-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2HXs3gjCoGMCR/Fuzqc46B/UNIJp7gol/DErE9kHCx8/2IWx9PFYMMGzRJuYAb6 kwr3YEU0jaHEepdAYNon2A== 0000740664-00-000002.txt : 20000215 0000740664-00-000002.hdr.sgml : 20000215 ACCESSION NUMBER: 0000740664-00-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: R F INDUSTRIES LTD CENTRAL INDEX KEY: 0000740664 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC CONNECTORS [3678] IRS NUMBER: 880168936 STATE OF INCORPORATION: NV FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-13301 FILM NUMBER: 540644 BUSINESS ADDRESS: STREET 1: 7610 MIRAMAR RD STREET 2: BLDG 6000 CITY: SAN DIEGO STATE: CA ZIP: 92126 BUSINESS PHONE: 6195496340 MAIL ADDRESS: STREET 1: 7620 MIRAMAR RD #4100 STREET 2: 7620 MIRAMAR RD #4100 CITY: SAN DIEGO STATE: CA ZIP: 92126-4202 FORMER COMPANY: FORMER CONFORMED NAME: CELLTRONICS INC DATE OF NAME CHANGE: 19910204 10KSB 1 ANNUAL REPORT 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, 1999 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, 1999 were $6,140,128. The approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 1999, 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, 1999 was $5,559,253 . As of December 31, 1999, the registrant had 3,148,648 outstanding shares of common stock, $.01 par value. Number of Pages/ Index to Exhibits This Form 10-KSB consists of a total of 42 pages. The Index to Exhibits can be found on page 22. 2 PART I Forward-Looking Statements: Certain statements in this Annual Report on form 10-KSB, and other oral and written statements made by the Company from time to time are "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including those that discuss strategies, goals, outlook or other non-historical matters, or projected revenues, income, returns or other financial measures. These forward-looking statements are subject to numerous risks and uncertainties that may cause actual results to differ materially from those contained in such statements. Among the most important of these risks and uncertainties is the ability of the Company to continue to source raw materials from its suppliers. Other factors and assumptions that could generally cause the Company's actual results to differ materially from those included in the forward-looking statements made herein include, without limitation, the effects of general economic conditions in the United States or abroad, changes in competitive market conditions, changes in the Company's business strategy due to unanticipated changes in general economic conditions, competitive market conditions or other factors. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. ITEM 1. BUSINESS General: RF Industries, Ltd. (hereinafter the "Company") has two operating divisions, the RF Connector Division, and the RF Neulink Division, both of which are involved in the design, manufacture and/or sale of communications equipment. The Company considers these Divisions to be separate business segments. The Company's principal executive office is located at 7610 Miramar Road, Building #6000, San Diego, California. 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; 3 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. There is also a standard cable assembly line with over 3,900 cable assemblies. 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. Product Description: The Company's products fall into three main categories which are produced by two "Strategic Business Units" as follows: RF Connector: 1. Coaxial connectors for radio communications equipment, PC LANS, antenna devices, instruments and other radio frequency devices are designed and distributed 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 have applications in industrial, scientific and military markets. The types of RF connectors offered by RF Industries include 3.5mm, 7-16 DIN, BNC, MCX, MHV, Mini-UHF, MMCX, N, SMA, SMB, TNC and UHF. These connectors are offered in several configurations for both plugs and jacks. There are hundreds of applications for these connectors including, but not limited to, digital applications, cellular and PCS telephones, cellular and PCS base stations, GPS (Global Positioning Systems), cable and dish radio/TV systems, aircraft, video surveillance systems, cable assemblies and test equipment. The RF Connectors Division also manufactures a variety of connector kits and hand tools used by lab and field technicians, R&D technicians and engineers. 2. Coaxial cable assemblies for test equipment, LANs, and other RF applications are produced by the Company's Cable Assembly Group, which is located at RFI's corporate headquarters in San Diego, CA. The Company entered the cable assembly business to provide a "total RF 4 solution" for the Company's distribution network. Cable assemblies are made with a variety of sizes and combinations of RFI coaxial connectors and coax cabling. Cabling is purchased from a variety of major suppliers. Coaxial cable assemblies have thousands of applications including local area networks, wide area networks, Internet systems, PCS/cellular systems, TV/dish network systems, test equipment and entertainment systems. RF Neulink: 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. Neulink's product line includes: o RF9600 UHF and VHF wireless modems o DAC9600'S incorporating RF9600's with Digital, Analogue, and Relay I/O modules o SS9600 2.4 Ghz Spread - Spectrum wireless modems requiring no user FCC licensing o RCL inexpensive, speech or data link transmitters and receivers in VHF and 900MHz frequencies. Current applications in use world-wide for our Neulink products are various and include: o seismic and volcanic monitoring o industrial remote censoring/control in oil fields, pipelines and warehousing o lottery remote terminals o various military applications o remote camera control and tracking o perimeter and security system control/monitoring o water and waste management o inventory control o HVAC remote control and monitoring o biomedical hazardous material monitoring o fish farming automation of food dispensing, water aeration and monitoring o remote emergency generator startup and monitoring 5 Product Enhancements: RF Connector Division RF Connectors continues to broaden its connector offerings. In addition to its already expansive line of connectors, RF