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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
For the Fiscal Year ended April 30, 1999
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
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Common Stock(par value $1.00 per share) American Stock Exchange, Inc.
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 21, 1999 - $55,239,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 21, 1999 - 7,664,284.
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 20, 1999.
(Cover page 1 of 61 pages)
Exhibit Index at Page 54
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 or the Company are to
Frequency Electronics, Inc. and its subsidiaries. References to "FEI" are to the
parent company alone and do not refer to any of the 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 and its website is
www.frequencyelectronics.com.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 7,662,409 shares were
outstanding at April 30, 1999, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.
At its inception, the Company 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 Company'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, the
Company 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 terrestrial
wireless communications. The Company has segmented its operations into two
principal industries: commercial products for wireless communications which are
based either on the ground or in space and products used by the United States
Government for defense or space applications. The Company's space and
terrestrial 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.
The Company has focused its internal research and development on
re-engineering its core technologies for the commercial markets. During fiscal
1999, 1998 and 1997 approximately 77%, 82% and 70%, respectively, of the
Company's sales were for commercial products used for terrestrial or space-based
wireless communications and foreign governments. For the years ended April 30,
1999, 1998 and 1997, approximately 23%, 18% and 30%, respectively, of the
Company's sales were for U.S. Government end-use. The Company 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
During fiscal year 1999, the Company focused a significant portion of its
resources on the development of new products for a line of satellite transponder
components as well as augmenting and improving its existing line of terrestrial
wireless communication products. The Company incurred research and development
costs of approximately $5.8 million as compared to approximately $1.4 million in
each of the two preceding fiscal years. The Company is beginning to market its
current generation of generic satellite and new terrestrial wireless products.
See additional discussion under Research and Development efforts.
On November 17, 1998, the Company received $4.5 million in settlement of
its claim against Associated International Insurance Company under applicable
directors and officers insurance coverage. This payment related to legal fees
incurred by FEI in previous years in defense of certain litigation brought
against it by agencies of the U.S. Government.
On June 19, 1998, FEI and the United States Government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and Related Documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters with the Government. Under the terms of the Settlement
Agreement, FEI paid an aggregate of $8 million to the Government. These
settlement payments are reflected in the Company's consolidated results of
operations for the prior fiscal year ended April 30, 1998.
By letter dated October 21, 1998, the U.S. Department of the Air Force
concluded the proceedings with respect to FEI's Government contract suspension
and debarment, as of December 12, 1998, without condition. As a consequence, FEI
may engage in projects related to U.S. Government military and space related
efforts if it chooses to do so.
For a more complete description of the Litigations and their disposition
pursuant to the Settlement Agreement and the Government contract suspension and
debarment proceedings, reference is made to Item 3 of the Registrant's Annual
Report on Form 10-K for the year ended April 30, 1998, a copy of which is on
file with the Securities and Exchange Commission.
See Item 3 - Legal Proceedings, for additional information on these
matters.
REPORTABLE SEGMENTS
The Company designs, develops, manufactures and markets precision time and
frequency control products for two principal markets: (1) commercial wireless
communications applications, either space- or ground-based and (2) the
traditional heritage government and military markets.
The Company's products for the two reportable segments are similar in
function and are manufactured by the same personnel in a single production
facility. The Company has chosen these two reportable segments based upon the
regulatory environment (Federal Acquisition Regulations or "FAR") under which it
operates when dealing with U.S. Government procurement contracts versus the less
restrictive commercial environment.
Commercial Wireless Communications segment:
The Company 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. The Company has focused its internal research and
development on re-engineering its core technologies for the commercial markets.
As a result, the Company has experienced accelerating growth in commercial
revenues and anticipates continued substantial sales growth in these areas.
Space-based
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, the Company
manufactures the master clocks (quartz, rubidium and cesium) and other
significant timing products for many satellite communication systems. The
Company'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 Company's own instruments and as stand alone
products for space and satellite applications. The Company'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.
