SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended October 31, 1997
Commission File Number 0-13301
RF INDUSTRIES, LTD.
(Exact name of registrant as specified in its charter)
Nevada 88-0168936
(State of Incorporation) (I.R.S. Employer Identification No.)
7610 Miramar Road, Bldg. 6000 San Diego, California 92126-4202
(Address of principal executive offices) (Zip Code)
(619) 549-6340 FAX (619) 549-6345
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g)of the Act:
Common Stock, $.01 par value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes X No
The issuer's revenues for the year ended October 31, 1997 were $6,831,291.
<PAGE>
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 31, 1997, based on the average
of the closing bid and asked prices of one share of the Common Stock of the
Company, as reported on December 31, 1997 was $3,533,399. As of December 31,
1997, the registrant had outstanding 3,064,598 shares of common stock, $.01 par
value.
Number of Pages/ Index to Exhibits
This Form 10-KSB consists of a total of 37 pages. The Index to Exhibits can be
found on page 20.
2
<PAGE>
PART I
ITEM 1. BUSINESS
General:
RF Industries, Ltd. (hereinafter the "Company") has two operating divisions, the
RF Connector Division, and the RF Neulink Division.
RF Connector Division
The Company, through its RF Connector Division, is engaged in the design,
manufacture and distribution of coaxial connectors used in radio communication
applications as well as in computers, test instruments, PC (Personal Computer)
LANs (Local Area Networks) and antenna devices. Coaxial products are distributed
through approximately 65 major domestic and international distributors. RF
Connector has introduced subminiature SMA, SMB, MCX, Semi-Rigid/Flexible cable
connectors; in series and between-series adapters; cellular connectors;
connectors for large diameter, low-loss cables and corrugated cable
applications. RF Connector is also engaged in the manufacturing and distribution
of RF cable assemblies. Cable assemblies are manufactured per end user
specifications and are sold through distribution or directly to major OEM
(Original Equipment Manufacturer) accounts.
RF Neulink Division
The Company, through its RF Neulink Division, designs and manufactures wireless
digital transmission products, commonly known as RF Data Links. A few of the
many applications for data links include industrial monitoring SCADA
(Supervisory Control And Data Acquisition) systems, wireless linking of private
WANs (Wide Area Networks), and GPS (Global Positioning Systems) tracking and
locations systems. These point to point and point to multi-point wireless data
networks are used by banks, casinos, petrochemical and gas and oil companies,
U.S. and foreign governments, military agencies, utility companies and
manufacturing plants, just to name a few users.
The Company considers these Divisions to be operating in a single segment
involving the design, manufacture and/or sale of communications equipment.
The Company's principal executive office is located at 7610 Miramar Road,
Building #6000, San Diego, California.
Product Description:
The Company's products fall into three main categories which are produced by two
"Strategic Business Units" as follows:
3
<PAGE>
1. Coaxial connectors for radio communications equipment, PC LANS, antenna
devices, instruments and other radio frequency devices are produced by
the Company's RF Connector Division. The Company entered the coaxial
connector design, production and distribution business in May 1987 with
the acquisition of the assets of RF Industries division of Hytek
International, Hialeah, Florida. Coaxial connectors continue to have
applications ranging through industrial, scientific and military
markets.
2. Coaxial cable assemblies for test equipment, LANs, and other RF
applications are produced by the Company's Cable Assembly Division. The
Company entered the cable assembly business in 1987 as a total solution
for their distribution network.
3. The wireless data transport products, manufactured by the RF Neulink
Division, are available in a wide range of configurations to satisfy
varied applications. Low data speeds (300bps) to medium data speeds to
very high data speeds (1,000,000bps), various RF output options, as
well as dumb and smart modems are available in various configurations.
Many frequency ranges are also supported from LF (50MHz), VHF
(136-174MHz), UHF (403-512MHz), 928-960MHz and the 2.400-2.499GHz ISM
band.
Product Enhancements:
During 1997, the RF Connector Division introduced a revised series of connectors
for large diameter, low-loss cables and corrugated cable applications. These
connectors, which have been tested by an independent third party, meet the
intermodulation specifications as set forth by the industry. They address cable
applications in the growing PCS (Personal Communications System) market and are
expected to achieve volume production early in 1998. The division has also
introduced several new connectors throughout the year ranging from the typical
CATV (Cable Television) F connector to specialized subminiature connectors. As
well as the increase in new connectors, the Company has allocated additional
resources for its cable assembly business.
As in 1996, the RF Connector Division increased its design and production of
specialized connectors to meet customer's requirements and FCC (Federal
Communications Commission) Regulation 15 demands for non-standard connector
interfaces.
The RF Neulink Division added VHF versions to both its Neulink 9600 and Skyline
product offerings. Several I/O (Input/Output) modules were also added to the
SkyLine product. These I/O modules provide SkyLine with digital, analog and
relay options that are commonly used in SCADA systems. Modern base station
software for SCADA systems usually employs graphics and analytical functions
that allows the user to perform analysis on line and make alterations as
necessary. There are several of these software packages on the market including
one called Citect(TM). Citect(TM) software drivers have been written for SkyLine
and included in the Citect(TM) product. This should allow new sophisticated
systems to be installed in a variety of applications.
4
<PAGE>
Initial shipments of the paging exciters started in the summer of 1997. Several
changes in the specifications by the Chinese government forced us to change the
product to meet the more stringent requirements. In addition RF Neulink also
introduced another paging exciter (DPT-260-S) in the 260-280 MHZ band. Most
experts believe this frequency band will grow substantially in the future.
A new high speed data transceiver modem is under development and should be
announced shortly. This new product will utilize a new multiple level encoding
technique which will allow more data to sent through a narrower bandwidth than
before. This product will meet the new FCC requirements for more efficient use
of the spectrum for many years to come.
The effort to develop the DCL-2400-S was stopped to allow other projects to
proceed. However, the spread spectrum market is real and one we need to provide
a product offering for. Therefore products from other companies are being
researched to determine there suitability to be added to the RF Neulink line.
Meetings have been held with two companies on this subject.
Distribution, Marketing and Customers:
Sales methods vary greatly between the two divisions.