Connectors has introduced a full line of MMCX connectors, which are used for applications restricted by minimal space such as cellular telephones, PCS telephones, miniature transmitters and receivers, and mobile radio systems. Additionally, RF Connectors introduced reverse polarity and reverse thread connectors which are designed to meet the requirements of the new government regulations for part 15 of the FCC. Applications for these connectors include nonlicensed, low wattage transmitters used in areas such as convention center broadcast systems. MHV connectors, 75 Ohm SMB connectors, used in areas such as microwave telephone and other nondefense applications, and 3.5mm connectors which are used in precision military applications, satellite applications and other high frequency applications. RF Connectors plans to address the exploding new digital and home entertainment markets with new connector product offerings for fiber optic and high-end coaxial cable assemblies. The RF Cable Assembly Division is part of RF Connectors. During 1999, Cable Assembly commenced shipments of over 3,900 standard cable assemblies and has produced a 30-page catalog offering these cable assemblies for immediate delivery. Response to the product and catalog have been encouraging. Approximately 80% of RF Connectors' sales are through distributors. We are encouraged that our distributors appear to have entered 2000 with a fair amount of momentum. Five new distributors were acquired in 1999 and we expect to continue adding new distributors in 2000. During 2000 we expect to revamp and expand our Rep program to increase overall OEM business. RF Neulink Division Design efforts have been completed for the software and hardware products which, in combination with existing products, will enable Neulink to market complete wireless solutions. New software enables RF Nuelink's RF9600 wireless modems, in conjunction with our I/O modules, to configure a SCADA system. The Software, named EZ-SCADA, creates a simple user-defined graphics screen that visually displays the status, analogue values and trends. Hardware changes include addition of Analogue 'C' module, allowing system design for a full range of sensing and monitoring devices, digital, analogue and relay control. During 1999, Neulink's standard RF 9600 radio modem was field proven for a new application for monitoring seismic and volcanic activity. Transmitting data on seismic and volcanic activity enables scientists and public safety agencies to improve disaster prevention and response. 6 Neulink is reviewing the addition of a number of new products to serve existing and potential new customers. Two of these new products are enhancements of the SS9600 Spread-Spectrum 2.4 Ghz radio modem. Introduction of over-the-air rate of up to 19.2Kbps and enhancement with a TCP/IP engine module will offer low-cost Ethernet or Internet access to data collected at the host PC of Host-to-Multipoint networks of 3 to over 250 remote modules. This product meets part 15 FCC requirements for end users unlicenced use. New products added to the Neulink Division include our SS9600, a long range, 2.4GHz, SpreadSpectrum wireless modem line. With an over-the-air rate of 9600 bps point-to-point or host-to- multipoint networks fall within the unlicenced FCC requirements for users. Units hand shake and frequency hop for security and to overcome susceptibility to RF interface. A TCP/IP engine module will allow data from the host PC of network configurations to be accessed via Corporate Ethernet or Internet addressing. In addition, the 'C' module, with 2 analogue inputs and 2 analogue outputs, has been added to the DAC9600 line of I/O devices for remote censoring/control in base-to-multipoint applications. With the new SS9600 radio modem and expanding applications for existing wireless products, we believe that RF Neulink will continue to dominate select market niches. Development of Business: General: During the year ended October 31, 1999, the Company 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 is seeking distributors, systems integrators and resellers which are more closely aligned with its 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 20% of Company sales for the year ended October 31, 1999, 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. 7 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. 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 20% of sales while distributors accounted for 80%, of RF Connector division sales in fiscal 1999. 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 coaxial connector manufacturing from Japan, Korea, the United States, and ISO (International Standards Organization) approved factories in Taiwan. Connector materials are typically made of commodity metals and include small applications of precious materials, including silver and gold. The RF Cable Assembly Division relies on supplies of coaxial connectors from RF Connector's manufacturing sources. Coaxial cable is readily available from a wide variety of various domestic and international suppliers. 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. Electronic components used in these products are readily available from a number of domestic and foreign suppliers. Additional manufacturing and assembly facilities are readily available in the United States. Personnel: The Company presently employs 37 full-time employees, and 2 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. 8 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, 1999, the Company had a sales order backlog of approximately $7,900,000, of which approximately $5,300,000 is expected to be delivered in the current fiscal year. This compares to backlog of $8,800,000 at October 31, 1998. 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 $800,000,000 coaxial connector market. 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. Some of RF Connectors competitors have significantly greater financial resources and broader product lines. RF Connector competes on the basis of product availability, service and value-added support to its distributors and OEM customers. Major competitors for Neulink include Microwave Data Systems and Data Radio. Although a number of larger firms could enter Neulink's markets with similar products, Neulink's strategy is focused on serving and providing specific hardware and software combinations enabling the company to maintain a strong position in selected "niche" wireless applications. 