The Company's space-qualified products have been utilized by commercial
satellite programs such as Globalstar, Eutelsat, Inmarsat and Worldstar. New
products based on the Company'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 transponders.
Terrestrial
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. Wide-band
digital systems have a need for more accurate synchronization which is
accomplished through use of precise timing devices located throughout the
system. The Company 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.
U.S. Government segment:
During the fiscal years ended April 30, 1999, 1998 and 1997, approximately
23%, 18% and 30%, respectively, of the Company'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 Company is
not subject to adjustment by reason of the costs incurred by the Company 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 Company 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
Company's accounts with respect to these contracts. The Company 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 Company is entitled to receive compensation as provided under
such contracts and in the applicable U.S. Government regulations.
The Company's proprietary products have been 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 in use 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 two examples of the
programs in which the Company participates. The Company has manufactured 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 Company'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.
Sales summaries for the Commercial Wireless Communications and U.S.
Government markets during each of the last five years are set forth in Item 6
(Selected Financial Data). Segment information regarding revenues, operating
profits, depreciation and assets is more fully disclosed in Note 13 to the
accompanying financial statements.
PRODUCTS
The Company'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 Company'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.
Components - The Company'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 the Company'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.
Precision quartz oscillators use quartz resonators in conjunction with
electronic circuitry to produce signals with accurate and stable frequency. The
Company'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 Company 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 Company'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 Company'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 Company's products and also supplied
directly to customers, for space and other high reliability systems.
Efficient and reliable DC-DC power converters are manufactured for the
Company's own instruments and as stand alone products, for space and satellite
applications.
The Company manufactures filters and discriminators using its crystal
resonators for its own radio-frequency and microwave receiver, signal
conditioner and signal processor products.
Instruments - The Company'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 Company'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 Company's frequency standard is
used in communications, guidance and navigation and time synchronization. The
Company'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 digital timing for systems use. The atomic standard
manufactured by the Company 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 communications 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 Company 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 Company'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. The Company'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 the Company'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.
BACKLOG
As of April 30, 1999, the Company's consolidated backlog amounted to
approximately $21 million (see Item 7) and includes orders for the commercial
wireless communications segment of approximately $19 million. Approximately 55%
of this backlog is expected to be filled during the Company's fiscal year ending
April 30, 2000. Although the current backlog is comparable to the backlog at
April 30, 1998, the character of the backlog is changing. In previous years, the
backlog of custom-built products could represent 12 to 18 months of production.
As the Company evolves into a more product-oriented manufacturer and seller of
generic wireless communication products, its cycle-time will be significantly
reduced. Consequently, the backlog will be less predictive of future results.
The backlog, which includes firm purchase orders and contracts, 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 Company'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 Company markets its products both directly and through 27 independent
sales representative organizations located principally in the United States.
Sales to non-U.S. customers totaled approximately 20%, 18% and 21% of net sales
in fiscal years 1999, 1998 and 1997, respectively.
The Company's products are sold to a variety of customers, both commercial
and governmental. For the years ended April 30, 1999, 1998 and 1997,
approximately 23%, 18% and 30%, respectively, of the Company's sales were made
under contracts to the U.S. Government or subcontracts for U.S. Government
end-use.
Sales to Motorola Corp. ("Motorola") exceeded 10% of the Company's
consolidated sales for the year ended April 30, 1999. Sales to Space Systems
Loral ("SSL") and Motorola each exceeded 10% of the Company's consolidated sales
for the year ended April 30, 1998, and for the year ended April 30, 1997, sales
to Hughes Space and Communications ("HSC") and SSL each exceeded 10% of
consolidated sales. During the three years ended April 30, 1999, sales to SSL
and Motorola were made by the Company's commercial wireless communications
segment. Sales to HSC during this period were substantially for U.S. Government
end-use. The loss by the Company of any one of these customers would have a
material adverse effect on the Company's business. The Company believes its
relationship with these companies to be mutually satisfactory and is not aware
of any prospect for the cancellation or significant reduction of any of its
commercial or existing U.S. Government contracts.
