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Forward-Looking Statements:

Certain statements in this Annual Report on Form 10-KSB, and other oral and written statements made by the Company from time to time are “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including those that discuss strategies, goals, outlook or other non-historical matters, or projected revenues, income, returns or other financial measures. In some cases forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “except,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These forward-looking statements are subject to numerous risks and uncertainties that may cause actual results to differ materially from those contained in such statements. Among the most important of these risks and uncertainties are the ability of the Company to continue to source its raw materials and products from its suppliers and manufacturers, and the market demand for its products, which market demand is dependent to a large part on the state of the telecommunications industry.

Important factors which may cause actual results to differ materially from the forward looking statements are described in the Section entitled “Risk Factors” in the Form 10-KSB, and other risks identified from time to time in the Company’s filings with the Securities and Exchange Commission, press releases and other communications. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

 

PART I

 

ITEM 1.

DESCRIPTION OF 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 six related divisions: (i) The RF Connector and Cable Assembly Division designs, manufactures and distributes coaxial connectors and cable assemblies that are integrated with coaxial connectors; (ii) the Aviel Electronics Division designs, manufactures and distributes custom RF connectors primarily for aerospace and military customers, (iii) Worswick Division distributes and sells coaxial and other connectors and cable assemblies primarily for local multi-media and communications customers; (iv) the Bioconnect Division manufactures and distributes cabling and interconnect products to the medical monitoring market; (v) the Neulink Division is engaged in the design, manufacture and sales of RF data links and wireless modems for receiving and transmitting control signals for remote operation and monitoring of equipment, personnel and monitoring services; and (vi) the RadioMobile Division is an OEM provider of end-to-end mobile management solutions implemented over wireless networks that supplement the operations of the Company’s Neulink division.

The Company’s principal executive office is located at 7610 Miramar Road, Building #6000, San Diego, California. The Company was incorporated in the State of Nevada on November 1, 1979, completed its initial public offering in March 1984 under the name Celltronics, Inc. and changed its name to RF Industries, Ltd. in November 1990. Unless the context requires otherwise, references to the “Company” in this report include RF Industries, Ltd. and its divisions.

The Company maintains an Internet website at http://www.rfindustries.com. The Company’s annual reports 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, are not and are 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, infrastructure build out by large telecommunications firms and on the Company’s ability to market its products. However, the Company’s sales of connectors and cable assemblies have increased in the past four out of five years as the overall market demand for wireless products that use the Company’s connectors has increased. Sales of connectors and cable assemblies decreased in fiscal year 2007 compared to 2006 sales as the build out of infrastructure projects were put on hold due to consolidation with the telecommunications industry. 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, 2007.

 

Aviel Electronics Division The Company acquired the business and all of the assets of Aviel Electronics in August 2004. Aviel has a 50 year history of serving the microwave transmission industries, and is an approved vendor to leading aerospace, electronics, OEM’s and government agencies in the United States and abroad. Aviel complements the Company’s Connector and Cable Division’s capabilities by providing additional custom design 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 complementary operation to the Connector and Cable Division. Worswick Industries sells coaxial connector solutions and manufactures RF cable assemblies for both individual customers and companies that design, build, operate, and maintain personal and private multi-media, wireless voice, data and messaging systems.

 

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.

RadioMobile Division The Company acquired substantially all of the assets and assumed certain liabilities of RadioMobile Inc., a privately held San Diego, California on September 1, 2007. The RadioMobile Division is an OEM provider of end-to-end mobile management solutions implemented over wireless networks. Although the RadioMobile Division operates as a separate division, its operations supplement the operations of the Company’s Neulink division.

For segment reporting purposes, the Company aggregates Connector and Cable Assembly, Aviel Electronics, Bioconnect and Worswick divisions into the RF Connector and Cables Assembly segment because they have similar economic characteristics, while RF Neulink and RadioMobile are aggregated in the RF Wireless segment.

 

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Product Description:

The Company produces a broad range of interconnect products and assemblies. The products that are offered and sold by the Company’s various divisions consist of the following:

Connector and Cable Products:

The Company’s Connector and Cable Division designs and distributes coaxial connectors for the numerous products, devices and instruments. Coaxial connectors have applications in commercial, industrial, automotive, scientific and military markets. The types of connectors offered by the RF Connector Division include 2.4mm and 3.5mm, 7-16 DIN, BNC, MCX, MHV, Mini-UHF, MMCX, N, SMA, SMB, TNC, QMA and UHF. These connectors are offered in several configurations for both plugs and jacks. There are hundreds of applications for these connectors, some of which include digital applications, cellular and PCS telephones, Wi-Fi and broadband wireless applications, cellular and PCS infrastructure, GPS (Global Positioning Systems), mobile radio products, aircraft, video surveillance systems, cable assemblies and test equipment. Users of the Company’s connectors include telecommunications companies, circuit board manufacturers, OEM, consumer electronics manufacturers, audio and video product manufacturers and installers, and satellite companies. The Connector Division markets approximately 1,500 types of connectors, which range in price from $0.40 to $125.00 per unit.

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, 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. 

RadioMobile Products:

RadioMobile provides hardware and software solutions for wireless mobile data management application. The primary markets include public safety (police, fire, and emergency medical services) and utilities and transportation (rail, bus, taxi and courier services). Software applications for both host and mobile environments are developed by in house engineers and contractors. RadioMobile products include:

 

	·	IQ Mobile VB mobile messaging software provides the fundamental engine for interfacing with computer aided displace functions.
	·	IQ Mobile IE browser mobile messaging application provides host and data base access.
	·	IQ Locator, a server resident map engine permitting one or many clients to access the map data.
	·	IQ Gateway software controls data to and from mobile units.
	·	MDT 7000 mobile computer terminal.
	·	MCT 1000 ruggedized mobile/portable computer terminal.
	·	CMX 6000 mobile short messaging status head.
	·	IQ AVL vehicle location software and hardware.

Foreign Sales:

Direct export sales by the Company to customers in South America, Canada, Mexico, Europe, Australia, the Middle East, and Asia accounted for $2,273,000 or approximately 15% of Company’s sales for the fiscal year ended October 31, 2007. 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.

 

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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 to enhance and expand the current customer base which includes the launch of the e-Commerce web-site in 2007, www.oddcables.com.

The Bioconnect group markets its products to the medical market through major hospital suppliers, dealers and distributors. The Bioconnect Division also sells its products to OEMs who incorporate the leads and cables into their product offerings.

The Neulink Division sells its products directly or through manufacturers representatives, system integrators and OEM’s. System integrators and OEMs integrate and/or mate Company’s products with their hardware and software to produce turnkey wireless systems. These systems are then either sold or leased to other companies, including utility companies, financial institutions, petrochemical companies, government agencies, and irrigation/water management companies.

The RadioMobile division sells its products direct and through value added resellers and dealers. Customers include police, fire, emergency medical services, rail, bus, taxi and courier services.

Manufacturing:

The Company contracts with outside third parties for the manufacture of all its coaxial connectors, and Neulink products. However, virtually all of RF cable assemblies sold by the Company during the fiscal year ended October 31, 2007 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 50 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.