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. 9 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. Risks and Uncertainties: The Company's business is subject to several risks and uncertainties, including, but not limited to: (a) technological developments which result in obsolescence or a change in demand for the Company's products, (b) political factors which may affect supply, pricing and availability of raw materials, (c) the highly competitive nature of the Company's industry and the impact that competitors new products and pricing may have on the Company's sales, (d) sales may vary due to general market and economic conditions, (e) reliance on distributors and distributors decisions to add competing product lines or discontinue RF products and other risks and uncertainties. ITEM 2. PROPERTIES: The Company leases its corporate headquarters building at 7610 Miramar Road, Building 6000, San Diego, California. The building consists of approximately 11,000 square feet which houses administrative, sales and marketing, engineering, production and warehousing for the Company's Connector 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 $8,040 plus utilities, maintenance and insurance. ITEM 3. LEGAL PROCEEDINGS: None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None. 10 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 1999 - ------------ November 1, 1998 - January 31, 1999 ............... 2 5/16 1 7/8 February 1, 1999 - April 30, 1999 ................. 2 1/8 1 11/16 May 1, 1999 - July 31, 1999 ....................... 2 1/8 1 3/4 August 1, 1999 - October 31, 1999 ................. 2 1 17/32 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 On December 31, 1999, the closing, high and low bid prices of the Company's Common Stock were $2.03 and $1.76, respectively. As of December 31, 1999, there were 816 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 1999. 11 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, 1999 and 1998:
1999 1998 ---------------------- ---------------------- % Total % Total Amount Assets Amount Assets ---------------------- ---------------------- Cash and cash equivalents ......................... $1,100,816 15.9% $1,209,143 19.3% Investments in available-for-sale securities....... 2,043,959 29.5 1,129,582 18.0 Current assets .................................... 6,648,954 95.9 5,992,249 95.7 Current liabilities ............................... 446,339 6.4 662,320 10.6 Working capital ................................... 6,202,615 89.4 5,329,929 85.1 Property and equipment - net ...................... 134,835 1.9 162,774 2.6 Total assets ...................................... 6,936,689 100.0 6,259,923 100.0 Stockholders' equity .............................. 6,490,350 93.6 5,597,603 89.4
Liquidity and Capital Resources: Management believes that cash generated from operations will be sufficient to fund the anticipated growth of the Company in fiscal 2000. Management believes that any financing requirements can be met through a combination of cash and investments held as of October 31, 1999, 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 2000. 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 2000. Management also believes that based on the Company's financial condition at October 31, 1999, 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. Results of Operations: The following summarizes the key components of the results of operations for the years ended October 31, 1999 and 1998: 12 1999 1998 ---------------------- --------------------- % of % of Amount Sales Amount Sales ---------- --------- ---------- --------- Net sales ................ $6,140,128 100 % $6,517,540 100 % Cost of sales ............ 2,841,090 46.3 3,258,640 50.0 ---------- ------- ---------- ------- Gross profit ............. 3,299,038 53.7% 3,258,900 50.0% Engineering expenses ..... 257,221 ======= 400,240 ======= Selling and general ...... 1,840,161 1,677,480 ---------- ---------- Operating income ......... 1,201,656 1,181,180 Other income, net ........ 122,945 104,819 ---------- ---------- Income before income taxes 1,324,601 1,285,999 Income taxes ............. 500,700 529,000 ---------- ---------- Net income ............... $ 823,901 $ 756,999 ========== ========== Net sales decreased $377,412 or 5.8% in 1999 compared to 1998. The decrease is primarily attributable to a $353,245 decline in sales at the RF Neulink Division to $991,551 from $1,344,796 in fiscal 1998. Sales at the RF Connector Division decreased $24,167 to $5,148,577 from $5,172,744 the previous year. The gross profit increased by $40,138 to $3,299,038 in 1999 from $3,258,900 in 1998. As a percent of sales, gross margin increased to 53.7% from 50% of sales in 1998 due to a favorable sales mix and tighter inventory controls. Engineering expenses declined $143,019 to $257,221 compared to $400,240 in 1998. As a percent of sales, engineering expenses declined to 4.2% compared to 6.1% in 1998. The decline in engineering expenses is attributable to a reduction in the amount of research and development. Selling and general expenses increased $162,681 to $1,840,161 from $1,677,480 in 1998. As a percent of sales, selling and general expenses increased to 30.0% from 25.7% in 1998. The increase is due to increased trade show, travel and advertising expenses. The $20,476 increase in operating income to $1,201,656 from $1,181,180 in the previous year is attributable to the increase in gross profit. Other income, net increased by $18,126. The increase is due to higher average cash balances and investments during the year which increased interest income. Net income increased $66,902 to $823,901 compared to net income of $756,999 in 1998. The increase in net income is due to higher gross profits and increased interest income. 