The Company purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Company 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 Company has found its suppliers
generally to be reliable and price-competitive.
RESEARCH AND DEVELOPMENT
The Company's technological expertise has been an important factor in its
growth. Until a few years ago, virtually all of its research and development
activities had 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 Company 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.
The Company has focused its internal research and development efforts on
improving the core physics and electronic packages in its time and frequency
products. The Company 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 Company continues to focus a significant portion of its own resources
and efforts on developing hardware for commercial satellite and terrestrial
wireless communications systems which it anticipates will result in future
growth and increased profits. During fiscal 1999, 1998 and 1997, the Company
expended $5.8 million, $1.4 million, and $1.5 million of its own funds,
respectively, on such research and development activity. (See also Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.) For fiscal year 2000, the Company expects to spend from $3 million
to $4 million on research and development which will include completion of
development of the family of generic transponder components for the growing
commercial telecommunications satellite market as well as for other emerging
wireless communications technologies.
PATENTS AND LICENSES
The Company believes that its business is not dependent on patent or
license protection. Rather, it is primarily dependent upon the Company'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 Company are assigned to the Company and the Company 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. The Company does not believe that patents and
licenses are material to its business.
COMPETITION
The Company experiences intense competition with respect to all areas of
its business. The Company competes primarily on the basis of the accuracy,
performance and reliability of its products, the ability of its products to
function in severe environments encountered in space, prompt and responsive
contract performance, and the Company's technical competence and price. The
Company has a unique and broad product line which includes all three frequency
standards - quartz, rubidium, and cesium. The Company 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, all under one roof, provides the Company with an advantage over
many of its competitors.
Many of the Company's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs.
With respect to the cesium beam atomic clock, quartz crystal standard and
rubidium frequency standard, the Company competes with Hewlett-Packard Company,
Datum, Inc., and E. G. and G., Inc. The Company's principal competition for
space products is the in-house capability of its major customers.
EMPLOYEES
The Company employs 225 persons, none of whom are represented by labor
unions.
OTHER ASPECTS
The Company's business is not seasonal and no unusual working capital
requirements exist.
Item 2. Properties
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The Company occupies 93,000 square feet of a manufacturing and office
facility located in Mitchel Field, Long Island, New York. This facility is part
of the building which the Company constructed in 1981 and expanded in 1988 on
land leased from Nassau County. In January 1998, the Company sold this building
and the related land lease with the County of Nassau, to Reckson Associates
Realty Corp. ("Reckson"), and leased back the space which it presently occupies.
The Company leases its manufacturing and office space from Reckson under
an 11-year lease at an annual rental of $400,000 per year with the Company
paying its pro rata share of real estate taxes along with the costs of utilities
and insurance. The lease provides for two 5-year renewal periods, exercisable at
the option of the Company, with annual rentals of $600,000 during the first
renewal period and $800,000 during the second renewal period. Under the terms of
the lease, new office and engineering facilities for the Company were
constructed at the cost of Reckson. The leased space is adequate to meet the
Company's present and future operational needs.
The sale of its building to Reckson, a real estate investment trust whose
shares are traded on the New York Stock Exchange ("REIT"), was effected through
a tax-deferred exchange of the building for approximately 486,000 participation
units of Reckson Operating Partnership, L.P. ("REIT units") which were valued at
closing at $12 million. Each REIT unit is convertible into one share of the
common stock of the REIT. In addition, approximately 27,000 REIT units have been
placed in escrow which may be released to the Company based upon the price per
share of the REIT on the date of conversion of REIT units. Under the accounting
provisions for sale and leaseback transactions, the sale of this building is
considered a financing and the REIT units received are reflected as a noncurrent
liability while the related building continues to be reflected as an asset. Upon
liquidation of the REIT units, a portion of the resulting gain on this sale will
be deferred and recognized into income over the term of the leaseback with the
balance recognized in income on the date of liquidation. (See Note 6 to the
accompanying financial statements.)