RF Connector continues to be the Company's core business. RF Connector presently
sells its products primarily through warehousing distributors and OEM (Original
Equipment Manufacturer) customers which utilize coaxial connectors in the
manufacture of their products. The OEM market, which includes manufacturers of
communications test equipment, and computers, accounted for approximately 40%
while distributors accounted for 60%, of the Company's RF Connector division
sales for fiscal 1997
RF Neulink sells its products directly or through Manufacturers Representatives,
System Integrators and OEM's. System integrators and OEMs integrate and/or mate
Company equipment with their hardware and software to produce turn-key wireless
systems. These systems are then either sold or leased to utility companies,
financial institutions, petrochemical companies, government agencies, and
irrigation/water management companies, just to name a few of the many
applications.
Raw Materials:
RF Connector currently sources its manufacturing from Japan, the United States,
and ISO (International Standards Organization) approved factories in Taiwan.
Neulink purchases its electronic products from a moderate number of both
domestic and foreign suppliers. All Neulink wireless modem transceivers, with
the exception of the 928-960MHz crystal controlled transceiver, are built in the
United States. The 928-960MHz transceiver is assembled in Japan and tested in
San Diego. In the event of a large production order, this unit would also be
built in the USA.
5
<PAGE>
Personnel:
The Company presently employs 31 full-time employees, and two part-time
employees. The RF Connector division employs 25 full-time and two part-time
employees. The Neulink Division employs the remaining six full-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.
Patents, Trademarks and Licenses:
The Company has no patent protection for any of its products, nor has it
registered any product trademarks.
Backlog, Warranties and Terms:
As of October 31, 1997, the Company had a sales order backlog of approximately
$4,219,000 compared to a backlog of $3,123,000 as of October 31, 1996.
The Company warrants its products to be free from defects in material and
workmanship for varying warranty periods, depending upon the product. Products
are generally warranted to the dealer for one year, with the dealer responsible
for any additional warranty it may make. Certain Neulink products are sold
directly to end-users and are warranted to those purchasers. The RF Connector
products are warranted for the useful life of the connectors.
The Company usually sells to customers on 30 day terms and does not generally
grant extended payment terms. Sales to most foreign customers are made on cash
terms at time of shipment.
Competition:
Management estimates that RF Connector has over 50 competitors in a $500,000,000
market. Management estimates this should be a $700,000,000 market by the year
2001. Management believes no one competitor has over 15% of the total market,
while the three leaders hold no more than 30% of the total market.
Major competitors for Neulink include Microwave Data Systems, E.F. Johnson, Data
Radio (selling Motorola radios), GRE America and Pacific Crest Corporation. When
the Company begins to market the 2.4GHz spread spectrum ISM radio, competitors
will include Cylink, Proxim, Aironet, and PrimeLink.
Government Regulations:
The Company's present and future products have been designed to meet any present
or proposed specifications and management believes it should have little
difficulty in meeting standards for approvals by government regulatory agencies
throughout the world.
6
<PAGE>
Neulink products are subject to the regulations of the Federal Communications
Commission (FCC) in the United States, the Department of Communications (D.O.C.)
in Canada, and the future E.C.C. Radio Regulation Division in Europe. The
Company's present equipment is "type-accepted" for use in the United States and
Canada.
Development of Business:
General:
During the three years ended October 31, 1997, the Company has continued its
efforts in the following areas:
o Expansion of RF Connector through broadening the selection of inventory
available for sale. Management believes that the success of this division
is dependent on having product available when other firms cannot deliver.
This broad availability of inventory also allows the Company to emphasize
sales to OEMs.
o Neulink has continued to improve and expand its wireless product lines
through 1998. In an effort to concentrate on sales and service, Neulink has
formed a strong strategic alliance with Sonik Technologies, Inc., a
privately held high tech wireless solutions company. Neulink contracts with
Sonik to develop the new products that the Company believes will be in
future demand, or that the Company can develop a market for. Sonik will
then develop the new product contracted for by Neulink, and supervise the
assembly of production hardware. The final integration, alignment, and all
final electrical and RF testing is typically performed at the Neulink
facility.
Foreign Operations:
Direct export sales by the Company to customers in South America, Canada,
Mexico, Europe, Australia, the Middle East, and the Orient accounted for
approximately 19% of Company sales for the year ended October 31, 1997, compared
to approximately 16% in fiscal 1996. The Company is attempting to aggressively
expand its foreign distribution under the RFI logo, while it concurrently seeks
new private label customers world wide.
The Company does not own, or directly operate any manufacturing operations or
sales offices in foreign countries at this time. It does manufacture much of its
Neulink product through contract manufacturing in the USA. Some crystal products
are manufactured in the Orient. RF Connector purchases almost all of its
connector products from contract manufacturers in Taiwan and the United States.
7
<PAGE>
ITEM 2. PROPERTIES:
The Company leases its corporate headquarters building at 7610 Miramar Road,
Building 6000, San Diego, California. The building consists of approximately
10,000 square feet which houses administrative, sales and marketing,
engineering, production and warehousing for the Company's Connector Division.
The rapid growth of both divisions of the Company required the leasing of an
additional building to house the Neulink Division in 1996. The building is
located adjacent to our corporate headquarters at 7606 Miramar Road, Building
7200. The building consists of approximately 2,400 square feet which houses the
production and sales staff of the Neulink Division. The lease on both buildings
will terminate in May 31, 2000. The monthly rental is approximately $6,500 plus
utilities, maintenance and insurance.
ITEM 3. LEGAL PROCEEDINGS:
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
8
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
Market information: The Company's stock is listed on the NASDAQ-OTC Bulletin
Board where it currently trades.
For the periods indicated, the following tables sets forth the high and low BID
prices per share of Common Stock. These prices represent inter-dealer quotations
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Quarter High Low
Fiscal 1997
November 1, 1996 - January 31, 1997 6 1/8 4 1/2
February 1, 1997 - April 30, 1997 5 3/4 2 3/4
May 1, 1997 - July 31, 1997 4 2
August 1, 1997 - October 31, 1997 3 1/4 2 1/8
Fiscal 1996
November 1, 1995 - January 31, 1996 1 1/2 7/8
February 1, 1996 - April 30, 1996 3 7/16 1 1/4
May 1, 1996 - July 31, 1996 5 3/8 2 7/8
August 1, 1996 - October 31, 1996 6 3/4 4 1/8
On December 31, 1997 the reported closing prices of the Common Stock of the
Company were $2.00 BID and $2.25 ASKED.
