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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the Fiscal Year ended April 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____ to______
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12 (b)of the Act:
Name of each exchange on
Title of each class which registered
------------------- ---------------------
Common Stock (par value American Stock Exchange, Inc.
$1.00 per share)
Securities registered pursuant to Section 12 (g)of the Act:
None
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-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 16, 1997 - $62,016,000.
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 16, 1997 - 5,052,963.
DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by
reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held on or about October 14, 1997.
(Cover page 1 of 66 pages)
Exhibit Index at Page 55
PART I
Item 1. Business
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GENERAL DISCUSSION
Frequency Electronics, Inc. (sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the area of time and frequency control. Unless the context
indicates otherwise, references to the Registrant are to Frequency Electronics,
Inc. and its subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became the
successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500.
The current authorized capital of the Registrant consists of
20,000,000 shares of $1.00 par value common stock, of which 4,973,488 shares
were outstanding at April 30, 1997, and 600,000 shares of $1.00 par value
preferred stock, none of which have been issued to date.
At its inception, Registrant was involved principally in military defense
contracting by way of the design, development, manufacture, and marketing of
precision time and frequency control products. Its products are used in guidance
and navigation, communications, surveillance and electronic counter measure and
timing systems. Such products are used on many of the United States' most
sophisticated military aircraft, satellites, and missiles. The Registrant's
business was highly dependent upon the defense and space spending policies of
the U.S. Government. In recent years, changing defense priorities and severe
federal government budget pressures have significantly changed the market
environment for defense related products.
In an effort to better serve customers on a more competitive basis,
Registrant has transformed itself from a defense contract manufacturer into a
high-tech provider of precision time and frequency products used to synchronize
voice, data and video transmissions in commercial satellites and wireless
communications. Registrant has segmented its operations into two principal
industries: commercial products for space and wireless communications and
defense and space applications for United States Government end-use. The
Registrant's commercial space and commercial communications programs are
produced by its wholly-owned subsidiary FEI Communications, Inc. ("FEIC"). FEIC
was incorporated in Delaware in December 1991, and was created as a separate
subsidiary company to provide ownership and management of assets and other
services appropriate for commercial clients, both domestic and foreign.
Registrant has focused its internal research and development on
re-engineering its core technologies for the commercial markets. During fiscal
1997, 1996 and 1995 approximately 70%, 45% and 25%, respectively, of the
Registrant's sales were for commercial products used for commercial space
applications, wireless communications and foreign governments. For the years
ended April 30, 1997, 1996 and 1995, approximately 30%, 55% and 75%,
respectively, of the Registrant's sales were for U.S. Government end-use.
Registrant believes a substantial commercial market exists for its legacy
technologies and has developed several new commercial product lines as discussed
later in this Item 1.
MATERIAL DEVELOPMENTS
On November 17, 1993, Registrant was indicted on criminal charges
alleging conspiracy and fraud in connection with six contracts for which
Registrant was a subcontractor. In addition, two derivative actions have been
filed against the Board of Directors essentially seeking recovery on behalf of
the Company for any losses it incurs as a result of the indictment. On December
14, 1993, Registrant was notified by the U.S. Department of the Air Force that
it had been suspended from contracting with any agency of the government.
Existing contracted programs are not affected by this suspension. Certain
exceptions will apply if a compelling reason exists. The suspension is temporary
subject to the outcome of the legal proceedings in connection with the
indictment. The Company and the individual defendants have pleaded not guilty to
all criminal charges, have denied all civil allegations, and will vigorously
contest all charges and allegations. See Item 3 - Legal Proceedings.
PRODUCTS
Registrant designs, develops, manufactures and markets precision time
and frequency control products. Using the technology the Registrant has
developed in time and frequency products for limited applications, the
Registrant has modified a number of products for wider application in the much
broader commercial market for commercial space applications and wireless
communications, as well as the traditional heritage government and military
markets.
Registrant's products are manufactured from raw material which, when
combined with conventional electronic components available from multiple
sources, become finished products, subsystems and systems used for satellite
applications, space exploration, wireless communications, position location,
radar, sonar and electronic counter-measures. These products, subsystems and
systems are employed in ground-based earth stations, domestic and international
satellites, fixed, transportable, portable and mobile communications
installations as well as aircraft, ships, submarines and missiles. The
Registrant's products are marketed as components, instruments, or complete
systems. Prices are determined based upon the complexity, design requirement and
delivery schedule as determined by project detail.
Sales summaries for each class of Registrant's products during each of
the last five years are set forth in Item 6 (Selected Financial Data).
COMPONENTS - The Registrant's key technologies include quartz, rubidium
and cesium from which it manufactures precision time and frequency standards and
higher level assemblies which allow the users to generate, synchronize,
transmit, and receive signals in order to locate their position, secure a
communications system, or guide a missile. The components class of Registrant's
products is rounded out with crystal filters and discriminators, surface
acoustic wave resonators, and space and high-reliability custom thick and thin
film hybrid assemblies.
Quartz crystal is the key element in making quartz resonators used for
oscillators and filters utilized in most of the Registrant's products.
Precision quartz oscillators use quartz resonators in conjunction with
electronic circuitry to produce signals with accurate and stable frequency. The
Registrant's products include several types of quartz oscillators, suited to a
wide range of applications, including: ultrastable units for critical satellite
and strategic systems, and fast warm-up, low power consumption units for mobile
applications, including commercial aircraft and telephony.
The ovenized quartz oscillator is the most accurate type, wherein the
oscillator crystal is enclosed in a temperature controlled environment called a
proportional oven. The Registrant manufactures several varieties of temperature
controlling devices and ovens.
The voltage-controlled quartz oscillator is an electronically
controlled device wherein the frequency may be stabilized or modulated,
depending upon the application.
The temperature compensated quartz oscillator is an electronically
controlled device using a temperature sensitive device to directly compensate
for the effect of temperature on the oscillator's frequency.
The key components for the atomic instrument products (cesium and
rubidium) are manufactured totally from raw materials. The rubidium lamp, filter
and resonance cell provide the optical subassembly used in the manufacture of
the Registrant's optically pumped atomic rubidium frequency standards. The
cesium tube resonator is also manufactured totally from raw materials and is
used in the manufacture of the Registrant's cesium primary standard atomic
clocks.
High reliability, MIL-M-38510 Class S and B, custom hybrid assemblies
are manufactured in thick and thin film technologies for applications from DC to
44 GHz. These are used in manufacturing the Registrant's products, and also
supplied directly to customers, for space and other high reliability systems.
The Registrant, under an agreement with TRW's Electronics and
Technology Division, markets an extensive line of microwave products, including
millimeter/microwave monolithic integrated circuits ("MIMICs") developed by TRW
for the Department of Defense, and microwave monolithic integrated circuits
("MMICs") developed at TRW's own cost. These devices are incorporated into
"supercomponents" and integrated subassemblies.
Efficient and reliable DC-DC power converters are manufactured for the
Registrant's own instruments, and as stand alone products, for space and
satellite applications.
The Registrant manufactures filters and discriminators using its
crystal resonators, for use in its own radio-frequency and microwave receiver,
signal conditioner and signal processor products.
INSTRUMENTS - The Registrant's instrument line consists of three basic
time and frequency generating instruments and a number of instruments which test
and distribute the time and frequency. The Registrant's time and frequency
generating instruments are the quartz frequency standard, rubidium atomic
standard, cesium beam atomic standards and VSAT transceivers.
The quartz frequency standard is an electronically controlled
solid-state device which utilizes a quartz crystal oscillator to produce a
highly stable output signal at a standardized frequency. The Registrant's
frequency standard is used in communications, guidance and navigation and time
synchronization. The Registrant's products also include a precision frequency
standard with battery back-up and memory capability enabling it to remain in
operation if a loss of power has occurred.
The optically pumped atomic rubidium frequency standard is a
solid-state instrument which provides both timing and low phase noise references
used in wireless communications systems. Rubidium oscillators combine
sophisticated glassware, light detection devices and electronics packages to
generate a highly stable frequency output. Rubidium, when energized by a
specific radio frequency, will absorb less light. The oscillator's electronics
package generates this specific frequency and the light detection device
ensures, through monitoring the decreased absorption of light by the rubidium
and the use of feedback control loops, that this specific frequency is
maintained. This highly stable frequency is then captured by the electronics
package and generated as an output signal. Rubidium oscillators provide atomic
oscillator stability, at lower costs and in smaller packages.
The cesium beam atomic standard utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency, several orders of
magnitude more accurate than other types of quartz frequency generators. The
atomic standard is a compact, militarized solid-state device which generates
these precision frequencies for use with advanced communications and navigation
equipment. A digital time-of-day clock is incorporated which provides visual
universal time display and provides digital timing for systems use. The atomic
standard manufactured by Registrant is a primary standard, capable of producing
time accuracies of better than one second in seven hundred thousand years.
The VSAT transceivers consisting of C and KU Bands are intended for use
in satellite communciations primarily for private data and voice earth stations.
As communications systems become more precise, the requirement for
precise frequency signals to drive a multitude of electronic equipment is
greatly expanded. To meet this requirement, the Registrant manufactures a
distribution amplifier which is an electronically controlled solid-state device
that receives frequency from a frequency standard and provides multiple signal
outputs of the input frequency. A distribution amplifier enables many items of
electronic equipment in a single facility, aircraft or ship to receive a
standardized frequency and/or time signal from a quartz, rubidium or cesium
atomic standard.
SYSTEMS - Essentially, the Registrant's systems portion of its business
is manufactured by integrating selections of its products into subsystems and
systems that meet customer-defined needs. This is done by utilizing its unique
knowledge of interfacing these technologies and experience in applying them to a
wide range of systems. Registrant's systems generate electronic frequencies of
predetermined value and then divide, multiply, mix, convert, modulate,
demodulate, filter, distribute, combine, separate, switch, measure, analyze,
and/or compare these signals depending on the system application.
The Systems portion of the business includes a complete line of time
and frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. The time and
frequency control systems combine Registrant's cesium, rubidium and/or crystal
instruments with its other products, to provide systems for space and ground
based communications, space exploration, satellite tracking stations,
satellite-based navigation and position location, secure communication,
submarine and ship navigation calibration, and electronic counter-measures
applications. A number of these time and frequency control systems provide up to
quadruple redundancy to assure operational longevity.
See Item 6 - Selected Financial Data - for sales data for each of these
product lines.
BACKLOG
As of April 30, 1997, the Registrant's backlog amounted to
approximately $14 million as compared to the approximately $15 million backlog
at April 30, 1996 (see Item 7). The backlog includes purchase orders and
contracts from commercial and foreign customers of approximately $10 million
compared to $9 million last year. A substantial portion of this backlog is
expected to be filled during Registrant's fiscal year ending April 30, 1998.
While the backlog includes firm purchase orders and contracts and may be a
guideline in determining the value of orders which may be deliverable in the
period indicated, it is subject to change by reason of several factors including
possible cancellation of orders, change orders, terms of the contracts and other
factors beyond the Registrant's control. Accordingly, the backlog is not
necessarily indicative of the revenues or profits (losses) which may be realized
when the results of such contracts are reported.
CUSTOMERS AND SUPPLIERS
The Registrant markets its products both directly and through 35
independent sales representative organizations located principally in the United
States. Sales to non-U.S. customers totaled approximately 21%, 17% and 16% of
net sales in fiscal years 1997, 1996 and 1995 respectively.
The Registrant's products are sold to a variety of customers, both
commercial and governmental. For the years ended April 30, 1997, 1996 and 1995,
approximately 30%, 55% and 75%, respectively, of the Registrant's sales were
made under contracts to the U.S. Government or subcontracts for U.S. Government
end-use.
Sales to Hughes Aircraft Company (HAC) and Space Systems Loral each
exceeded 10% of the Company's consolidated sales for the years ended April 30,
1997 and 1996. Collectively these two companies accounted for approximately 51%
and 39% of the Registrant's consolidated sales for those periods, respectively.
For the year ended April 30, 1995, sales to HAC, TRW and Raytheon Corp. exceeded
10% individually and 56% collectively of consolidated sales. For the years ended
April 30, 1997 and 1996, the sales to HAC were substantially all for U.S.
Government end-use while the sales to Space Systems Loral were for space
applications and commercial communications. Sales to the above named customers
in the fiscal year ended April 30, 1995 were substantially all for U.S.
government end-use. The loss by the Registrant of any one of these customers or,
for those customers contracting with the U.S. Government, the loss of any
contracts which are partially subcontracted to the Registrant would have a
material adverse effect on the Registrant's business. The Registrant believes
its relationship with these companies to be mutually satisfactory and, except
for the pending legal proceedings discussed in Item 3, is not aware of any
prospect for the cancellation or significant reduction of any of its commercial
or U.S. Government contracts.
The Registrant purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Registrant is not dependent upon any one supplier or source of
supply for any of its component part purchases and maintains alternative sources
of supply for all of its purchased components. The Registrant has found its
suppliers generally to be reliable and price-competitive.
COMMERCIAL MARKETS
Registrant has transformed itself from a defense contract manufacturer
into a high-tech provider of time and frequency products used to synchronize
voice, data and video transmissions in commercial satellites and digital
wireless communications. Registrant has focused its internal research and
development on re-engineering its core technologies for the commercial markets.
During the fiscal year ended April 30, 1994, Registrant transferred all
commercial communications and space programs to its wholly-owned subsidiary,
FEIC. The foregoing developments have been implemented with a view towards
enabling Registrant to achieve long-term substantial increases in commercial
sales.
COMMERCIAL SPACE:
The commercial use of satellites launched for communications,
navigation, weather forecasting, video and data transmissions has led to the
increased need and ability to transmit information to earth based receivers.
This requires precise timing and frequency control at the satellite. For
example, Registrant manufactures the master clocks (quartz, rubidium and cesium)
and other significant timing products for many satellite communication systems.
Registrant's space hybrid assemblies are used onboard spacecraft for command,
control and power distribution. Efficient and reliable DC-DC power converters
are also manufactured for the Registrant's own instruments and as stand alone
products for space and satellite applications. Registrant's subminiature
oven-controlled quartz crystal oscillator is a low cost, small size, precision
crystal oscillator suited for high-end performance required in satellite
transmissions, airborne telephony and geophysical survey positioning systems.
New products based on Registrant's heritage military designs are being
introduced to take advantage of this emerging market. These new products include
local frequency generators, up and down converters, low noise amplifiers and
complete satellite transceivers.
WIRELESS COMMUNICATIONS:
The telecommunications industry is rapidly expanding as a result of the
conversion from analog to digital systems and the expansion of cellular and PCS
networks. Wireless communication services have become an integral part of the
telecommunications market.
Wireless communication networks consist of numerous installations
located throughout a service area, each with its own base station connected by
wire or microwave radio through a network switch. Network operators are in the
process of converting older networks from analog to digital technology in order
to expand network coverage, increase capacity and improve transmission quality.
This upgrade requires very accurate frequency control at the base stations
accomplished through quartz or rubidium oscillators to achieve a higher degree
of precision.
Currently three leading digital technologies are utilized: Time
Division Multiple Access, Code Division Multiple Access and Global System for
Mobile Communications. These transmission protocols are segmented and
transmitted over a wider spectrum of bandwidths than available under analog
systems. Digital systems have a need for more accurate synchronization which is
accomplished through use of precise timing devices located throughout the
system. Registrant manufactures a Commercial Rubidium Atomic Standard, an
extremely small, low cost, low phase noise, stable atomic standard and
temperature stable quartz crystal oscillators ideally suited for use in advanced
cellular communications and wireless telecommunications.
GOVERNMENT CONTRACTS
During the fiscal years ended April 30, 1997, 1996 and 1995,
approximately 30%, 55% and 75%, respectively, of the Registrant's sales were
made either directly with U.S. Government agencies or indirectly with government
agencies through subcontracts intended for government end-use. All of these
contracts were on a fixed price basis. Under a fixed price contract the price
paid to the Registrant is not subject to adjustment by reason of the costs
incurred by the Registrant in the performance of the contract, except for costs
incurred due to contract changes ordered by the customer. These contracts are on
a negotiated basis under which the Registrant bears the risk of cost overruns
and derives the benefit from cost savings.