 

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The RadioMobile division products are purchased from various U.S. and overseas suppliers. Some products are designed and manufactured by third party manufactures to RadioMobile specifications.

 

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 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 material from vendors in Asia and the United States. The Company believes the connector materials used in the manufacturing of its connector products are readily available from a number of foreign and domestic suppliers.

Worswick connectors and cable are typically acquired from the Connector and Cable Division or purchased from other high quality manufacturers and distributors.

Bioconnect cable assembly materials are typically made of commodity materials such as plastics, rubber, resins and wire. The Company believes materials and components used in these products are readily available from a number of domestic suppliers and from other foreign suppliers.

RadioMobile purchases its electronic products from various U.S. and overseas suppliers.

Employees:

As of December 31, 2007, the Company employed 83 full-time employees, of whom 35 were in accounting, administration, sales and management, 46 were in manufacturing, distribution and assembly, and 2 were engineers engaged in design, engineering and research and development. The Company also occasionally hires part-time employees. The Company believes that it has a good relationship with its employees and, at this time, no employees are represented by a union.

Research and Development:

The Company incurs research and development expenses from time to time when developing new products. The Company engaged in approximately $50,000 of research and development activities in fiscal year ended October 31, 2007. During the fiscal year ended October 31, 2006, the Company did not engage in any new research and development activities. 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.

 

Quarter		High			Low
Fiscal 2007
November 1, 2006 - January 31, 2007		$	9.57		$	6.15
February 1, 2007 - April 30, 2007			8.38			5.33
May 1, 2007 - July 31, 2007			6.25			5.20
August 1, 2007 - October 31, 2007			7.67			5.40
Fiscal 2006
November 1, 2005 - January 31, 2006		$	5.67		$	4.55
February 1, 2006 - April 30, 2006			6.81			4.72
May 1, 2006 - July 31, 2006			6.45			5.49
August 1, 2006 - October 31, 2006			8.64			5.12

 Stockholders: As of October 31, 2007 there were 497 holders of the Company’s Common Stock according to the records of the Company’s transfer agent, Continental Stock Transfer & Trust Company, New York, New York, not including holders who hold their stock in “street name”.

 

 Dividends: The Company paid dividends of $.06 per share for total dividends of $196,375 during fiscal 2007. The Board of Directors may declare dividends in the future depending on the Company’s financial condition and its financial needs.

 

Recent Sales of Unregistered Securities: Effective September 1, 2007, the Company issued a total of 30,919 shares of its common stock, valued at $5.66 per share, to two persons in connection with the purchase of the assets of RadioMobile, Inc. The foregoing issuance of shares was effected as a private placement under Section 4(2) of the Securities Act of 1933, as amended. Other than the foregoing stock issuance, there were no previously unreported sales of equity securities by the Company that were not registered under the Securities Act during fiscal 2007.

 

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Repurchase of Securities: The Company repurchased 24,516 shares of its common stock during the fourth quarter of fiscal year 2007. The Company repurchased and retired a total of 103,308 shares of its common stock during fiscal year 2007.

 

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of October 31, 2007 with respect to the shares of Company common stock that may be issued under the Company’s existing equity compensation plans.  

 

			A			B			C
Plan Category			Number of Securities to be Issued Upon Exercise of Outstanding Options			Weighted Average Exercise Price of Outstanding Options ($)			Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A)
Equity Compensation Plans Approved by Stockholders (1)			510,571		$	6.04			10,185
Equity Compensation Plans Not Approved by Stockholders (2)			500,871		$	1.53			0
Total			1,011,442		$	3.81			10,185

(1)

Consists of options granted under the R.F. Industries, Ltd. (i) 2000 Stock Option Plan, (ii) the 1990 Incentive Stock Option Plan, and (iii) the 1990 Non-qualified Stock Option Plan. The 1990 Incentive Stock Option Plan and Non-qualified Stock Option Plan have expired, and no additional options can be granted under these plans. Accordingly, all 10,185 shares remaining available for issuance represent shares under the 2000 Stock Option Plan.

 

(2)	Consists of options granted to six officers and/or key employees of the Company under employment agreements entered into by the Company with each of these officers and employees.

 

ITEM 6.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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 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 losses. The Company uses the Black-Scholes model to value the stock option grants which involves significant judgments and estimates.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

For recently issued accounting pronouncements that may affect us, see Note 1 of Notes to Financial Statements.

			2007						2006
			Amount			% of Net Sales			Amount			% of Net Sales
Net sales		$	14,853,039			100	%	$	15,187,893			100	%
Cost of sales			7,965,850			54	%		7,932,097			52	%
Gross profit			6,887,189			46	%		7,255,796			48	%
Engineering expenses			571,237			4	%		516,498			3	%
Selling and general expenses			4,625,065			31	%		4,311,515			28	%
Operating income			1,690,887			11	%		2,427,783			16	%
Other income			387,712			3	%		335,604			2	%
Income before income taxes			2,078,599			14	%		2,763,387			18	%
Income taxes			943,376			6	%		1,222,715			8	%
Net income			1,135,223			8	%		1,540,672			10	%

 

Net sales of the Company decreased by $335,000 or 2%, for the fiscal year ended October 31, 2007 (“fiscal 2007”) compared to the fiscal year ended October 31, 2006 (“fiscal 2006”) due to decreased net sales in two of the Company’s divisions. The decrease in fiscal 2007 is primarily attributable to a decrease in sales of $498,000 for connector and cable assembly division. During the first two quarters of fiscal 2007, the market demand for connectors and cables assembly products decreased, particularly for wireless applications, as the telecommunication industry was going through a consolidation of larger firms, including the four largest wireless service providers. Net sales in the third and fourth quarters increased by approximately $2,000,000 compared the first and second quarters as infrastructure projects put on hold during the telecom mergers were reinstituted. Bioconnect net sales also decreased by approximately $183,000. The decrease in sales was due to the internal restructuring of Bioconnect’s primary customer, which caused major purchases to be delayed by an average of five months. The decreases in net sale in the Company’s connector and cable division and in the Bioconnect division were partially offset by increased revenues from the Neulink Division of $279,000 as a result of the release of its new wireless modem in 2006 and by minor increases in the other divisions (net sales for the Aviel Division increased by approximately $15,000 and net sales for the Worswick Industries Division increased by $3,000). Neulink’s net sales increased due to increased demand for its new wireless products by government agencies. The RadioMobile acquisition in September 2007 added $48,000 in additional revenues during the fiscal year ended October 31, 2007.