As of December 31, 1997, there were 868 holders of the Company's Common Stock
per records of the Company's transfer agent, Continental Stock Transfer Co., New
York, NY.
The Company has not paid and does not presently intend to pay cash dividends on
its Common Stock.
RF Industries is implementing NASDAQ's Corporate Governance Requirements. This
annual report, the shareholder proxy solicitation and the Stockholders' meeting
tentatively scheduled for March 31, 1998 are part of these requirements. The
Company is also establishing a formal audit committee primarily composed of
outside directors.
9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition:
The following table presents the key measures of financial condition as of
October 31, 1997 and 1996:
<TABLE>
1997 1996
------------------- --------------------
<CAPTION>
% of % of
Total Total
Amount Assets Amount Assets
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents ......................................... $ 877,587 17.0% $ 403,547 9.9%
Investments in available-for-sale
securities ....................................................... 642,799 12.5 604,186 14.9
Current assets .................................................... 4,942,619 95.9 3,908,795 96.2
Current liabilities ............................................... 449,643 8.7 454,265 11.2
Working capital ................................................... 4,492,976 87.1 3,454,530 85.0
Property & equipment - net ........................................ 119,140 2.3 111,809 2.8
Total assets ...................................................... 5,155,659 100.0 4,063,504 100.0
Stockholders' equity .............................................. 4,706,016 91.3 3,609,239 88.8
</TABLE>
Liquidity and Capital Resources:
Management believes that cash generated from operations will be sufficient to
fund the anticipated growth of the Company in fiscal 1998. Management believes
that any financing requirements can be met through a combination of cash and
investments held as of October 31, 1997, internally generated cash flow, advance
payments from customers and borrowing on favorable credit terms from commercial
banking establishments.
10
<PAGE>
There is little expected need for additional capital equipment in fiscal 1998.
In the past, the Company has financed much of its fixed asset requirements
through capital leases. No additional capital equipment purchases have been
identified that would require significant additional leasing or capital
obligations during fiscal 1997. Management also believes that based on the
Company's financial condition at October 31, 1997, the absence of outstanding
bank debt and recent operating results, the Company would be able to obtain bank
loans to finance its expansion, if necessary.
General Outlook:
Management believes that because of a number of achievements during the year
ended October 31, 1997, the Company could maintain steady growth in the year
ended October 31, 1998.
As explained above, management believes the Company has capital resources
available to fund operations at current and expanded levels.
RF Connector Division is attacking all vertical markets within the RF arena
through the addition of new distributor and OEM accounts. Two of these
distributors, each having annual sales exceeding one billion dollars and one
being over 50 years old, provide the RF Connector Division with large worldwide
distribution potential through multiple outlets. Coupled with these new
distributor and OEM accounts, and the rebound of the RF market in Mexico, the
Connector Division is penetrating deeper into existing accounts through the use
of private label programs and new product introductions
The Neulink Division has continued the major effort started in 1995, to provide
new products for the rapidly growing wireless market. These new products, 2.4GHz
ISM radio, 150MHz paging exciter for China, a VHF NEULINK 9600 transceiver
modem, a 230MHz and 280MHz paging exciter, and a European certified radio,
should position Neulink to address many new applications in 1998 and beyond.
Results of Operations:
The following summarizes sales, cost of sales and gross profit for the years
ended October 31, 1997 and 1996:
1997 1996
--------------------- -----------------------
% of % of
Amount Sales Amount Sales
--------- -------- ---------- ---------
Sales $ 6,831,291 100% $ 6,083,545 100%
Cost of Sales 3,767,187 55.1 3,271,470 53.8
------------ ---- ------------- ----
Gross Profit $ 3,064,104 44.9% $ 2,812,075 46.2%
=========== ===== ============ =====
11
<PAGE>
Net sales increased $747,746 or 12.3% in 1997 compared to 1996. The increase in
sales was primarily due to increased demand by customers, and increased
inventory available to meet customer demands. The Company has expended much
effort and funding on new and improved products to position the Company to be
highly competitive in the coming years. The increase in sales volume was the
result of the Company's efforts to improve visibility in the industry by its
active participation in many industry trade shows. In addition, the Company is
assisting customers in marketing the Company's products.
The gross profit was increased by approximately $252,000 in 1997 and declined
slightly, as a percent of sales, to 44.9% from 46.2% in 1996.
Engineering expenses declined approximately $24,000 to 6.4% of sales compared to
7.6% of sales in 1996. Engineering expenses were significantly higher in fiscal
1996 due to accelerated development costs for introducing a line of large RF
Connector products and Neulink Emergency Alert System radio development.
Selling and general expenses increased approximately $258,000 to 24.7% of sales
compared to 23.5% of sales in 1996. The increase in expenses, and as a percent
of sales, is attributable to increases in salary expenses, contract labor,
travel and trade show expenses.
Operating income increased approximately $18,000 due to the higher sales in
1997.
Other income, due to interest income on cash and investments, increased
approximately $9,000. Interest income increased due to higher balances, partly
offset by lower yields.
Net income per share was $.19 for both 1997 and 1996, due primarily to an
additional 286,407 shares of common stock outstanding at the end of fiscal 1997.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements of the Company with related Notes and
accountants' report are attached hereto as pages F-1 to F-15 and filed as part
of this Annual Report:
o Report of J.H. Cohn LLP, Independent Public Accountants
o Balance Sheet as of October 31, 1997
o Statements of Income for the years ended October 31, 1997 and 1996
o Statements of Stockholders' Equity for the years ended October 31, 1997
and 1996
o Statements of Cash Flows for the years ended October 31, 1997 and 1996
o Notes to Financial Statements
12
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
13
<PAGE>
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors: Age Date of Election Position
Jack A. Benz 64 February 1990 Chairman
Howard F. Hill 57 November 1979 President/Chief Executive Officer
John Ehret 60 November 1991 Director
Robert Jacobs 46 May 1997 Director
Jack A. Benz is an electronic engineer by education, holding a degree from
Milwaukee School of Engineering. He has been involved in the sales and marketing
end of the electronics and communications industry for over 40 years. He has
owned and successfully operated businesses in the manufacturers representative
and export field. He managed RF Industries, Ltd. when it operated as a separate
company in Florida prior to its acquisition in 1987 by Celltronics.