Negotiations on U.S. Government contracts are sometimes based in part
on Certificates of Current Costs. An inaccuracy in such certificates may entitle
the government to an appropriate recovery. From time to time, the Defense
Contracts Audit Agency ("DCAA") of the Department of Defense audits the
Registrant's accounts with respect to these contracts. The Registrant is not
aware of any basis for recovery with respect to past certificates.
All government end-use contracts are subject to termination by the
purchaser for the convenience of the U.S. Government and are subject to various
other provisions for the protection of the U.S. Government. In the event of such
termination, the Registrant is entitled to receive compensation as provided
under such contracts and in the applicable U.S.
Government regulations.
The Registrant's proprietary products are used in guidance, navigation,
communications, radar, sonar surveillance and electronic countermeasure and
timing systems. Products are built in accordance with Department of Defense
standards and are used on many of the United States' most sophisticated military
aircraft, satellites and missiles. The Global Positioning Satellite System, as
well as the MILSTAR Satellite System, are but two examples of the programs in
which the Registrant participates. The Registrant manufactures the master clock
for the Trident missile, the basic timing system for the Voyager I and Voyager
II deep space exploratory missions and the quartz timing system for the Space
Shuttle. The Registrant's cesium beam atomic clock is presently employed in low
frequency secure communications, surveillance and positioning systems for the
United States Air Force, Navy and Army.
RESEARCH AND DEVELOPMENT
The Registrant's technological expertise has been an important factor
in its growth. Until recently, virtually all of its research and development
activities have taken place in connection with customer-sponsored
development-oriented products conducted under fixed price contracts and
subcontracts in support of U.S. Government programs. The Registrant has been
successful in applying its resources to develop prototypes and preproduction
hardware for use in navigation, communication, guidance and electronic
countermeasure programs and space application. The output of these
customer-sponsored projects, in all cases, is of a proprietary nature.
Registrant has focused its internal research and development efforts on
improving the core physics and electronic packages in its time and frequency
products. Registrant continues to conduct research in developing new time and
frequency technologies and improving product manufacturability by seeking to
reduce its production costs through product redesign and other measures to take
advantage of lower cost components.
The Registrant continues to focus a significant portion of its own
resources and efforts on developing hardware for commercial satellite programs,
commercial ground communication systems and wireless communications systems
which it anticipates will result in future growth and increases in profits.
During fiscal 1997, 1996 and 1995, the Registrant expended $1.5 million, $1.1
million and $1.9 million of its own funds, respectively, on such research and
development activity.
PATENTS AND LICENSES
The Registrant believes that its business is not dependent on patent or
license protection. Rather, it is primarily dependent upon the Registrant's
technical competence, the quality of its products and its prompt and responsible
contract performance. However, the rights to inventions of employees working for
the Registrant are assigned to the Registrant and the Registrant presently holds
such patents and licenses. Also, in certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses it has funded. Registrant does not believe that patents and
licenses are material to its business.
COMPETITION
The Registrant experiences intense competition with respect to all
areas of its business. The Registrant competes primarily on the basis of the
accuracy, performance and reliability of its products, the ability of its
products to perform in severe environments encountered in space, prompt and
responsive contract performance, and the Registrant's technical competence and
price. The Registrant has a unique and broad product line which includes all
three frequency standards -quartz, rubidium, and cesium. The Registrant believes
its ability to take such raw materials, manufacture finished products, integrate
them into systems and sub-systems, and to interface these systems with end-user
applications by determining the most appropriate type, all under one roof,
provides the Registrant with an advantage over many of its competitors.
Many of the Registrant's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs than the
Registrant. With respect to the cesium beam atomic clock, quartz crystal
standard and rubidium frequency standard, the Registrant competes with
Hewlett-Packard Company, Datum, Inc., and E. G. and G., Inc.
EMPLOYEES
The Registrant employs 212 persons.
OTHER ASPECTS
The Registrant's business is not seasonal and no unusual working
capital requirements exist.
Item 2. Properties
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Registrant established its headquarters in December 1981 in a 131,000
square foot manufacturing and office facility located in Mitchel Field, Long
Island, New York (the "Mitchel Field Complex"). The Mitchel Field Complex was
built and equipped, in part, with the proceeds of a $5,000,000 Industrial
Development Bond financing arrangement concluded through the Nassau County
Industrial Development Agency and various lending institutions ("Financing
Arrangement"). The Mitchel Field Complex is erected on land leased from the
County of Nassau ("Nassau County Lease") dated as of February 24, 1981 for an
aggregate period of 99 years (including renewal options exercisable at
Registrant's sole discretion). Registrant paid total base rentals under this
lease of approximately $167,000 during the fiscal year ended April 30, 1997. The
Nassau County Lease provides for increases generally at 10 year intervals.
Registrant has granted to the lending banks a security interest in all personal
property purchased with the proceeds of this financing and a mortgage on the
Nassau County Lease.
In June 1988, Registrant completed construction of an additional 90,000
square feet of manufacturing and office facility contiguous to the Mitchel Field
Complex. These additional facilities were financed with the proceeds of a
$3,500,000 Industrial Development Bond Financing arrangement with the Nassau
County Industrial Development Agency and a lending institution, as part of its
plan to finance the new plant and equipment ("Financing Arrangement II").
Under the terms of the Financing Arrangement and Financing Arrangement
II, interest is payable at 65% and 79%, respectively, of the lending banks'
prime commercial lending rates. This advantageous interest rate is made
available under an exemption from the taxation of interest payments received by
the lenders as provided by the Internal Revenue Code ("Code"). In fiscal 1995
the Financing Arrangement was fully repaid. Registrant has no reason to believe
that the exemption with respect to Financing Arrangement II will be challenged
by the Internal Revenue Service.
Such interest rate formula will remain in effect during the 15-year
period required to amortize Financing Arrangement II. Registrant has the right
to prepay the loan at any time. Financing Arrangement II contains certain
restrictions with respect to the maintenance of net worth and encumbering the
building.
In December 1990, a subsidiary of the Registrant signed a 15 year lease
with Lab Corporation of America ("LCA", formerly National Health Laboratories
Incorporated). The terms require that the subsidiary of the Registrant have a
building constructed for use by LCA for which construction was completed in
November 1992. The Registrant provided $9,000,000 of financing for the cost of
the building financed through a bank construction loan currently due January 30,
1998. This loan has been guaranteed and collateralized by LCA assets. Annual
rental income of $1,650,000 commenced in November 1992 upon completion of the
building. Minimum rentals are subject to adjustment based on the difference
between the actual rate of interest incurred on the borrowing used to construct
the facility and the targeted range of 9.75% to 10.25%. Under the terms of the
lease agreement annual rent escalations of 5% began in the fourth year of the
lease. This lease is accounted for as a direct finance lease and income is
recognized by a method which produces a constant periodic rate of return on the
outstanding investment in the lease.
Item 3. Legal Proceedings
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U.S. Government Indictment
On November 17, 1993, a Federal Grand Jury in the United States
District Court for the Eastern District of New York returned an indictment in a
criminal proceeding entitled, "United States District Court, Eastern District of
New York, United States of America, Plaintiff, against Frequency Electronics,
Inc., Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants", index number CR 93-1261 ("Indictment"). As the caption in the
proceeding indicates, the Indictment named as defendants Frequency Electronics,
Inc ("FEI"), Martin Bloch - its then board chairman, president and chief
executive officer, Abraham Lazar - one of its directors, Harry Newman-its
secretary/treasurer, and Marvin Norworth its contracts manager. The eighteen
count Indictment charges violations of Title 18, United States Code ("U.S.C.")
Sections 286 and 3551 et seq., 1031(a), 2 and 3551 et seq., 1001, 2 and 3551 et
seq.
The Indictment makes allegations, generally, as follows: TRW, Inc.
("TRW") was a prime contractor on a contract with the United States Government
("Government") to build satellites; FEI was a subcontractor of TRW under six
contracts to manufacture electronic devices for space satellites pursuant to
TRW's contracts with the Government. In February 1988, three of the subcontracts
were terminated by TRW and three of the subcontracts were partially terminated
by TRW and restructured. In connection with such terminations, FEI submitted
detailed statements of information setting out its costs incurred in connection
with the subcontracts for the unpaid portion of which it was eligible for
compensation, directly or indirectly, by the Government. Among the costs for
which it was eligible for compensation were labor costs, overhead and general
and administrative costs (collectively "costs"). Settlement proposals were
submitted by FEI with respect to the three terminated subcontracts. The
proposals contained, among other things, the cost information described above
and FEI was compensated, directly or indirectly, by the Government. Contract
pricing proposals were submitted by FEI with respect to the three partially
terminated and restructured subcontracts and such proposals contained, among
other things, the cost information described above. FEI and TRW entered into an
agreement restructuring such subcontracts and FEI was paid settlement expenses
in connection with such restructured subcontracts.
The general substance of the criminal charges against FEI and the
individual defendants named in the Indictment is that FEI and the individual
defendants conspired to defraud and did defraud the Government and that some or
all of them committed, among others, the following criminal acts: they agreed to
defraud the Government; they submitted statements and invoices with respect to
FEI's costs incurred in connection with the terminated and/or partially
terminated and restructured subcontracts for the purpose of FEI obtaining
compensation thereunder, which statements and invoices were intentionally false;
the statements and invoices included claims for labor costs and other costs
which were intentionally false; FEI and the individual defendants destroyed or
caused to be destroyed important records relating to labor costs; FEI and the
individual defendants altered or caused to be altered FEI's records and vendor
invoices with respect to FEI's cost of labor, materials and services; FEI and
the individual defendants intentionally made false statements to Government
officials; and FEI and the individual defendants intentionally submitted false
documents to Government officials. The Indictment does not specify the dollar
amount as to which it is claimed the Government was defrauded.
Subsequent to the return of the Indictment, FEI and the individual
defendants moved to dismiss the Indictment on various grounds ("Motion(s)"). The
Motions were heard on May 13, 1994 and the Court rendered its decision and
denied the Motions. Discovery has not been completed. FEI has determined to
vigorously defend the Indictment.
On April 6, 1994, a Federal Grand Jury in the United States District
Court for the Eastern District of New York returned a superseding indictment in
a criminal proceeding entitled, "United States District Court, Eastern District
of New York, United States of America, Plaintiff, against Frequency Electronics,
Inc., Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants", index number CR 93-0176 ("Superseding Indictment"). As the caption
in the proceeding indicates, the Superseding Indictment named as defendants all
of the same parties as in the Indictment. The nineteen count Superseding
Indictment charges violations of Title 18, U.S.C. Sections 371 and 3551 et seq.,
1001, 2 and 3551 et seq. It is believed that the Superseding Indictment
primarily represents an attempt by the Government to meet and cure certain of
the asserted deficiencies in the Indictment which were specified in the Motions.
The Superseding Indictment enlarged Count One of the Indictment from an 18
U.S.C. Section 286 conspiracy to a conspiracy charged under Title 18, U.S.C.
Section 371. In addition, the Superseding Indictment contained an additional
count charging a violation of Section 1001 of Title 18, i.e., making a false
statement to a Government agency. Other than the foregoing, there are no other
substantial differences between the Indictment and the Superseding Indictment.
The Superseding Indictment does not specify the dollar amount as to which it is
claimed the Government was defrauded. The Government takes the position that it
may proceed to trial on either the Indictment or the Superseding Indictment. The
Government has not advised as to whether it intends to proceed under the
Indictment or the Superseding Indictment and the Court has not ruled on this
subject. FEI and the other defendants moved to dismiss the Superseding
Indictment and those motions were also heard on May 13, 1994. The Court denied
the motions addressed to the Superseding Indictment. Discovery has not been
completed. FEI has determined to vigorously defend the Superseding Indictment.
In connection with the defense of the Indictment and the Superseding
Indictment, FEI and the other defendants have sought the production of United
States Government classified information and documents pursuant to the
provisions of the Classified Information Procedures Act ("CIPA"). A formal
hearing under CIPA commenced on April 29, 1996. The CIPA process is continuing
and no assessment can be made as to when it will be concluded or the outcome.
Upon a conviction of FEI, the Government may be awarded fines,
penalties, restitution, forfeitures, treble damages or other conditional relief.
On November 17, 1993, the Government commenced a civil action for
damages in the United States District Court for the Eastern District of New York
entitled, "United States District Court, Eastern District of New York, United
States of America, Plaintiff, against Frequency Electronics, Inc., Martin Bloch,
Abraham Lazar, Harry Newman and Marvin Norworth, Defendants", index number CV
93-5200 ("Government Civil Action"). The Government Civil Action sets forth four
causes of action against each of the named defendants alleging, in substance,
fraud under 31 U.S.C. Section 3729, et seq, (the "False Claims Act"), fraud,
unjust enrichment and breach of contract. In the complaint, demand is made for
treble damages in an unspecified sum based upon the alleged violations under the
False Claims Act, plus costs and attorneys fees in an unspecified amount, plus
$10,000 for each false claim and for each false record and statement. Pursuant
to an order of the Court dated January 12, 1994, all proceedings in the
Government Civil Action including, without limitation, discovery are stayed
pending a jury verdict of the Indictment. Under the False Claims Act, a recovery
can be made in favor of the Government for a civil penalty of not less than
$5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses. No opinion can be
offered as to the outcome of the Government Civil Action. FEI has determined to
vigorously defend the Government Civil Action.
A qui tam action was commenced in the United States District Court for
the Eastern District of New York entitled, "The United States of America ex rel.
Ralph Muller, Plaintiff, against Frequency Electronics, Inc., Raytheon Company,
Raytheon Company Subsidiaries #1-10, fictitious names for subsidiaries of
Raytheon Company, Hughes Aircraft Company, Hughes Aircraft Company subsidiaries
#1-20, fictitious names for subsidiaries of Hughes Aircraft Company, and Martin
Bloch, Defendants", index number CV-92 5716 ("Muller Qui Tam Action"). The
Muller Qui Tam Action was brought pursuant to the provisions of the False Claims
Act and is an action by which an individual may, under certain circumstances,
sue one or more third persons on behalf of the Government for damages and other
relief.
The complaint was filed on or about December 3, 1992, in camera and
under seal pursuant to the provisions of the False Claims Act. The Court
unsealed the complaint by order dated December 3, 1993, after FEI complained to
the United States Attorney for the Eastern District of New York regarding
newspaper articles that charged FEI with manufacturing defective products based
upon claims in an unspecified and undisclosed qui tam action. It is believed
that the Government made applications to the Court on one or more occasions
after December 3, 1993, to continue to have the file in the Muller Qui Tam
Action remain under seal. The complaint was served on FEI and Martin Bloch on
March 28, 1994 and March 30, 1994, respectively. Under the provisions of the
False Claims Act, the Government is permitted to take over the prosecution of
the action. The Government has declined to prosecute the Muller Qui Tam Action
and the plaintiff, Ralph Muller ("Muller"), is proceeding with the action on
behalf of the Government as is permitted under the False Claims Act. Moreover,
while the action names as parties defendant, Hughes Aircraft Company ("Hughes")
and Raytheon Company ("Raytheon"), along with several of their subsidiaries, it
appears that the Muller Qui Tam Action was dismissed voluntarily by Muller on
April 6, 1994, as to Hughes, Raytheon and their respective subsidiaries. FEI and
Martin Bloch moved to dismiss the complaint on various grounds and at the oral
argument of the motion to dismiss, the Court granted the motion to the extent
that the complaint failed to plead fraud with sufficient particularity as is
required under the Federal Rules of Civil Procedure and the plaintiff was
directed to serve an amended complaint. On February 6, 1996, plaintiff served an
amended complaint ("Amended Complaint").