 

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The Company’s gross profit decreased $369,000 or by 5% to $6,887,000 in 2007 from $7,256,000 in 2006 due to the decrease in net sales and lower gross margins. As a percent of net sales, gross profit decreased to 46% in fiscal 2007 from 48% in fiscal 2006. The decrease in the gross profit percentage is primarily due to changes in the product mix that make up the Connector and Cable Assembly divisions. Fiscal 2007 had a decrease in sales of higher margin connector products and increased sales of lower margin cable assembly products compared to fiscal 2006, resulting in gross profit decreasing to 46% from 48% in 2006 for the RF Connector and Cable assembly segment. The Company’s aggregate gross profit decreased to 46% during fiscal 2007 from 48% in fiscal 2006. Additionally, the Connector and Cable Assembly division incurred a $164,000 increase in stock compensation expense for production labor. Total cost of goods sold increased by $30,000 during fiscal 2007 for the Connector and Cable Assembly divisions. The Bioconnect division’s gross profit decreased to 15% during 2007 from 19% in 2006 as a result of the decrease in sales as the division was unable to reduce its fixed labor costs. Gross profits at the Aviel division and at the Worswick division remained substantially unchanged. The decrease in the RF Connector and Cable Assembly divisions were offset in part as Neulink division’s gross margins increased to 45% in 2007 from 37% in 2006. The increase at Neulink is directly attributed to keeping overall labor cost substantially unchanged while revenues increased by 34%, thereby lowering it’s per unit costs and its cost of sales.

Engineering expenses, which include research and development expenses, increased by $55,000 to $571,000 in fiscal 2007 from $516,000 in fiscal 2006. As a percent of net sales, engineering expenses increased to 4% in fiscal 2007 from 3% 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 2007 from fiscal 2006. However, the Company incurred approximately $50,000 of research and development expenses incurred in fiscal 2007 compared to no research and development expenses in fiscal 2006.

Selling and general expenses increased by $313,000 or by 7%, to $4,625,000 during fiscal 2007 from $4,312,000 in fiscal 2006 despite the 2% decrease in revenues. Stock based compensations increased to $356,000 in fiscal 2007 from $91,000 in fiscal 2006 as the Company adopted SFAS 123 (R) in fiscal 2007. The Company increased its use of independent sale representatives in fiscal 2007, resulting in an increase in commission expenses to $97,000 in fiscal 2007 from $52,000 in fiscal 2006. Accounting and legal fees increased to $335,000 in fiscal 2007 from $284,000 in fiscal 2006. Cost reduction efforts by the Company helped offset the increase as advertising costs decreased to $172,000 in fiscal 2007 from $196,000 in fiscal 2006. Bad debt expense decreased by $45,000 as collections of receivables improved.

As a result of the $369,000 increase of engineering, selling and general administrative expenses and the decrease of $369,000 in gross profit, operating income decreased 30% or by $737,000 to $1,691,000 in fiscal 2007 from $2,428,000 in fiscal 2006.

 

Income before taxes in fiscal 2007 decreased 25% or by $685,000 to $2,079,000 compared to income before taxes of $2,763,000 in fiscal 2006. The decrease in income before taxes is due to lower operating income and by an increase in interest income of 16%.

Net income for fiscal year ended October 31, 2007 decreased 26% or by $406,000 to $1,135,000 compared to $1,541,000 in fiscal year ended October 31, 2006.

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-19 and filed as part of this Annual Report:

·

Report of J.H. Cohn LLP, Independent Registered Public Accounting Firm

·

Balance Sheets as of October 31, 2007 and 2006

·

Statements of Income for the years ended October 31, 2007 and 2006

·

Statements of Stockholders’ Equity for the years ended October 31, 2007 and 2006

·

Statements of Cash Flows for the years ended October 31, 2007 and 2006

·

Notes to Financial Statements

 

18

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ITEM 8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

 

ITEM 8A(T)

CONTROLS AND PROCEDURES

(a) Internal control over financial reporting. Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that a company files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes In Internal Controls Over Financial Reporting. The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of October 31, 2007, the end of the period covered by this report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of October 31, 2007. Management reviewed the results of this evaluation with the Audit Committee of our Board of Directors, and based on this evaluation, management has determined that as of October 31, 2007, a material weakness existed relating to inadequate financial department staffing and a lack of financial accounting expertise necessary to properly account for certain complex or non-routine transactions. Notwithstanding the existence of this material weakness, we believe that the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. This material weakness resulted in the need for certain adjustments to equity based compensation, segment reporting, income tax expense, and certain other expense estimates. Although only one of these adjustments was material, until this material weakness is remediated, management has concluded that there is a reasonable possibility that a material misstatement to the annual or interim consolidated financial statements could occur and not be prevented or detected by the Company’s controls in a timely manner. Accordingly, management has determined that this control deficiency constitutes a material weakness. Because of this material weakness, we have concluded that we did not maintain effective internal control over financial reporting as of October 31, 2007 based on the criteria in Internal Control - Integrated Framework.

Our management, with the oversight our Audit Committee, has devoted considerable effort to remediate the material weakness identified above. However, as of October 31, 2007, we had not fully remediated the material weakness in our internal control over financial reporting. The Company has retained consultants to provide assistance in addressing non-routine complex accounting and the proper reporting of transactions.

We believe that the actions described above and resulting improvements in controls will generally strengthen our disclosure controls and procedures, as well as our internal control over financial reporting and will, over time, address the material weakness that we have identified in our internal control over financial reporting as of October 31, 2007. Many of the remedial actions we have taken are very recent, and other remedial actions are yet to be implemented. Because our remediation efforts include adding additional resources, many of the controls in our current system of internal controls will still rely extensively on manual review and approval, and management will not be able to conclude that the material weakness has been eliminated until such additional resources have been put in place, and the controls have been successfully operated and tested.

We, along with our Audit Committee, will continue to monitor and evaluate the effectiveness of these remedial actions and make further changes as deemed appropriate.

Except for the matters discussed above, there has been no change in the Company’s internal control over financial reporting during the period ended October 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

(c) Limitations On Disclosure Controls And Procedures. The Company, including its principal executive officer and principal financial officer, does not expect that its disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company can be detected.

 

19

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ITEM 8B

OTHER INFORMATION

None

Name		Age		Director Since
John R. Ehret		70		1991
Marvin H. Fink		71		2001
Howard F. Hill		67		1979
William Reynolds		72		2005
Robert Jacobs		55		1997
Linde Kester		62		2001

John R. Ehret has been the President of TPL Electronics of Los Angeles, California, since 1982. He holds a B.S. degree in Industrial Management from the University of Baltimore. He has been in the electronics industry for over 33 years.

 

Marvin H. Fink served as the Chief Executive Officer, President and Chairman of the Board of Recom Managed Systems, Inc. from October 2002 to March 2005. Prior thereto, Mr. Fink was President of Teledyne’s Electronics Group. Mr. Fink was employed at Teledyne for 39 years. He holds a B.E.E. degree from the City College of New York, an M.S.E.E. degree from the University of Southern California and a J.D. degree from the University of San Fernando Valley. He is a member of the California Bar.

