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, 1998
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, 1998 were $6,517,540.
<PAGE>
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 31, 1998, 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, 1998 was $5,251,338. As of December 31,
1998, the registrant had outstanding 3,078,598 shares of common stock, $.01 par
value.
Number of Pages/ Index to Exhibits
This Form 10-KSB consists of a total of 39 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 70 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 and Wireless
Modems. A few of the many applications for these products include industrial
monitoring and control of remote sensors and devices (SCADA ), wireless linking
of remote weather and seismic sites, multipoint military training range
information systems, infrastructure linking of Public Safety communications
networks and Automatic Vehicle Location systems.
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, a 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 Group. The
Company entered the cable assembly business in 1987 to provide a "total
RF solution" for the Company's distribution network.
3. The wireless data transport products available from the RF Neulink
Division come in a variety of configurations to satisfy the
requirements of the various vertical markets. Transmitter and receiver
modules come in a wide range of power output and frequency ranges and
are used to convey data or voice from point to point. Additionally,
dumb or smart programable modems are available in a wide range of
speeds and frequency/price ranges. Accessory modules have been
developed for the purposes of remotely controlling and monitoring
electrical devices.
Product Enhancements:
RF Connector
- ------------
During 1998, the RF Connector Division introduced an expanded offering in the
7-16 DIN area as well as in other connector types. The 7-16 DIN, introduced in
Europe, is becoming popular as replacement for the "N" style connectors in
certain applications. The division has also introduced several new connectors
throughout the year ranging from typical CATV (Cable Television) "F" type
connectors to specialized subminiature connectors. In addition to these new
connector products, additional resources have been allocated to the development
of the cable assembly business.
The RF Connector Division continues to apply resources for the design and
production of specialized connectors which meet customer and FCC (Federal
Communications Commission) requirements for Regulation 15 rules for non-standard
connector interfaces.
RF Neulink
- ----------
In the last quarter of calendar 1998, the new management team at the RF Neulink
division began a process of refocusing the product mix to address certain key
vertical markets. Efforts have been made to improve sales and support
documentation. All products have been evaluated for their sales potential and
some have been eliminated.
Design efforts have commenced to develop complementary software and hardware
products which, in combination with existing products, will enable Neulink to
market complete wireless solutions.
4
<PAGE>
These solutions will be designed to address specific applications in Neulink's
target markets.
Development also started on an industrial monitoring and control software
package. This software is designed to enable use of the control module product
line in complete turnkey systems. Additionally, certain products being developed
for two OEM customers should have extensive applications in other product areas.
A spread spectrum, high speed data modem is also currently in development. This
product will be designed for compatibility with the existing monitor and control
modules and the new control software under development. Neulink anticipates that
it will be able to offer a complete monitoring and control solution on licensed
or unlicenced radio channels.
Neulink will soon develop a smart controller which will enable our existing
wireless modems to provide multi-site access to a remote enterprise data base.
Distribution, Marketing and Customers:
Sales methods vary greatly between the two divisions.
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 25% of sales while distributors accounted for 75%,
of RF Connector division sales in fiscal 1998.
RF Neulink 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 turn-key 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.
Raw Materials:
RF Connector currently sources its manufacturing from Japan, Korea, the United
States, and ISO (International Standards Organization) approved factories in
Taiwan.
Neulink purchases its electronic products from various domestic and foreign
suppliers. All Neulink wireless modem transceivers, with the exception of the
928-960MHz crystal controlled transmitter and receiver assemblies, are built in
the United States. The 928-960MHz units are 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 33 full-time employees, and one part-time
employee. 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, 1998, the Company had a sales order backlog of approximately
$8,805,000, of which approximately $6,500,000 is expected to be delivered in the
current fiscal year. This compares to backlog of $4,219,000 at October 31, 1997.
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
coaxial connector market. Management estimates this market should exceed
$700,000,000 annually 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 and Data Radio.
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.
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.
6
<PAGE>
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, 1998, 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 New management at RF Neulink has implemented a strategy of coherent
marketing, sales and product development. The marketing emphasis is to
focus and position the Company's products, in order to simplify,
clarify, and create increased awareness of the Company's products.