The Amended Complaint, insofar as it pertains to FEI and Martin Bloch,
contains a series of allegations to the effect that Hughes and Raytheon
contracted with the Government to supply it with Advanced Medium Range Air to
Air Missiles ("AMRAAMS"); Hughes and Raytheon (collectively, the "Contractors")
entered into a subcontract with FEI pursuant to which FEI was to design,
manufacture, test, sell and deliver to the Contractors certain oscillators which
constituted components of the AMRAAMS; that FEI improperly designed,
manufactured and tested the oscillators; that numerous faulty and defective
oscillators were delivered to the Contractors; that the oscillators did not meet
contract specifications; that FEI was aware of the defective and faulty nature
of the oscillators; that FEI and Martin Bloch knowingly directed non-disclosure
of the design flaws; that the concealed design defects in developmental
oscillators permitted FEI to manufacture additional defective oscillators which
were used in operational missiles; that as a direct result of FEI's fraudulent
concealment of the defects, FEI was contracted to design and manufacture
additional oscillators; that when missiles were returned to FEI for repair, FEI
charged the Government for repair even though FEI knew the units had been
defective at the time of delivery; that FEI falsified test results and FEI and
Martin Bloch directed the falsification of test results; and that FEI sold and
delivered the oscillators to the Contractors; as a result of the faulty and
defective oscillators, many of the AMRAAMS failed to function properly; and that
the Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act,
and that the plaintiff Muller be awarded a bounty. Under the False Claims Act, a
recovery can be made in favor of the Government for a civil penalty of not less
than $5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses.
FEI has determined to vigorously defend the Muller Qui Tam Action. It
has answered the Amended Complaint, denied the material allegations, asserted
seventeen affirmative defenses, and counterclaims for: libel and product libel
demanding damages of $3,000,000; republication of the libel and product libel -
demanding damages of $3,000,000; slander demanding damages of $3,000,000;
tortious interference with prospects for additional business relations -
demanding damages of $1,865,010; prima facie tort - demanding damages of
$1,865,010; conversion - demanding damages of $11 plus an amount to be
determined at trial; breach of employment contract - demanding damages of
$1,865,010; breach of fiduciary duty demanding damages of $1,865,010; plus
punitive damages in the amount of $30,000,000 on each of the tort causes of
action, and legal fees and expenses. The substance of the counterclaims alleged
against Muller are predicated upon a letter dated November 23, 1992 ("November
23 Letter") written by Muller's attorneys Schneider, Harris, Harris and Furman
("SHHF") to the Government which allegedly contained false and libelous
statements concerning FEI's design, manufacture and production of components for
Hughes and Raytheon in connection with the AMRAAMS.
In addition, FEI has instituted a third party action against SHHF,
Robert Harris, Esq. and Rod Kovel, Esq., attorneys for Muller, in connection
with their alleged authoring and publishing of the November 23 Letter provided
to the Government. The third-party complaint asserts the same claims against the
attorneys as are asserted in the counterclaims against Muller, for libel and
product libel, republication of the libel and product libel, slander, tortious
interference with contractual relations, prima facie tort and conversion. The
counterclaims and third-party complaint have been served. Muller has replied to
the counterclaims asserted in FEI's answer to the Amended Complaint, denied the
substantive allegations and asserted various affirmative defenses. The
third-party defendants have replied to the third-party complaint and have denied
the allegations and asserted various affirmative defenses. Discovery has not
commenced.
Muller moved to dismiss the counterclaims in the answer and the third
party defendants moved to dismiss the third-party complaint. FEI and Martin
Bloch moved to dismiss the complaint in the Muller Qui Tam Action. The motions
were argued on January 5, 1996 and at the time the Court directed the plaintiff
to serve the Amended Complaint. At the oral argument, the Court deferred a
portion of its decision and, in addition, it indicated a formal decision and
order would be provided as to certain of the relief requested. By order dated
August 29, 1996, the Court stated that on January 5, 1996, the Government had
agreed to unseal the case file and that the balance of the relief requested was
denied or otherwise dealt with as reflected on the record at the oral argument
on January 5, 1996. On April 11, 1997, in open Court and on the record, the
Court ordered that the Muller Qui Tam Action is stayed pending resolution of the
criminal case.
No opinion can be offered as to the outcome of the Muller Qui Tam
Action, the FEI counterclaims, third-party action or the pending motions.
On December 1, 1993, FEI was served with a complaint in an action
entitled, "In the Court of Chancery of the State of Delaware In and For New
Castle County, Diane Solash Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, Abraham Lazar, John C. Ho, E. John Rosenwald,
Jr., individuals, Defendants and Frequency Electronics, Inc., a Delaware
Corporation, Nominal Defendant", Civil Action No. 13266 ("Solash Action"). All
of the individual defendants named in the complaint are or were directors of
FEI, Martin B. Bloch was president and chairman of the board of directors,
Abraham Lazar was a vice-president, and Joseph P. Franklin is presently chairman
of the board of directors. On January 24, 1994, plaintiff served an amended
complaint adding as named defendants Harry Newman, FEI's secretary/treasurer and
Marvin Norworth, FEI's contracts manager. This is a derivative action which is
permitted by law to be instituted by a shareholder for the benefit of a
corporation to enforce an alleged right or claim of the corporation where it is
alleged that such corporation has either failed and refused to do so or may not
reasonably be expected to do so. FEI is named as a nominal defendant. In the
Solash Action, the complaint alleges that the members of FEI's board of
directors may not reasonably be expected to authorize an action against
themselves.
The substance of the amended complaint contains allegations, in
general, as follows: the Indictment was issued (reciting certain of the
allegations contained in the Indictment); the misconduct of FEI's personnel as
alleged in the Indictment is such that FEI is exposed to material and
substantial monetary judgments and penalties as well as the loss of significant
Government business; such misconduct is likely to continue; the individual
defendants were under a fiduciary obligation to FEI and its shareholders to
supervise, manage and control with due care and diligence the business
operations of FEI and the business conduct of its personnel; that they failed to
do so and as a direct consequence, the matters alleged in the Indictment
occurred; and that the individual defendants breached their fiduciary duty. The
amended complaint seeks judgment against the individual defendants in the amount
of all losses and damages suffered by FEI and indemnification, on account of the
matters alleged in the amended complaint, together with interest, costs, legal
and other experts' fees.
FEI and all of the individual defendants have moved to dismiss the
complaint in the Solash Action ("Motion(s)"). To date, the Motions have not been
heard by the Court. FEI has determined to vigorously defend the Solash Action.
Discovery has not commenced. No opinion can be offered as to the outcome of the
Motions or with respect to the Solash Action.
On February 4, 1994, FEI was served with a complaint in an action
entitled "Supreme Court of the State of New York, County of New York, Moise
Katz, Plaintiff, against Martin B. Bloch, Joseph P. Franklin, Joel Girsky, John
C. Ho, Abraham Lazar, E. John Rosenwald, Jr., Defendants, and Frequency
Electronics, Inc., Nominal Defendant", Index Number 93-129450 ("Katz Action").
This is a derivative action which is permitted by law to be instituted by a
shareholder for the benefit of a corporation to enforce an alleged right or
claim of the corporation where it is alleged that such corporation has either
failed and refused to do so or may not reasonably be expected to do so. FEI is
named as a nominal defendant. In the Katz Action, the complaint alleges that the
members of FEI's board of directors may not reasonably be expected to authorize
an action against themselves. All of the individual defendants named in the
complaint are directors of FEI, Martin B. Bloch was president and chairman of
the board of directors, Abraham Lazar was a vice president, and Joseph P.
Franklin is presently chairman of the board of directors.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued (reciting certain of the allegations
contained in the Indictment); the misconduct of FEI's personnel as alleged in
the Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a
consequence, the matters alleged in the Indictment occurred; that the individual
defendants were grossly negligent and as a consequence the matters alleged in
the Indictment occurred; that the individual defendants voluntarily participated
in such wrongdoing and attempted to conceal it; and that the individual
defendants intentionally and negligently breached their fiduciary duty to FEI
and its shareholders. The complaint seeks judgment against these defendants in
favor of FEI in the amount of all losses and damages suffered by FEI on account
of the facts alleged in the complaint, together with interest, costs, legal and
other experts' fees.
FEI and all of the defendants have moved to dismiss the complaint in
the Katz Action ("Motion(s)"). At the time of the Motions, the plaintiff moved
to amend the complaint by setting forth certain additional allegations of
wrongdoing including, among others, amplifying allegations with respect to the
Indictment, setting forth allegations relating to the Muller Qui Tam Action, and
allegations attempting to clarify the relationship of the parties to the New
York forum, the latter allegations having been attacked on the Motions. In
connection with the Motions, the defendants stipulated that they would not
object to any application by the plaintiff Katz to intervene in the Solash
action. By order dated September 21, 1994, the Court granted the defendants'
Motions, dismissed the complaint and denied the plaintiff's cross-motions.
On or about November 17, 1994, FEI was served with a complaint in an
action entitled, "In the Court of Chancery of the State of Delaware In and For
New Castle County, Moise Katz Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, John C. Ho, Abraham Lazar, E. John Rosenwald,
Jr., Harry Newman, Marvin Norworth, individuals, Defendants and Frequency
Electronics, Inc., a Delaware corporation, Nominal Defendant", Civil Action No.
13841 ("Katz Delaware Action"). All of the individual defendants named in the
complaint, with the exception of Harry Newman ("Newman") and Marvin Norworth
("Norworth"), were all directors of FEI, Martin B. Bloch was president and
chairman of the board of directors, Abraham Lazar was a vice-president, and
Joseph P. Franklin is presently chairman of the board of directors. Newman is
FEI's secretary/treasurer and Norworth was FEI's contracts manager. This is a
derivative action which is permitted by law to be instituted by a shareholder
for the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed or
refused to do so or may not reasonably be expected to do so. FEI is named as a
nominal defendant. In the Katz Delaware Action, the complaint alleges that the
members of FEI's board of directors may not reasonably be expected to authorize
an action against themselves.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued (reciting certain of the allegations
contained in the Indictment); the misconduct of FEI's personnel as alleged in
the Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage, and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the complaint, together with interest, costs, legal, and other experts' fees.
Pursuant to the order of the Court, the Solash Action and the Katz
Delaware Action have been consolidated under consolidated Civil Action No.
13266, with the caption "In Re Frequency Electronics Derivative Litigation"
("Derivative Litigation").
In the Derivative Litigation, FEI and all of the individual defendants
have moved to dismiss the consolidated complaint and to stay the Derivative
Litigation pending a disposition of the Indictment and the Superseding
Indictment ("Motion(s)"). To date, the Motions have not been heard by the Court.
However, as a result of the Motions, pursuant to a Stipulation and Order of the
Court dated May 17, 1995, and a Stipulation and Order of the Court dated June
14, 1995, the Derivative Litigation has been dismissed as to Newman and Norworth
and is otherwise stayed pending a disposition of the Indictment, Superseding
Indictment and related investigations until the further order of the Court. FEI
has determined to vigorously defend the Derivative Litigation. Discovery has not
been commenced. No opinion can be offered as to the outcome of the Motion(s) or
with respect to the Derivative Litigation.
A qui tam action was commenced in the United States District Court for
the Eastern District of New York entitled, "United States of America, ex rel.
Howard B. Geldart, Plaintiff - Relator v. Frequency Electronics, Inc., Markus
Hechler, Harry Newman, Marvin Norworth, and Steven Calceglia, Defendants"
(Geldart Qui Tam Action"). The Geldart Qui Tam Action was brought pursuant to
the False Claims Act, which is described above.
The complaint was originally filed on or about October 19, 1993 in
camera and under seal pursuant to the provisions of the False Claims Act. An
amended complaint was filed on or about April 4, 1995. The Court unsealed the
amended complaint on or about June 2, 1995. The Government has exercised its
right under the False Claims Act to take over the prosecution of this action.
The amended complaint alleges that FEI created and used materially
false cost data to justify cost estimates in bid packages and otherwise,
affecting prices and fees charged and paid for defense procurement contracts
relating to the AMRAAM missile, and to a program for the replacement of Cesium
Standard parts, and to continue to justify the award of and payments under such
contracts; that the false claims caused the United States unknowingly to pay
more than the actual cost (plus a reasonable profit) of the products and
services; that FEI knowingly made transfers to cost from contract to contract
that were unjustified and materially false and otherwise overstated the costs of
its contracts; that this materially false cost data was used to support false
cost estimates by FEI to the United States or its contractors, to fraudulently
accelerate costs incurred so as to obtain progress payments, to justify cost
estimates in bids for contracts of a nature similar to ones already awarded FEI,
and to misrepresent cost information to the United States and its contractors.
FEI has determined to vigorously defend the Geldart Qui Tam Action. To
date, none of the defendants have answered the amended complaint. On April 11,
1997, in open court and on the record, the Court ordered that the Geldart Qui
Tam Action is stayed pending resolution of the criminal case.
On December 22, 1993, February 10, 1994, February 24, 1994, May 10,
1994, June 7, 1994 and July 19, 1995, Grand Jury Subpoenas Duces Tecum were
served on FEI ("Subpoenas"), the Subpoenas were each returnable before a Grand
Jury sitting in the United States District Court for the Eastern District of New
York. The Subpoenas called for the production of a variety of finance,
accounting and other documents, computer records and computer tapes relating to
the AMRAAMS. A number of FEI employees have been subpoenaed to appear before the
Grand Jury. The prosecutor has not advised as to the theory of this
investigation. Based upon the FEI documents subpoenaed, it appears that the
inquiry relates to finance and/or pricing matters. FEI is advised the notices
provided with the Subpoenas to FEI employees indicate their testimony is
required in connection with an investigation related to false statements (18
U.S.C. Section 1001), false claims (18 U.S.C. Section 287), and conspiracy to
present fraudulent claims (18 U.S.C. Section 286). FEI regards charges or claims
of violations of Government laws and regulations as extremely serious and
recognizes that such charges or claims could have a material adverse affect on
it. FEI's business is dependent upon contracts with the Government and contracts
and subcontracts with other companies as to which the Government or its agencies
are the end-user. Under the law, a Grand Jury indictment of FEI or any of its
officers, directors or employees, can result in suspension or debarment of FEI
from receiving Government contracts for a specified period of time. Registrant
is currently subject to such a suspension by reason of its indictment on
November 17, 1993. Upon conviction of FEI or in a civil proceeding, the
Government may seek fines, penalties, restitution, forfeitures, treble damages
or other conditional relief. To date, no charges have been filed, nor claims
asserted against FEI as a result of the Grand Jury investigation related to
AMRAAM.
Robert H. Harris, Esq. ("Harris"), a counsel to one of FEI's former
employees who was subpoenaed to testify before the Grand Jury, threatened to
file a claim against FEI, in the name of such counsel, in the form of a qui tam
action pursuant to the False Claims Act. To date, FEI has not been served with
any legal process relating to the False Claims Act other than the Government
Civil Action, the Muller Qui Tam Action and the Geldart Qui Tam Action.
FEI has filed claims with its insurance carriers pertaining to
potential coverages for directors and officers relating to the first Grand Jury
Investigation, the Indictment and the Superseding Indictment, the Government
Civil Action, the Muller Qui Tam Action, the Geldart Qui Tam Action, the Solash
Action and the Katz Action.
Certain disclaimers of coverage have been made by the carriers with
respect to certain of these matters. No opinion can be offered as to coverage or
the extent of coverage under any of the foregoing policies. At the appropriate
time, FEI intends to vigorously pursue its rights with respect to these
insurance policies.
Included in selling and administrative expenses are legal fees incurred
in connection with the above matters of approximately $890,000, $919,000 and
$2,300,000 for fiscal years 1997, 1996 and 1995, respectively.
Government Contract Suspension
On December 14, 1993, Registrant was notified by the U.S. Department of
the Air Force that, effective December 13, 1993, it had been suspended from
contracting with, or acting as subcontractor under any contract with any agency
of the U.S. Government and that such suspension is effective throughout the
executive branch of the Government. The suspension is also applicable to
Registrant's former chairman and chief executive officer, one of Registrant's
directors and former vice presidents, Registrant's secretary and treasurer, who
went on leave of absence from such position, and Registrant's contract manager,
presently on leave of absence from such position and has since retired. The
suspension is temporary, subject to the outcome of legal proceedings against
Registrant and the four individuals named above presently pending in the United
States District Court as discussed above.