 

Option Grants in Last Fiscal Year

 

 

 

Name

Securities Underlying Options Granted (#)

% of Total Options Granted to Employees in Fiscal Year

Base Price ($/Share)

Expiration Date

Howard F. Hill, President Chief Executive Officer

Incentive Stock Option

6,000

4.03

%

$

7.56

October 2017

James S. Doss, Chief Financial Officer
Incentive Stock Option			16,416			11.02	%	$	7.56			October 2017
Non-qualified Stock Option			16,500			11.04	%	$	7.56			October 2017

Option Exercises and Holdings. The following table sets forth information concerning option exercises and option holdings and the value, at October 31, 2007, of unexercised options held by the Named Executive Officers:

 

22

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Aggregated Options/SAR Exercises in Last Fiscal Year

and Fiscal Year-End Option/SAR Values

 

			Shares Acquired			Value Realized Market Price at Exercise Less			Number of Unexercised Options/SARs at Fiscal Year-End (#)						Value of Unexercised In-the-Money Options/SARs at Fiscal Year-End ($)Exercisable/
Name			Exercise #			Exercise Price ($)			Exercisable			Unexercisable			Unexercisable   (1)
Howard F. Hill, President, Chief Executive Officer			65,000		$	35,540			245,871			6,000		$ $	1,858,785/ 45,360
James S. Doss, Chief Financial Officer			0		$	0			0			32,916		$	0 / $248,845

(1)	Represents the closing price per share of the underlying shares on the last day of the fiscal year less the option exercise price multiplied by the number of shares. The closing value per share was $7.56 on the last trading day of the fiscal year as reported on the Nasdaq Capital Market.

 

During the fiscal year ended October 31, 2007, the Company did not adjust or amend the exercise price of stock options awarded to the Named Executive Officers.

Employment Agreement

The Company has no employment or severance agreements with any of its executive officers other than with Mr. Howard Hill, the Company’s President and Chief Executive Officer. Mr. Hill has been the President/Chief Executive Officer of the Company since 1994. On June 20, 2005 the Company entered into a new employment agreement with Mr. Hill. Under the new employment agreement, Mr. Hill agreed to serve as the Company’s President and Chief Executive Officer for up to three one-year periods. The new employment agreement provides for an annual salary of $175,000. Either Mr. Hill or the Company can terminate the employment agreement at each of the first and second anniversaries of the agreement. The employment agreement will expire on June 20, 2008.

Compensation of Directors

The Company compensates its directors with an annual grant of options to purchase 2,000 shares of common stock. The exercise price of the options is set at the closing price of the common stock on the last day of the fiscal year, or if the grant occurs after the end of the fiscal year, the closing price on the date of grant. For the fiscal year ended October 31, 2007, options to purchase 2,000 shares of common stock were granted to each of the following directors: Mr. Ehret, Mr. Jacobs, Mr. Kester and Mr. Reynolds. Mr. Fink was granted 4,000 as Chairman of the Board. All options granted had an exercise price of $7.56 per share. The directors are also eligible for reimbursement of expenses incurred in connection with attendance at Board meetings and Board committee meetings. For the fiscal years ending after October 31, 2006, the Board has voted to compensate all non-employee directors, in addition to the foregoing options, with an annual cash payment of $5,000 per director, and to pay the non-employee Chairman of the Board an additional annual payment of $10,000.

ITEM 11.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding the ownership of the Company’s Common Stock as of October 31, 2007 for each director; (ii) the executive officer named in the Summary Compensation Table in Executive Compensation; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than 5% of the Common Stock.

Name and Address of Beneficial Owner			Number of Shares (1) Beneficially Owned			Percentage Beneficially Owned
Howard H. Hill 7610 Miramar Road, Ste. 6000 San Diego, CA 92126-4202			245,871(2	)		6.5	%

 

23

---

 

John R. Ehret 7610 Miramar Road, Ste. 6000 San Diego, CA 92126-4202			28,000(3	)		0.7	%
Robert Jacobs 7610 Miramar Road, Ste. 6000 San Diego, CA 92126-4202			8,000(4	)		0.2	%
Marvin H. Fink 7610 Miramar Road, Ste. 6000 San Diego, CA 92126-4202			37,165(5	)		0.9	%
Linde Kester 7610 Miramar Rd., Ste. 6000 San Diego, CA 92126-4202			91,472(6	)		2.7	%
William Reynolds 7610 Miramar Rd., Ste. 6000 San Diego, CA 92126-4202			20,300(7	)		0.5	%
All Directors and Officers as a Group (6 Persons)			430,808(8	)		11.4	%
Hytek International, Ltd PO Box 10927 APO George Town Cayman Islands			450,930(9	)		11.9	%
Walrus Partners, LLC 8014 Olson Memorial, #232 Golden Valley, MN 55427			294,416(10	)		7.8	%

 

(1)

Shares of Common Stock, which were not outstanding but which could be acquired upon exercise of an option within 60 days from the date of this filing, are considered outstanding for the purpose of computing the percentage of outstanding shares beneficially owned. However, such shares are not considered to be outstanding for any other purpose.

 

(2)	Represents the 245,871 shares that Mr. Hill has the right to acquire upon exercise of options exercisable within 60 days.

 

(3)	Consists of 16,000 shares, which Mr. Ehret has the right to acquire upon exercise of options exercisable within 60 days, 2,000 options exercised and held on October 18, 2007 plus 10,000 shares purchased on the open market.

 

(4)	Consists of 8,000 shares, which Mr. Jacobs have the right to acquire upon exercise of options exercisable within 60 days.

 

(5)	Consists of 25,165 shares, which Mr. Fink has the right to acquire upon exercise of options exercisable within 60 days plus 5,000 shares purchased on the open market.

 

(6)	Consists of 32,170 shares, which Mr. Kester has the right to acquire upon exercise of options exercisable within 60 days plus 61,302 shares purchased on the open market.

 

(7)	Consists of 18,000 shares, which Mr. Reynolds has the right to acquire upon exercise of options exercisable within 60 days plus 2,300 shares purchased on the open market.

 

(8)	Includes 345,206 shares, which the directors and officers have the right to acquire upon exercise of options exercisable within 60 days.

 

(9)	Represents shares owned by Hytek International, Ltd is a Cayman Islands holding company which is deemed to possess sole voting and dispositive power over securities held.

 

(10)

Information is based on a report on Schedule 13G filed in February 2007. Represents shares owned by clients of Walrus Partners, LLC, which is an investment adviser. Walrus Partners, LLC is deemed to possess sole voting and dispositive power over securities held by its clients. Walrus Partners, LLC disclaims beneficial ownership of these securities held by these clients

 

24

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ITEM 12.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

On April 1, 1997, the Company loaned to Howard Hill, its President and Chief Executive Officer, $70,000 pursuant to a Promissory Note which provides for interest at the rate of 6% per annum and which has no specific due date for principal. The principal balance still outstanding on the loan is $66,980. Mr. Hill pays interest on the loan annually. The loan is evidenced by a promissory note that is secured by a lien on certain of Mr. Hill’s personal property.

Mr. Jacobs, a director of the Company, is an employee of the Company’s public relations firm. For the fiscal years ended October 31, 2007 and October 31, 2006, the Company paid the firm $40,409 and $39,870, respectively, for services rendered.

ITEM 13.