Marketing programs are being developed to address and identify
vertical markets which are compatible with Neulink's core competencies.
The Sales Representative Force is being changed, and Neulink is seeking
distributors, systems integrators and resellers which are more closely
aligned with it's target markets. The Company is currently working to
expand its customer base to provide a greater level of repeat business
which will complement its larger system customers.
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, 1998, compared
to approximately 16% in fiscal 1996. The Company is aggressively expanding its
foreign distribution under the RFI logo, and seeking 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 $7,072 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 and trades on the NASDAQ Small
Cap Exchange.
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 1998
November 1, 1997 - January 31, 1998 2 7/8 2
February 1, 1998 - April 30, 1998 3 1 1/8
May 1, 1998 - July 31, 1998 3 1/8 1 1/4
August 1, 1998 - October 31, 1998 2 7/16 11/2
Fiscal 1997
November 1, 1996 - January 31, 1997 6 1/8 41/2
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
On December 31, 1998, the closing, high and low bid prices of the Company's
Common Stock were $2.31, and $2.00 respectively.
As of December 31, 1998, there were 843 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 April 30, 1999 are part of these requirements. The
Company's Audit Committee met once in 1998.
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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
% of % of
Total Total
Amount Assets Amount Assets
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents .......... $1,209,143 19.3% $ 877,587 17.0%
Investments in available-for-sale
securities ........................ 1,129,582 18.0 642,799 12.5
Current assets ..................... 5,992,249 95.7 4,942,619 95.9
Current liabilities ................ 662,320 10.6 449,643 8.7
Working capital .................... 5,329,929 85.1 4,492,976 87.1
Property and equipment - net ....... 162,774 2.6 119,140 2.3
Total assets ....................... 6,259,923 100.0 5,155,659 100.0
Stockholders' equity ............... 5,597,603 89.4 4,706,016 91.3
</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 1999. Management believes
that any financing requirements can be met through a combination of cash and
investments held as of October 31, 1998, internally generated cash flow, advance
payments from customers and borrowing on favorable credit terms from commercial
banking establishments.
There is little expected need for additional capital equipment in fiscal 1999.
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 1999. Management also believes that based on the
Company's financial condition at October 31, 1998, 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.
10
<PAGE>
Results of Operations:
The following summarizes sales, cost of sales and gross profit for the years
ended October 31, 1998 and 1997:
1998 1997
--------------------- --------------------
% of % of
Amount Sales Amount Sales
-------- ------- -------- -------
Sales .................. $6,517,540 100% $6,831,291 100%
Cost of Sales .......... 3,258,640 50.0 3,767,187 55.1
---------- ------ ---------- ------
Gross Profit ........... $3,258,900 50.0% $3,064,104 44.9%
========== ====== ========== ======
Net sales decreased $313,751 or 4.6% in 1998 compared to 1997. The decrease is
primarily attributable to a $477,570 decline in sales at the RF Neulink Division
to $1,344,796 from $1,822,366 in fiscal 1997. Sales at the RF Connector Division
increased $163,819 to $5,172,744 from $5,008,925 the previous year.
The gross profit increased by $194,796 to $3,258,900 in 1998 from $3,064,104 in
1997. As a percent of sales, gross margin increased to 50% from 45% of sales in
1997 due to a favorable sales mix and tighter inventory controls.
Engineering expenses declined $38,734 to $400,240 compared to $438,974 in 1997.
As a percent of sales, engineering expenses declined to 6.1% compared to 6.4% of
sales in 1997. The decline in engineering expenses is attributable to a
reduction in the amount of customer supported research and development.
Selling and general expenses decreased $10,264 to $1,677,480 from $1,687,744 in
1997. As a percent of sales, selling and general expenses increased to 25.7% of
sales from 24.7% in 1997. The increase, as a percent of sales, is due to the
decline in sales.
The $243,794 increase in operating income to $1,181,180 from $937,386 in the
previous year is primarily attributable to the increase in gross profit.
Other income increased by $38,701. The increase is due to higher cash balances
and investments during the year, partly offset by lower yields on invested
assets.