The suspension does not preclude the completion by Registrant of its
performance of Government contracts or subcontracts awarded to it and pending on
the date of suspension. The Government may also conduct business with Registrant
during the period of suspension when a Government department or agency
determines that a compelling reason exists for it to do so. Examples of
compelling reasons are: (1) only Registrant can provide the supplies or services
required; (2) urgency requires contracting with Registrant; and (3) the national
defense requires continued dealings with Registrant. However, except for all of
the foregoing, during the period of suspension:
(1) Offers will not be solicited from, contracts will not be
awarded to, existing contracts will not be renewed or
otherwise extended for, and subcontracts requiring Government
approval will not be approved for Registrant by any agency in
the executive branch of the Government, unless the head of the
agency taking the contracting action, or a designee, states in
writing the compelling reason for continued business between
Registrant and the agency.
(2) Registrant may not conduct business with the Government as an
agent or representative of other contractors and it may not
act as an individual security for other contractors.
(3) No government contractor may award Registrant a subcontract
equal to or in excess of $25,000 unless there is a compelling
reason to do so and the contractor first notifies the
contracting officer and further complies with certain
Government registrations.
(4) Registrant's affiliation with or relation with any
organization doing business with the Government will be
carefully examined to determine the impact of these ties on
the responsibility of that organization to be a government
contractor or subcontractor.
The suspension regulations allow Registrant the opportunity to contest
the suspension by submitting to the suspending agency information and argument
in opposition to the suspension. Since Registrant and all of the individual
defendants have pleaded not guilty to the Indictment and the Superseding
Indictment and denied the charges alleged in the Government's related civil
action, the Registrant believes that the suspension is unwarranted, and
accordingly, Registrant has undertaken to vigorously contest the suspension.
However, to date, the suspension has not been withdrawn and no opinion can be
provided as to removing the suspension pending a favorable disposition of the
above-described legal proceedings.
If the Indictment results in conviction, the period of suspension could
be extended by way of the debarment of Registrant from any future Government
contracts or subcontracts. Debarment is imposed for a period commensurate with
the seriousness of the causes. Generally, debarment does not exceed three years.
The duration of Registrant's suspension will be considered in determining the
debarment period. The debarring official may also extend the debarment for an
additional period if that official determines that an extension is necessary to
protect the Government's interest. A debarment may not be extended solely on the
basis of the facts and circumstances upon which the initial debarment action was
based. The debarring official may likewise reduce the period or extent of
debarment, upon Registrant's request, supported by documentation for reasons
such as: 1) newly discovered material evidence; 2) reversal of the conviction or
civil judgment upon which the debarment was based; 3) bona fide change in
ownership or management; 4) elimination of other causes for which the debarment
was imposed; or 5) other reasons the debarring official deems appropriate.
On February 14, 1997, the Company commenced an action in the United
States District Court for the Eastern District of Virginia, Alexandria Division,
entitled "Frequency Electronics, Inc., Plaintiff, v. United States of America,
Department of the Air Force, Defendant", which sought (1) a declaration that (i)
the Government's decision to continue the Company's suspension from Government
contracting beyond three years violates the applicable provisions of the Federal
Acquisition Regulations ("FAR"), (ii) its continuation of the suspension beyond
three years is punitive in nature, (iii) the summary nature of the
administrative decision to continue the suspension violates the Company's rights
under the Due Process Clause of the Fifth Amendment, denies the procedural due
process and the principles of fundamental fairness mandated by the FAR, and is
otherwise arbitrary and capricious, and an abuse of discretion, and (iv) further
consideration of the matter on remand to the Air Force Suspension Official would
prove to be an exercise in futility, (2) a preliminary and permanent injunction
prohibiting defendant from (i) continuing the Company's suspension, or (ii)
imposing a new suspension or debarment relating to the facts and circumstances
known by the Government at the time of the imposition of the suspension on
December 13, 1993, and (3) an order directing the Government to promptly and
expeditiously take the necessary action to remove the Company's name from the
GSA "Lists of Parties Excluded from Federal Procurement or Non-Procurement
Programs."
The Air Force moved for summary judgment. On March 14, 1997, the
District Court granted the Air Force's judgment, dismissed the action with
prejudice, and refused to grant and decide the Company's motion for a
preliminary injunction. The Company has appealed the District Court's order to
the United States Court of Appeals for the Fourth Circuit. No opinion can be
offered as to the outcome of the Appeal.
Approximately 30% of Registrant's business is comprised of prime and
subcontracts in which the Government is the end-user. The balance of
Registrant's business (approximately 70%), which it has been expanding in recent
years, is in commercial and export markets unrelated to the Government. To the
extent that Registrant is currently reliant on Government contracts and
subcontracts and the effect which the suspension, unless withdrawn, will have on
Registrant's ability to continue to obtain such business, Registrant believes
that the suspension and possible debarment is an extremely serious matter which
could have a material adverse effect on Registrant's business prospects,
financial condition and results of its operations. However, Registrant is unable
to ascertain at this time whether or not this has been the case.
At April 30, 1997, included in Registrant's inventory is $3.2 million
of components and sub-assemblies in anticipation of replenishment orders from
the U.S.Government, for which Registrant is currently under suspension. Regist-
rant believes such inventories are fully recoverable based upon the aging of the
installed systems and the fact that Registrant is the sole provider of such
products.
Environmental Matters
The State of California Regional Water Quality Control Board has issued
certain abatement orders relative to ground water contaminations originating
from the site of premises obtained by the Company in connection with an
acquisition. In June, 1988, the U.S. Environmental Protection Agency proposed
that such premises be added to the National Priorities List, which would subject
the premises to the Super-fund requirements of federal law. No estimate as to
the cost to clean up the premises has been made or provided to Registrant.
Pursuant to the terms of the Purchase Agreement, the seller, a financially
capable party, has indemnified Registrant from any damages arising from this
environmental matter. Since Registrant is no longer the owner of the property
and has only secondary responsibility, it is of the opinion that the outcome
will not have a significant impact on operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were required to be submitted by Registrant to a vote of
security holders during the fourth quarter of fiscal 1997.
Item 4(a) Executive Officers of the Registrant
- ----------------------------------------------
The executive officers hold office until the annual meeting of the
Board of Directors following the annual meeting of stockholders, subject to
earlier removal by the Board of Directors. During fiscal 1994 certain officers
have taken voluntary leaves of absence as discussed in Registrant's Form 8-K
dated November 17, 1993.
The names of all executive officers of Registrant and all positions and
offices with the Registrant which they presently hold are as follows:
Joseph P.Franklin - Chairman of the Board of Directors, Chief Executive
Officer, Chief Financial Officer.
Martin B. Bloch - President(1), Chief Scientist
John C. Ho - Vice President of Research and Development(3) and
Director
Marvin Meirs - Vice President, Engineering
Alfred Vulcan - Vice President, Systems Engineering
Markus Hechler - Vice President, Manufacturing and Acting Secretary
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Space Systems and Business Development
Harry Newman - Secretary and Treasurer(2)
None of the officers and directors are related.
(1) In connection with the indictment as discussed under Item 3 -
Legal Proceedings, Martin B. Bloch has taken a leave of absence
as president and no one has been elected as acting president.
(2) In connection with the indictment as discussed under Item 3 -
Legal Proceedings, Harry Newman has taken a leave of absence as
secretary and treasurer and Markus Hechler, a vice president of
Registrant, has been elected acting secretary.
(3) Effective May 1, 1997, Mr. Ho has retired from his position as
Vice President of Research and Development but continues as a
director of Registrant.
Joseph P. Franklin, age 63, has served as a Director of the Company
since March 1990. In December 1993 he was elected Chairman of the Board of
Directors, Chief Executive Officer and has served as Chief Financial Officer
since September 15, 1996. He has been the Chief Executive Officer of Franklin
S.A., since August 1987, a Spanish business consulting company located in
Madrid, Spain, specializing in joint ventures, and was a director of several
prominent Spanish companies. General Franklin was a Major General in the United
States Army until he retired in July 1987.
Martin B. Bloch, age 61, has been a Director of the Company and of its
predecessor since 1961. As discussed in Item 3, Mr. Bloch resigned as Chairman
of the Board of Directors and Chief Executive Officer and is currently its
President and Chief Scientist. Previously, he served as chief electronics
engineer of the Electronics Division of Bulova Watch Company.
John C. Ho, age 64, has been employed by the Company and its
predecessor since 1961 and has served as a Vice President since 1963 and as a
Director since 1968.
Marvin Meirs, age 59, was employed by the Company in an engineering
capacity from 1966 to 1972 and rejoined the Company in such capacity in 1973,
serving as Vice President, Engineering since 1978.
Alfred Vulcan, age 60, joined the Company as an engineer in 1973 and
has served as its Vice President, Systems Engineering since 1978.
Markus Hechler, age 51, joined the Company in 1967, and has served as
its Vice President, Manufacturing since 1982, and as Assistant Secretary since
1978. He was elected Acting Secretary in December 1993 when Harry Newman took a
leave of absence.
Charles S. Stone, age 66, joined the Company in 1984, and has served as
its Vice President since that time. Prior to joining the Company, Mr. Stone
served as Senior Vice President of Austron Inc., from 1966 to 1979, and Senior
Scientist of Tracor Inc., from 1962 to 1966.
Leonard Martire, age 60, joined the Company in August 1987 and served
as Executive Vice President of FEI Microwave, Inc., the Company's wholly-owned
subsidiary until May 1993 when he was elected Vice President, Space Systems.
Harry Newman, age 50, has been employed by the Company as Secretary and
Treasurer since 1979, prior to which he served as Divisional Controller of
Jonathan Logan, Inc., apparel manufacturers, from 1976 to 1979, and as
supervising Senior Accountant with Clarence Rainess and Co., Certified Public
Accountants, from 1971 to 1975.
PART II
Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
The Common Stock of the Registrant is listed on the American Stock
Exchange under the symbol "FEI". The following table shows the high and low sale
price for the Registrant's Common Stock for the quarters indicated, as reported
by the American Stock Exchange.
FISCAL QUARTER HIGH SALE LOW SALE
1997 -
FIRST QUARTER $ 9 1/4 $5
SECOND QUARTER 10 3/8 6 7/8
THIRD QUARTER 12 7/8 8 9/16
FOURTH QUARTER 12 3/4 9 1/4
1996 -
FIRST QUARTER $ 5 $3 1/8
SECOND QUARTER 5 1/8 3 5/8
THIRD QUARTER 6 1/2 3 5/16
FOURTH QUARTER 8 1/2 4 7/8
As of July 16, 1997, the approximate number of holders of record of common
stock was 984.
DIVIDEND POLICY
On March 24, 1997, Registrant announced a policy of distributing a cash
dividend to shareholders of record on April 30 and October 31, payable on June 1
and December 1, respectively. Dividend amounts will be determined by the Board
of Directors prior to each declaration based on the Company's financial
condition and financial performance.
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth selected financial data including net
sales and operating income for the five year period ended April 30, 1997. The
information has been derived from the audited financial statements of the
Company for the respective periods.
Years Ended April 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Components ........ $11,574 $10,565 $ 5,695 $ 4,652 $22,551
Instruments ....... 11,424 9,524 14,065 15,921 17,495
Systems ........... 3,686 3,801 4,321 6,891 3,185
Purchase Services . 1,245 1,202 -- -- --
------- ------- ------- ------- -------
Total Net Sales ....... $27,929 $25,092 $24,081 $27,464 $43,231
======= ======= ======= ======= =======
Operating Profit (Loss) $ 2,675 $ 1,047 ($ 6,025) ($ 6,174) ($12,279)
======= ======= ======= ======= =======
Net Earnings (Loss) ... $ 4,863 $ 2,822 ($ 3,843) ($ 4,622) ($ 7,966)
======= ======= ======= ======= =======
Average Common and
Common Equivalent
Shares Outstanding 4,892,907 4,626,581 4,835,367 5,410,762 5,596,788
Earnings (Loss) per
Common and Common
Equivalent Shares . $ 0.99 $ 0.61 ($ 0.80) ($ 0.85) ($1.42)
====== ====== ====== ====== =====
Total Assets .......... $74,866 $68,770 $65,032 $72,655 $97,065
======= ======= ======= ======= =======
Long-Term Obligations . $ 5,460 $14,877 $14,959 $15,327 $24,945
======= ======= ======= ======= =======
Cash dividend declared
per common share .(1) $ 0.15 -- -- -- --
====== ====== ====== ====== ======
(1) On March 24, 1997, the Company declared its initial cash dividend to
shareholders of record at April 30, 1997, payable on June 1, 1997
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
The table below sets forth for the fiscal years ended April 30 the
percentage of consolidated net sales represented by certain items in the
Company's consolidated statements of operations:
1997 1996 1995
---- ---- ----
Net Sales
Commercial ................................ 70.2% 44.7% 25.3%
US Government ............................. 29.8 55.3 74.7
----- ----- -----
100.0 100.0 100.0
Cost of Sales ................................. 64.7 66.5 85.5
Selling and administrative expenses ........... 20.5 25.1 31.4
Research and development expenses ............. 5.2 4.2 8.1
----- ----- -----
Operating profit (loss) ....................... 9.6 4.2 (25.0)
Other income (expense) - net .................. 8.6 7.8 8.5
Provision for income taxes .................... (0.7) (0.8) (0.3)
----- ----- -----
Earnings (loss) before cumulative effect
of change in accounting principle ......... 17.4 11.2 (16.8)
Net earnings (loss) ........................... 17.4% 11.2% (16.0%)
===== ===== =====
Operating Profit
Operating profit for the year ended April 30, 1997, improved by $1.6
million over the year ended April 30, 1996 and by $8.7 million over fiscal year
1995. This result was achieved through increased sales to non-U.S. Government
customers coupled with significant improvement in gross margins due to cost
cutting and, as compared to fiscal 1995, the conclusion of certain unprofitable
contracts initiated by the Company's former west coast operations. Reduced
selling and administrative expenses and more focused research and development
costs, as discussed below, further enhanced the operating results for the
current fiscal year.
Net Sales
Net sales in fiscal 1997 increased by $2.8 million (11%) over fiscal
1996 and by $3.8 million (16%) over fiscal 1995. As illustrated in the table
above, commercial sales have become the dominant portion of the Company's
business. Sales to such customers for the fiscal year ended April 30, 1997
increased by $8.3 million over fiscal 1996 and by $13.5 million over fiscal
1995. Sales to non-U.S. Government customers are expected to remain the major
source of revenues in subsequent fiscal years. The Company will continue to
engage in contracts for which the end user is the U.S. Government but such sales
are not expected to increase significantly in absolute sales dollars due to the
overall decline in U.S. Government procurement (principally DOD and NASA) and
the Company's continuing contract suspension by the U. S. Air Force.
Included in each of fiscal 1997 and 1996 commercial sales is
approximately $1.2 million of revenues related to parts procurement and
screening services on behalf of the Globalstar Satellite program. The Company
intends to actively promote its procurement services for other satellite
programs. Fiscal 1997 commercial revenues continued the trend established in the
prior fiscal year of increasing sales of the Company's commercial product lines
particularly for commercial rubidium. Sales of these product lines are expected
to continue to grow as the Company further advances its products into the
marketplace.
Gross margins
Gross margins for the fiscal year ended April 30, 1997, improved
modestly over fiscal year 1996 increasing to 35.3% from 33.5%, both of which are
substantially improved over the fiscal 1995 gross margin of 14.5%. The current
year results reflect a continuation of the cost reductions and process
improvements which were initiated in fiscal 1996. These results also reflect the
growth in the commercial product lines where margins, in general, are larger
than on U.S. government related contracts. In addition, fiscal year 1995
incurred costs associated with the restructuring and consolidation of the
Company's former west coast facility. The retained assets and activities of that
entity were relocated to the Company's headquarters location during fiscal 1995.
Gross margin in fiscal 1996 was negatively impacted by the
establishment of reserves for certain slow moving or obsolete inventory items
and accruals for employee bonuses as a result of the profitable year. Without
these charges to earnings, the 1996 gross margin would have been approximately
35.7%. Similar items in fiscal 1997 had a negligible impact on margins. While
the Company cannot reasonably predict the need for future inventory reserves or
the possibility of cost overruns on existing or future contracts, the Company
expects that gross margins to be realized on recent bookings and existing
contracts included in its current backlog will be comparable to those
experienced during fiscal 1997.