EXHIBITS

The following exhibits are filed as part of this report:

3.1

Articles of Incorporation, as amended (1)

3.2.1

Company Bylaws as Amended through August, 1985 (2)

3.2.2

Amendment to Bylaws dated January 24, 1986(2)

	3.2.3	Amendment to Bylaws dated February 1, 1989(3)
	3.2.4	Amendment to Bylaws dated June 9, 2006(6)
	3.2.5	Amendment to Bylaws dated September 7, 2007

10.1

Form of 2000 Stock Option Plan(4)

10.2

Directors’ Nonqualified Stock Option Agreements (2)

10.3

Lease Agreement - San Diego, CA Facility (3)

10.4

Employment Contract - Howard Hill (4)

14.1

Code of Ethics(5)

 

23.1

Consent of J.H. Cohn LLP

 

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350

 

99.1

Press Release dated February 8, 2008 announcing the financial results for the fiscal year ending October 31, 2007.

(1)   Previously filed as an exhibit to the Company’s Form 10-KSB for the year ended October 31, 2000, which exhibit is hereby incorporated herein by reference.

 

25

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(2)   Previously filed as an exhibit to the Company’s Form 10-KSB for the year ended October 31, 1987, which exhibit is hereby incorporated herein by reference.

(3)   Previously filed as an exhibit to the Company’s Form 10-KSB for the year ended October 31, 1992, which exhibit is hereby incorporated herein by reference.

(4)   Previously filed as an exhibit to the Company’s Form 10-QSB for the quarter ended January 31, 2001, which exhibit is hereby incorporated herein by reference.

(5)   Previously filed as an exhibit to the Company’s Form 10-KSB for the year ended October 31, 2003, which exhibit is hereby incorporated herein by reference.

 

(6)   Previously filed as an exhibit to the Company’s Form 8-K, dated June 9, 2006, which exhibit is hereby incorporated herein by reference.

Shareholders of the Company may obtain a copy of any exhibit referenced in this 10-KSB Report by writing to: Secretary, RF Industries, Ltd., 7610 Miramar Road, Bldg. 6000, and San Diego, CA 92126. The written request must specify the shareholder’s good faith representation that such shareholder is a stockholder of record of common stock of the Company. A charge of forty-one cents ($.41) per page will be made to cover Company expenses in furnishing the requested documents.

ITEM14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit-Related Fees

The following is a summary of the fees billed to RF Industries, Ltd. by J.H. Cohn LLP for professional services rendered for the fiscal years ended October 31, 2007 and 2006:

 

Fee Category		2007			2006
Audit Fees		$	203,350		$	161,091
Audit-Related Fees			12,859			9,520
Tax Fees						3,760
Total Fees		$	216,209		$	174,371

 Audit Fees. Consists of fees billed for professional services rendered for the audit of RF Industries, Ltd. financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by J.H. Cohn LLP in connection with statutory and regulatory filings or engagements.

 Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit and review of RF Industries’ financial statements and are not reported under “Audit Fees.” These services include professional services requested by RF Industries in connection with its preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, accounting consultations in connection with acquisitions and consultations concerning financial accounting and reporting standards.

 Tax Fees. Consists of fees billed for professional services and review of tax compliance, tax advice and tax planning matters. These services include assistance regarding federal and state tax compliance and assistance with tax reporting.

 

26

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Index

[Attachment to Item 7]

		Page
Report of Independent Registered Public Accounting Firm			F-2
Balance Sheets
October 31, 2007 and 2006			F-3
Statements of Income
Years Ended October 31, 2007 and 2006			F-4
Statements of Stockholders’ Equity
Years Ended October 31, 2007 and 2006			F-5
Statements of Cash Flows
Years Ended October 31, 2007 and 2006			F-6
Notes to Financial Statements			F-7-F20

RF INDUSTRIES, LTD.

 

STATEMENTS OF INCOME

YEARS ENDED OCTOBER 31, 2007 AND 2006

		2007			2006
Net sales		$	14,853,039		$	15,187,893
Cost of sales			7,965,850			7,932,097
Gross profit			6,887,189			7,255,796
Operating expenses:
Engineering			571,237			516,498
Selling and general			4,625,065			4,311,515
Totals			5,196,302			4,828,013
Operating income			1,690,887			2,427,783
Other income - interest			387,712			335,604
Income before income taxes			2,078,599			2,763,387
Provision for income taxes			943,376			1,222,715
Net income		$	1,135,223		$	1,540,672
Earnings per share:
Basic		$	.35		$	.48
Diluted		$	.30		$	.42

 

See Notes to Financial Statements.

 

F-4

---

 

RF INDUSTRIES, LTD.

STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED OCTOBER 31, 2007 AND 2006

 

															Accumulated
									Additional						Other			Total
			Common Stock						Paid-In			Retained			Comprehensive			Stockholders'
			Shares			Amount			Capital			Earnings			Income			Equity
Balance, November 1, 2005			3,082,521		$	30,825		$	3,872,983		$	7,302,596					$	11,206,404
Comprehensive income:
Net income												1,540,672						1,540,672
Unrealized gain on short-term investments														$	5,308			5,308
Total comprehensive income																		1,545,980
Stock based compensation expense									143,188									143,188
Tax benefit on non-qualified stock
options									288,000									288,000
Exercise of stock options			170,092			1,701			278,726									280,427
Balance, October 31, 2006			3,252,613			32,526			4,582,897			8,843,268			5,308			13,463,999
Net income												1,135,223						1,135,223
Reclassification adjustment for gain on short-term investment included in net income															(5,308	)		(5,308	)
Stock based compensation expense									572,471									572,471
Tax benefit on non-qualified stock
options									198,000									198,000
Exercise of stock options			105,745			1,057			197,098									198,155
Dividends												(196,375	)					(196,375	)
Shares issued - acquisition			30,919			309			174,691									175,000
Treasury stock purchased and retired			(103,308	)		(1,032	)		(24,795	)		(574,545	)					(600,372	)
Balance, October 31, 2007			3,285,969		$	32,860		$	5,700,362		$	9,207,571		$			$	14,940,793

See Notes to Financial Statements.

 

F-5

---

RF INDUSTRIES, LTD.

