketing and general and administrative expenses for the Worswick Industries division that was acquired in
September 2005. Advertising and promotional costs also increased from $135,000 in fiscal 2005 to $196,000 in
fiscal 2006 as the Company increased its marketing efforts of certain of its products. Selling, general and
administrative expenses are expected to increase during the next fiscal year because the Company will have to
recognize expenses related to stock option grants made after November 1, 2006 as a result of FASB 123 (R) that
became effective for the Company commencing in the first quarter of fiscal year 2007.
As a result of the $379,000 decrease of engineering, selling and general administrative expenses and the increase of
$1,307,000 in gross profit, operating income increased 246% or by $1,686,000 from $742,000 in fiscal 2005 to
$2,428,000 in fiscal 2006.
Net income before taxes in fiscal 2006 increased 229% or by $1,925,000 to $2,763,000 compared to net income
before taxes of $839,000 in fiscal 2005. The increase in net income before taxes is due to higher operating income
and by an increase in interest income of 246% or by $239,000 in fiscal 2006 to $336,000 from $97,000 in fiscal
2005.
Net income after tax for the fiscal year ended October 31, 2006 increased 246% or by $1,096,000 to $1,541,000
compared to $445,000 in fiscal year ended October 31, 2005.
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, 2006 and 2005
Statements of Income for the years ended October 31, 2006 and 2005
Statements of Stockholders’ Equity for the years ended October 31, 2006 and 2005
Statements of Cash Flows for the years ended October 31, 2006 and 2005
Notes to Financial Statements
15
Index
[Attachment to Item 7]
Page
Report of Independent Registered Public Accounting Firm ...............................................F-2
Balance Sheets
October 31, 2006 and 2005 .........................................................................................F-3
Statements of Income
Years Ended October 31, 2006 and 2005 .......................................................................F-4
Statements of Stockholders’ Equity
Years Ended October 31, 2006 and 2005 .......................................................................F-5
Statements of Cash Flows
Years Ended October 31, 2006 and 2005 .......................................................................F-6
Notes to Financial Statements......................................................................................F-7/19
F-1
RF INDUSTRIES, LTD.
BALANCE SHEETS
OCTOBER 31, 2006 AND 2005
ASSETS
2006
2005
Current assets:
Cash and cash equivalents
Investments in available-for-sale securities
Trade accounts receivable, net of allowance for
doubtful accounts of $45,653 and $14,898
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
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Total current liabilities
Deferred tax liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity:
$
4,612,935 $
2,252,589
4,507,219
2,053,402
5,250,484
208,156
196,075
14,573,641
1,662,822
386,137
2,048,959
1,672,813
376,146
200,848
73,333
66,980
28,087
1,890,700
2,500
4,180,500
306,131
97,356
136,000
11,120,406
1,543,120
364,063
1,907,183
1,441,448
465,735
200,848
113,333
29,750
66,980
28,087
$
441,203 $
603,351
719,864
1,764,418
90,618
1,855,036
334,749
377,986
712,735
106,000
818,735
Totals
$
15,319,035 $
12,025,139
Common stock - authorized 10,000,000 shares at $.01 par value;
3,252,613 and 3,082,521 shares issued and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income - net unrealized
gain on available-for-sale securities
Total stockholders' equity
32,526
4,582,897
8,843,268
5,308
13,463,999
30,825
3,872,983
7,302,596
11,206,404
Totals
$
15,319,035 $
12,025,139
See Notes to Financial Statements.
F-3
RF INDUSTRIES, LTD.
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2006 AND 2005
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
See Notes to Financial Statements.
2006
2005
$
15,187,893 $
7,932,097
13,151,576
7,202,863
7,255,796
5,948,713
516,498
4,311,515
4,828,013
2,427,783
335,604
2,763,387
1,222,715
553,542
4,653,240
5,206,782
741,931
96,729
838,660
394,000
$
1,540,672 $
444,660
$
$
.48 $
.42 $
.15
.12
F-4
RF INDUSTRIES, LTD.