Selling and administrative expenses
Selling and administrative costs declined by $588,000 or 9% for the
year ended April 30, 1997, over fiscal 1996 and by $1.8 million or 24% over
fiscal 1995. The decrease from fiscal 1996 to 1997 resulted primarily from a
decrease in bad debt expense by $538,000. While provisions for incentive bonuses
in fiscal 1997 increased in tandem with the improved profitability of the
Company, this was more than offset by decreases in other compensation-related
areas such as adjustments in deferred compensation accruals, better than
expected growth in cash surrender values of officers' and employees' life
insurance, and lower administrative headcount which was effected in the first
quarter of fiscal 1996. The principal cause of the decrease from the 1995
expense levels was a reduced amount of activity in 1997 and 1996 related to the
Company's defense of the ongoing litigation with the government and related
actions. Related legal fees were $1.4 million less in both 1997 and 1996 than in
fiscal 1995. Without regard to bad debt expenses, bonuses and the legal fees
related to the government litigation, selling and administrative costs in fiscal
1997 were $476,000 lower (10%) than in 1996 and $1.1 million lower (20%) than in
1995. This result was achieved through a reduction in the number of personnel,
reduced insurance costs, lower usage of professional services and improved
operating efficiencies. As sales increase, the ratio of selling and
administrative expenses (excluding legal costs) to net sales is expected to
decrease. The Company is unable to predict the future level of legal costs for
any specific period as this is dependent on factors outside of its immediate
control.
Research and development expenses
Research and development costs in the year ended April 30, 1997,
increased by $411,000 (39%) over fiscal 1996 but decreased by $479,000 (25%)
from the level of spending in fiscal 1995. The increase in 1997 over fiscal 1996
is due principally to costs related to the Company's successful commmercial
rubidium development efforts. Research and development spending in fiscal 1995
was higher than in the subsequent years principally due to an intense effort to
develop the two VSAT product lines. In fiscal 1997 and 1996, spending on these
product lines continued but at a lower level. The Company will continue to focus
its research and development activities on those commercial projects which it
expects will provide the best return on investment and provide the best
prospects for the future growth of the Company. For fiscal 1998, the Company
expects to invest in research and development at approximately the same rate as
it did for fiscal 1997.
Other Income and Expense
For the year ended April 30, 1997, net nonoperating income increased by
$413,000 (21%) over fiscal 1996 and by $339,000 (17%) over fiscal 1995. During
fiscal year 1995, the Company realized a gain of approximately $1.2 million on
the sale of certain marketable securities. Excluding that one-time gain, 1997
net nonoperating income has increased by $1.5 million (181%) over fiscal 1995.
Iinvestment income increased by $250,000 and $785,000 over fiscal 1996
and 1995, respectively, as the result of a continuing increase in
interest-earning assets in fiscal 1997. Interest rates, which were lower in
fiscal 1997 than in fiscal 1996 but higher than in fiscal 1995, also impacted
the level of investment income. Interest expense in fiscal 1997 decreased by
$88,000 and $155,000, respectively, from fiscal 1996 and 1995 levels. This was
the result of declining long-term debt balances as the Company makes scheduled
principal payments, as well as the same interest rate factors noted above.
Although the Company is unable to predict the future levels of interest rates,
at current rates the Company anticipates that investment income will continue to
increase and interest expense will continue to decrease when compared to earlier
fiscal years.
Other income, net, which consists principally of income under the
long-term direct finance lease with Lab Corporation of America, should continue
at moderately increasing levels over the 15-year term of the lease.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a highly liquid
position with working capital of $37.3 million at April 30, 1997 although this
is a decrease from the working capital position of $41.8 million at April 30,
1996. This decline is wholly attributable to the reclassification to current
liabilities of the real estate construction loan of $9 million which is due
January 30, 1998 (originally July 31, 1997 before an extension was granted by
the lender). Excluding that reclassification, working capital would have
increased by $4.5 million from the level at the end of the last fiscal year.
Included in working capital at April 30, 1997 is $24.6 million of cash, cash
equivalents and short-term investments which are readily convertible to cash.
The Company's current ratio at April 30, 1997 is 3.6 to 1 compared to a 10.3 to
1 ratio at April 30, 1996. Again excluding the reclassification of the
construction loan, the 1997 current ratio would be 9.7 to 1. The slight decline
in this current ratio is principally due to the Company's declaration of its
first dividend which was payable June 1, 1997 to holders of record on April 30,
1997.
Net cash provided by operating activities for the year ended April 30,
1997, was approximately $4 million compared to $7 million for fiscal 1996. This
decrease in cash inflow is due to the growth in unbilled receivables of $2.4
million, lower accounts payable and higher work-in-process inventory levels.
Unbilled receivables have grown due to the increased volume in commercial
contracts which do not provide the more generous upfront funding of the typical
government-related long-term contract. Payables have decreased as the Company
has largely completed the purchase and rebilling of approximately $13 million of
parts under a procurement contract. The second procurement agreement for $2.5
million of parts for this same customer was only beginning as of the end of
fiscal 1997.
Net cash used in investing activities for the year ended April 30,
1997, was $16.5 million. Of this amount, $15.4 million (net) was used to acquire
certain U.S. government and agency securities. The Company may continue to
invest cash equivalents in longer-term securities or to convert short-term
investments to cash equivalents as dictated by its investment strategies. The
Company also invested $860,000 in production equipment which will improve the
efficiency of its operations and an additional $280,000 was used to install new
computer software which will improve its financial and operational information
systems. The Company may continue to acquire more efficient equipment to
automate its production process and to invest in additional computer software.
However, for fiscal 1998, the Company has no material commitments to acquire
such fixed assets.
Net cash provided by financing activities for the year ended April 30,
1997, was $11,000 compared to $1.4 million used for such purposes in fiscal
1996. Of the fiscal 1997 amount, $457,000 was provided from the sale of shares
of common stock from treasury to satisfy the exercise of stock options granted
to certain employees and the payment of $305,000 on notes receivable from
certain officers and employees. These inflows were offset by $751,000 used to
make regularly scheduled long-term debt payments. The Company will continue to
use treasury shares to satisfy the future exercise of stock options granted to
officers and employees in previous years. The Company may repurchase shares of
its common stock for treasury whenever appropriate opportunities arise but it
has neither a formal repurchase plan nor commitments to purchase additional
shares in the future.
The Company will continue to expend its resources and efforts to
develop hardware for commercial satellite programs and commercial ground
communication and navigation systems which management believes will result in
future growth and continued profitability. Internally generated cash will be
adequate to fund development efforts in these markets.
At April 30, 1997, the Company's backlog amounted to approximately $14
million as compared to the approximately $15 million backlog at April 30, 1996.
The April 30, 1997, backlog consists of approximately $10 million (71%) for
commercial and foreign customers and $4 million (29%) for U.S. Government
contracts. The Company anticipates that most of the backlog orders and contracts
will be filled in fiscal 1998.
As discussed more thoroughly in Item 3. Legal Proceedings and in Note 9
to the consolidated financial statements, the Company is temporarily suspended
from receiving new contracts from any agency of the U.S. Government, except
under certain circumstances. Because of the Company's transition to commercial
products, the continuation of the suspension is not expected to have a material
adverse effect on liquidity, financial condition or results of operations. In
the event the Company is convicted under the Indictment discussed in Item 3, the
Government may be awarded fines, penalties, restitution, forfeitures, treble
damages or other conditional relief. However, the Company is unable to determine
the effect that such awards may have on its liquidity or financial condition.
The Company also has available for income tax purposes, approximately
$12 million of net operating loss carryforwards which may be applied against
future taxable income.
OTHER MATTERS
On May 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement 115"). Pursuant to Statement 115,
investments in certain debt and equity securities are categorized as
available-for-sale and are carried at fair value, with unrealized gains and
losses excluded from income and recorded directly to stockholders' equity. The
favorable cumulative effect of this change in accounting principle was
approximately $215,000 or $.04 per share which was recorded during the year
ended April 30, 1995.
See discussion of recently issued pronouncements included in Note 1 to
the consolidated financial statements.
The financial information reported herein is not necessarily indicative
of future operating results or of the future financial condition of Registrant.
Except as noted, management is unaware of any impending transactions or events
that are likely to have a material adverse effect on results from operations.
INFLATION
During fiscal 1997, as in the two prior fiscal years, the impact of
inflation on the Registrant's business has not been materially significant.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Frequency Electronics, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES listed in
Item 14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule 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 consolidated financial position of
Frequency Electronics, Inc. and Subsidiaries as of April 30, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended April 30, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As more fully discussed in Note 9 to the consolidated financial
statements, the Company and certain of its employees were indicted and served
with a civil suit by the United States Government (the "Government") in November
1993 in the United States District Court for the Eastern District of New York
(the "Eastern District"). The indictment and the civil action allege fraud and
certain criminal acts relating to certain Government contracts. In addition, two
derivative actions have been filed against the Company, as a nominal defendant,
its board of directors, and certain individuals essentially seeking recovery on
behalf of the Company for any losses it may incur as a result of the Government
indictment and civil action. The Company and its former chief executive officer
have been named as defendants in a qui tam action in the Eastern District in
which claims are made by an individual on behalf of the Government that the
Company manufactured certain defective components which were ultimately sold to
the Government. The Company was notified by an agency of the Government that it
has been temporarily suspended from contracting with the government pending the
outcome of the legal proceedings in the Eastern District. The Company and the
individual defendants have pleaded not guilty to the indictment and have denied
the allegations of the Government, derivative and qui tam actions and will
vigorously contest all such civil and criminal proceedings. The government civil
action has been stayed pending the resolution of the indictment. The ultimate
outcome of these actions and the government's suspension as well as their
impact, if any, on the consolidated financial statements and operations cannot
presently be determined. Accordingly, no provision for any liability that may
result has been made in the accompanying consolidated financial statements.
In 1995, as discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for certain investments
in debt and equity securities and, as discussed in Note 11, changed its method
of accounting for contributions to its Employee Stock Ownership Plan.
COOPERS & LYBRAND L.L.P.
Melville, New York
June 24, 1997.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1997 and 1996
-----------
ASSETS: 1997 1996
---- ----
(In thousands)
Current assets:
Cash and cash equivalents ................... $ 3,448 $15,915
Marketable securities (Note 3) .............. 21,112 5,632
Accounts receivable, net of allowance for
doubtful accounts of $190 in 1997 and $483
in 1996 (Note 4) ......................... 14,797 13,415
Inventories (Note 5) ........................ 11,060 10,281
Prepaid expenses and other .................. 1,233 1,026
------ ------
Total current assets ................. 51,650 46,269
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization (Notes 6 and 7)................ 9,059 8,839
Investment in direct finance lease (Note 8) ..... 9,702 9,607
Other assets (Note 2) ........................... 4,455 4,055
------- -------
Total assets ......................... $74,866 $68,770
======= =======
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1997 and 1996
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 1997 1996
---- ----
(In thousands)
Current liabilities:
Current maturities of long-term debt (Note 7) .. $ 9,718 $ 750
Accounts payable - trade ....................... 882 1,379
Accrued liabilities ............................ 2,921 2,262
Dividend payable ............................... 746 --
Income taxes payable ........................... 73 79
------- -------
Total current liabilities ............ 14,340 4,470
Long-term debt, net of current maturities (Note 7) . 1,687 11,438
Deferred compensation (Note 11) .................... 3,737 3,302
Other .............................................. 36 137
------- -------
19,800 19,347
------- -------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity (Note 11):
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued ......... -- --
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued-6,006,300 shares .. 6,006 6,006
Additional paid-in capital ...................... 35,190 35,024
Retained earnings ............................... 20,414 16,265
------- -------
61,610 57,295
Common stock reacquired and held in treasury -
at cost (1,032,812 shares in 1997 and
1,159,905 shares in 1996) ................. (4,612) (5,075)
Unamortized ESOP debt (Notes 7 and 11) ......... (1,500) (2,000)
Notes receivable-common stock (Note 10) ........ (435) (740)
Unearned compensation .......................... (77) (113)
Unrealized holding gain ........................ 80 56
------- -------
Total stockholders' equity ................ 55,066 49,423
------- -------
Total liabilities and stockholders' equity ...... $74,866 $68,770
======= =======
The accompanying notes are an integral part of
these financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 1997, 1996 and 1995
-----------
1997 1996 1995
---- ---- ----
(In thousands, except share data)
Net sales (Note 13) .................... $ 27,929 $ 25,092 $ 24,081
-------- -------- --------
Cost of sales ................... 18,075 16,689 20,602
Selling and administrative expenses .... 5,718 6,306 7,564
Research and development expenses ...... 1,461 1,050 1,940
-------- -------- --------
Total operating expenses ......... 25,254 24,045 30,106
-------- -------- --------
Operating profit (loss) ...... 2,675 1,047 (6,025)
Other income (expense):
Interest income .................. 1,543 1,293 758
Interest expense ................. (879) (967) (1,034)
Other, net (Notes 3 and 8) ....... 1,724 1,649 2,325
-------- -------- --------
Earnings (Loss) before provision
for income taxes .................... 5,063 3,022 (3,976)
Provision for income taxes (Note 12) ... 200 200 82
-------- -------- --------
Net Earnings (Loss) before cumulative effect
of change in accounting principle ... 4,863 2,822 (4,058)
Cumulative effect of change in
accounting principle ................ -- -- 215
-------- -------- --------
Net Earnings (Loss) .................... $ 4,863 $ 2,822 ($ 3,843)
======== ======== ========
Earnings (Loss) per common share before
cumulative effect of change in accounting
principle (Note 1) ................. $0.99 $0.61 ($0.84)
Cumulative effect of change in
accounting principle ................ -- -- .04
-------- -------- ----------
Earnings (Loss) per common share ....... $0.99 $0.61 ($0.80)
======== ======== ========
Weighted average common and common
equivalent shares outstanding (Note 1) 4,892,907 4,626,581 4,835,367
========= ========= =========
The accompanying notes are an integral part of these financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 1997, 1996 and 1995
(In thousands, except share data)
Unrealized
holding
Note gain or
Add'l Treasury stock Receivable (loss) on
Common Stock paid in Retained (at cost) Unamortized Common Unearned marketable
Shares Amount capital earnings Shares Amount ESOP debt Stock Compensation securities Total
------ ------ ------- -------- ------ ------ --------- ---------- ------------ ----------- ------
Balance at May 1, 1994... 6,006,300 $6,006 $35,339 $17,286 619,305 ($2,975) ($3,000) ($79) $52,577
Amortization of unearned
compensation ......... 61 61
Purchase of treasury
stock................. 345,000 (1,412) (1,412)
Amortization of ESOP
debt as a result of
shares allocated....... (208) 500 292
Decrease in market value
of marktble securities. ($39) (39)
Advances to officers
and employees for
the purchase of stock.. ($822) (822)
Net Loss ................ (3,843) (3,843)
--------- ----- ------ ------ ------- ----- ----- ---- --- --- ------
Balance April 30, 1995... 6,006,300 6,006 35,131 13,443 964,305 (4,387) (2,500) (822) (18) (39) 46,814
Amortization of ESOP
debt as a result of
shares allocated....... (156) 500 344
Shares issued under
restricted stock plan.. 49 (25,000) 92 (116) 25
Purchase of treasury
stock.................. 200,600 (698) (698)
Restricted stock surrendered
to treasury stock ..... 20,000 (82) 82
Amortization of unearned
compensation .......... 21 21
Increase in market value of
marketable securities.. 95 95
Net Earnings ............ 2,822 2,822
--------- ----- ------ ------ --------- ----- ----- --- --- --- ------
Balance April 30, 1996... 6,006,300 6,006 35,024 16,265 1,159,905 (5,075) (2,000) (740) (113) 56 49,423
Exercise of stock options (6) (127,093) 463 457
Amortization of ESOP
debt as a result of
shares allocated....... 172 500 672
Payment received for
common stock subscribed. 305 305
Amortization of unearned
compensation .......... 36 36
Increase in market value in
marketable securities.. 24 24
Cash dividend, $.15 per
share.................. (714) (714)
Net Earnings ............ 4,863 4,863
--------- ------ ------- ------- --------- ------ ------ ---- ---- --- ------
Balance April 30, 1997 .. 6,006,300 $6,006 $35,190 $20,414 1,032,812 ($4,612)($1,500) ($435) ($ 77) $80 $55,066
========= ====== ======= ======== ========= ====== ====== ==== ==== === =======
The accompanying notes are an integral part of these financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1997, 1996 and 1995
-----------
1997 1996 1995
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net earnings (loss) ...................... $4,863 $2,822 ($3,843)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization
Property ............................. 921 974 995
Other ................................ 18 20 20
Provision for losses on accounts
receivable and inventories ........... 42 996
Gains on marketable securities ......... (70) (59) (1,197)
Gain on sale or disposal of
property, plant and equipment ........ -- (4) --
Amortization resulting from
allocation of ESOP shares ............ 672 344 292
Employee benefit plan provisions ....... 407 765 717
Noncash interest on finance lease ...... (95) (155) (188)
Changes in assets and liabilities:
Accounts receivable .................... (1,424) (101) 8,318
Inventories ............................ (779) 180 322
Prepaid and other ...................... (207) 231 (360)
Other assets ........................... (418) (511) 685
Accounts payable - trade ............... (497) 652 (357)
Accrued liabilities .................... 659 480 (800)
Income taxes payable ................... (6) 79
Refundable income taxes ................ -- 318 (31)
Other liabilities ...................... (37) (78) (311)
------- ------- -------
Net cash provided by operating
activities .......................... 4,049 6,953 4,262
------- -------- -------
Cash flows from investing activities:
Purchase of marketable securities ........ (25,927) -- (11,094)
Proceeds from sale or redemption of
marketable securities ................. 10,541 5,910 3,440
Capital expenditures ..................... (1,141) (330) (168)
Proceeds from sale of property, plant
and equipment ......................... -- 513 --
------- ------- -------
Net cash (used in) provided by
investing activities ............. (16,527) 6,093 (7,822)
------- ------- -------
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1997, 1996 and 1995
(Continued)
-----------
1997 1996 1995
---- ---- ----
(In thousands)
Cash flows from financing activities:
Principal payments of long-term debt ..... (751) (749) (1,086)
Purchase of treasury stock ............... -- (698) (1,412)
Sale of stock from treasury .............. -- 25 --
Payment on (issuance of) notes
receivable from employees .............. 305 -- (822)
Exercise of stock options ................ 457 -- --
-------- ------- -------
Net cash provided by (used in)
financing activities ................ 11 (1,422) (3,320)
-------- ------- -------
Net (decrease) increase in cash and
cash equivalents ......................... (12,467) 11,624 (6,880)
Cash and cash equivalents at
beginning of year ........................ 15,915 4,291 11,171
-------- ------- -------
Cash and cash equivalents at
end of year .............................. $ 3,448 $15,915 $ 4,291
======== ======= =======
Supplemental disclosures of cash flow information (Note 15):
Cash paid during the year for:
Interest ............................ $ 979 $ 942 $1,017
===== ===== ======
Income taxes ........................ $ 206 $ 81 $ 151
===== ===== ======
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of Frequency
Electronics, Inc. and its wholly-owned subsidiaries (the "Company" or
"Registrant"). The Company is principally engaged in the design, development and
manufacture of precision time and frequency control products and components for
microwave integrated circuit applications. See Note 13 for information regarding
the Company's commercial and U.S. government business. Intercompany accounts and
significant intercompany transactions are eliminated in consolidation.