STATEMENTS OF CASH FLOWS

YEARS ENDED OCTOBER 31, 2007 AND 2006

		2007			2006
Operating activities:
Net income		$	1,135,223		$	1,540,672
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for bad debts			(4,393	)		40,224
Depreciation and amortization			268,707			271,209
Deferred income taxes			(146,243	)		(75,457	)
Stock based compensation expense			572,471			143,188
Income tax benefit on non-qualified stock options			(198,000	)		288,000
Changes in operating assets and liabilities (net of acquisition):
Trade accounts receivable			184,819			(202,926	)
Inventories			429,145			(1,069,984	)
Income tax payable			(354,239	)		1,025,995
Other current assets			(23,899	)		(110,800	)
Accounts payable			(236,067	)		106,454
Accrued expenses			105,588			225,365
Net cash provided by operating activities			1,733,112			2,181,940
Investing activities:
Payment for acquisition			(166,667	)
Purchases of available-for-sale securities			(4,832,399	)		(5,363,610	)
Sales of available-for-sale securities			2,548,000			3,116,329
Capital expenditures			(93,823	)		(141,620	)
Payment of note receivable						2,500
Payments of note receivable from related party						29,750
Net cash used in investing activities			(2,544,889	)		(2,356,651	)
Financing activities:
Proceeds from exercise of stock options			198,155			280,427
Purchases of treasury stock			(600,372	)
Dividends paid			(196,375	)
Income tax benefit on non-qualified stock options			198,000
Net cash provided by (used in) financing activities			(400,592	)		280,427
Net increase (decrease) in cash and cash equivalents			(1,212,369	)		105,716
Cash and cash equivalents at beginning of year			4,612,935			4,507,219
Cash and cash equivalents at end of year		$	3,400,566		$	4,612,935
Supplemental cash flow information - income taxes paid		$	1,438,631
Noncash investing and financing activities:
Stock issued for acquisition		$	175,000
Present value of minimum guaranteed payments		$	35,665
Retirement of treasury stock		$	600,372

 

See Notes to Financial Statements. 

 

F-6

---

 

RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

Note 1 - Business activities and summary of significant accounting policies:

 

Business activities:

The Company’s business is comprised of the design, manufacture and/or sale of communications equipment primarily to the radio and other professional communications related industries. The Company currently conducts its operations through six related business divisions: (i) RF Connector and Cable Division is engaged in the design, manufacture and distribution of coaxial connectors and cable assemblies used primarily in radio and other professional communications applications; (ii) Aviel Division is engaged in the design, manufacture and sales of radio frequency, microwave and specialized connectors and connector assemblies for aerospace, original electronics manufacturers and military electronics applications; (iii) Worswick Division is engaged in sales of microwave and radio frequency connectors and cable assemblies to end users in multi-media, radio and other communications applications; (iv) Bioconnect Division is engaged in the design, manufacture and sales of cable interconnects for medical monitoring applications; (v) Neulink Division is engaged in the design, manufacture and sales of radio links for receiving and transmitting control signals for remote operation and monitoring of equipment, personnel and monitoring services; and (vi) RadioMobile Division is engaged as an OEM provider of end-to-end mobile management solutions implemented over wireless networks. RadioMobile Division operates as a separate division and supplements the operations of the Company’s Neulink division (see Note 11).

Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results may differ from those estimates.

Cash equivalents:

The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Revenue recognition:

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 criterion for revenue recognition.

Inventories:

Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or market. Cost has been determined using the weighted average cost method.

Equipment and furnishings:

Equipment, tooling and furniture are recorded at cost and depreciated over their estimated useful lives (generally 3 to 7 years) using the straight-line method.

 

F-7

---

 

RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

Note 1 - Business activities and summary of significant accounting policies (continued):

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.

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 2007 or 2006.

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, 2007, amortizable intangible assets are amortized over a period of three years. Amortization expense is expected to be $60,489 and $27,156 and $27,156 for the years ending October 31, 2008, 2009 and 2010, respectively.

 

		2007			2006
Intangible Assets
Non-Compete		$	120,000		$	120,000
Software			47,522
Customer List			33,945
			201,467			120,000
Accumulated Amortization			(86,667	)		(46,667	)
Totals		$	114,800		$	73,333

 

Advertising:

The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations were $172,000 and $196,000 in 2007 and 2006, 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 $50,000 and $0 in 2007 and 2006, respectively.

 

F-8

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

Note 1 - Business activities and summary of significant accounting policies (continued):

Income taxes:

The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in future periods based on enacted laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Stock options:

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 the Company upon the exercise of stock options in any period for the year ended October 31, 2007 and October 31, 2006, that were not included in the computation because they were anti-dilutive, totaled 163,923 and 77,929, respectively.

The following table summarizes the calculation of basic and diluted earnings per share:

		2007			2006
Numerators:
Net income (A)		$	1,135,223		$	1,540,672
Denominators:
Weighted average shares outstanding for basic
earnings per share (B)			3,263,695			3,185,920
Add effects of potentially dilutive securities -
assumed exercise of stock options			491,754			525,615
Weighted average shares for diluted
earnings per share (C)			3,755,449			3,711,535
Basic net earnings per share (A)÷(B)		$	.35		$	.48
Diluted net earnings per share (A)÷(C)		$	.30		$	.42

 

F-10

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

Note 1 - Business activities and summary of significant accounting policies (continued):

 

New accounting pronouncements:

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 the October 31, 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 Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. For the Company, SFAS 157 will be effective for the 2009 fiscal year. The Company is currently evaluating the impact SFAS 157 will have on its financial statements.

Reclassification:

Certain amounts in the 2006 financial statements have been reclassified from amounts in the financial statements we originally filed to conform to the current presentation.

 

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, 2007, the balance exceeded the Federal Deposit Insurance Corporation limitation for coverage of $100,000 by approximately $1,747,000. 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 18% and 17% of total sales, and 13% and 12% of total accounts receivable in 2007 and 2006, 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.

F-11

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 - Inventories and major vendors:

 

Inventories consist of the following as of October 31, 2007 and 2006:

		2007			2006
Raw materials and supplies		$	1,092,965		$	1,038,857
Work in process			19,716			20,024
Finished goods			3,966,681			4,259,125
Less inventory reserve			(124,060	)		(67,522	)
Totals		$	4,955,302		$	5,250,484

Purchases of connector products from two major vendors represented 17% and 20% of the total inventory purchases in 2007 and 46% and 12% in 2006, respectively. The decrease is due primarily to the Company choosing to utilize different suppliers as a means to offset proposed price increases from one of the Company’s major suppliers in 2006. The Company has arrangements with these vendors to purchase product based on purchase orders periodically issued by the Company.

Note 4 - Commitments:

 

The Company leases its facilities in San Diego, California and Las Vegas, Nevada under non-cancelable operating leases. The Company amended its San Diego lease in June 2005, adding additional square feet. The amended lease expires in May 2010 and requires minimum annual rental payments that are subject to fixed annual increases. The minimum annual rentals under this lease are being charged to expense on a straight-line basis over the lease term. Deferred rents were $54,000 as of October 31, 2007 and $59,000 at October 31, 2006. The San Diego lease also requires the payment of the Company's pro rata share of the real estate taxes and insurance, maintenance and other operating expenses related to the facilities. The Worswick division operations include a warehouse and retail space. Approximately 25% of the space is subleased to other tenants. The Las Vegas lease is a three year lease expiring in March 2010. The Company also leases certain automobiles under operating leases which expire at various dates through February 2011.

Rent expense under all operating leases totaled approximately $420,000 and $399,000 in 2007 and 2006, respectively.

Minimum lease payments under these operating leases in each of the years subsequent to October 31, 2007 are as follows: 

 

Year Ending
October 31,			Amount
2008		$	387,000
2009			353,000
2010			178,000
2011			5,000
Total		$	923,000

 

F-12

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

 

Note 4 - Commitments (concluded):

 

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 $95,764 at October 31, 2007.