Howard F. Hill, a founder of the Company in 1979, has degrees in manufacturing
engineering, quality engineering and industrial management. He took over the
presidency of the Company in July of 1993. He has held various positions in the
electronics industry over the past 30 years.
John Ehret holds a B.S. degree in Industrial Management from the University of
Baltimore. He is Vice-President and CFO as well as co-owner of TPL Electronics
of Los Angeles, California. He has been in the electronics industry for over 30
years.
Robert Jacobs is RFI's account executive at Neil Berkman Associates and
coordinates the Company's investor relations. He holds an MBA from the
University of Southern California and has been in the investor industry for over
16 years.
Officers:
Jack A. Benz - See biography above.
Howard F. Hill - See biography above.
Terrie Gross joined the Company in January 1992 as accounting manager. She was
elected to Corporate Secretary in February 1995, and elected to Chief Financial
Officer in 1997.
14
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table:
The Company does not have any executive officer paid in excess of $100,000.00
The following table presents the annual cash and other compensation of Howard F.
Hill, the Company's President:
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards
----------------------------------------------------------------
(a) (b) (c) (f) (g)
Name
and Prin- Restricted
cipal Stock Options
Position Year Salary($) Awards SARs (#)
Howard F. Hill 1997 $85,000 0 4,000
President
1996 $85,000 0 4,000
The following categories have no balance so they have been excluded from the
Summary Compensation Table:
(d) Bonus
(e) Other Annual Compensation
(h) LTIP Payout
(I) All Other Compensation
Note: Pursuant to the terms of the employment contract discussed below between
the Company and Mr. Hill, Mr. Hill was granted the option to acquire
500,000 shares of common stock at $.10 per share on June 1, 1994. These
options vest ratably over the six year period ending in July 1999.
15
<PAGE>
Option Tables:
The following table depicts the options granted to the President during the year
ended October 31, 1997:
Option Grants in Last Fiscal Year
Individual Grants
-------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities % of Total
Underlying Options Exercise
Options Granted to or Base
Granted (#) Employees Price per Expiration
Name in Fiscal Year Share Date
------------ ---------- -------------- -------- -------------
Howard Hill, President
Incentive Stock Option 2,000 7% $2.50 October, 2007
Non-Qualified Option 2,000 9% $2.13 October, 2007
The following table depicts the options held by the President as of October 31,
1997:
<TABLE>
Aggregated Option Exercises and Fiscal Year End Option Positions
------------------------------------------------------------------
<CAPTION>
Number of Value of
Unexercised Unexercised
Options at Options at
Shares FY-End FY-End
Acquired on Value Exercisable Exercisable
Exercise Realized /Unexer- /Unexer-
Name # $ cisable cisable
- ---- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Howard F. Hill, President 20,000 $100,000 349,333/ $797,079
166,667 $400,000
</TABLE>
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<PAGE>
Long-Term Incentive Awards:
There are no awards under long-term incentive plans, such as phantom stock
grants and restricted stock grants, that vest upon the satisfaction of
performance goals.
Compensation of Directors:
The Company has no standard arrangement by which its Directors are compensated.
Employment Contracts:
The Company has no employment or severance agreements for payments of more than
$100,000. However, on June 1, 1994, the Company entered into a six year,
renewable employment contract with the President calling for annual compensation
of $85,000 plus a bonus to be determined by the Board. In addition, the
employment contract granted the President options to acquire 500,000 shares of
common stock at $.10 per share. Such options vest ratable over the six year term
of the initial agreement. During the year ended October 31, 1997, options to
purchase 16,000 shares were exercised at $.10 per share and, at October 31,
1997, options to purchase 317,333 shares were vested.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information with respect to all
shareholders who are beneficial owners of more than 5% of the Company's
outstanding common stock, by each director and by all directors and officers as
a group as of October 31, 1996. The beneficial owner is the owner of record and
has sole voting and investment power over the shares shown, except as otherwise
indicated.
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<PAGE>
Number of
Shares (1) Percentage (1)
Name and Address Beneficially Beneficially
of Beneficial Owner Owned Owned
- ---------------------- -------------- --------------
Hytek International, Ltd.
690 West 28th Street
Hialeah, FL 33010 1,227,167 40.0%
Jack A. Benz
7610 Miramar Rd.
San Diego, CA 92126 52,000 (2) 1.7%
Howard F. Hill
7610 Miramar Rd.
San Diego, CA 92126 374,830 (3) 12.2%
John Ehret
3370 San Fernando Rd. #206
Los Angeles, CA 90065 25,000 (4) 0.8%
Robert Jacobs
Neil Berkman Associates
1900 Ave of the Stars, #2850
Los Angeles, CA 90067 51,000 (5) 1.6%
All Directors & Officers
as a group 523,333 (6) 17.0%
(1) Shares available through outstanding options which are exercisable
within 60 days of this report are treated as outstanding for purposes
of computing the number and percentage of shares each stockholder
beneficially owns.
(2) Includes 12,000 shares which Mr. Benz has the right to acquire upon
exercise of options exercisable within 60 days of the date of this
report.
(3) Includes 349,333 shares which Mr. Hill has the right to acquire upon
exercise of options exercisable within 60 days of the date of this
report.
(4) Includes 8,000 shares which Mr. Ehret has the right to acquire upon
exercise of options exercisable within 60 days of the date of this
report.
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<PAGE>
(5) Includes 30,000 shares which Neil Berkman Associates has the right to
acquire upon exercise of vested options.
(6) Includes 413,833 shares which all Directors and Officers, as a group,
have the right to acquire upon exercise of options exercisable within
60 days of the date of this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
RF Industries, Ltd. contracted on January 1, 1995 with Hytek International, Ltd.
("Hytek"), a principal stockholder of the Company, for technical development as
well as marketing services for a period of three years from January 1, 1995
through December 31, 1997. The Company issued to Hytek a total of 600,000 shares
of common stock at the rate of 200,000 shares per year. In February 1995, 1996
and 1997, 200,000 shares were delivered. As payment for the shares, Hytek
remitted a total of $60,000 in three equal installments of $20,000; the
installments were paid on January 1, 1995, 1996 and 1997. The difference of
$690,000 between the market value of $1.25 per share of common stock at January
1, 1995 and the aggregate purchase price of the shares is being amortized to
expense over the service period. The Chairman of the Board of the Company was an
employee of Hytek at the inception of the contract.. He resigned his position
with Hytek on May 1, 1997.