These financial statements have been prepared in conformity with
generally accepted accounting principles and require management to make
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. Actual results could differ from these
estimates.
Inventories:
Inventories, which consist of work-in-process, raw materials and compo-
nents, are accounted for at the lower of cost (specific and average) or market.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and includes interest
on funds borrowed to finance construction. Expenditures for renewals and
betterments are capitalized; maintenance and repairs are charged to income when
incurred. When fixed assets are sold or retired, the cost and related
accumulated depreciation and amortization are eliminated from the respective
accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the long-lived
asset, an impairment loss is recognized. To date, no impairment losses have been
recognized.
Depreciation and Amortization:
Depreciation of fixed assets is computed on the straight-line method
based upon the estimated useful lives of the assets (40 years for buildings and
3 to 10 years for other depreciable assets). Leasehold improvements are
amortized on the straight-line method over the shorter of the term of the lease
or the useful life of the related improvement.
Revenue and Cost Recognition:
Sales of products and services to customers are generally reported in
operating results based upon shipment of the product or the performance of
services pursuant to contractual terms. However, revenue under certain contracts
is reported in operating results using the percentage of completion method based
upon the ratio that incurred costs bear to total estimated costs. Provisions for
anticipated losses are made in the period in which they become determinable.
Changes in job performance may result in revisions to costs and income and are
recognized in the period in which revisions are determined to be required.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as depreciation, indirect
labor and supplies. Selling, general and administrative costs are charged to
expense as incurred.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Revenue and Cost Recognition (cont'd):
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year.
Income Taxes:
The Company recognizes deferred tax liabilities and assets based on the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Earnings Per Share:
Primary earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock and, when dilutive, common
stock equivalents outstanding.
Fully diluted earnings per share are not presented since they do not
materially vary from primary earnings per share.
Marketable Securities:
Marketable securities consist of investments in common stocks, mutual
funds, and debt securities of U.S. government agencies. Substantially all of
the marketable securities at April 30, 1997 and 1996 were held in the custody
of one financial institution.
On May 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Pursuant to SFAS 115,
investments in certain debt and equity securities are categorized as available
for sale and are carried at fair value, with unrealized gains and losses
excluded from income and recorded directly to stockholders' equity. For the year
ended April 30, 1995, the cumulative effect of this change in accounting
principle was approximately $215,000 or $0.04 per share.
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company places its temporary cash investments with high credit
quality financial institutions. Such investments may be in excess of the FDIC
insurance limit. No losses have been experienced on such investments.
Fair Values of Financial Instruments:
Cash and cash equivalents and loans payable are reflected in the
accompanying consolidated balance sheets at amounts considered by management to
reasonably approximate fair value based upon the nature of the instrument and
current market conditions. Management is not aware of any factors that would
significantly affect the value of these amounts.
Stock-based Plans:
Effective May 1, 1996, the Company adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," which allows companies either to
measure compensation cost in connection with the employee stock compensation
plans using a fair value based method or to continue to use an intrinsic value
based method. The Company will continue to use the intrinsic value based method,
which generally does not result in compensation cost.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Recently Issued Pronouncement
The Financial Accounting Standards Board recently issued SFAS No. 128,
"Earnings Per Share," SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
which are effective for the Company in future periods. The Company is in the
process of assessing the effect these pronouncements will have on its financial
statements and related disclosures.
2. Other Assets
Included in other assets at April 30, 1997, is a promisory note in the
amount of $1.7 million. This promisory note is a result of the June 1995 sale of
the Company's former west coast facility. Such note bears interest at 10% and
requires monthly installments of principal and interest of $21,734 until July
31, 2000, when the entire remaining principal balance shall be due and payable.
3. Marketable Securities
Marketable securities at April 30, 1997 and 1996 are summarized as
follows (in thousands):
April 30, 1997
Unrealized
Market Holding
Cost Value Gain
Fixed income securities $ 19,688 $ 19,763 $75
Equity Securities 1,344 1,349 5
--------- --------- ---
$ 21,032 $ 21,112 $80
======== ======== ===
April 30, 1996
Unrealized
Market Holding
Cost Value Gain (Loss)
Fixed income securities $ 4,231 $ 4,346 $115
Equity Securities 1,345 1,286 (59)
-------- ------- ----
$ 5,576 $ 5,632 $ 56
======== ======= ====
Maturities of fixed income securities classified as available-for-sale at
April 30, 1997 are as follows (in thousands):
Current ............................... $ 2,502
Due after one year through five years 13,916
Due after five years through ten years 3,211
After ten years ....................... 59
-------
$19,688
=======
The proceeds from sales of available-for-sale securities, principally
fixed-income securities, and the gross realized gains (based on specific
identification) were $10.5 million and $70,000, respectively, for the year
ended April 30, 1997. For the year ended April 30, 1996, proceeds from sales
of available-for-sale securities and the gross realized gains were $174,000
and $58,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
4. Accounts Receivable
Accounts receivable include costs and estimated earnings in excess of
billings on uncompleted contracts accounted for on the percentage of completion
basis of approximately $7,722,000 at April 30, 1997 and $5,315,000 at April 30,
1996. Such amounts represent revenue recognized on long-term contracts that has
not been billed, pursuant to contract terms, and was not billable at the balance
sheet date.
5. Inventories
Inventories, which are reported net of reserves of $350,000 and
$940,000 at April 30, 1997 and 1996, respectively, consisted of the following
(in thousands):
1997 1996
---- ----
Raw Materials and Component Parts $ 2,797 $ 1,998
Work in Progress 8,263 8,283
------- -------
$11,060 $10,281
======= =======
Title to all inventories related to United States Government contracts
that provide for progress billings vests in the U.S. Government.
At April 30, 1997, included in the Company's inventory is $3.2 million
of inventory of components and sub-assemblies in anticipation of replenishment
orders from the U. S. Government, for which the Company is currently under
suspension (see Note 9). The Company believes such inventories are fully
recoverable based upon the aging of the installed systems and the fact that
the Company is the sole provider of such products.
6. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
1997 1996
---- ----
Buildings and building improvements $ 8,751 $ 8,751
Machinery, equipment and furniture 16,331 15,191
------ ------
25,082 23,942
Less, accumulated depreciation and
amortization 16,023 15,103
------ ------
$ 9,059 $ 8,839
======= =======
Depreciation and amortization expense for the years ended April 30, 1997,
1996 and 1995 was $921,000, $974,000, and $995,000, respectively.
Maintenance and repairs charged to operations for the years ended April 30,
1997, 1996 and 1995 was approximately $347,000, $320,000, and $562,000,
respectively.
Portions of a building owned by the Company are leased to outside parties.
Related cost and accumulated depreciation at April 30, 1997 are approximately
$565,000 and $177,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
1997 1996
---- ----
Unsecured note payable in forty equal
quarterly installments of $125,000
through April 1, 2000 with interest at
adjusted LIBOR plus 1.00% (7.1875% at
April 30, 1997) (1) $ 1,468 $ 2,000
Nassau County Industrial Development Bonds
payable in quarterly installments of
$62,500 through September 30, 2000 at
79% of prime (6.7150% at April 30, 1997) (2) 937 1,188
Real Estate Construction Loan in the amount
of $9,000,000, maturity date January 30, 1998
(extended from July 31, 1997) with interest
at LIBOR plus 1.375% (6.90625% at April 30, 1997)
or prime plus 0.25% (3) 9,000 9,000
------- -------
11,405 12,188
Less, current maturities 9,718 750
------- -------
$ 1,687 $11,438
======= =======
(1) This note, originally in the amount of $5,000,000, was used to fund
the purchase of 714,286 shares of the Company's common stock for the
Employee Stock Ownership Plan (ESOP). Under the terms of this loan
the Company has the right to borrow either at the bank's stipulated
prime rate, at LIBOR plus 1.0% or at a designated fixed rate to be
determined. Dividends received on ESOP shares ($32,000 at April 30,
1997) which have not been allocated to participant accounts are used
to pay a portion of the principal of this note. (see Note 11.)
(2) This obligation is collateralized by certain property, plant and
equipment having a net book value of approximately $5,952,000 at
April 30, 1997
(3) This obligation is collateralized by the tenant's assets for which a
building was constructed (see Note 8).
Aggregate amounts of long-term debt scheduled to mature in each of the
subsequent years ending April 30, are as follows (in thousands):
1998 $ 9,718
1999 750
2000 750
2001 187
-------
$11,405
=======
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
8. Leases
Operating Leases:
The Company leases land on which its plant is located under an operating
lease expiring in 2080. The lease provides for payments of real estate taxes,
insurance and other charges by the lease. The lease agreement provides for
rental escalations ranging from three to ten percent at varying periods of from
four to ten years. The Company also has sublease rentals providing for annual
rental income. These sublease agreements provide for escalations which are
substantially the same as those in the Company's lease.
Lease commitments and related sublease rental income for real property at
April 30, 1997 are as follows (in thousands):
Aggregate Lease Sublease
Commitments Rental Income
1998 $ 230 $ 66
1999 195 66
2000 179 66
2001 169 66
2002 167 66
2003 and thereafter 18,464 330
------- ---
$19,404 $660
======= ====
Lease rental expenses, including real estate taxes, charged to operations
for the years ended April 30, 1997, 1996 and 1995 were approximately $844,000,
$783,000 and $1,036,000, respectively.
Direct Finance Lease:
During 1993, construction was completed on a building which is being
leased to Laboratory Corportation of America ("LCA"), formerly National Health
Laboratories, Inc., under a fifteen year direct finance lease.
Income from this direct finance lease is recognized by a method which
produces a constant periodic rate of return on the outstanding investment in the
lease. Minimum rentals are based on the specified rental rate in the agreement
and are subject to adjustment based on the difference between the actual rate of
interest incurred on the borrowing used to construct the facility and the
targeted range of 9.75% to 10.25%. During fiscal 1997, 1996 and 1995, rental
reductions, representing actual interest savings, of approximately $256,000,
$241,000, and $286,000, respectively, were passed through to LCA.
The Company's net investment in the direct finance lease is as follows
(in thousands):
Minimum lease payments receivable $24,328
Unearned Income (14,626)
-------
Net Investment $ 9,702
=======
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Scheduled receipts under the direct financing lease at April 30, 1997 are
as follows (in thousands):
1998 $ 1,895
1999 1,990
2000 2,089
2001 2,194
2002 2,303
2003 and thereafter 13,857
-------
$24,328
=======
9. Commitments and Contingencies
U.S. Government Indictment:
On November 17, 1993, a Federal Grand Jury (the "Grand Jury") in the
United States District Court for the Eastern District of New York indicted the
Company and certain individuals (including certain officers) alleging that they
conspired to and did defraud the U.S. Government ("the Government") and
committed certain criminal acts in connection with six contracts (which were
terminated for the convenience of the Government) under which the Company was a
subcontractor and the Government was the end-user. Such alleged criminal acts
included submitting false documents, intentionally making false statements and
destroying or causing to be destroyed, records relating to labor and other
costs. On April 6, 1994, the Grand Jury returned a superseding indictment for
the purpose, it is believed, of curing certain asserted deficiencies in the
original indictment. Upon a conviction under the original or superseding
indictment (collectively the "Indictment") the Government may seek fines,
penalties, forfeitures, restitution, treble damages and other conditional
relief. The Company and the other defendants have pleaded not guilty to and
intend to vigorously defend the Indictment.
U.S. Government Civil Action:
Contemporaneously with the issuance of the original indictment, the
Government commenced a civil action for damages naming the same parties and
alleging essentially the identical facts and charges set forth in the
Indictment. The complaint seeks to recover treble damages in an unspecified
amount, $10,000 for each false claim, record and statement, certain costs and
attorney's fees, and such other relief the court deems proper. Neither the
Indictment nor the civil action alleges the dollar amounts as to which the
Government claims it was defrauded. The Company was reimbursed for costs
incurred for contract performance and for settlement costs in connection with
the six terminated contracts. The civil action has been stayed pending the
disposition of the Indictment. The Company and the other defendants have denied
the allegations of and intend vigorously to contest the civil action.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Private Civil Derivative Actions:
On December 1, 1993, and February 4, 1994, two separate derivative
shareholder actions (pursuant to a court order, are now consolidated under one
civil action) were served in state court actions against the Company as a
nominal defendant and the entire board of directors and certain individuals. A
derivative action is one permitted by law to be instituted by a shareholder for
the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. The substance of
the complaint in each action is similar and comprises a series of allegations
that the misconduct of Company personnel, involved in the aforementioned
Indictment, is such that it exposes the Company to material and substantial
monetary judgments and penalties and the loss of significant business, and the
directors were under a fiduciary obligation to manage and control the business
operations of the Company and the conduct of its personnel. The complaint seeks
judgment against the directors in the amount of all losses and damages suffered
by the Company on account of the facts alleged in the complaint, together with
interest costs, legal and other professional fees. The Company and the other
defendants have denied the allegations of and intend vigorously to contest the
derivative actions. The derivative shareholder actions have been stayed pending
the disposition of the Indictment and related investigations.