 

Note 5 - Segment information:

The Company has adopted the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Pursuant to the provisions of SFAS No. 131, the Company reports segment sales in the same format reviewed by the Company’s management (the “management approach”).

Management identifies the Company’s segments based on strategic business units that are, in turn, based along market lines. These strategic business units offer products and services to different markets in accordance with their customer base and product usage. For segment reporting purposes, the Company aggregates Connector and Cable Assembly, Aviel Electronics, Bioconnect and Worswick divisions into the RF Connector Cables Assembly segment while RF Neulink and RadioMobile are part of the RF Wireless segment. The Company had not reported segment information in its previous filings for the operations associated with its Connector, Neulink and Bioconnect business units in the same format as reviewed by the Company’s chief operating decision maker. The Company evaluates the performance of each segment based on income or loss before income taxes. The Company charges depreciation and amortization directly to each division within the segment. All stock based compensation is attributed to the RF Connector Cable Assembly segment. Inventory, fixed assets, goodwill and intangible assets are the only assets identified by segment. Except as discussed above, the accounting policies for segment reporting are the same as for the company as a whole.

Substantially all of the Company’s operations are conducted in the United States; however, the Company derives a portion of its revenue from export sales. The Company attributes sales to geographic areas based on the location of the customers. The following table presents the sales of the Company by geographic area for the years ended October 31, 2007 and 2006:

		2007			2006
United States		$	12,579,555		$	13,740,623
Foreign countries			2,273,484			1,447,270
Totals		$	14,853,039		$	15,187,893

 

F-13

---

 

Note 5 - Segment information (concluded):

Net sales, income before provision for income taxes and other related segment information as of October 31, 2007 and 2006, and for the years then ended follows:       

 

2007		RF Connectors Cable Assembly			RF Wireless			Corporate			Total
Net sales		$	13,706,909		$	1,146,130		$	0		$	14,853,039
Income before provision for income taxes			1,465,109			225,778			387,712			2,078,599
Depreciation and amortization			268,115			592			0			268,707
Total assets			4,797,987			836,287			10,493,884			16,128,158
Additions to property and equipment			93,823			0			0			93,823

 

2006
Net sales		$	14,369,570		$	818,323		$	0		$	15,187,893
Income before provision for income taxes			2,392,653			35,130			335,604			2,763,387
Depreciation and amortization			271,209			0			0			271,209
Total assets			5,900,811			454,429			8,963,795			15,319,035
Additions to property and equipment			141,620			0			0			141,620

 

Note 6 - Income taxes:

 

The provision (benefit) for income taxes consists of the following:

		2007			2006
Current:
Federal		$	842,619		$	1,032,000
State			247,000			266,172
			1,089,619			1,298,172
Deferred:
Federal			(119,343	)		(65,000	)
State			(26,900	)		(10,457	)
			(146,243	)		(75,457	)
Totals		$	943,376		$	1,222,715

 

F-14

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

 

Note 6 - Income taxes (concluded):

 

Income tax at the Federal statutory rate is reconciled to the Company's actual net provision for income taxes as follows:

 

		2007						2006
					% of Pretax						% of Pretax
		Amount			Income			Amount			Income
Income tax at Federal
statutory rate		$	706,700			34.0	%	$	940,000			34.0	%
State tax provision, net
of Federal tax benefit			145,200			7.0			169,000			6.1
Nondeductible differences: ISO stock options			142,000			6.8			43,000			1.6
Other			(50,524	)		(2.4	)		70,715			2.5
Provision for income
taxes		$	943,376			45.4	%	$	1,222,715			44.2	%

 

The Company's total deferred tax assets and deferred tax liabilities at October 31, 2007 and 2006 are as follows:

		2007			2006
Assets:
Allowance for doubtful accounts		$	17,300		$	18,000
Inventory obsolescence			49,400			27,000
Accrued vacation			62,100			61,000
State income taxes			85,600			66,000
Stock based compensation awards			61,600
Capital loss carryforwards			-			3,000
Other			45,700			24,075
Totals			321,700			199,075
Liabilities:
Depreciation			(70,000	)		(90,618	)
Less valuation allowance			-			(3,000	)
Net deferred tax assets		$	251,700		$	105,457

 

F-15

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

 

Note 7 - Stock options:

 

Incentive and Non-Qualified Stock Option Plans:

The Board of Directors approved an Incentive Stock Option Plan (the "1990 Incentive Plan") during fiscal 1990 that provides for grants of options to employees to purchase up to 500,000 shares of common stock of the Company. Under its terms, the 1990 Incentive Plan terminated in 2000, and no additional options can be granted under that option plan. However, options previously granted under the 1990 Incentive Plan remain outstanding and continue in effect until they either expire or are forfeited or are exercised. As of October 31, 2007, a total of 313 options were still outstanding under the 1990 Incentive Plan, all of which are currently exercisable.

The Board of Directors also approved a Non-Qualified Stock Option Plan (the "1990 Non-Qualified Plan") during fiscal 1990 that provides for grants of options to purchase up to 200,000 shares of common stock to officers, directors and other recipients selected by the Board of Directors. Under its terms, the 1990 Non-Qualified Plan terminated in 2000, and no additional options can be granted under that option plan. However, options previously granted under the 1990 Non-Qualified Plan remain outstanding and continue in effect until they expire, are forfeited or are exercised. As of October 31, 2007, a total of 4,000 options were still outstanding under the 1990 Non-Qualified Plan, all of which are currently exercisable.

In May 2000, the Board of Directors adopted the Company’s 2000 Stock Option Plan (the “2000 Option Plan”). Under the 2000 Option Plan, the Company may grant options to purchase shares of common stock to officers, directors, key employees and others providing services to the Company. The number of shares of common stock that the Company is authorized to issue under options granted under the 2000 Option Plan initially was 300,000, which number automatically increases on January 1 of each year by the lesser of (i) 4% of the total number of shares of common stock then outstanding or (ii) 10,000 shares. In May 2003, the Board of Directors and Shareholders approved an increase to the 2000 Option Plan of 100,000 options. In June 2006, the Company’s shareholders approved an increase to the 2000 Option Plan of 250,000 options. In May 2007, the shareholders approved an increase to the 2000 Option Plan of 100,000 options. Accordingly, as of October 31, 2007, the authorized number of shares of common stock that could be issued under the 2000 Option Plan was 810,000, of which 506,258 are still outstanding and 10,185 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 and non-qualified stock options are granted at an exercise price no less than the fair value of the common stock on the date of grant.