19
<PAGE>
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents have been filed as part of this report:
(1) Exhibits
23.1 Consent of Independent Public Accountants
The following are incorporated by reference to Form 10-K for fiscal year ended
October 31, 1986 filed on February 4, 1987 as amended by Amendment No. 1 filed
on August 2, 1987 and Form 10- KSB for fiscal year ended October 31, 1992 filed
on March 5, 1993, and October 31, 1994 filed on February 14, 1995, October 31,
1995 filed on January 31, 1996, October 31, 1996 filed on January 30, 1997, and
October 31, 1997 filed on January 31, 1998:
3.2.1 Company Bylaws as Amended through August, 1985
3.2.2 Amendment to Bylaws dated January 24, 1986
3.2.3 Amendment to Bylaws dated February 1, 1989
10.1 Asset Purchase Agreement
10.2 Settlement Agreement
10.3 Funds Impound Escrow Agreement
10.4 Stock Escrow Agreement
10.5 Lease - San Diego, CA Facility
10.6 Lease - Gardena, CA Facility
10.7 Celltronics, Inc. Incentive Stock Option Plan
10.8 Form of Incentive Stock Option Plan
10.9 Directors' Nonqualified Stock Option Agreements
10.10 Consulting Agreements
10.11 Consultants' Nonqualified Stock Option Agreements
10.12 Agreement for Cancellation of Shares
10.13 Neutec Sale Agreement
10.14 Trilectric Sale Agreement
10.15 Incentive Stock Option Plan
10.16 Amended Lease Agreement - San Diego, CA Facility
10.17 Lease Agreement - San Diego, CA Facility
10.18 Employment Contract - Howard Hill
10.19 Consulting Agreement - Hytek International
10.20 Lease Agreement - San Diego, CA Facility
10.21 Public Relations Agreement - Neil G.Berkman Associates
10.22 Employment Contract -Donald Catledge
20
<PAGE>
(2) Reports on Form 8-K
None
Shareholders of the Company may obtain a copy of any exhibit referenced in this
10-KSB Report by writing to: Secretary, RF Industries, Ltd., 7610 Miramar Road,
Bldg. 6000, San Diego, CA 92126. The written request must specify the
shareholder's good faith representation that such shareholder is a stock holder
of record of common stock of the Company. A charge of twenty cents ($.20) per
page will be made to cover Company expenses in furnishing the requested
documents.
21
<PAGE>
SIGNATURE
------------------
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RF INDUSTRIES, LTD.
Date: January 30, 1998 By: /s/ Howard F. Hill
----------------------------------------
Howard F. Hill, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Dated: January 30, 1998 By: /s/ Jack A. Benz
----------------------------------------
Jack A. Benz, Chairman Board of Directors
Dated: January 30, 1998 By: /s/ Terrie A. Gross
----------------------------------------
Terrie A. Gross, Chief Financial Officer
(Principal Accounting Officer)
Dated: January 30, 1998 By: /s/ Howard F. Hill
----------------------------------------
Howard F. Hill, Chief Executive Officer
Dated: January 30, 1998 By: /s/ John Ehret
---------------------------------------
John Ehret, Director
Dated: January 30, 1998 By: /s/ Robert Jacobs
---------------------------------------
Robert Jacobs, Director
22
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 originally filed on October 31, 1990 by RF Industries, Ltd. (previously
Celltronics, Inc.) of our report dated December 12, 1997 appearing in this
Annual Report of Form 10-KSB for the fiscal year ended October 31, 1997 (the
"Form 10-KSB"), on our audits of the financial statements of RF Industries, Ltd.
as of October 31, 1997 and for each of the two years in the period ended October
31, 1997 also appearing in this Form 10-KSB.
J.H. COHN LLP
San Diego, California
December 12, 1997
<PAGE>
RF INDUSTRIES, LTD.
INDEX TO FINANCIAL STATEMENTS
[ATTACHMENT TO ITEM 7]
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................................. F-2
BALANCE SHEET
OCTOBER 31, 1997 ....................................................... F-3
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1997 AND 1996 .................................. F-4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997 AND 1996 .................................. F-5
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997 AND 1996 .................................. F-6
NOTES TO FINANCIAL STATEMENTS ......................................... F-7/15
* * *
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
RF Industries, Ltd.
We have audited the accompanying balance sheet of RF INDUSTRIES, LTD. as of
October 31, 1997, and the related statements of income, stockholders' equity and
cash flows for the years ended October 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these finan cial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RF Indus tries, Ltd. as of
October 31, 1997, and its results of operations and cash flows for the years
ended October 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
J.H. COHN LLP
San Diego, California
December 12, 1997
F-2
<PAGE>
RF INDUSTRIES, LTD.
BALANCE SHEET
OCTOBER 31, 1997
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 877,587
Investments in available-for-sale securities ............... 642,799
Trade accounts receivable, net of allowance for
doubtful accounts of $33,000 ......................... 765,433
Inventories, net of valuation allowance of $47,000.......... 2,251,582
Prepaid expenses and deposits .............................. 293,218
Deferred tax assets ........................................ 42,000
Note receivable from stockholder ........................... 70,000
---------
Total current assets ................................... 4,942,619
---------
Property and equipment:
Equipment and tooling ...................................... 436,361
Furniture and office equipment ............................. 108,206
---------
544,567
Less accumulated depreciation ............................ 425,427
---------
Total .................................................. 119,140
---------
Deferred tax assets .......................................... 89,000
Other assets ................................................. 4,900
---------
Total .................................................. $5,155,659
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 154,256
Accrued expenses .......................................... 295,387
---------
Total liabilities ..................................... 449,643
---------
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 10,000,000 shares of $.01
par value; 3,064,598 shares issued and outstanding ..... 30,646
Additional paid-in capital .............................. 4,803,366
Retained earnings ....................................... 767,451
Unearned compensation ................................... (895,447)
---------
Total stockholders' equity ............................ 4,706,016
---------
Total ................................................. $5,155,659
=========
See Notes to Financial Statements.