13 General Outlook: Management believes that because of a number of achievements during the year ended October 31, 1999, the Company could maintain steady growth in the year ending October 31, 2000. As explained above, management believes the Company has capital resources available to fund operations at current and expanded levels. Every year, we find more efficient ways to meet our customers needs and manufacture top quality products. As a result, even with the minimal sales decrease in 1999, profits have continued to grow. To build stockholder value, RF Industries must achieve more earnings growth in the years ahead. We are continuing to pursue viable mergers and acquisitions. We are strengthening our mergers and acquisitions team to insure stockholder value. However, we cannot assure that any mergers will be consummated or that they will, if consummated, result in increased earnings. When appropriate, we will continue to buy back RFIL shares from the open market. RF Industries has been able to continue its earnings growth, significantly increase cash and improve operating margins in the past six years. Despite sales fluctuations, the Company's earnings have improved, we are debt free and our stockholders' equity continues to steadily grow. We have a solid position in the coaxial connector market and are working to expand Neulink's sales and product lineup. 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. The Company modified or replaced 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 utilized both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The cost of new software purchased was capitalized; all other costs were expensed as incurred. Overall, these costs have not had a material effect on the results of operations. In addition, the Company has assessed 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 remediate their own Year 2000 issues. However, there can be no guarantee that the systems of other 14 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. 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-18 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, 1999 o Statements of Income for the years ended October 31, 1999 and 1998 o Statements of Stockholders' Equity for the years ended October 31, 1999 and 1998 o Statements of Cash Flows for the years ended October 31, 1999 and 1998 o Notes to Financial Statements ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 15 PART III. ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors: Age Date of Election Position - ---------- ----- ----------------- ---------- Jack A. Benz 66 February 1990 Chairman John Ehret 62 November 1991 Director Howard F. Hill 59 November 1979 President/Chief Executive Officer Henry E.Hooper 46 January 1998 Director Robert Jacobs 48 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. 16 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 $100,000 The following table presents the annual cash and other compensation of Howard F. Hill, the Company's President: SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards ------------------------------------------- -------------------------- (a) (b) (c) (d) (f) (g) Name and Prin- Restricted cipal Stock Options Position Year Salary($) Bonus($) Awards SARs (#) - ----------- ------ ---------- --------- ----------- ---------- Howard Hill 1999 $125,000 $25,000 0 4,000 President 1998 $85,000 $25,000 0 4,000 1997 $85,000 0 0 4,000 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. 17 Option Tables: The following table depicts the options granted to the President during the year ended October 31, 1998: Option Grants in Last Fiscal Year Individual Grants -------------------------------------------------------------------------- (a) (b) (c) (d) (e) % of Total Number of Options Securities Granted to Exercise Underlying Employees or Base Options in Fiscal Price per Expiration Name Granted (#) Year Share Date -------------- ------------ ------------ ---------- -------------- Howard Hill, President Incentive Stock Option 2,000 4% $1.56 October, 2009 Non-Qualified Option 2,000 16% $1.33 October, 2009 The following table depicts the options held by the President as of October 31, 1999: Aggregated Option Exercises and Fiscal Year End Option Positions ------------------------------------------------------------------- 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 - -------- ----------- ---------- ------------- ------------- Howard F. Hill, President 20,000 $17,800 504,000/ $689,080/ 0 0 Meetings of the Board of Directors and Committees During the fiscal year ended October 31, 1999, 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, 1999. 18 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, raised to $125,000 in 1999, 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, 1999, options to purchase all 500,000 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, 1999. The beneficial owner is the owner of record and has sole voting and investment power over the shares shown, except as otherwise indicated. 19 Number of Shares (1) Percentage (1) Name and Address Beneficially Beneficially of Beneficial Owner Owned Owned - --------------------- -------------- --------------- Hytek International 690 West 29th Street Hialeah, FL 33010 ............................ 1,267,167 41.2% Jack A. Benz 7610 Miramar Rd. San Diego, CA 92126 .......................... 56,000 (2) 1.7% Howard F. Hill 7610 Miramar Rd. San Diego, CA 92126 .......................... 541,000 (3) 17.1% John Ehret 3370 San Fernando Rd. #206 Los Angeles, CA 90065 ........................ 29,000 (4) 0.9% Robert Jacobs Neil Berkman Associates 1900 Ave of the Stars, #2850 Los Angeles, CA 90067 ........................ 89,000 (5) 2.8% Henry Hooper 7610 Miramar Rd. San Diego, CA 92126 .......................... 19,055 (6) 0.6% All Directors & Officers as a group........... 758,455 (7) 24.0% (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 10,000 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 504,000 shares which Mr. Hill has the right to acquire upon exercise of options exercisable within 60 days of the date of this report. 20 (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 50,000 shares which Neil Berkman Associates has the right to acquire upon exercise of vested options, and 19,900 that Robert Jacobs has the right to acquire upon exercise of options. (6) Includes 18,555 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 585,955 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. 21 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 22 (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. 