Item 3. Legal Proceedings
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On June 19, 1998 FEl and the United States government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and related documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters, as follows:
1. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CR No. 93/1261 ("Indictment").
2. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CR No. 93/0176 ("Superseding Indictment"). (The
Indictment and Superseding Indictment are collectively
referred to as the "Criminal Cases").
3. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CV No. 93/5200 ("Fox Civil Case").
4. United States of America, ex rel, Howard B. Geldart,
Plaintiff-Relator vs. Frequency Electronics, Inc., Markus
Hechler, Harry Newman, Marvin Norworth and Steven Calceglia,
Defendants, United States District Court, Eastern District of
New York, CV No. 93/4750 ("Geldart qui tam Action").
5. AMRAAM/cesium Grand Jury investigation, United States District
Court, Eastern District of New York ("AMRAAM Investigation").
The foregoing matters are collectively referred to as the "Litigations". By
letter dated October 21, 1998, the Air Force concluded the proceedings with
respect to FEI's Government contract suspension and debarment as of December 12,
1998, without condition. For a more complete description of the Litigations and
their disposition pursuant to the Settlement Agreement and the Government
contract suspension and debarment proceedings, reference is made to Item 3 of
the Registrant's Annual Report on Form 10-K for the year ended April 30, 1998, a
copy of which is on file with the Securities and Exchange Commission.
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, 1992, to continue to have the file in the Muller Qui Tam Action
remain under seal. The complaint was served on FEI and Martin B. 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 named as parties defendant, Hughes Aircraft Company ("Hughes") and
Raytheon Company ("Raytheon"), along with several of their subsidiaries, 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 was stayed pending resolution of
the Criminal Cases. Since the disposition of the Criminal Cases, litigation has
resumed. To date, the parties have engaged in limited discovery since the
Government has determined that all classified and unclassified documents
relating to this action are deemed classified documents subject to Department of
Defense security regulations. As a result, extraordinary procedures have only
recently been put in place for purposes of conducting discovery.
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"). At
the time this action was instituted, all of the individual defendants named in
the complaint were directors of FEI, Martin B. Bloch was president and chairman
of the board of directors and Abraham Lazar was a vice-president. Joseph P.
Franklin is presently chairman of the board of directors, Lazar has retired and
is no longer a vice president. On January 24, 1994, plaintiff served an amended
complaint adding as named defendants Harry Newman, FEI's then
secretary/treasurer and Marvin Norworth, then 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 naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); 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 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 was 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. At the time this action was instituted, all of the
individual defendants named in the complaint were directors of FEI, Martin B.
Bloch was president and chairman of the board of directors and Abraham Lazar was
a vice president. Joseph P. Franklin is presently chairman of the board of
directors. Lazar has retired and is no longer a vice president.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); 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 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. Lazar has
retired and is no longer a vice president. Newman was FEI's secretary/treasurer
and is FEI's secretary and Norworth was FEI's contracts manager and is retired.
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 alleged
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 naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); 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 was otherwise stayed pending a disposition of the Indictment, Superseding
Indictment and related investigations until the further order of the Court. The
Indictment, Superseding Indictment and the related investigations have been
disposed of by reason of the Global Disposition. Since the disposition of the
Criminal Cases, the plaintiff in the Derivative Litigation has made an
application to resume the litigation and is presently seeking to serve an
amended complaint. FEI has determined to vigorously defend the Derivative
Litigation. Discovery has not commenced. No opinion can be offered as to the
outcome of the Motion(s) or with respect to the Derivative Litigation.
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 Fox Civil
Case, the Muller Qui Tam Action, the AMRAAM Investigation, the Geldart Qui Tam
Action, the Solash Action and the Katz Action. On November 17, 1998, FEI settled
its claim with Associated International Insurance Company and FEI received
payment from Associated in the amount of $4.5 million.