Net income increased $156,095 to $756,999 compared to net income of $600,904 in
1997. The increase in net income is due to higher gross profits and increased
interest income.
11
<PAGE>
General Outlook:
Management believes that because of a number of achievements during the year
ended October 31, 1998, the Company could maintain steady growth in the year
ending October 31, 1999.
As explained above, management believes the Company has capital resources
available to fund operations at current and expanded levels.
RF Connector Division continues to pursue all vertical markets within the RF
arena through the addition of new industries, distributors, and OEM accounts.
Two of these distributors, each having annual sales exceeding one billion
dollars, 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
increasing its penetration of existing accounts through the use of private label
programs and new product introductions. RFI has recently upgraded its world wide
web site to enable new and existing customers to order connector and cable
products via the web.
It is expected that RF Neulink will become a larger contributor to our overall
sales and earnings. This is due to a growing market for wireless data
opportunities along with Neulink's co-ordinated product development and
marketing philosophy. An important goal for fiscal 1999 will be the building of
a solid, steady customer base, weighed towards OEM's and system integrators.
This customer base would provide a regular, recurring source of sales on which
to overlay the existing contract business which tends to be sporadic in nature.
Year 2000 Issue:
The Year 2000 issue is the result of computer programs using only two digits to
identify a year within date fields. Date-sensitive software may recognize a date
using "00" as year 1900 rather than the year 2000. Such an error could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Company currently believes
that with modifications to existing software and conversions to new software,
the effects of the Year 2000 issue can be mitigated. The Company will utilize
both internal and external resources to reprogram, or replace, and test the
software for Year 2000 modifications. The cost of new software purchased will be
capitalized; all other costs will be expensed as incurred. Overall, these costs
are not expected to have a material effect on the results of operations.
In addition, the Company is assessing the readiness of its significant suppliers
and large customers to determine the extent to which the Company is vulnerable
to those third parties' failure to
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<PAGE>
remediate their own Year 2000 issues. The Company's total Year 2000 costs
include the estimated costs associated with the impact on the Company of the
Year 2000 issue and on the Company's suppliers and customers, and are based on
currently available information. However, there can be no guarantee that the
systems of other companies will be timely converted, or that a failure to
convert by another company would not have a material adverse effect on the
Company. The Company has determined that it has no exposure to contingencies
related to the Year 2000 issue for the products it has sold.
Forward-Looking Statements:
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report contain forward-looking
statements within the meaning of the Securities Litigation Reform Act of 1995
that are based on current expectations, estimates and projections about the
Company's business, management's beliefs and assumptions made by management.
Words such as "expect," "anticipates," "plans," "believes," "seeks," "estimates"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements due to numerous factors, including, but not limited to, those
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as those discussed elsewhere in this Annual
Report and from time to time in the Company's other Securities and Exchange
Commission filings and reports. In addition, such statements could be affected
by general industry and market conditions and growth rates, and general domestic
and international economic conditions.
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-16 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, 1998
o Statements of Income for the years ended October 31, 1998 and 1997
o Statements of Stockholders' Equity for the years ended October 31, 1998
and 1997
o Statements of Cash Flows for the years ended October 31, 1998 and 1997
o Notes to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
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<PAGE>
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors: Age Date of Election Position
Jack A. Benz 65 February 1990 Chairman
John Ehret 61 November 1991 Director
Howard F. Hill 58 November 1979 President/Chief Executive Officer
Henry E.Hooper 45 January 1998 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.
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.
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.
Henry E. Hooper has a bachelor's and master's degree from Yale University. He
serves as the Director of Technical Knowledge Support at TESSCO Technologies, a
distributor of wireless communications products and services. Before TESSCO, Mr.
Hooper served as a VP of sales and marketing with a textile manufacturing
company. Mr. Hooper has been in the telecommunications industry for over 10
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 investment industry for
over 16 years.