23 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 14, 2000 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 14, 2000 By: /s/ Jack A. Benz ------------------------------------ Jack A. Benz, Chairman - Board of Directors Dated: February 14, 2000 By: /s/ Terrie Gross ------------------------------------ Terrie Gross, Chief Financial Officer (Principal Accounting Officer) Dated: February 14, 2000 By: /s/ Howard F. Hill ------------------------------------ Howard F. Hill, Chief Executive Officer Dated: February 14, 2000 By: /s/ John Ehret ------------------------------------ John Ehret, Director Dated: February 14, 2000 By: /s/ Henry Hooper ------------------------------------- Henry Hooper, Director Dated: February 14, 2000 By: /s/ Robert Jacobs ------------------------------------ Robert Jacobs, Director 24 RF INDUSTRIES, LTD. INDEX TO FINANCIAL STATEMENTS [ATTACHMENT TO ITEM 7] PAGE ------ REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................... F-2 BALANCE SHEET OCTOBER 31, 1999............................................... F-3 STATEMENTS OF INCOME YEARS ENDED OCTOBER 31, 1999 AND 1998.......................... F-4 STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1999 AND 1998.......................... F-5 STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1999 AND 1998.......................... F-6 NOTES TO FINANCIAL STATEMENTS.................................. F-7/18 * * * F-1 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, 1999, and the related statements of income, stockholders' equity and cash flows for the years ended October 31, 1999 and 1998. 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, 1999, and its results of operations and cash flows for the years ended October 31, 1999 and 1998, in conformity with generally accepted accounting principles. J.H. COHN LLP San Diego, California January 7, 2000 F-2 RF INDUSTRIES, LTD. BALANCE SHEET OCTOBER 31, 1999 ASSETS Current assets: Cash and cash equivalents .................................. $1,100,816 Investments in available-for-sale securities ............... 2,043,959 Trade accounts receivable, net of allowance for doubtful accounts of $42,000 ........................... 757,665 Notes receivable ........................................... 12,000 Inventories, net of valuation allowance of $47,000 ......... 2,413,123 Prepaid expenses and deposits .............................. 247,391 Deferred tax assets ........................................ 74,000 ---------- Total current assets ................................ 6,648,954 Property and equipment: Equipment and tooling ...................................... 481,768 Furniture and office equipment ............................. 184,002 665,770 Less accumulated depreciation .............................. 530,935 Total ............................................... 134,835 Note receivable from stockholder ............................... 70,000 Deferred tax assets ............................................ 78,000 Other assets ................................................... 4,900 ---------- Total ............................................. $6,936,689 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .......................................... $ 88,496 Accrued expenses .......................................... 357,843 ----------- Total liabilities .................................. 446,339 Commitments and contingencies Stockholders' equity: Common stock - authorized 10,000,000 shares of $.01 par value; 3,148,598 shares issued .................... 31,486 Additional paid-in capital ................................ 4,400,868 Retained earnings ......................................... 2,348,351 Unearned compensation ..................................... (211,602) Receivables from sale of stock ............................ (25,900) Treasury stock, at cost - 29,400 shares ................... (52,853) ----------- Total stockholders' equity ......................... 6,490,350 Total .............................................. $ 6,936,689 =========== See Notes to Financial Statements. F-3 RF INDUSTRIES, LTD. STATEMENTS OF INCOME YEARS ENDED OCTOBER 31, 1999 AND 1998 1999 1998 ----------- ----------- Net sales .................................... $ 6,140,128 $ 6,517,540 Cost of sales ................................ 2,841,090 3,258,640 ----------- ----------- Gross profit ................................. 3,299,038 3,258,900 ----------- ----------- Operating expenses: Engineering .............................. 257,221 400,240 Selling and general ...................... 1,840,161 1,677,480 ----------- ----------- Totals ............................... 2,097,382 2,077,720 ----------- ----------- Operating income ............................. 1,201,656 1,181,180 Other income ................................. 123,432 105,677 Interest expense ............................. (487) (858) ----------- ----------- Income before provision for income taxes ..... 1,324,601 1,285,999 Provision for income taxes ................... 500,700 529,000 ----------- ----------- Net income ................................... $ 823,901 $ 756,999 =========== =========== Earnings per share: Basic .................................... $ .27 $ .25 =========== =========== Diluted ................................. $ .23 $ .21 =========== =========== See Notes to Financial Statements. F-4 RF INDUSTRIES, LTD. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1999 AND 1998
Additional Receivables Total Common Stock Paid-In Retained Unearned from Sale Treasury Stockholders Shares Amount Capital Earnings Compensation of Stock Stock Equity -------- -------- ---------- -------- ------------ ----------- ---------- ----------- Balance, November 1, 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 compen- satory stock options for purchase of 180,000 shares ............... (806,958) 806,958 Amortization of unearned compen- sation .......................... 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 Shares issued on exercise of stock options ......................... 70,000 700 27,000 $(25,900) 1,800 Amortization of unearned compen- sation .......................... 119,899 119,899 Purchase of 29,400 shares of treasury stock .................. $(52,853) (52,853) Net income ........................ 823,901 823,901 --------- --------- --------- --------- --------- ---------- --------- ---------- Balance, October 31, 1999 ......... 3,148,598 $31,486 $4,400,868 $2,348,351 $(211,602) $(25,900) $(52,853) $6,490,350 ========== ======== ========== ========== =========== ========= ========= ===========