Certain disclaimers of coverage have been made by the remaining 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 $221,000, $741,000 and
$890,000 for fiscal years 1999, 1998 and 1997, respectively.
Government Contract Suspension and Debarment
By letter dated July 13, 1998, FEI was notified by the U.S. Department of
the Air Force that it terminated the suspension proceedings initiated against
FEI's president and director, Martin B. Bloch, its former vice president and
director, Abraham Lazar, its secretary/treasurer, Harry Newman and its former
contracts manager, Marvin Norworth, who has since retired. By letter dated July
9, 1998, FEI was notified by the U.S. Department of the Air Force of FEI's
debarment from Government contracting and from directly or indirectly receiving
the benefits of federal assistance programs. The debarment was based upon FEI's
guilty plea entered in connection with the Global Disposition and the Settlement
Agreement. The debarment was effective July 9, 1998. By letter dated October 21,
1998, the U.S. Department of the Air Force concluded the proceedings with
respect to the debarment and determined that the debarment of FEI would be
terminated on December 12, 1998, without condition. Such debarment, in fact,
terminated on December 12, 1998 and, as a consequence, FEI may engage in
projects related to U.S. Government military and space related efforts if it
chooses to do so.
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 1999.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
- ------- ----------------------------------------------------------------------
The Common Stock of the Company is listed on the American Stock Exchange
under the symbol "FEI". The following table shows the high and low sale price
for the Company's Common Stock for the quarters indicated, as reported by the
American Stock Exchange and as adjusted for the 3-for-2 stock split in the form
of a 50% stock dividend, effective October 31, 1997.
FISCAL QUARTER HIGH SALE LOW SALE
1999 -
FIRST QUARTER $19 3/8 $10
SECOND QUARTER 11 5 9/16
THIRD QUARTER 11 3/4 6 7/8
FOURTH QUARTER 9 1/8 6 3/16
1998 -
FIRST QUARTER $11 3/8 $ 6 3/8
SECOND QUARTER 19 1/2 10 13/16
THIRD QUARTER 20 13 1/8
FOURTH QUARTER 17 3/8 13 1/4
As of July 21, 1999, the approximate number of holders of record of common
stock was 833.
DIVIDEND POLICY
On March 24, 1997, the Company 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. The Board of Directors will determine dividend
amounts 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 profit (loss) for the five-year period ended April 30, 1999. The
information has been derived from the audited financial statements of the
Company for the respective periods.
Years Ended April 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Wireless Communications ............ $ 14,547 $ 26,364 $ 19,612 $ 11,220 $ 6,103
U.S. Government .................... 4,411 5,633 8,317 13,872 17,978
-------- -------- -------- -------- --------
Total Net Sales ..................... $ 18,958 $ 31,997 $ 27,929 $ 25,092 $ 24,081
======== ======== ======== ======== ========
Operating (Loss) Profit ............. $ (701)(1)($ 9,105)(2) $ 2,675 $ 1,047 ($ 6,025)
======== ======= ======== ======== ========
Net Earnings (Loss) ................. $ 1,173 $ 64 $ 4,863 $ 2,822 ($ 3,843)
======== ======= ======== ======== ========
Average Common Shares Outstanding (4)
Basic ............. 7,502,260 7,368,472 6,967,109 6,939,872 7,253,051
Diluted ........... 7,820,742 7,787,140 7,319,250 6,995,133 7,253,051
Earnings (Loss) per Common Share (4)
Basic ............. $ 0.16 $ 0.01 $ 0.70 $ 0.41 ($ 0.53)
======= ======= ======= ======= =======
Diluted ........... $ 0.15 $ 0.01 $ 0.66 $ 0.40 ($ 0.53)
======= ======= ======= ======= =======
Total Assets ........................ $ 78,355 $ 88,780 $ 74,866 $ 68,770 $ 65,032
======== ======== ======== ======== ========
Long-Term Obligations
and Deferred Items ............ $ 16,959 $ 18,841 $ 5,460 $ 14,877 $ 14,959
======== ======== ======== ======== ========
Cash dividend declared
per common share (4) ............ $ 0.20 $ 0.20 $ 0.10 -- --
======= ======= ======= ======= =======
(1) Includes insurance reimbursement of $4.5 million for legal fees related
to certain litigation with the U.S. Government.