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED OCTOBER 31, 2006 AND 2005
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Total
Retained
Earnings
Comprehensive Stockholders'
Income
Equity
Balance, November 1, 2004
2,996,937 $ 29,970 $ 3,566,760 $ 6,857,936 $
- $
10,454,666
Net income
Tax benefit on non-qualified stock
options
444,660
122,000
Exercise of stock options
83,372
833
171,745
Stock issued for acquisition
2,212
22
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
Comprehensive income:
Net income
Unrealized gain on short-term
investments
Total comprehensive income
1,540,672
5,308
Stock based compensation expense
Tax benefit on non-qualified stock
options
143,188
288,000
Exercise of stock options
170,092
1,701
278,726
1,540,672
5,308
1,545,980
143,188
288,000
280,427
Balance, October 31, 2006
$ 3,252,613 $ 32,526 $ 4,582,897 $ 8,843,268 $
5,308 $
13,463,999
See Notes to Financial Statements.
F-5
RF INDUSTRIES, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2006 AND 2005
Operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debts
Depreciation and amortization
Deferred income taxes
Stock based compensation expense
Income tax benefit on non-qualified stock options
Changes in operating assets and liabilities:
Trade accounts receivable
Inventories
Income tax receivable/payable
Other current assets
Other assets
Accounts payable
Accrued expenses
Net cash provided by operating activities
Investing activities:
Payment for acquisition
Purchases of available-for-sale securities
Sales of available-for-sale securities
Capital expenditures
Payment of note receivable
Payments of note receivable from related party
Net cash used in investing activities
Financing activities - exercise of stock options
Net increase in cash and cash equivalents
2006
2005
$
1,540,672 $
444,660
40,224
271,209
(75,457 )
143,188
288,000
(202,926 )
(1,069,984 )
1,025,995
(110,800 )
106,454
225,365
2,181,940
(5,363,610 )
3,116,329
(141,620 )
2,500
29,750
(2,356,651 )
280,427
105,716
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)
172,578
9,897
Cash and cash equivalents at beginning of year
4,507,219
4,497,322
Cash and cash equivalents at end of year
$
4,612,935 $
4,507,219
Supplemental cash flow information - income taxes paid
$
320,000
Noncash investing and financing activities:
Stock issued for acquisition
See Notes to Financial Statements.
$
12,500
F-6
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies:
Business activities:
is comprised of
The Company’s business
the design, manufacture and/or sale of
communications equipment primarily to the radio and other professional communications
related industries. The Company currently conducts its operations through five related business
divisions (i) RF Connector and Cable Division is engaged in the design, manufacture and
distribution of coaxial connectors and cable assemblies used primarily in radio and other
professional communications applications; (ii) Aviel Division is engaged in the design,
manufacture and sales of radio frequency, microwave and specialized connectors and connector
assemblies for aerospace, original electronics manufacturers and military electronics
applications; (iii) Worswick Division is engaged in sales of microwave and radio frequency
connectors and cable assemblies to end users in multi-media, radio and other communications
applications (see Note 11); (iv) BioConnect Division is engaged in the design, manufacture and
sales of 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 recognized when the product is shipped and collectability is
reasonably assured. At times, when the Company manufactures custom connectors and cable
assemblies for aerospace or military customers, product acceptance is also a criteria 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.
Investments:
The Company follows Statement of Financial Accounting Standards No. 115 (“SFAS 115”),
“Accounting for Certain Investments in Debt and Equity Securities” which requires the
Company’s investments in U.S. Treasury Bills to be classified as “available-for-sale securities”
and valued at fair market value at month end. If there is any other than temporary decline in fair
value, the cost basis of the individual security will be written down to fair value via a charge to
earnings. Net unrealized holding gains on these investments as of October 31, 2006 were
$5,308.