See Notes to Financial Statements. F-5 RF INDUSTRIES, LTD. STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1999 AND 1998
1999 1998 ---------- ---------- Operating activities: Net income .................................................. $ 823,901 $ 756,999 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debts .................................. 12,000 Depreciation ............................................. 55,201 50,309 Amortization of unearned compensation .................... 119,899 133,188 Deferred income taxes .................................... 14,000 (35,000) Changes in operating assets and liabilities: Trade accounts receivable ............................. 37,004 (41,236) Inventories ........................................... 53,325 (214,866) Prepaid expenses and deposits and other assets ........ (2,984) 48,811 Accounts payable ...................................... (115,154) 49,394 Accrued expenses ...................................... (100,827) 163,283 ----------- ----------- Net cash provided by operating activities ......... 896,365 910,882 ----------- ----------- Investing activities: Purchases of investments in available-for-sale securities ... (914,377) (486,783) Capital expenditures ........................................ (27,262) (93,943) Increase in notes receivable ................................ (12,000) ----------- Net cash used in investing activities ............. (953,639) (580,726) ----------- ----------- Financing activities: Proceeds from shares issued on exercise of stock options .... 1,800 1,400 Purchase of treasury stock .................................. (52,853) ----------- ----------- Net cash provided by (used in) financing activities (51,053) 1,400 ----------- ----------- Net increase (decrease) in cash and cash equivalents ............ (108,327) 331,556 Cash and cash equivalents at beginning of year .................. 1,209,143 877,587 ----------- ----------- Cash and cash equivalents at end of year ........................ $ 1,100,816 $ 1,209,143 =========== =========== Supplemental cash flow information: Interest paid ............................................... $ 487 $ 858 =========== =========== Income taxes paid ........................................... $ 612,124 $ 423,815 =========== ===========
See Notes to Financial Statements. F-6 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 1 - Business activities and summary of significant accounting policies: Business activities: The Company's business is comprised of the design, manufacture and/or sale of communications equipment primarily to the radio and other professional communications related industries. The Company 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"). Management considers each division to be a separate business segment (see Note 6). 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. 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. Research and development: Costs and expenses related to research and development are expensed as incurred. Research and development expenses charged to operations were approximately $35,000 and $174,000 in 1999 and 1998, respectively. F-7 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 1 - Business activities and summary of significant accounting policies (continued): Advertising: The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations were approximately $72,000 and $38,000 in 1999 and 1998, respect- ively. 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. Stock options: In accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the Company will recognize compensation costs as a result of the issuance of stock options based on the excess, if any, of the fair value of the underlying stock at the date of grant or award (or at an appropriate subsequent measurement date) over the amount the employee must pay to acquire the stock. Therefore, the Company will not be required to recognize compensation expense as a result of any grants of stock options at an exercise price that is equivalent to or greater than fair value. The Company will also make pro forma disclosures, as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), of net income or loss as if a fair value based method of accounting for stock options had been applied instead if such amounts differ materially from the historical amounts. 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 and the treasury stock method had been applied during the period. F-8 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:
1999 1998 ---------- ---------- Numerators: Net income (A) ................................. $ 823,901 $ 756,999 ========== ========== Denominators: Weighted average shares outstanding for basic net earnings per share (B) ................. 3,098,689 3,071,486 Add effects of potentially dilutive securities - assumed exercise of stock options .......... 543,663 531,595 ---------- ---------- Weighted average shares for diluted net earnings per share (C) ..................... 3,642,352 3,603,081 ========== ========== Basic net earnings per share (A)/(B) .............. .27 .25 ========== ========== Diluted net earnings per share (A)/(C) ............ .23 .21 ========== ==========