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<PAGE>
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.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table:
The Company does not have any executive officer, other than the president, paid
in excess of $100,000.00 The following table presents the annual cash and other
compensation of Howard F. Hill, the Company's President:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards
-----------------------------------------------------------------------------------------
(a) (b) (c) (d) (f) (g)
Name
and Prin- Restricted
cipal Stock Options
Position Year Salary($) Bonus($) Awards SARs (#)
<S> <C> <C> <C> <C> <C>
Howard Hill 1998 $85,000 $25,000 0 4,000
President 1997 $85,000 0 0 4,000
1996 $85,000 0 0 4,000
</TABLE>
The following categories have no balance so they have been excluded from the
Summary Compensation Table:
(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.
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<PAGE>
Option Tables:
The following table depicts the options granted to the President during the year
ended October 31, 1998:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
Howard Hill, President
Incentive Stock Option 2,000 4% $1.87 October, 2008
Non-Qualified Option 2,000 8% $1.59 October, 2008
</TABLE>
The following table depicts the options held by the President as of October 31,
1998:
Aggregated Option Exercises and Fiscal Year End Option Positions
------------------------------------------------------------------
<TABLE>
<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 0 0 436,660/ $713,788/
83,340 $147,512
</TABLE>
Meetings of the board of Directors anD Committees:
During the fiscal year ended October 31, 1998, the Board of Directors met four
times. The Board of Directors has an Audit Committee. All Board members attended
more than 75% of the aggregate number of Board meetings and meetings of
committees on which each served during the fiscal year ended October 31, 1998.
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<PAGE>
The purposes and functions of the Company's Audit Committee are to meet with the
auditors; to recommend the engagement or discharge of independent auditors; to
review quarterly financial statements prior to issuance; to review year-end
financial statements prior to issuance; to review the services from time to time
being performed by the independent auditors, including nonaudit services and the
fees charged, or to be charged, for all such services; and to make appropriate
reports and recommendations to the Board of Directors. The persons who currently
are serving on the Audit committee are Messrs. Hooper, Jacobs, and Ms.Tracy
Wolfe, the Company's tax accountant. The Audit Committee met two times during
the last fiscal year.
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 annual 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 ratably over the six year
term of the initial agreement. At October 31, 1998, options to purchase 400,660
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, 1998. 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 1,267,167 41.2%
Jack A. Benz
7610 Miramar Rd.
San Diego, CA 92126 54,000 (2) 1.7%
Howard F. Hill
7610 Miramar Rd.
San Diego, CA 92126 453,660 (3) 14.7%
John Ehret
3370 San Fernando Rd. #206
Los Angeles, CA 90065 27,000 (4) 0.9%
Robert Jacobs
Neil Berkman Associates
1900 Ave of the Stars, #2850
Los Angeles, CA 90067 67,900 (5) 2.2%
Henry Hooper
7610 Miramar Rd.
San Diego, CA 92126 17,055 (6) 0.6%
All Directors & Officer
as a group 636,115 (7) 20.7%
(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 436,660 shares which Mr. Hill has the right to acquire upon
exercise of options exercisable within 60 days of the date of this
report.
18
<PAGE>
(4) Includes 10,000 shares which Mr. Ehret has the right to acquire upon
exercise of options exercisable within 60 days of the date of this
report.
(5) Includes 30,000 shares which Neil Berkman Associates has the right to
acquire upon exercise of vested options, and 17,900 that Robert Jacobs
has the right to acquire upon exercise of options.
(6) Includes 16,555 shares which Mr. Hooper has the right to acquire upon
exercise of options exercisable within 60 days of the date of this
report.
(7) Includes 456,285 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
None.
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: February 11, 1999 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: February 11, 1999 By: /s/ Jack A. Benz
-------------------------------------------
Jack A. Benz, Chairman - Board of Directors
Dated: February 11, 1999 By: /s/ Terrie A. Gross
-------------------------------------------
Terrie A. Gross, Chief Financial Officer
(Principal Accounting Officer)
Dated: February 11, 1999 By: /s/ Howard F. Hill
-------------------------------------------
Howard F. Hill, Chief Executive Officer
Dated: February 11, 1999 By: /s/ John Ehret
--------------------------------------------
John Ehret, Director
Dated: February 11, 1999 By: /s/ Henry Hooper
--------------------------------------------
Henry Hooper, Director
Dated: February 11, 1999 By: /s/ Robert Jacobs
--------------------------------------------
Robert Jacobs, Director
22
<PAGE>
Exhibit 23.1
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 3, 1998 appearing in this Annual
Report of Form 10-KSB for the fiscal year ended October 31, 1998 (the "Form
10-KSB"), on our audits of the financial statements of RF Industries, Ltd. as of
October 31, 1998 and for each of the two years in the period ended October 31,
1998 also appearing in this Form 10-KSB.