F-3
<PAGE>
RF INDUSTRIES, LTD.
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1997 AND 1996
1997 1996
---------- ----------
Net sales ......................................... $6,831,291 $6,083,545
Cost of sales ..................................... 3,767,187 3,271,470
--------- ---------
Gross profit ...................................... 3,064,104 2,812,075
--------- ---------
Operating expenses:
Engineering ..................................... 438,974 462,930
Selling and general ............................. 1,687,744 1,429,296
--------- ---------
Totals ........................................ 2,126,718 1,892,226
--------- ---------
Operating income .................................. 937,386 919,849
Other income ...................................... 67,319 58,153
Interest expense .................................. (1,201) (1,604)
--------- ---------
Income before provision for income taxes........... 1,003,504 976,398
Provision for income taxes ........................ 402,600 415,000
--------- ---------
Net income ........................................ $ 600,904 $ 561,398
========= =========
Net income per share:
Primary ..................................... $.19 $.19
===== =====
Fully-diluted ................................ $.19 $.18
===== =====
See Notes to Financial Statements.
F-4
<PAGE>
RF INDUSTRIES, LTD.
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997 AND 1996
<CAPTION>
Retained
Additional Earnings Total
Common Stock Paid-In (Accumulated Unearned Stockholders'
Shares Amount Capital Deficit) Compensation Equity
<S> <C> <C> <C> <C> <C> <C>
Balance,
November 1,
1995 .................... 2,538,547 $25,385 $ 3,219,938 $ (394,851) $ (140,560) $ 2,709,912
Shares issued on
exercise of
stock options ........... 39,644 397 23,204 23,601
Shares issued
under consult-
ing service
agreement................. 200,000 2,000 248,000 250,000
Grant of
compensatory
stock options
for purchase of
100,000 shares ......... 377,500 (377,500)
Amortization of
unearned
compensation .............. 64,328 64,328
Net income .................. 561,398 561,398
---------- ---------- ---------- ---------- ---------- ----------
Balance,
October 31,
1996..................... 2,778,191 27,782 3,868,642 166,547 (453,732) 3,609,239
Shares issued on
exercise of
stock options............ 86,407 864 70,072 70,936
Shares issued
under consult-
ing service
agreement............... 200,000 2,000 248,000 250,000
Grant of
compensatory
stock options
for purchase of
215,000 shares .......... 908,375 (908,375)
Effect of cancel-
lation of
compensatory
stock options
for purchase of
84,164 shares .......... (291,723) 291,723
Amortization of
unearned
compensation ............. 174,937 174,937
Net income ................. 600,904 600,904
---------- ---------- ---------- ---------- ---------- ----------
Balance,
October 31, 1997........... 3,064,598 $30,646 $4,803,366 $ 767,451 $(895,447) $ 4,706,016
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
RF INDUSTRIES, LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997 AND 1996
1997 1996
-------- --------
Operating activities:
Net income ............................................ $600,904 $561,398
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ........................................ 47,712 44,849
Amortization of costs under consulting
agreement .................................... 230,000 230,000
Amortization of unearned compensation............ 174,937 64,328
Deferred income taxes ........................... (33,000) (22,000)
Changes in operating assets and liabilities:
Trade accounts receivable ......................... (62,336) (359,501)
Inventories ....................................... (389,726) (464,537)
Prepaid expenses and deposits
and other assets ........................... (17,109) (50,940)
Accounts payable .................................. (31,994) 16,176
Accrued expenses .................................. 27,372 193,030
--------- ---------
Net cash provided by operating
activities ............................. 546,760 212,803
--------- ---------
Investing activities:
Purchases of investments in available-
for-sale securities ............................. (38,613) (34,733)
Capital expenditures ................................ (55,043) (29,414)
Loan to stockholder ................................. (70,000)
--------- ---------
Net cash used in investing
activities ............................. (163,656) (64,147)
--------- ---------
Financing activities:
Proceeds from shares issued:
On exercise of stock options .................... 70,936 23,601
Under consulting service agreement .............. 20,000 20,000
--------- ---------
Net cash provided by financing
activities ............................. 90,936 43,601
--------- ---------
Net increase in cash and cash equivalents ............... 474,040 192,257
Cash and cash equivalents at beginning of year........... 403,547 211,290
--------- ---------
Cash and cash equivalents at end of year ................ $877,587 $403,547
========= =========
Supplemental cash flow information:
Interest paid ......................................... $ 1,201 $ 1,569
========= =========
Income taxes paid ..................................... $450,748 $256,340
========= =========
See Notes to Financial Statements.
F-6
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies:
Business activities:
The Company operates two divisions within a single business segment
involving the design, manufacture and/or sale of communications
equipment primarily to the radio and other professional communica-
tions related industries. The Company is engaged in the design and
distribution of coaxial connectors used primarily in radio and
other professional communications applications (the "RF CONNECTOR
Division") and the design, manufacture and sale of radio links
for receiving and transmitting control signals for remote operation
and monitoring of equipment (the "NEULINK Division").
Recent accounting pronouncements:
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statements of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income, " ("SFAS 130")and No.131, "Disclo-
sures about Segments of an Enterprise and Related Information,
" ("SFAS 131") which could require the Company to make additional
disclosures in its financial statements no later than for the
fiscal year ending October 31, 1999. SFAS 130 defines comprehensive
income, which includes items in addition to those reported in the
statement of income, and requires disclosures about its components.
Management believes that the adoption of SFAS 130 will not have a
material impact on the Company's disclosures. SFAS 131 requires
disclosures for each segment of a business and the determination of
segments based on its internal management structure. Management is
in the process of evaluating whether SFAS 131 will require the
Company to make any additional disclosures.
Use of estimates:
The preparation of financial statements in conformity with general-
ly accepted accounting principles requires managment to make
estimates and assumptions that affect certain reported amounts
and disclosures. Accordingly, actual results may differ from those
estimates.
Cash equivalents:
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
F-7
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting
policies (continued):
Investments:
Pursuant to Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Secur-
ities, " the Company's investments in mutual fund units have been
classified as available-for-sale securities and, accordingly, are
valued at fair value at the end of each period. Any material
unrealized holding gains and losses arising from such valuation
are excluded from income and recognized, net of applicable income
taxes, as a separate component of stockholders' equity until
realized.