Recent accounting pronouncements: The Financial Accounting Standards Board and the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants had issued certain accounting pronouncements as of October 31, 1999 that will become effective in subsequent periods; however, management of the Company does not believe that any of those pronouncements would have significantly affected the Company's financial accounting measurements or disclosures had they been in effect during the years ended October 31, 1999 and 1998. Note 2 - Concentration of credit risk and sales to major customers: The Company maintains its cash balances primarily in one financial institution. As of October 31, 1999, the balance exceeded the Federal Deposit Insurance Corporation limitation for coverage of $100,000 by $81,275. In addition, two unsecured money market accounts totaling $919,041 were held at October 31, 1999. The Company reduces its exposure to credit risk by maintaining such balances with financial institutions that have high credit ratings. F-9 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 2 - Concentration of credit risk and sales to major customers (concluded): 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% of total sales in 1999 and 1998 and sales to another customer represented 13% of total sales in 1998. Note 3 - Investments: At October 31, 1999, 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, 1999. Gross unrealized holding gains and losses on these investments were not material as of October 31, 1999 or 1998. There were no realized gains or losses from sales of investments during 1999 or 1998. Note 4 - Inventories: Inventories consisted of the following as of October 31, 1999: Raw materials and supplies ..................... $ 295,215 Finished goods ................................. 2,164,908 ----------- Total........................................ 2,460,123 Less allowance for slow-moving inventory........ 47,000 ----------- Total........................................ $2,413,123 Charges to earnings to reduce the carrying value of slow-moving inventory to estimated fair values were not material in 1999 and 1998. 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, 1999. 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. The Company also leases certain automobiles under operating leases which expire at various dates through June 2001. F-10 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 5 - Lease commitments (concluded): Total rent expense under all operating leases totalled $99,062 and $92,029 in 1999 and 1998, respectively. Minimum lease payments under these operating leases for years subsequent to October 31, 1999 are as follows: Year Ending October 31, ------------- 2000...................................... $58,000 2001...................................... 5,000 -------- Total.................................. $63,000 ======== Note 6 - Segment information: During 1999, the Company adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). Pursuant to the provisions of SFAS 131, the Company is reporting segment sales in the same format reviewed by the Company's management (the "management approach"). Management identifies the Company's segments based on strategic business units that are, in turn, based along market lines. These strategic business units offer products and services to different markets in accordance with their customer base and product usage. Accordingly, the Company's two business segments are centered on the operations associated with the RF CONNECTOR Division and the NEULINK Division. Substantially all of the Company's operations are conducted in the United States; however, the Company derives a portion of its revenue from export sales. The Company evaluates the performance of each segment based on income or loss from operations before income taxes. The Company has no significant intersegment sales or transfers. Assets are managed on a corporate basis. The Company allocates depreciation and other indirect expenses at a rate of 80% to the RF CONNECTOR Division and 20% to the NEULINK Division. F-11 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 6 - Segment Information (concluded): Net sales, income (loss) before provision for income taxes and other related segment information as of October 31, 1999 and for the years ended October 31, 1999 and 1998 follows:
Common/ Connector Neulink Corporate Total ----------- ----------- ----------- ----------- 1999 ---- Net sales ................. $ 5,148,576 $ 991,552 $ 6,140,128 Income (loss) before provision for income taxes ................... 1,296,972 (98,887) $ 126,516 1,324,601 Depreciation .............. 44,161 11,040 55,201 Research and development expense...... 20,903 13,610 34,513 Total assets .............. 6,936,689 1998 ---- Net sales ................. $ 5,172,743 $ 1,344,797 $ 6,517,540 Income (loss) before provision for income taxes ................... 1,229,494 (48,314) $ 104,819 1,285,999 Depreciation .............. 40,247 10,062 50,309 Research and development expense....... 16,527 157,725 174,252 Total assets .............. 6,259,923
The Company attributes revenues to geographic areas based on the location of the customers. The following table presents the revenues of the Company by geographic area for the year ended October 31, 1999: United States.................................. $5,244,973 Foreign countries.............................. 895,155 ----------- Total....................................... $6,140,128 =========== No individual foreign country accounted for more than 10% of total net sales for the year ended October 31, 1999. F-12 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 7 - Income taxes: The net provision for income taxes consisted of the following provisions and (credits): 1999 1998 -------- -------- Current: Federal ......................... $ 377,500 $ 443,300 State ........................... 109,200 120,700 --------- --------- 486,700 564,000 --------- --------- Deferred: Federal ......................... 18,000 (30,000) State ........................... (4,000) (5,000) --------- --------- 14,000 (35,000) --------- --------- Totals ........................ $ 500,700 $ 529,000 ========= ========= Income tax at the Federal statutory rate is reconciled to the Company's actual net provision for income taxes as follows:
1999 1998 --------------------- -------------------- % of Pretax % of Pretax Amount Income Amount Income -------- ----------- -------- ----------- Income tax at Federal statutory rate ............. $ 450,360 34.0% $ 437,240 34.0% State tax provision, net of Federal tax benefit ..... 83,600 6.3 93,434 7.3 Other credit ................ (33,260) (2.5) (1,674) (.2) --------- ----- --------- ----- Net provision for income taxes ................... $ 500,700 37.8% $ 529,000 41.1% ========= ===== ========= =====