J.H. COHN LLP
San Diego, California
December 3, 1998
<PAGE>
RF INDUSTRIES, LTD.
INDEX TO FINANCIAL STATEMENTS
[ATTACHMENT TO ITEM 7]
PAGE
------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ....................... F-2
BALANCE SHEET
OCTOBER 31, 1998 ............................................. F-3
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1998 AND 1997 ........................ F-4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1998 AND 1997 ........................ F-5
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998 AND 1997 ........................ F-6
NOTES TO FINANCIAL STATEMENTS .................................. F-7/16
* * *
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, 1998, and the related statements of income, stockholders' equity and
cash flows for the years ended October 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 Industries, Ltd. as of
October 31, 1998, and its results of operations and cash flows for the years
ended October 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
J.H. COHN LLP
San Diego, California
December 3, 1998
F-2
<PAGE>
RF INDUSTRIES, LTD.
BALANCE SHEET
OCTOBER 31, 1998
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 1,209,143
Investments in available-for-sale securities ............... 1,129,582
Trade accounts receivable, net of allowance for
doubtful accounts of $30,000 ........................... 806,669
Inventories, net of valuation allowance of $47,000 ......... 2,466,448
Prepaid expenses and deposits .............................. 244,407
Deferred tax assets ........................................ 66,000
Note receivable from stockholder ........................... 70,000
-----------
Total current assets ................................ 5,992,249
-----------
Property and equipment:
Equipment and tooling ...................................... 479,880
Furniture and office equipment ............................. 158,628
-----------
638,508
Less accumulated depreciation .............................. 475,734
-----------
Total ............................................... 162,774
-----------
Deferred tax assets ............................................ 100,000
Other assets ................................................... 4,900
-----------
Total ............................................. $ 6,259,923
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 203,650
Accrued expenses ........................................... 458,670
-----------
Total liabilities ................................... 662,320
-----------
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 10,000,000 shares of $.01
par value; 3,078,598 shares issued and outstanding ..... 30,786
Additional paid-in capital ................................. 4,373,868
Retained earnings .......................................... 1,524,450
Unearned compensation ...................................... (331,501)
-----------
Total stockholders' equity .......................... 5,597,603
-----------
Total ............................................... $ 6,259,923
===========
See Notes to Financial Statements
F-3
<PAGE>
RF INDUSTRIES, LTD.
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1998 AND 1997
1998 1997
----------- -----------
Net sales ......................................... $ 6,517,540 $ 6,831,291
Cost of sales ..................................... 3,258,640 3,767,187
----------- -----------
Gross profit ...................................... 3,258,900 3,064,104
----------- -----------
Operating expenses:
Engineering ................................... 400,240 438,974
Selling and general ........................... 1,677,480 1,687,744
----------- -----------
Totals ..................................... 2,077,720 2,126,718
----------- -----------
Operating income .................................. 1,181,180 937,386
Other income ...................................... 105,677 67,319
Interest expense .................................. (858) (1,201)
----------- -----------
Income before provision for income taxes .......... 1,285,999 1,003,504
Provision for income taxes ........................ 529,000 402,600
----------- -----------
Net income ........................................ $ 756,999 $ 600,904
=========== ===========
Earnings per share:
Basic ......................................... $ .25 $ .20
=========== ===========
Diluted$ ...................................... .21 $ .17
=========== ===========
See Notes to Financial Statements
F-4
<PAGE>
RF INDUSTRIES, LTD.