Inventories:
Inventories are stated at the lower of cost or market. Cost has
been determined using the weighted average cost method (see
Note 4).
Property and equipment:
Equipment, tooling and furniture are recorded at cost and depre-
ciated over their estimated useful lives ( generally 3 to 7
years) using the straight-line method.
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 annually 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 necessar
to reduce deferred tax assets to the amount expected to be
realized. The income tax provision or credit is the tax payable or
refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Net income per share:
Primary net income per share was computed based on the 3,233,936
and 2,994,016 weighted average number of common and common equiva-
lent shares outstanding in 1997 and 1996, respectively. Common
equivalent shares reflect the dilutive effect of the assumed
exercise of outstanding stock options based on average market
prices during each year.
F-8
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting
policies (concluded):
Net income per share (concluded):
Fully - diluted net income per share was computed based on the
3,247,761 and 3,144,244 weighted average number of common and
common equivalent shares outstanding in 1997 and 1996, respect-
ively, and reflects the additional dilutive effect of the assumed
exercise of outstanding stock options based on the market price as
of the end of each year to the extent that it exceeded the related
average market price during the year for such options.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share," ("SFAS 128")
which replaces the presentation of primary earnings per share
required under previously promulgated accounting standards with a
presentation of basic earnings per share. It also requires dual
presentation of basic and diluted earnings per share on the face of
the statement of income for all entities with complex capital
structures and provides guidance on other computational changes.
SFAS 128 is effective for financial statements for both interim
and annual periods ending after December 15, 1997. Management
believes that the adoption of SFAS 128 will not have a material
impact on the Company's reported net income per share.
Note 2 - Concentration of credit risk and sales to major customers:
The Company maintains all of its cash balances in one financial
institution. At times, these balance exceed the Federal Deposit
Insurance Corporation limitation for coverage of $100,000 thereby
exposing the Company to credit risk. The Company reduces its
exposure to credit risk by maintaining such deposits with high
quality financial institutions.
Accounts receivable are financial instruments that also expose the
Company to a 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 14% and 15% and sales to another
customer represented 13% and 16% of total sales in 1997 and 1996,
respectively.
F-9
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 3 - Investments:
At October 31, 1997, investments in available-for-sale securities
consisted of units issued by mutual funds as described below:
Short-term secured obligation funds............ $584,239
Short-term U.S. Treasury fixed income
obligation funds........................... 58,560
--------
Total $642,799
========
The investments in mutual funds were carried at cost which approx-
imated fair value at October 31, 1997. Gross unrealized holding
gains and losses on these investments were not mate rial as of
October 31, 1997 or 1996. There were no realized gains and losses
from sales of investments during 1997 or 1996.
Note 4 - Inventories:
Inventories consisted of the following as of October 31, 1997:
Raw materials and supplies................... $ 360,412
Finished goods .............................. 1,938,170
----------
Total ................................. 2,298,582
Less allowance for slow-moving inventory..... 47,000
---------
Total.................................. $2,251,582
The allowance for slow-moving inventory was established through
charges to earnings (which were not material in 1997 and 1996) to
reduce the carrying value of certain inventory to estimated fair
values.
Note 5 - Lease commitments:
The Company leases its facilities in San Diego, California under
a noncancelable operating lease. The lease expires in May 2000 and
requires minimum annual rental payments that are subject to fixed
annual increases. The minimum annual rentals under this lease are
being charged to expense on a straight-line basis over the lease
term. Deferred rentals were not material at October 31, 1997.
The lease also requires the payment of the Company's pro rata share
of the real estate taxes and insurance, maintenance and other
operating expenses related to the facilities. Rent expense was
$94,912 in 1997 and $67,970 in 1996.
F-10
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 5 - Lease commitments (concluded):
Future minimum rental commitments under the facilities' operating
lease for years subsequent to October 31, 1997 are as follows:
Year Ending
October 31,
----------
1998............................. $ 83,000
1999............................. 86,000
2000............................. 44,000
--------
Total.......................... $213,000
Note 6 - Income taxes:
The net provision for income taxes consisted of the following
provisions and (credits):
1997 1996
-------- --------
Current:
Federal.................... $331,100 $340,000
State...................... 104,500 97,000
-------- --------
435,600 437,000
-------- --------
Deferred:
Federal.................... (23,000) (16,000)
State...................... (10,000) (6,000)
-------- --------
(33,000) (22,000)
-------- --------
Totals................. $402,600 $415,000
Income tax at the Federal statutory rate is reconciled to the
Company's actual income tax provision as follows:
1997 1996
-------------------- ------------------
% of Pretax % of Pretax
Amount Income Amount Income
Income tax at Federal
statutory rate........... $341,191 34.0% $ 331,975 34.0%
State tax provision,
net of Federal tax
benefit ............... 62,370 6.2 60,866 6.2
Other provision
(credit) .............. (961) (.1) 22,159 2.3
--------- ----- --------- -----
Total income tax
provision ............. $ 402,600 40.1% $ 415,000 42.5%
========= ==== ========= ====
F-11
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income taxes (concluded):
The Company's total deferred tax assets and deferred tax liabilities
at October 31, 1997 and 1996 are as follows:
1997 1996
-------- --------
Total deferred tax asset................ $173,000 $122,000
Total deferred tax liabilities ........ 42,000 24,000
-------- --------
Net deferred tax assets ............ $131,000 $ 98,000
======== ========
The temporary differences generating net current and noncurrent
deferred tax assets were primarily related to accrued vacation ex-
pense, reserves for doubtful accounts, deferred compensation and
inventory obsolescence.
Note 7 - Stock options:
Incentive and Non-Qualified Stock Option Plans: The Board of
Directors approved an Incentive Stock Option Plan (the "Incentive
Plan") during fiscal 1990 that provides for grants of options to
purchase up to 500,000 shares of common stock to employees of the
Company. Under the Incentive Plan, the option price cannot be less
than the fair market value on the date options are granted and
options can expire no later than ten years after the date of grant.
All options granted through October 31, 1997 expire five years from
the date of grant. Options vest immediately upon grant.