The Company's total deferred tax assets and deferred tax liabilities at October 31, 1999 are as follows: 1999 1998 ----------- ---------- Total deferred tax assets............ $190,000 $204,000 Total deferred tax liabilities....... (38,000) (38,000) ---------- ---------- Net deferred tax assets........... $152,000 $166,000 ========== ========== 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-13 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 8 - 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. Options vest immediately upon grant. Incentive and Non-Qualified Stock Option Plans (concluded): 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 vested 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 $25,569 and $38,333 was amortized to compensation expense in 1999 and 1998, respectively. Additionally, in connection with an agreement for the provision of public relations services, on January 1, 1996, the Company granted a consultant 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-14 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 8 - Stock options (continued): Compensatory stock option plans (concluded): 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 was being amortized over the vesting period. A total of $22,630 was amortized to compensation expense in 1998. On February 1, 1998, the remaining unvested options for the purchase of a total of 180,000 shares were cancelled and options for the purchase of 180,000 shares at $.10 per share were granted to the two executives of which options to purchase 45,000 shares are 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 1998. 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, and is being amortized over the vesting period. A total of $94,056 and $70,538 was amortized to compensation expense in 1999 and 1998, respectively. 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 vested on January 1, 1998; however they were not 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 $274 and $1,687 was amortized to compensation expense in 1999 and 1998, respectively. F-15 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 8 - Stock options (continued): Additional required disclosures related to stock option plans: Since the Company has elected to continue to use the provisions of APB 25 in accounting for stock options, 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 based on the fair value at the grant date for all awards consistent with the provisions of SFAS 123, the Company's net income and net income per share in 1999 and 1998 would have been reduced to the pro forma amounts set forth below: 1999 1998 -------- --------- Net income - as reported......... $823,901 $756,999 Net income - pro forma........... $753,517 $625,757 Basic earnings per share: As reported................... $.27 $.25 Pro forma..................... $.23 $.21 Diluted earnings per share: As reported................... $.24 $.20 Pro forma..................... $.21 $.17 The fair value of each option granted in 1999 and 1998 was estimated on the date of grant using the Black-Sholes option - pricing model with the following weighted average assumptions: 1999 1998 -------- -------- Dividend yield................ 0% 0% Expected volatility........... 23% 90% Risk-free interest rate....... 6.5% 7% Expected lives................ 10 years 1 to 10 years F-16 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 8 - Stock options (concluded): Additional required disclosures related to stock option plans (concluded): Additional information regarding all of the Company's outstanding stock options at October 31, 1999 and 1998 and changes in outstand- ing stock options in 1999 and 1998 follows:
1999 1998 ------------------------- ------------------------- Weighted Weighted Shares Average Shares Average or Price Exercise or Price Exercise Per Share Price Per Share Price ----------- ----------- ----------- ---------- Options outstanding at beginning of year ............... 965,263 .80 935,560 .84 Options granted ................... 46,887 1.50 267,477 .66 Options exercised ................. (70,000) .40 (14,000) .10 Options canceled .................. (180,000) .10 Options forfeited ................. (24,917) 3.44 (43,774) 3.78 ----------- -------- --------- -------- Options outstanding at end of year 917,233 .79 965,263 .80 =========== ======== ========= ======== Option price range at end of year $.10-$5.75 $.10-$5.75 Options available for grant at end of year ..................... 179,954 201,924 Weighted average fair value of options granted during the year.. $ 1.50 $ 2.00 Option price range for options exercised during the year ....... $.10-$1.00 $ .10
The following table summarizes information about stock options out- standing at October 31, 1999, 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 ---------------- ----------- ------------ ---------- ----------- --------- $.10 628,000 4.9 $.10 529,000 $.10 $.94 50,000 2.0 $.94 40,000 $.94 $1.28-$1.87 137,456 8.6 $1.65 137,456 $1.65 $2.13-$2.50 54,320 8.0 $2.34 54,320 $2.34 $4.88 8,000 7 $4.88 8,000 $4.88 $5.75 39,457 7 $5.75 39,457 $5.75 -------- -------- 917,233 808,233 ======= =======
F-17 RF INDUSTRIES, LTD. NOTES TO FINANCIAL STATEMENTS Note 9 - Retirement plan: The Company sponsors a deferred savings and profit sharing plan under Section 401(k) of the Internal Revenue Code. Substantially all of its employees may participate in and make voluntary contributions to this defined contribution plan after they meet certain eligibility requirements. The Board of Directors of the Company can authorize additional discretionary contributions by the Company. The Company did not make contributions to the plan in 1999 and 1998. Note 10- Related party transactions: The note receivable from stockholder of $70,000 at October 31, 1999 is due from the President of the Company, bears interest at 6%, payable annually, and has no specific due date. Receivables from the sale of stock arose from advances made to assist officers and employees in the exercise of stock options and, accordingly, are reported as a reduction of stockholders' equity in the accompanying balance sheet. The receivables are interest free and due prior to October 31, 2000. * * * EX-27 2 FDS FOR YEAR ENDED 10/31/99
5 12-MOS OCT-31-1999 NOV-01-1998 OCT-31-1999 1,100,816 2,043,959 799,665 42,000 2,413,123 6,648,954 665,770 530,935 6,936,689 446,339 0 0 0 31,486 6,458,864 6,936,689 6,140,128 6,140,128 2,841,090 4,938,472 0 0 (122,945) 1,324,601 500,700 823,901 0 0 0 823,901 .27 .23
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