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1998 AND 1997
<CAPTION>
Additional Total
Common Stock Paid-In Retained Unearned Stockholders'
Shares Amount Capital Earnings Compensation Equity
------------------------- ------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
November 1, 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 consulting 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 cancellation 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
Shares issued on
exercise of
stock options ................ 14,000 140 1,260 1,400
Grant of
compensatory
stock options
for purchase of
180,000 shares ................ 376,200 (376,200)
Effect of cancellation of
compensatory
stock options
for purchase of
180,000 shares ................ (806,958) 806,958
Amortization of
unearned
compensation .................. 133,188 133,188
Net income ...................... 756,999 756,999
---------- ---------- ---------- ---------- ---------- ----------
Balance,
October 31, 1998 .............. 3,078,598 $30,786 $4,373,868 $1,524,450 $ (331,501) $5,597,603
========== ========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
RF INDUSTRIES, LTD.
<TABLE>
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998 AND 1997
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Operating activities:
Net income ............................................................. $ 756,999 $ 600,904
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ........................................................ 50,309 47,712
Amortization of costs under consulting agreement .................... 230,000
Amortization of unearned compensation ............................... 133,188 174,937
Deferred income taxes ............................................... (35,000) (33,000)
Changes in operating assets and liabilities:
Trade accounts receivable ........................................ (41,236) (62,336)
Inventories ...................................................... (214,866) (389,726)
Prepaid expenses and deposits and other assets ................... 48,811 (17,109)
Accounts payable ................................................. 49,394 (31,994)
Accrued expenses ................................................. 163,283 27,372
----------- -----------
Net cash provided by operating activities .................... 910,882 546,760
----------- -----------
Investing activities:
Purchases of investments in available-for-sale securities .............. (486,783) (38,613)
Capital expenditures ................................................... (93,943) (55,043)
Loan to stockholder .................................................... (70,000)
----------- -----------
Net cash used in investing activities ........................ (580,726) (163,656)
----------- -----------
Financing activities:
Proceeds from shares issued:
On exercise of stock options ....................................... 1,400 70,936
Under consulting service agreement ................................. 20,000
----------- -----------
Net cash provided by financing activities .................... 1,400 90,936
----------- -----------
Net increase in cash and cash equivalents .................................. 331,556 474,040
Cash and cash equivalents at beginning of year ............................. 877,587 403,547
----------- -----------
Cash and cash equivalents at end of year ................................... $ 1,209,143 $ 877,587
=========== ===========
Supplemental cash flow information:
Interest paid .......................................................... $ 858 $ 1,201
=========== ===========
Income taxes paid ...................................................... $ 423,815 $ 450,748
=========== ===========
</TABLE>
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 communi-
cations equipment primarily to the radio and other professional
communications 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,
Disclosures 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.
The FASB had issued certain other pronouncements as of October
31, 1998 that will become effective in subsequent periods;
however, management does not believe that any of those
pronouncements will affect any financial accounting measurements
or disclosures the Company will be required to make.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management 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 Securities,
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
depreciated 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
necessary 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.
Earnings per share:
Effective October 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings per
Share ("SFAS 128"), which replaced the presentation of "primary"
and "fully diluted" earnings per share required under previously
promulgated accounting standards with the presentation of "basic"
and "diluted" earnings per share.
Basic earnings per share is calculated by dividing net income
applicable to common stock 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 during the period.
F-8
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business activities and summary of significant accounting policies
(concluded):
Earnings per share (concluded):
The following table summarizes the calculation of basic and diluted
earnings per share:
1998 1997
------ ------
Numerators:
Net income (A) ................................. $ 756,999 $ 600,904
========== ==========
Denominators:
Weighted average shares outstanding for basic
net earnings per share (B) ................. 3,071,486 2,938,249
Add effects of potentially dilutive securities -
assumed exercise of stock options .......... 531,595 495,942
---------- ----------
Weighted average shares for diluted net
earnings per share (C) ..................... 3,603,081 3,434,191
========== ==========
Basic net earnings per share (A)/(B) ............... .25 .20
========== ==========
Diluted net earnings per share (A)/(C) ............. .21 .17
========== ==========
Prior to the retroactive adoption of SFAS 128 in 1998, the Company reported
primary and fully diluted earnings per share of $.19 for 1997.
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 balances 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 16% and 14% of total sales in 1998 and
1997, respectively, and sales to another customer represented 13% of total
sales in 1998.