 

F-16

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

Note 7 - Incentive and Non-Qualified Stock Option Plans (concluded):

 

The Company’s historical net income and earnings per common share and pro forma net income and earnings per common share assuming compensation cost had been determined for the year ended October 31, 2006 based on the fair value instead of the intrinsic value at the grant date for all awards to the Company’s employees, using the Black-Scholes option pricing model consistent with the provisions of SFAS 123 and amortized ratably over the vesting period, are set forth below:

 

		2006
Net income:
As reported		$	1,540,672
Add back stock based compensation expense
recognized under the intrinsic value method			143,188
Deduct total stock-based employee
compensation expense determined
under the fair value based method
for all awards - net of income taxes			(528,000	)
Pro forma		$	1,155,860
Basic earnings per share:
As reported		$	.48
Pro forma		$	.36
Diluted earnings per share:
As reported		$	.42
Pro forma		$	.31

Additional required disclosures related to stock option plans:

The fair value of each option granted in 2007 and 2006 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

		2007			2006
Dividend yield			0% to 1.06	%		0	%
Expected volatility			54% to 58	%		54% to 57	%
Risk-free interest rate			4.16% to 5.00	%		4.42% to 4.95	%
Expected lives			4.75 to 6 years			5 years
Weighted average fair market value of
options granted during the year		$	3.74		$	3.54

Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical experience with exercise and post employment termination behavior to determine the options’ expected life. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.

 

F-17

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Additional information regarding all of the Company's outstanding stock options at October 31, 2007 and 2006 and changes in outstanding stock options in 2007 and 2006 follows:

		2007						2006
					Weighted						Weighted
		Shares			Average			Shares			Average
		or Price			Exercise			or Price			Exercise
		Per Share			Price			Per Share			Price
* Options outstanding at beginning of year			974,122		$	3.05			906,097		$	1.99
Options granted			148,985			7.50			272,508			6.02
Options exercised			(105,745	)		1.87			(170,092	)		1.65
Options forfeited			(5,920	)		7.38			(34,391	)		5.38
* Options outstanding at end of year			1,011,442			3.81			974,122			3.05
* Option price range at end of year		$	.10 - $7.56					$	.10 - $7.50
Aggregate intrinsic value of options exercised during year:		$	600,078					$	953,981

 

*

Included in the options outstanding are 500,871 in 2007 and 564,871 in 2006 previously granted to six officers and/or key employees of the Company under employment agreements entered into by the Company with each of these officers and employees.

 

Weighted average remaining contractual life of options exercisable at October 31, 2007: 7.26 years
Aggregate intrinsic value of options outstanding at October 31, 2007: $3,786,868
Aggregate intrinsic value of options exercisable at October 31, 2007: $3,033,968

 

As of October 31, 2007, $631,408 of expense with respect to nonvested share-based arrangements has yet to be recognized and is expected to be recognized over a weighted average period of 1.9 years.

 

The following table summarizes information about stock options outstanding at October 31, 2007, all of which are at fixed-prices:

 

									Weighted Average						Weighted
									Remaining						Average
						Weighted			Contractual						Exercise
Range of						Average			Life			Number			Price
Exercise			Number			Exercise			of Options			of Options			of Options
Price			Outstanding			Price			Outstanding			Exercisable			Exercisable
$.10			239,871		$	.10			1 year after termination			239,871		$	.10
$1.33 - $ 2.50			145,693			2.12			4 years			75,693			2.12
$2.66 - $3.95			169,035			3.02			6 years			89,035			3.13
$4.94 - $7.50			456,843			6.58			7 years			307,858			6.14
			1,011,442			3.81						712,457			3.30

 

 

F-18

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

Note 8 - Retirement plan:

 

The Company sponsors a deferred savings and profit sharing plan under Section 401(k) of the Internal Revenue Code. Substantially all of its employees may participate in and make voluntary contributions to this defined contribution plan after they meet certain eligibility requirements. The Board of Directors of the Company can authorize additional discretionary contributions by the Company. The Company did not make contributions to the plan in 2007 or 2006.

Note 9 - Related party transactions:

 

The note receivable from stockholder of $66,980 at October 31, 2007 and 2006 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.

A director of the Company is an employee of the Company’s public relations firm. For the fiscal years ended October 31, 2007 and 2006, the Company paid the firm $40,409 and $39,870, 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.

Note 11- Business acquisition:

 

The Company acquired substantially all of the assets and assumed certain liabilities of RadioMobile Inc. (“RadioMobile”), a privately held San Diego, California company on September 1, 2007. RadioMobile Inc. is an OEM provider of end-to-end mobile management solutions implemented over wireless networks. RadioMobile has developed software and hardware used by police departments and transportation vehicles to receive and transfer electronic data. The RadioMobile purchase agreement contains certain provisions containing contractual and/or legal rights that could potentially create intangible assets apart from goodwill. The asset purchase agreement has an earn out provision over three years based upon revenues earned by RadioMobile operating as a separate division. The maximum future consideration is $500,000. The purchase price for the RadioMobile asset purchase included $166,667 in cash payments and $175,000 in stock issuance, representing 30,919 shares at $5.66, and totaling $35,665 of guaranteed minimum future consideration. Upon the resolution of a contingency based on earnings, any additional consideration paid will be recorded by the acquiring enterprise as an additional cost of the acquired enterprise. Minimum contingent consideration amounts per the Asset Purchase Agreement were recorded upon closing at their net present value, using an 8% discount rate. Any future contingent consideration based on meeting certain earnings levels will be accounted for as additional consideration when the amounts are resolved.

The purpose of the acquisition was to combine Neulink’s industry leading modem products, which enables the Company to enter and compete in the design and marketing of mobile wireless communications systems. Goodwill recorded upon the purchase acquisition is fully deductible for tax purposes.

 

F-19

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RF INDUSTRIES, LTD.

NOTES TO FINANCIAL STATEMENTS

 

Note 11- Business acquisition (concluded):

 

The acquisition of the RadioMobile assets has been accounted for as a purchase and, accordingly, the net assets acquired were recorded at estimated fair values on the date of acquisition. A summary of the allocation of the cost of the acquisition to the net assets acquired as of September 1, 2007 follows:

 

Accounts receivable		$	27,053
Inventory			133,963
Other assets (prepaid, net fixed assets)			27,218
Intangible assets:
Software			47,522
Customer list			33,945
Goodwill			107,631
Total assets acquired			377,332
Assumed liabilities			(164,000	)
Net assets aquired at closing		$	213,332

Assuming the acquisition had taken place on the first day of the year ended October 31, 2007 and 2006, unaudited net sales would have been approximately $15,600,000 and $15,900,000 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 years ended October 31, 2007 and 2006.

 

F-20

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SIGNATURE

In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

RF INDUSTRIES, LTD.

Date: February 8, 2008	By:	/s/ Howard F. Hill
		Howard F. Hill, President/CEO (Principal Executive Officer)

 

In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

Date: February 8, 2008	By:	/s/ James S. Doss
		James S. Doss, Chief Financial Officer (Principal Accounting Officer)

 

Date: February 8, 2008	By:	/s/ Howard F. Hill
		Howard F. Hill, President/CEO (Principal Executive Officer)

 

Date: February 8, 2008	By:	/s/ John Ehret
		John Ehret, Director

 

Date: February 8, 2008	By:	/s/ Marvin Fink
		Marvin Fink, Director

 

Date: February 8, 2008	By:	/s/ William Reynolds
		William Reynolds, Director

 

Date: February 8, 2008	By:	/s/ Robert Jacobs
		Robert Jacobs, Director

 

Date: February 8, 2008	By:	/s/ Linde Kester
		Linde Kester, Director

 

27

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