F-7
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
Goodwill:
The Company follows Statement of Financial Accounting Standards No. 142 (“SFAS 142”),
“Goodwill and Other Intangible Assets”, which requires that goodwill and certain intangible
assets, including those recorded in past business combinations, no longer be amortized against
earnings, but instead be tested for impairment at least annually. There was no impairment of
goodwill as a result of impairment tests performed according to SFAS 142 in 2006 and 2005.
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, 2006 and 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 $46,667 and $6,667, respectively. Amortization expense is
expected to be $40,000 and $33,333 in the years ending October 31, 2007 and 2008,
respectively.
Advertising:
The Company expenses the cost of advertising and promotions as incurred. Advertising costs
charged to operations were $196,000 and $135,000 in 2006 and 2005, 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 $0 and $45,000 in
2006 and 2005, 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.
F-8
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
Stock options:
The Company continues to measure compensation cost related to stock options issued to
employees using the intrinsic value method of accounting prescribed by Accounting Principles
Board Opinion No. 25 (“APB 25”). “Accounting for Stock Issued to Employees,” which only
requires charges to compensation expense for the excess, if any, of the fair market value of the
underlying stock at the date a stock option is granted (or at an appropriate subsequent
measurement date) over the amount an employee must pay to acquire the stock. The Company
has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” as amended by Statement of
Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based
Compensation-Transaction Disclosure.”
The Company’s historical net income and earnings per common share and pro forma net income
and earnings per share assuming compensation cost had been determined based on the fair value
on the grant date for all awards by the Company consistent with the provisions of SFAS 123 are
set forth below:
Net income:
As reported
Add stock compensation expense
recognized under APB 25
Deduct total stock-based employee
compensation expense determined
under the fair value based method
for all awards - net of income taxes
Pro forma
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
2006
2005
$
1,540,672 $
444,660
143,188
(528,000 )
(208,000 )
1,155,860 $
236,660
.48 $
.36 $
.42 $
.31 $
.15
.08
.12
.06
$
$
$
$
$
Stock options (concluded):
The fair value of each option granted in 2006 and 2005 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
Weighted average fair market value of
options granted during the year
F-9
2006
0%
54% to 57%
4.42%to 4.95%
5 years
2005
0%
56%
4.34%
4 years
$
3.54 $
2.34
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
Earnings per share:
Basic earnings per share is calculated by dividing net income applicable to common
stockholders by the weighted average number of common shares outstanding during the period.
The calculation of diluted earnings per share is similar to that of basic earnings per share, except
that the denominator is increased to include the number of additional common shares that would
have been outstanding if all potentially dilutive common shares, principally those issuable upon
the exercise of stock options, were issued and the treasury stock method had been applied
during the period. The greatest number of shares potentially issuable by us upon the exercise of
stock options in any period for the year ended October 31, 2006, that were not included in the
computation because they were anti-dilutive, totaled 77,929. During the year ended October, 31
2005, all options were considered dilutive and included in the calculation of diluted earnings per
share.
The following table summarizes the calculation of basic and diluted earnings per share:
Numerators:
Net income (A)
Denominators:
Weighted average shares outstanding for basic
earnings per share (B)
Add effects of potentially dilutive securities -
assumed exercise of stock options
Weighted average shares for diluted
earnings per share (C)
Basic net earnings per share (A)÷(B)
Diluted net earnings per share (A)÷(C)
2006
2005
$
1,540,672 $
444,660
3,185,920
3,049,215
525,615
744,273
3,711,535
3,793,488
$
$
.48 $
.42 $
.15
.12
New accounting pronouncements:
In December 2004, the FASB issued SFAS No. 123 (R), “Accounting for Stock-Based
Compensation.” SFAS No. 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 No. 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 No. 123 (R), only certain pro forma disclosures of fair value were
required. SFAS No. 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.