F-9
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 3 - Investments:
At October 31, 1998, investments in available-for-sale securities consisted
of units of mutual funds that invest primarily in short-term, secured
obligations. The investments were carried at cost which approximated fair
value at October 31, 1998. Gross unrealized holding gains and losses on
these investments were not material as of October 31, 1998 or 1997. There
were no realized gains or losses from sales of investments during 1998 or
1997.
Note 4 - Inventories:
Inventories consisted of the following as of October 31, 1998:
Raw materials and supplies ............. $ 315,248
Finished goods ......................... 2,198,200
----------
Total 2,513,448
Less allowance for slow-moving inventory 47,000
----------
Total $2,466,448
==========
Charges to earnings to reduce the carrying value of slow-moving inventory
to estimated fair values were not material in 1998 and 1997.
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, 1998. 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 $92,029 in 1998 and $94,912 in 1997.
Future minimum rental commitments under the facilities' operating lease for
years subsequent to October 31, 1998 are as follows:
Year Ending
October 31,
------------
1999 ................................................ $ 86,000
2000 ................................................ 44,000
---------
Total ............................................ $130,000
=========
F-10
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Income taxes:
The net provision for income taxes consisted of the following provisions
and (credits):
1998 1997
-------- --------
Current:
Federal ............................ $ 443,300 $ 331,100
State .............................. 120,700 104,500
--------- ---------
564,000 435,600
--------- ---------
Deferred:
Federal ............................ (30,000) (23,000)
State .............................. (5,000) (10,000)
--------- ---------
(35,000) (33,000)
--------- ---------
Totals .......................... $ 529,000 $ 402,600
========= =========
Income tax at the Federal statutory rate is reconciled to the Company's
actual net provision for income taxes as follows:
1998 1997
--------------------- -----------------
% of Pretax % of Pretax
Amount Income Amount Income
Income tax at Federal
statutory rate ........... $ 437,240 34.0% $ 341,191 34.0%
State tax provision, net
of Federal tax benefit ... 93,434 7.3 62,370 6.2
Other credit ................ (1,674) (.2) (961) (.1)
--------- ---- --------- ----
Net provision for income
taxes ................ $ 529,000 41.1% $402,600 40.1%
========= ===== ========= =====
The Company's total deferred tax assets and deferred tax liabilities at
October 31, 1998 are as follows:
1998 1997
--------- ---------
Total deferred tax assets ................... $ 204,000 $ 173,000
Total deferred tax liabilities .............. (38,000) (42,000)
--------- ---------
Net deferred tax assets ................ $ 166,000 $ 131,000
========= =========
The temporary differences generating net current and noncurrent deferred
tax assets were primarily related to accrued vacation expense, reserves for
doubtful accounts, deferred compensation and inventory obsolescence.
F-11
<PAGE>
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 "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, 1998 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 ten
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 compensation expense annually through 1999.
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.
F-12
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (continued):
Compensatory stock option plans (concluded):
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 was amortized to
compensation expense in 1997. 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 two executives options to purchase a total
of 200,000 shares of common stock at $.10 per share pursuant to
the terms of their employment contracts dated January 1, 1997.
Options to purchase 20,000 shares were originally scheduled to
vest and become exercisable annually from January 1, 1998 through
January 1, 2007. The difference of $905,000 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
$22,630 and $75,412 was amortized to compensation expense in 1998
and 1997, respectively. The remaining unvested options for the
purchase of a total of 180,000 shares at February 1, 1998 were
cancelled and options for the purchase of the same number of
shares at $.10 per share were granted to the two executives of
which 45,000 were scheduled to vest and become exercisable
annually from March 1, 1998 through February 1, 2002. The
cancellation of the options resulted in the reversal of the
remaining unearned compensation of $806,958. In connection with
the reissuance of the options on February 1, 1998, the difference
of $376,200 between the market value and the aggregate purchase
price of the shares subject to option at the date of the
reissuance was initially recorded as unearned compensation and
deducted from stockholders' equity, of which $70,538 was
amortized to compensation expense in 1998.