The Board of Directors also approved a Non-Qualified Stock Option
Plan (the "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 the Non Qualified Plan, the option price
cannot be less than 85% of the fair market value on the date options
are granted and options can expire no later than five years after
the date of grant. Options vest immediately upon grant.
Compensatory stock option plans:
The Company granted to its President an option for the purchase of
500,000 shares of common stock at $.10 per share pursuant to the
terms of his employment contract dated June 1, 1994 that became
effective as of July 1, 1993. Options for the purchase of 83,333
shares vest annually from July 1994 through July 1999. The
difference of $230,000 between the market value and the aggregate
purchase price of the shares subject to option at the date of grant
was initially recorded as unearned compensation and deducted from
stockholders' equity, of which $38,333 will be amortized to compen-
sation expense annually through 1999.
F-12
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (continued):
Compensatory stock option plans (concluded):
Additionally, in connection with an agreement with a consultant for
the provision of public relations services, on January 1, 1996, the
Company granted an option to purchase 50,000 shares of common stock
at $.94 per share, the market value of a share of common stock on
January 1, 1996 and, accordingly, no charges for compensation are
being made in connection with these options. Options to purchase
10,000 shares vest annually from January 1, 1996 through January 1,
2000.
The Company also granted to an executive an option to purchase
100,000 shares of common stock at $.10 per share pursuant to the
terms of an employment contract dated July 1, 1996. Options to
purchase 20,000 shares were initially scheduled to vest annually
from July 1, 1997 through July 1, 2001. The difference of $377,500
between the market value and the aggregate purchase price of the
shares subject to option at the date of grant was initially
recorded as unearned compensation and deducted from stockholders'
equity, of which $59,782 and $25,995 was amortized to compensation
expense in 1997 and 1996, respectively. Unexercised options for the
purchase of 84,164 shares were canceled during 1997, and the
remaining unearned compensation of $291,723 was reversed.
The Company granted to three executives options to purchase
100,000, 100,000 and 15,000 shares of common stock at $.10, $.10
and $4.40 per share, respectively, pursuant to the terms of their
employment contract dated January 1, 1997. For the first two
executives, options to purchase 10,000 shares vest and become
exercisable annually from January 1, 1998 through January 1, 2007.
For the third executive, options to purchase all 15,000 shares vest
on January 1, 1998; however, they will not be exercisable until
January 1, 1999. The difference of $908,375 between the market
value and the aggregate purchase price of the shares subject to
option at the date of grant to the three executives was initially
recorded as unearned compensation and deducted from stock holders'
equity, of which $76,822 was amortized to compensation expense
in 1997.
Additional required disclosures related to stock option plans: The
Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123,"Accounting for Stock-Based
Compensation,"("SFAS 123"). Accordingly, no earned or unearned
compensation cost was recognized in the accompanying financial
statements for stock options granted in 1997 and 1996 other than
the amounts attributable to the compensatory options granted to the
executives on January 1, 1997 and July 1, 1996 described above. Had
compensation cost been determined based on the fair value at the
F-13
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (continued):
Additional required disclosures related to stock option plans
(continued):
grant date for all awards in 1997 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net income and net income
per share would have been reduced to the pro forma amounts set forth
below:
1997 1996
-------- -------
Net income - as reported............. $600,904 $561,390
Net income - pro forma............... $471,531 $423,193
Net income per share - as reported... $.19 $.19
Net income per share - pro forma..... $.15 $.14
The fair value of each option granted in 1997 was estimated
on the date of grant using the Black-Schole option-pricing model with
the following weighted-average assumptions: dividend yield of 0%;
expected volatility of 70%; risk-free interest rate of 7%; and
expected lives of 4 to 10 years.
Additional information regarding options outstanding under all of
the Company's stock option plans at October 31, 1997 and 1996 and
changes in outstanding options in 1997 and 1996 follows:
1997 1996
------------------- ------------------
Weighted Weighted
Shares Average Shares Average
or Price Exercise or Price Exercise
Per Share Price Per Share Price
Options outstanding at
beginning of year 822,746 $.79 640,580 $ .30
Options granted 283,385 .88 221,810 2.08
Options exercised (86,407) .82 (39,644) .60
Options canceled (84,164) .10
--------- ---------
Options outstanding at
end of year 935,560 .84 822,746 .79
========= =========
Option price range at
end of year $.10-$5.75 $.10-$5.75
Options available for
grant at end of year 235,710 304,095
Weighted average fair
value of options
granted during the year $4.31 $2.52
Option price range for
options exercised
during the year $.10-$1.50 $.10-$1.50
F-14
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (concluded):
Additional required disclosures related to stock option plans
(concluded):
The following table summarizes information about stock options
outstanding at October 31, 1997, all of which are at fixed- prices:
Options Options
Outstanding Exercisable
------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
---------- ----------- ----------- -------- ----------- --------
$.10 690,000 7.0 yrs $ .10 323,333 $ .10
$.85-$2.50 161,602 6.1 yrs $1.60 131,602 $1.75
$4.00-$5.75 83,958 9.2 yrs $5.41 68,958 $5.63
------- -------
935,560 523,893
======= =======
Note 8 - Shares issuable under consulting agreement:
Effective January 1, 1995, the Company entered into an agreement with
an organization (the "Consultants") whereby the Consultants will
provide technical development and marketing consulting services to
the Company over the three year period from January 1995 through
December 1997. As part of the consid eration for such services, the
Company agreed to issue to the Consultants a total of 600,000 shares
of common stock at the rate of 200,000 shares per year and the
Consultants agreed to pay a total of $60,000 at the rate of $20,000
per year. As of October 31, 1997, the Company had received all of
the payments and had issued all of the shares.
As of January 1, 1995, the 600,000 shares had an approximate market
value of $750,000. The difference of $690,000 between the market
value at January 1,1995 and the total paid by the Consultants for the
shares is being amortized to expense over the service period on a
straight-line basis and, accordingly, $230,000 was amortized in 1997
and 1996.
At October 31, 1997 and 1996, the Consultants owned 1,227,167
and 1,027,167 shares of common stock of the Company, representing
40% and 37% of the shares then outstanding, respectively. The
Chairman of the Board of the Company was an employee of the organiza-
tion that is providing the consulting services at the inception of
the agreement.
* * *
F-15
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