Qui Tam Actions:
In March 1994, a qui tam action was served upon the Company and Martin
Bloch, its former chief executive officer and, in July 1995, a separate qui tam
action was served upon the Company and certain employees of the Company. A qui
tam action is a form of derivative action wherein an individual may, under
certain circumstances, bring a legal action against one or more third persons on
behalf of the Government for damages and other relief by reason of one or more
alleged wrongs perpetrated against the Government by such third persons. The
March 1994 complaint alleges that the Company, in connection with its
subcontract to design and manufacture certain oscillators which are components
of the Government's Advance Medium Range Air to Air Missiles ("AMRAAMS"),
improperly designed, manufactured and tested the oscillators and as a result the
Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act.
The July 1995 complaint alleges that the Company created and used materially
false cost data to justify cost estimates in bid packages and otherwise
affecting prices and fees charged and paid for defense procurement contracts
relating to the AMRAAM missile and to a program for the replacement of cesium
standard parts, and to continue to justify the award of the payments under such
contracts; that the false claims caused the United States unknowingly to pay
more than the actual cost (plus a reasonable profit) of the products and
services; that FEI knowingly made transfers to costs from contract to contract
that were unjustified and materially false and otherwise overstated the costs of
its contracts; that this materially false cost data was used to support false
cost estimates by FEI to the United States or its contractors, to fraudulently
accelerate costs incurred so as to obtain progress payments, to justify cost
estimates bids for contracts of a nature similar to ones already awarded FEI,
and to misrepresent cost information to the United States and its contractors.
Under the False Claims Act, a recovery can be made in favor of the Government
for a civil penalty of not less than $5,000 and not more than $10,000 as to each
false claim and for each false record and statement, plus three times the amount
of damages it is determined the Government sustained, plus legal fees and
expenses. The Company and Mr. Bloch have denied the allegations of and intend to
vigorously defend the March 1994, qui tam action. The Company intends to
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
vigorously defend the July 1995 qui tam action, but to-date, none of the defen-
dants have answered the complaints. On April 11, 1997, the Court ordered that
the qui tam actions are stayed pending resolution of the criminal case.
Company Position and Legal Fees:
The Company and the individual defendants in each of the legal matters
described above consider the allegations and the charges asserted to be
unjustified. They further consider the actions of the Company and the individual
defendants with respect to the subject matter of these charges to have been
taken in good faith and without wrongful intent, criminal or otherwise. Because
of the uncertainty associated with the foregoing matters, the Company is unable
to estimate the potential liability or loss that may result, if any, and,
accordingly, no provision has been made in the accompanying consolidated
financial statements. However, an unfavorable outcome of these matters could
have a material impact on the Company's financial position, results of
operations and cash flows. Included in selling and administrative expenses are
legal fees incurred in connection with the above matters of approximately
$890,000, $919,000, and $2,300,000 for the fiscal years ended April 30, 1997,
1996 and 1995, respectively.
Government Contract Suspension:
On December 14, 1993, the Company was notified by the U.S. Department of
the Air Force that, effective December 13, 1993, it had been suspended from
contracting with, or acting as subcontractor under any contract with any agency
of the Government and that such suspension is effective throughout the executive
branch of the Government. The suspension is also applicable to: Martin Bloch,
FEI's former chairman and chief executive officer, presently on leave of absence
from the position of president; Harry Newman, FEI's secretary and treasurer,
presently on leave of absence from such positions; and Marvin Norworth, FEI's
contract manager who went on a leave of absence from such position and has since
retired. The suspension is temporary, subject to the outcome of legal
proceedings against the Company and certain individuals presently pending in the
Eastern District as discussed above. The suspension does not preclude the
completion by the Company of its performance of Government contracts or
subcontracts awarded to it and pending on the date of suspension. The Government
may also conduct business with the Company during the period of suspension when
a Government department or agency determines that a compelling reason exists for
it to do so. The suspension allows the Company the opportunity to contest the
suspension by submitting information and argument in opposition to the
suspension. Since the Company and all the individual defendants have pleaded not
guilty to the Indictment and denied the charges alleged in the Government's
related civil action, denied the allegations in the Muller Qui Tam Action and,
it is anticipated, will deny the allegations in the Geldart Qui Tam Action, the
Company believes that the suspension is unwarranted and, accordingly, is
vigorously contesting the suspension. However, to date, the suspension has not
been withdrawn and no assurance can be given as to removing the suspension
pending a favorable disposition of the aforementioned legal proceedings. If the
Indictment results in conviction, the period of suspension could be extended by
way of debarment of the Company from any future Government contracts or
subcontracts. Debarment is imposed for a period commensurate with the
seriousness of the causes. Generally, debarment does not exceed three years. The
duration of the Company's suspension will be considered in determining the
debarment period.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Approximately 30% of the Company's revenue for fiscal 1997 is comprised
of prime and subcontracts in which the Government is the end-user. The balance
of the Company's business (approximately 70%) is in commercial and export
markets unrelated to the Government. To the extent to which the Company is
currently reliant on government contracts and subcontracts and the effect which
the suspension, unless withdrawn, will have on the Company's ability to continue
to obtain such business, the Company believes that the suspension and possible
debarment is an extremely serious matter which could have a material adverse
effect on the Company's business prospects, financial condition and results of
its operations.
On February 14, 1997, the Company commenced an action in the United
States District Court for the Eastern District of Virginia against the U.S.
Department of the Air Force to obtain an injunction against continuance of the
Government contract suspension. The Air Force moved for summary judgment. On
March 14, 1997, the District Court dismissed the Company's action with prejudice
and refused to grant the Company's motion for an injunction. The Company has
appealed the District Court's order to the Unites States Court of Appeals for
the Fourth Circuit. No opinion can be offered as to the outcome of the appeal.
Unasserted Claims:
By reason of a separate Grand Jury investigation, the Company was served
at various times with a series of Grand Jury subpoenas commencing in late
December 1993. The subpoenas, with which the Company complied, called for the
production of a variety of finance, accounting and other documents relating to
AMRAAMS. The prosecutor has not advised as to the theory of this investigation.
Based upon the documents subpoenaed, it appears that the inquiry relates to
finance and/or pricing matters. The Company regards charges or claims of
violations of Government laws and regulations as extremely serious and
recognizes that such charges or claims could have a material adverse affect on
it. In the event of an indictment and conviction against the Company in this
matter, the Government may seek fines, penalties, restitution, forfeitures,
treble damages or other conditional relief. The Company would also be subject to
the suspension and debarment regulations of the Department of Defense described
above. To date, no charges have been filed nor claims asserted against the
Company as a result of this Grand Jury investigation.
Environmental Matters:
In connection with an acquisition in 1987, the Company obtained certain
real estate which the U.S. Environmental Protection Agency proposed be added to
the National Priorities List which would subject the premises to the Superfund
requirements of the law. No estimate as to the cost to clean up the premises has
been made or provided to the Company. Pursuant to the terms of the purchase
agreement, the seller, a financially capable party, indemnified the Company from
any liabilities arising from this environmental matter. Since the Company is no
longer the owner of the property and has only secondary responsibility, it is
management's opinion that the outcome will not have a significant impact on the
Company's financial position or results of operations.
Other:
The Company is subject to various other legal proceedings and claims
which arise in the ordinary course of business. In the opinion of management,
the amount of ultimate liability with respect to these actions will not
materially affect the financial position of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
10. Notes Receivable - Common Stock
In October 1994, certain officers and employees acquired an aggregate
of 250,000 shares of the Company's common stock in the open market. The purchase
price of these shares of approximately $822,000 was financed by advances from
the Company to such officers and employees. The notes, collateralized by the
shares of common stock purchased, accrue interest at 1/2% above prime (8.25% at
date of issuance) which is payable and adjusted annually. The principal is due
in its entirety at the earlier of termination of employment or October 1999.
During the year ended April 30, 1997, certain officers and employees paid down
their notes in the aggregate amount of $305,000. During the year ended April 30,
1996, one of the officers left the Company and surrendered 25,000 shares
acquired under this arrangement. Accordingly, the related note receivable was
satisfied.
11. Employee Benefit Plans
Stock Options:
The Company has various Incentive Stock Option Plans ("ISOP's") for key
management employees (including officers and directors who are employees). The
ISOP's provide that eligible employees may be granted options to purchase an
aggregate of 900,000 shares of the Company's common stock. Under one Plan the
options are exercisable one year after the date of grant. Under the remaining
plans the options are exercisable over a four-year period beginning one year
after the date of grant. The options expire ten years after the date of grant
and are subject to certain restrictions on transferability of the shares
obtained on exercise. The options are granted at the discretion of the Stock
Option committee at an exercise price not less than the fair market value of the
Company's common stock on the date of grant.
Transactions under these plans, including the weighted average exercise
prices of the options, are as follows:
1997 1996 1995
--------------- --------------- ---------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 582,915 $5.15 543,071 $5.17 591,446 $5.18
Granted 21,500 $6.56 52,000 $4.88 -
Exercised (171,923) $5.17 - -
Expired or canceled (15,500) $5.23 (12,156) $5.12 (48,375) $5.30
------- ------- -------
Outstanding at end of year 416,992 $5.07 582,915 $5.15 543,071 $5.17
======= ======= =======
Exercisable at end of year 356,017 $5.17 494,915 $5.18 380,428 $5.15
======= ======= =======
Available for grant at
end of year 259,000 278,698 327,198
======= ======= =======
The weighted average remaining contractual life of options outstanding at
April 30, 1997 is 4.5 years. At April 30, 1997 and 1996, option prices per share
were from $4.875 to $6.562.
The excess of the consideration received over the par value of the
common stock or cost of treasury stock issued under these option plans has been
recognized as an increase in additional paid-in capital. No charges are made to
income with respect to stock options.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Restricted Stock Plan:
During fiscal 1990, the Company adopted a Restricted Stock Plan which
provides that key management employees may be granted rights to purchase an
aggregate of 250,000 shares of the Company's common stock. The grants,
transferability restrictions and purchase price are determined at the discretion
of a special committee of the board of directors. The purchase price may not be
less than the par value of the common stock.
1997 1996 1995
--------------- --------------- ---------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
Exercisable at beginning
of year 90,000 $6.00 25,000 $1.00 25,000 $1.00
Granted - 90,000 $6.00 -
Exercised - (25,000) $1.00 -
------- ------- -------
Exercisable at end of year 90,000 $6.00 90,000 $6.00 25,000 $1.00
====== ===== ====== ===== ====== =====
Balance of shares available
for grant at end of year 66,500 66,500 152,500
====== ====== =======
Transferability of shares is restricted for a four year period, except
in the event of a change in control as defined. Amounts shown as unearned
compensation in stockholders' equity represent the excess of the fair market
value of the shares over the purchase price at the date of grant which is being
amortized as compensation expense over the period in which the restrictions
lapse.
-----------------------
The Company applies the intrinsic value based method permitted by SFAS
No. 123 in accounting for the plans. Accordingly, no compensation expense has
been recognized other than for restricted stock awards. Had compensation cost
for stock option awards under the plans been determined based on the fair value
at the grant dates utilizing the Black-Scholes option pricing model, the
proforma effect on the Company's fiscal 1997 and 1996 net earnings would not
have been material.
Employee Stock Ownership Plan/Stock Bonus Plan:
During 1990 the Company amended its Stock Bonus Plan to become an
Employee Stock Ownership Plan (ESOP). This amendment became effective January 1,
1990. A loan in the amount of $5,000,000 was negotiated with a bank on May 22,
1990 to fund the Trust. The loan is for a ten year period with forty equal
quarterly installments of $125,000, plus interest at various rates at the
Company's option. The Company reacquired 374,435 shares of its common stock
during fiscal 1990. These shares plus approximately 340,000 additional shares
issued by the Company from its authorized, unissued shares were sold to the ESOP
in May 1990.
Shares are released for allocation to participants based on the ratio of
the current year's debt service to the sum of the current year's debt service
plus the principal to be paid for all future years. At April 30, 1997, 371,558
shares were allocated to participant accounts.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Effective May 1, 1994, the Company changed its method of accounting for
its ESOP in accordance with Statement of Position ("SOP") 93-6. In accordance
with SOP 93-6 the annual expense related to the leveraged ESOP, determined as
interest incurred on the note plus compensation cost based on the fair value of
the shares released was approximately $797,000, $515,000 and $479,000 for the
years ended April 30, 1997, 1996 and 1995, respectively. The effect of this
change on the statement of operations for the year ended April 30, 1995 was a
benefit of $208,000.
The SOP also requires that ESOP shares that are committed to be released
are considered outstanding for purposes of calculating earnings per share. The
fair value of unallocated shares approximates $2.1 million and $1.4 million at
April 30, 1997 and 1996, respectively.
Deferred Compensation Plan:
The Company has a program for key employees providing for the payment
of benefits upon retirement or death. Under the plan, these employees receive
specified retirement payments for the remainder of the employees' life with a
minimum payment of ten years' benefits to either the employee or their
beneficiaries. The plan also provides for reduced benefits upon early retirement
or termination of employment. The Company pays the benefits out of its working
capital but has also purchased whole life insurance policies on the lives of
certain of the participant's to cover the optional lump sum obligations of the
plan upon the death of the participant.
Deferred compensation expense charged to operations during the years
ended April 30, 1997, 1996, and 1995 was approximately $371,000, $774,000, and
$717,000, respectively.
Profit Sharing Plan:
The Company adopted a profit sharing plan and trust under section
401(k) of the Internal Revenue Code. This plan allows all eligible employees to
defer a portion of their income through voluntary contributions to the plan. In
accordance with the provisions of the plan, the Company can make discretionary
matching contributions in the form of cash or common stock. There were no such
contributions in fiscal 1997, 1996 or 1995.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees
which are based on operating profits of the Company. The Company also adopted a
plan for the President and Chief Executive Officer of the Company, which formula
is based on pre-tax profits. The Company charged $500,000 and $125,000 to
operations under these plans for the fiscal years ended April 30, 1997 and 1996,
respectively. The Company had no charges to operations for the fiscal year ended
April 30, 1995.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
12. Income Taxes
The provision for income taxes consists of the following (in thousands):
1997 1996 1995
---- ---- ----
Current Federal $ 40 $ 45 -
Current State and Local 160 155 $ 82
------ ----- -----
Current provision 200 200 82
Deferred tax provision (benefit) 2,124 298 (737)
(Reduction) increase in valuation
allowance (2,124) (298) 737
------ ----- -----
Total provision $ 200 $ 200 $ 82
====== ===== =====
The components of deferred taxes are as follows (in thousands):
1997 1996
---- ----
Deferred tax assets:
Accounts receivable $ - $ 84
Employee benefits 1,999 1,708
Inventory 276 643
Miscellaneous 2 3
Net operating loss carryforwards 5,072 4,542
----- -----
Total deferred tax asset 7,349 6,980
----- -----
Deferred tax liabilities:
Accounts receivable 2,248 -
Property, plant and equipment 2,493 2,248
----- -----
Total deferred tax liabilities 4,741 2,248
----- -----
Net deferred tax asset 2,608 4,732
Valuation allowance (2,608) (4,732)
----- -----
$ - $ -
====== ======
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
The following table reconciles the reported income tax expense
(benefit) with the amount computed using the federal statutory income tax rate.