F-10
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies (continued):
New accounting pronouncements (continued):
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) . FIN 48 applies to all tax positions related to income taxes subject to SFAS
No. 109, Accounting for Income Taxes (SFAS 109). Under FIN 48, a company would recognize
the benefit from a tax position only if it is more-likely-than-not that the position would be
sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies
how a company would measure the income tax benefits from the tax position that are
recognized, provides guidance as to the timing of the derecognition of previously recognized tax
benefits and describes the methods for classifying and disclosing the liabilities within the
financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company
should record interest and penalties related to tax positions and how the interest and penalties
may be classified within the income statement and presented in the balance sheet. FIN 48 is
effective for fiscal years beginning after December 15, 2006. For the Company, FIN 48 will be
effective for our 2008 fiscal year. Differences between the amounts recognized in the statement
of operations prior to and after the adoption of FIN 48 would be accounted for as a cumulative
effect adjustment to the beginning balance of retained earnings. The Company is currently
evaluating FIN 48 and its possible impacts on the Company’s financial statements. Upon
adoption, there is a possibility that the cumulative effect would result in a charge or benefit to
the beginning balance of retained earnings, increases or decreases in future effective tax rates,
and/or increases in future effective tax rate volatility.
In September 2006, the SEC staff issued SAB No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB
108). In SAB 108, the SEC staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of the company’s
financial statements and the related financial statement disclosures. SAB 108 permits public
companies to initially apply its provisions either by (i) restating prior financial statements or
(ii) recording the cumulative effect as adjustments to the carrying values of assets and liabilities
with an offsetting adjustment recorded to the opening balance of retained earnings. The
Company is required to adopt SAB 108 by the end of fiscal 2007 and will early adopt during the
first quarter of fiscal 2007. The Company has not completed its analysis but does not expect
adoption to have a significant impact on the Company’s results of operations or financial
position.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework
for measuring fair value in accounting principles generally accepted in the United States of
America, and expands disclosures about fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact SFAS 157 will have on its financial statements.
F-11
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 2 - Concentration of credit risk and sales to major customers:
The Company maintains its cash balances with several financial institutions. As of October 31, 2006,
the balance exceeded the Federal Deposit Insurance Corporation limitation for coverage of $100,000
by approximately $746,000. The Company reduces its exposure to credit risk by maintaining such
balances with financial institutions that have high credit ratings.
Accounts receivable are financial instruments that also expose the Company to concentration of
credit risk. Such exposure is limited by the large number of customers comprising the Company's
customer base and their dispersion across different geographic areas. In addition, the Company
routinely assesses the financial strength of its customers and maintains an allowance for doubtful
accounts that management believes will adequately provide for credit losses.
Sales to one customer represented 17% and 15% of total sales, and 12% and 10% of total accounts
receivable in 2006 and 2005, 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, 2006 and 2005:
Raw materials and supplies
Work in process
Finished goods
Less inventory reserve
2006
2005
$
1,038,857 $
20,024
4,259,125
(67,522)
845,313
63,242
3,318,293
(46,348)
Totals
$
5,250,484 $
4,180,500
Purchases of connector products from two major vendors represented 46% and 12% of the total
inventory purchases in 2006 and 35% and 24% in 2005, respectively. The increase is due primarily
to a one-time purchase of a two year supply of certain connectors. The Company has arrangements
with these vendors to purchase product based on purchase orders periodically issued by the
Company.
F-12
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 4 - Commitments:
The Company leases its facilities in San Diego, California and Las Vegas, Nevada under non-
cancelable operating leases. The Company amended its San Diego lease in June 2005, adding
additional square feet. The amended lease expires in May 2010 and requires minimum annual rental
payments that are subject to fixed annual increases. The minimum annual rentals under this lease are
being charged to expense on a straight-line basis over the lease term. Deferred rents were $59,000 as
of October 31, 2006 and $55,000 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 on a one year lease expiring
in January 2007. After expiration, the lease will operate on a month-to-month basis while terms for a
long-term lease are 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 $399,000 and $276,000 in 2006 and
2005, respectively.