The Company granted to an executive an option to purchase 15,000
shares of common stock at $4.40 per share pursuant to the terms
of an employment contract dated January 1, 1997. The options will
vest on January 1, 1998; however they will not be exercisable
until January 1, 1999. The difference of $3,375 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 $1,687 and $1,410 was amortized to compensation expense in
1998 and 1997, respectively.
F-13
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (continued):
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 other than
the amounts attributable to the compensatory options granted to
the executives described above. Had compensation cost been
determined in 1998 and 1997 based on the fair value at the grant
date for all awards 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:
1998 1997
----------- ----------
Net income - as reported ......... $ 756,999 $ 600,904
Net income - pro forma ........... $ 625,757 $ 471,531
Basic earnings per share:
As reported .................... $.25 $.20
Pro forma ...................... $.20 $.16
Diluted earnings per share:
As reported .................... $.21 $.17
Pro forma ...................... $.17 $.14
The fair value of each option granted in 1998 and 1997 was estimated
on the date of grant using the Black-Sholes option-pricing model with
the following weighted average assumptions:
1998 1997
---------- ---------
Dividend yield ............................ 0% 0%
Expected volatility ....................... 90% 70%
Risk-free interest rate ................... 7% 7%
Expected lives ................... 1 to 10 years 4 to 10 years
F-14
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Note 7 - Stock options (continued):
Additional information regarding all of the Company's outstanding
stock options at October 31, 1998 and 1997 and changes in outstanding
stock options in 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Weighted Weighted
Shares Average Shares Average
or Price Exercise or Price Exercise
Per Share Price Per Share Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year ............. 935,560 .84 822,746 $ .79
Options granted ................... 267,477 .66 283,385 .88
Options exercised ................. (14,000) .10 (86,407) .82
Options canceled .................. (180,000) .10 (84,164) .10
Options forfeited ................. (43,774) 3.78
--------- --------
Options outstanding at end of year 965,263 .80 935,560 .84
========= =========
Option price range at end of year $.10-$5.75 $.10-$5.75
Options available for grant at
end of year 201,924 235,710
Weighted average fair value of
options granted during the year $ 2.00 $ 4.31
Option price range for options
exercised during the year $ .10 $.10-$1.50
</TABLE>
The following table summarizes information about stock options outstanding
at October 31, 1998, all of which are at fixed-prices:
<TABLE>
<CAPTION>
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
--------- ------------ ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .10 674,000 6.1 $ .10 446,660 $ .10
$.85-$2.50 228,806 6.4 $1.63 208,806 $1.69
$4.40-$5.75 62,457 6.3 $5.31 62,457 $5.31
--------- ---------
965,263 717,923
========= =========
</TABLE>
F-15
<PAGE>
RF INDUSTRIES, LTD.
NOTES TO FINANCIAL STATEMENTS
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
provided technical development and marketing consulting services
to the Company over the three year period from January 1995
through December 1997. As part of the consideration 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 was amortized to expense over the
service period on a straight-line basis and, accordingly,
$230,000 was amortized in 1997.
At October 31, 1998 and 1997, the Consultants owned 1,227,167
shares of common stock of the Company, representing 40% of the
shares then outstanding. The Chairman of the Board of the
Company was an employee of the organization that is providing
the consulting services at the inception of the agreement.
* * *
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 1,209,143
<SECURITIES> 1,129,582
<RECEIVABLES> 836,699
<ALLOWANCES> 30,000
<INVENTORY> 2,466,448
<CURRENT-ASSETS> 5,992,249
<PP&E> 638,508
<DEPRECIATION> 475,734
<TOTAL-ASSETS> 6,259,923
<CURRENT-LIABILITIES> 662,320
<BONDS> 0
0
0
<COMMON> 30,786
<OTHER-SE> 5,566,817
<TOTAL-LIABILITY-AND-EQUITY> 6,259,923
<SALES> 6,517,540
<TOTAL-REVENUES> 6,623,217
<CGS> 3,258,640
<TOTAL-COSTS> 5,336,360
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 858
<INCOME-PRETAX> 1,285,999
<INCOME-TAX> 529,000
<INCOME-CONTINUING> 756,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 756,999
<EPS-PRIMARY> .25
<EPS-DILUTED> .21
</TABLE>