1997 1996 1995
---- ---- ----
(In thousands)
Computed "expected" tax expense (benefit) $1,721 $1,027 ($1,352)
State and local tax, net of federal
benefit 106 102 55
Dividend received deduction (32) (21) (22)
Loss carryforward for which no tax
benefit was recorded 530 - 635
Benefit of loss carry forward - (619) -
(Reduction) increase in valuation
allowance (2,124) (298) 737
Other items, net, none of which
individually exceeds 5% of
federal taxes at statutory rates (1) 9 29
------ ----- -----
$ 200 $ 200 $ 82
====== ====== ======
At April 30, 1997, the Company has net operating loss carryforwards of
approximately $12 million which may be applied against future taxable income and
which expire in fiscal years 2008 through 2011.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
13. Industry and Operations
The Company is engaged in the manufacture and sale of precision time
and frequency control products for defense and space for U.S. Government end-use
and commercial communication and non-U.S. defense and space. As a result, the
Company's operations have been classified into two business segments as follows
(in thousands):
1997 1996 1995
---- ---- ----
Net sales:
Commercial $19,612 $11,220 $ 6,103
U.S. Government 8,317 13,872 17,978
Operating income (loss):
Commercial 3,242 2,140 (2,088)
U.S. Government 2,011 1,551 281
Corporate (2,578) (2,644) (4,218)
Identifiable assets:
Commercial 15,809 10,408 6,348
U.S. Government 20,571 23,103 27,606
Corporate 38,486 35,259 31,078
Depreciation:
Commercial 649 427 351
U.S. Government 253 517 615
Corporate 19 30 29
Capital expenditures:
Commercial 600 3 40
U.S. Government 271 327 128
Corporate 270 - -
Sales to Hughes Aircraft Company (HAC) and Space Systems Loral each
exceeded 10% of the Company's consolidated sales for the years ended April 30,
1997 and 1996. Collectively these two companies accounted for approximately 51%
and 39%, respectively, of the Company's consolidated sales for the same periods.
For the year ended April 30, 1995, sales to HAC, TRW and Raytheon Corp. exceeded
10% individually and 56% collectively of consolidated sales.
For the fiscal years ended April 30, 1997 and 1996, the sales to HAC
were substantially all for U.S. Government end-use while the sales to Space
Systems Loral were for commercial communication and foreign defense and space
applications. Sales to the above named customers in the fiscal year ended April
30, 1995 were substantially all for U.S. government end-use.
The loss by the Company of any one of these customers or, for those
customers contracting with the U.S. Government, the loss of any contracts which
are partially subcontracted to the Company, would have a material adverse effect
on the Company's business. The Company believes its relationship with these
companies to be mutually satisfactory and, except for the pending legal
proceedings discussed in Note 9, is not aware of any prospect for the
cancellation or significant reduction of any of their U.S. Government contracts
in which the Company is involved.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Export sales were as follows (in thousands):
1997 1996 1995
---- ---- ----
Korea $2,418 $1,858 $ 100
Canada 8 525 1,071
Italy 876 9 663
United Kingdom 519 871 671
Indonesia 359 427 21
France 690 225 7
Other 1,038 406 1,379
------ ------ ------
$5,908 $4,321 $3,912
====== ====== ======
14. Interim Results (Unaudited)
Quarterly results for fiscal years 1997 and 1996 are as follows (in
thousands, except per share data):
1997 Quarter
1st 2nd 3rd 4th
--- --- --- ---
Net sales $6,124 $6,576 $7,558 $7,671
Gross profit 2,237 2,395 2,720 2,502
Net earnings 939 1,210 1,342 1,372
*Income per share $0.20 $0.25 $0.27 $0.28
1996 Quarter
1st 2nd 3rd 4th
--- --- --- ---
Net sales $5,338 $5,576 $6,513 $7,665
Gross profit 1,337 1,979 2,224 2,863
Net earnings 256 971 913 682
*Income per share $0.05 $0.19 $0.19 $0.15
*Quarterly earnings per share data does not equal the annual amount
due to changes in the average common equivalent shares outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
15. Other Information
The following provides information about investing and financing
activities of the Company that affect assets or liabilities but do not result in
cash flow for the three years ended April 30, 1997, 1996 and 1995 and, therefore
are excluded from the Consolidated Statements of Cash Flows (in thousands):
1997 1996 1995
---- ---- ----
Declaration of cash dividend $746 - -
Sale of a building, classified as
asset held for sale in 1995, for
$2.3 million consisting of $500,000
in cash and a promissory note for
$1.8 million. - $1,800 -
Write-off of fully depreciated
fixed assets - 543 $6,634
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Description Balance Charged Charged
at to costs to other Balance at
beginning and accounts Deductions end of
of period expenses -describe -describe period
--------- -------- --------- --------- --------
Year ended April 30, 1997
Allowance for doubtful
accounts $483 $42 $335(a) $190
Year ended April 30, 1996
Allowance for doubtful
accounts $562 $580 $659(a) $483
Year ended April 30, 1995
Allowance for doubtful
accounts $562 - - $562
(a) Accounts written off
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
NONE
PART III
Item 10. Directors and Executive Officers of the Registrant
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
or about October 14, 1997.
Item 11. Executive Compensation
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
or about October 14, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
or about October 14, 1997.
Item 13. Certain Relationships and Related Transactions
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
or about October 14, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements and financial statement schedule are
listed below and are filed as part of this report.
Index to Financial Statements and Financial Statement Schedules
Included in Part II of this report:
Page(s)
Report of Independent Accountants 27
Consolidated Balance Sheets
April 30, 1997 and 1996 28-29
Consolidated Statements of Operations
-years ended April 30, 1997, 1996 and 1995 30
Consolidated Statements of Changes in Stockholders' Equity
- years ended April 30, 1997, 1996 and 1995 31
Consolidated Statements of Cash Flows
- years ended April 30, 1997, 1996 and 1995 32-33
Notes to Consolidated Financial Statements 34-51
(2) FINANCIAL STATEMENT SCHEDULES
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 52
Other financial statement schedules are omitted because they
are not required, or the information is presented in the
consolidated financial statements or notes thereto.
(3) EXHIBITS
Exhibit 23.1 - Consent of Independent Accounts. 65
The exhibits listed on the accompanying index to exhibits
beginning on page 55 are filed as part of this annual report.
(b) REPORTS ON FORM 8-K
Registrant's Forms 8-K, dated February 14, 1997 and March 14, 1997,
containing disclosure under Item 5 thereof, were filed with the
Securities and Exchange Commission during the quarter ended April 30,
1997.
INDEX TO EXHIBITS
ITEM 14(a)3
Certain of the following exhibits were filed with the Securities and
Exchange Commission as exhibits, numbered as indicated below, to the
Registration Statement or report specified below, which exhibits are
incorporated herein by reference:
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
1 (3) Copy of Ceritificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware (1) 3.1
2 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on March 27, 3.2
1981 (2)
3 (3) Copy of By-Laws of the
Registrant, as amended
to date (3) 3.3
4 (4) Specimen of Common Stock
certificate (1) 4.1
5 (10) Lease agreement as amended,
between Registrant and Hyde
Park Associates (predecessor
in interest to We're
Associates Company) (4) 10.1
1981 (2)
6 (10) Stock Bonus Plan of Registrant
and Trust Agreement
thereunder (4) 10.2
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
7 (10) Employment agreement
between Registrant and
Martin B. Bloch 10.3
8 (10) Employment agreement
between Registrant and
Abraham Lazar (4) 10.4
9 (10) Employment agreement
between Registrant and
John C. Ho (4) 10.5
10 (10) Employment agreement
between Registrant and
Marvin Meirs (4) 10.6
11 (10) Employment agreement
between Registrant and
Alfred Vulcan (4) 10.7
12 (10) Employment agreement
between Registrant and
Harry Newman (4) 10.8
13 (10) Employment agreement
between Registrant and
Marcus Hechler (4) 10.9
14 (10) Form of stock escrow
agreement between Vincenti &
Schickler as escrow agent
and certain officers of
Registrant (4) 10.10
15 (10) Form of Agreement concerning
Executive Compensation (2) 10.11
16 (10) Bond Purchase Agreement
between Nassau Country
Industrial Development Agency,
Long Island Trust Company,
The Bank of New York,
Bank Leumi Trust Company
of New York and Registrant (5) 16
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
17 (10) Five Million dollar
Industrial Development
Bonds of Registrant
with Nassau County
Industry Development
Agency (5) 17
18 (10) Lease Agreement between
Registrant and the Country
of Nassau (5) 18
19 (10) Assignment of Lease
between Registrant and
the County of Nassau by
Registrant to the Nassau
County Industrial
Development Agency and the
Acknowledgement and Consent
of the County of Nassau (5) 19
20 (10) Installment Sale Agreement
between the Nassau County
Industrial Development
Agency and Registrant, and
the promissory notes
of Registrant to the Nassau
Country Industrial Development
Agency and Long Island Trust
Company, The Bank of New York
and Bank Leumi Trust Company
of New York (5) 20
21 (10) Assignment of Installment Sale
Agreement between the Nassau
County Industrial Development
Agency and Registrant, from the
Nassau County Industrial
Development Agency to long
Island Trust Company, The Bank
of New York, Bank Leumi Trust
Company of New York, and the
Acknowledgement and Consent
of Registrant (5) 21
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
22 (10) Guaranty Agreement from
Registrant, Marlboro
Research Corporation,
Tek-Wave, Inc., Atomichron,
Frequency Electronics
International Corp. to Long
Island Trust Company, The
Bank of New York and Bank
Leumi Trust Company of
New York (5) 22
23 (10) Bill of Sale from Registrant
conveying personal property
to the Nassau County
Industrial Development
Agency (5) 23
24 (10) Leasehold Mortgage between
the Nassau County Industrial
Development Agency and Long
Island Trust Company, The
Bank of New York and Bank
Leumi Trust Company of New
York, and the Acknowledgment
and Consent of the
Registrant (5) 24
25 (10) Registrant's 1982 Incentive
Stock Option Plan (5) 25
26 (10) Amendment dated April 19,
1981 to Stock Bonus Plan
of Registrant and Trust
Agreement (3) 20.1
27 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
Secretary of State of
Delaware on October 26,
1984 (6) 27
28 (10) Registrant's 1984 Incentive
Stock Option Plan (6) 28
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
29 (10) Pledge and Assignment
dated December 1, 1985
between Registrant,
Nassau County Industrial
Development Agency and
National Westminster
Bank USA (7) 29
30 (10) Bond Purchase Agreement
dated December 1, 1985
between Registrant, Nassau
County Industrial
Development Agency and
National Westminster
Bank USA (7) 30
31 (10) Three Million Five Hundred
Thousand Dollar 1985
Industrial Development
Revenue Bond of Registrant
with Nassau County Industrial
Development Agency (7) 31
32 (10) Mortgage and Security
Agreement dated December 1,
1985 between Nassau County
Industrial Development Agency
and National Westminster
Bank USA (7) 32
33 (10) Sales Agreement dated
December 1, 1985 between
Nassau County Industrial
Development Agency and
Registrant (7) 33
34 (3) Three Million Five Hundred
Thousand Dollar Promissory
Note dated December 1,
1985 between Registrant,
Nassau County Industrial
Development Agency and
National Westminster
Bank USA (7) 34
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
35 (10) Guaranty dated December
1, 1985, between Registrant,
Marlboro Research Corporation,
Tek-Wave, Inc., Atomichron,
Inc., Frequency Electronics
International Corp. and
Brightline Corporation to National
Westminister Bank U.S.A (7) 35
36 (10) Registrant's Cash or Deferral
Profit Sharing Plan and
Trust under Internal Revenue
Code Section 401,
dated April 1, 1985 36
37 (22) List of subsidiaries of
Registrant (7) 37
38 (10) Computation of Earnings Included
Included in the Financial in the
Statement per Share of Financial
Common Stock Statements
39 (10) Amendment Restated Effective
as of May 1, 1984 of the
Stock Bonus Plan and Trust
Agreement of Registrant (7) 39
40 (28) Form 8-K dated January 20,
1987 and filed January 21,
1987 (File No. 1-8061) (8) No Number
41 (28) Form 8-K dated June 25,
1987 and filed June 26, 1987
(File No. 1-8061) (9) No Number
42 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with the
Secretary of State of Delaware
on October 22, 1986 (11) 42
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
43 (10) Amendment Restated Effective
as of May 1, 1984 of the Stock
Bonus Plan and Trust Agreement
of Registrant (11) 43
44 (2) Agreement of Purchase
and Sale between FEI
Microwave, Inc. and TRW
Microwave, Inc. dated as
of August 12, 1987 (10) 44
45 (3) Amended and Restated
Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on
October 26, 1987 (13) 45
46 (22) List of Subsidiaries
of Registrant (13) 46
47 (10) Employment agreement
between Registrant and
Charles Stone (12) 47
48 (10) Employment agreement
between Registrant and
Jerry Bloch (12) 48
49 (3) Employment agreement
between Registrant and
Joseph Kastenholz (12) 49
50 (10) Registrant's 1987
Incentive Stock Option
Plan (12) 50
51 (10) Registrant's Senior
Executive Stock Option
Plan (12) 51
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
52 (10) Amendment dated Jan. 1, 1988
to Registrant's Cash or
Deferred Profit Sharing Plan
and Trust under Section 401
of Internal Revenue Code (12) 52
53 (10) Amendment to Guarantee
dated as of Dec. 1, 1985
made by Registrant to
National Westminster Bank
USA ("Nat West") dated as
of Jan. 18, 1989 (12) 53
54 (10) Loan Agreement between
FEIM and Nat West dated as
of Jan. 18, 1989 (12) 54
55 (10) Note by FEIM in favor of
Nat West dated as of
Jan. 18, 1989 (12) 55
56 (10) Loan Agreement between
Tech 1 and Nat West dated
as of Jan. 18, 1989 (12) 56
57 (10) Note by Tech 1 in favor
of Nat West dated as of
Jan. 18, 1989 (12) 57
58 (10) Executive Incentive
Compensation Plan between
Registrant and various
employees (12) 58
59 (10) Amended Certificate of In-
corporation of the Registrant
filed with the Secretary of
State of Delaware on
November 2, 1989 (13) 59
60 (10) Registrant's Employee Stock
Option Plan (13) 60
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
61 (10) Loan Agreement between
Registrant and Nat West
dated May 22, 1990 (13) 61
62 (10) Loan Agreement between
Registrant's Employee
Stock Ownership Plan and
Registrant dated
May 22, 1990 (13) 62
63 (23.1) Consent of Independent
Accountants to incorporation
by reference of 1997 audit
report in Registrant's Form
S-8 Registration Statement. 63
NOTES:
(1) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-29609, which
exhibit is incorporated herein by reference.
(2) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-71727, which
exhibit is incorporated herein by reference.
(3) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061 for the year ended
April 30, 1981, which exhibit is incorporated herein by reference.
(4) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-69527, which
exhibit is incorporated herein by reference.
(5) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1982, which exhibit is incorporated herein by reference.
(6) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1985, which exhibit is incorporated herein by reference.
(7) Filed with the SEC as exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1986, which exhibit is incorporated herein by reference.
(8) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 8-K, dated January 15, 1987, which exhibit
is incorporated herein by reference.
(9) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 8-K, dated June 25, 1987, which exhibit is
incorporated herein by reference.
(10) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 8-K, dated August 12, 1987, which exhibit is
incorporated herein by reference.
(11) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1987, which exhibit is incorporated herein by reference.
(12) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1989, which exhibit is incorporated herein by reference.
(13) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1990, which exhibit is incorporated herein by reference.
------------------------
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement of Frequency Electronics, Inc. on Form S-8 of our report dated June
24, 1997, on our audits of the consolidated financial statements and financial
statement schedule of Frequency Electronics, Inc. as of April 30, 1997 and 1996,
and for the years ended April 30, 1997, 1996 and 1995, which report is included
in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Melville, New York
June 24, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
Registrant
By: /s/ Joseph P. Franklin
-----------------------
Joseph P. Franklin
Chairman of the Board
and Chief Executive Officer
By: /s/ Alan Miller
---------------
Alan L. Miller
Controller
Dated: July 28, 1997
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 dates indicated:
Signature Title Date
/s/ John Ho Director 7/28/97
---------------------
John Ho
/s/ Joel Girsky Director 7/28/97
---------------------
Joel Girsky
/s/ Martin B. Bloch President & Director 7/28/97
--------------------
Martin B. Bloch