Minimum lease payments under these operating leases in each of the years subsequent to October
31, 2006 are as follows:
Year Ending
October 31,
2007
2008
2009
2010
Total
Amount
272,000
232,000
223,000
132,000
859,000
$
$
The Company has an employment agreement with the President and Chief Executive Officer for a
term of up to three consecutive one year periods commencing on June 20, 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 $287,292 at October 31, 2006.
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, 2006 and 2005:
United States
Foreign countries
Totals
2006
2005
$
13,740,623 $
1,447,270
11,818,019
1,333,557
$
15,187,893 $
13,151,576
F-13
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income taxes:
The provision for income taxes consists of the following:
Current:
Federal
State
Deferred:
Federal
State
$
2006
2005
1,032,000 $
266,172
1,298,172
(65,000)
(10,457)
(75,457)
256,000
80,000
336,000
56,000
2,000
58,000
Totals
$
1,222,715 $
394,000
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
Expiration of capital loss
carryforwards
Other
Provision for income
taxes
Change in valuation allowance
(34,000)
2006
% of Pretax
Income
2005
% of Pretax
Income
Amount
Amount
$
940,000
34.0%$
285,000
34.0%
169,000
43,000
34,000
70,715
6.1
1.6
(1.2)
1.2
2.5
52,000
8,000
3,000
-
46,000
6.2
0.9
0.4
0.0
5.5
$
1,222,715
44.2%$
394,000
47.0%
F-14
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income taxes (concluded):
The Company's total deferred tax assets and deferred tax liabilities at October 31, 2006 and 2005 are
as follows:
Assets:
Allowance for doubtful accounts
Inventory obsolescence
Accrued vacation
State income taxes
Capital loss carryforwards
Other
Totals
Liabilities:
Depreciation
Less valuation allowance
$
2006
2005
18,000 $
27,000
61,000
66,000
3,000
24,075
199,075
6,000
18,000
59,000
30,000
37,000
23,000
173,000
(90,618)
(106,000)
(3,000)
(37,000)
Net deferred tax assets
$
105,457 $
30,000
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.
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, 2006, a total of 313
options were still outstanding under the 1990 Incentive Plan, all of which are currently
exercisable.
The Board of Directors also approved a Non-Qualified Stock Option Plan (the "1990 Non-
Qualified Plan") during fiscal 1990 that provides for grants of options to purchase up to 200,000
shares of common stock to officers, directors and other recipients selected by the Board of
Directors. Under its terms, the 1990 Non-Qualified Plan terminated in 2000, and no additional
options can be granted under that option plan. However, options previously granted under the
1990 Non-Qualified Plan remain outstanding and continue in effect until they either expire, are
forfeited or are exercised. As of October 31, 2006, a total of 6,000 options were still outstanding
under the 1990 Non-Qualified Plan, all of which are currently exercisable.
F-15
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (continued):
Incentive and Non-Qualified Stock Option Plans (concluded):
In May 2000, the Board of Directors adopted the Company’s 2000 Stock Option Plan (the
“2000 Option Plan”). Under the 2000 Option Plan, the Company may grant options to purchase
shares of common stock to officers, directors, key employees and others providing services to
the Company. The number of shares of common stock that the Company is authorized to issue
under options granted under the 2000 Option Plan initially was 300,000, which number
automatically increases on January 1 of each year by the lesser of (i) 4% of the total number of
shares of common stock then outstanding or (ii) 10,000 shares. In May 2003, the Board of
Directors and Shareholders approved an increase to the 2000 Option Plan of 100,000 options. In
June 2006, the Shareholders approved an increase to the 2000 Option Plan of 250,000 options.
Accordingly, as of October 31, 2006, the authorized number of shares of common stock that
could be issued under the 2000 Option Plan was 710,000, of which 402,938 are still outstanding
and 43,250 options were still available to be granted. Under the 2000 Option Plan, the Company
is authorized to grant both incentive stock options and non-qualified stock options 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.
Additional required disclosures related to stock option plans:
Additional information regarding all of the Company's outstanding stock options at October 31,
2006 and 2005 and changes in outstanding stock options in 2006 and 2005 follows:
2006
2005
Shares
or Price
Per Share
Weighted
Average
Exercise
Price
Shares
or Price
Per Share
Weighted
Average
Exercise
Price
** Options outstanding at
beginning of year
Options granted
Options exercised
* Options purchased for cash
Options forfeited
** Options outstanding at end of
year
906,097
272,508
(170,092)
$ 1.99
6.02
1.65
(34,391)
5.38
1,035,714
60,705
(83,372)
(100,000)
(6,950)
$ 1.63
5.34
2.07
.10
4.65
974,122
3.05
906,097
1.99
Option price range at end of year
$.10 - $7.50
$.10 - $6.38
* This transaction consisted of the Company repurchase of 100,000 options from the Company’s
Chief Executive Officer for $551,000.
** Included in the options outstanding are 564,871 in 2006 and 690,963 in 2005 previously granted to
six officers and/or key employees of the Company under employment agreements entered into by
the Company with each of these officers and employees.
F-16
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Incentive and Non-Qualified Stock Option Plans (concluded):
The following table summarizes information about stock options outstanding at October 31,
2006, all of which are at fixed-prices:
Range of
Exercise
Price
Weighted
Average
Exercise
Price
Number
Outstanding
Weighted Average
Remaining
Contractual Life
of Options
Outstanding
$.10
$1.33 - $ 2.50
$2.66 - $3.95
$4.94 - $7.50
298,871 $
147,693
187,535
340,023
974,122
Note 8 - Retirement plan:
1yr. after
termination
5yrs.
7yrs.
8yrs.
.10
2.12
3.03
6.07
3.05
Weighted
Average
Exercise Price
of Options
Exercisable
Number
of Options
Exercisable
298,871 $
67,693
87,535
206,265
660,364
.10
2.12
3.18
5.25
2.32
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 2006 or 2005.
Note 9 - Related party transactions:
The note receivable from stockholder of $66,980 at October 31, 2006 and 2005 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 was zero at October 31, 2006 and $29,750 at October 31,
2005, were due from an employee of the Company, bore interest at 6% and were due when shares of
the Company’s common stock were sold by the employee. The notes are collateralized by properties
owned by the employee. The related party notes were 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, 2006 and 2005, the Company paid the firm $39,870 and $39,360,
respectively, for services rendered.
Note 10- Legal proceedings:
From time to time, the Company is involved in legal proceedings that are related to its business
operations. The Company is not currently a party to any legal proceedings that could have a material
adverse effect upon its financial position or results of operations.
F-17
Note 11- 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.
Note 11- Business acquisition (concluded):
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 year ended October 31, 2005,
unaudited net sales would have been approximately $13,401,000 while unaudited net income and
earnings per share information would not have been materially different than the amounts shown on
the accompanying statement of income for the year ended October 31, 2005.
F-18
NOTES
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
Howard F. Hill
Director, President and CEO
Robert Jacobs
Director
William L. Reynolds
Director
Corporate Officers
Howard F. Hill
President and CEO
James S. Doss
Acting CFO and
Corporate Secretary
Manny Gutsche
VP Sales and Marketing
RF Industries
Robert Macias
VP Product Assurance
RF Industries;
President/General Manager
Aviel Electronics division
Richard “Joe” LaFay
President/General Manager
RF Connectors Division
Conrad Neri
President/General Manager
RF Cable Assemblies Division
George R. Marks
President/General Manager
Bioconnect/RF Neulink Divisions
Jesse Fuller
President/General Manager
Worswick Industries Division
Common Stock
Nasdaq Small Cap Market
Symbol: RFIL
Annual Meeting
June 1, 2007
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