(2) Includes litigation settlement of $8 million and U.S. Government-related
inventory writedowns and reserves of $4.8 million.
(3) In addition to items in (2) above, includes net gain on sale of buildings
of $4.9 million and the reversal of the valuation allowance on deferred
tax assets of $2.6 million.
(4) All share and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective
October 31, 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:
1999 1998 1997
---- ---- ----
Net Sales
Wireless Communications ........ 76.7% 82.4% 70.2%
U.S. Government ................ 23.3 17.6 29.8
----- ----- -----
100.0 100.0 100.0
Cost of Sales ...................... 68.5 80.9 64.7
Selling and administrative expenses 28.4 18.1 20.5
Insurance reimbursement ............ (23.7) -- --
Litigation settlement .............. -- 25.0 --
Research and development expenses .. 30.5 4.5 5.2
----- ----- -----
Operating (loss) profit ........ (3.7) (28.5) 9.6
Other income (expense) ............. 12.0 24.3 8.6
Provision (benefit) for income taxes 2.1 (4.4) 0.7
----- ----- -----
Net Earnings ................... 6.2% 0.2% 17.4%
===== ===== =====
Significant Fiscal 1999 & 1998 Events
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal 1999 and 1998 results of
operations were materially impacted by several specific events as well as a
strategic management decision. In fiscal 1999, the Company recovered $4.5
million from an insurance company related to legal expenses incurred in defense
of the Company's litigation with the U.S. Government. (Item 3. Legal Proceedings
and Note 9 to the financial statements) In addition, the Company recognized an
opportunity to provide generic satellite transponder components for the
anticipated growth in the space-based wireless telecommunications industry.
Accordingly, during fiscal 1999, the Company committed significant resources to
developing a line of generic satellite transponder products to meet the expected
demand while it also continued development of generic terrestrial wireless
communications products. The Company spent an aggregate of $5.8 million on
research and development efforts during the fiscal year as compared to
approximately $1.4 million in each of the preceding two years.
Fiscal 1998 results were impacted by: (1) the settlement of litigation with
the U.S. Government (Item 3. Legal Proceedings and Note 9 to the financial
statements); (2) the sale of its real estate holdings (Item 2. Properties and
Note 6 to the financial statements) and (3) the writedown or reserve for
inventories related to phasing out U.S. Government business. (Note 4 to the
financial statements)
In June 1998, the Company settled all outstanding criminal and civil cases
brought by the U.S. Government and made total payments of $8 million (Item 3.
Legal Proceedings). Accordingly, including related accrued litigation expenses,
the Company recorded a charge of $8.15 million against fiscal 1998 earnings.
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust, and leased back
a portion of the building which it occupies. (Item 2. Properties and Note 6 to
the financial statements.) In one sale transaction, the Company sold the
building which it had leased to Laboratory Corporation of America, receiving
cash of approximately $15.6 million and realizing a gain of approximately $5.4
million after selling expenses. A portion of the proceeds were used to repay the
$9 million loan obtained to finance the original construction of this building.
In the other sale, the Company effected a tax-deferred exchange of the building
which it occupies for approximately 486,000 participation units of Reckson
Operating Partnership, L.P. ("REIT units") which were valued at closing at $12
million. The Company leased back approximately 43% of this building from Reckson
and incurred approximately $500,000 of relocation expenses related to this
leaseback during fiscal 1998. Under the accounting provisions for sale and
leaseback transactions, most of the ultimate gain on this sale will be deferred
and recognized into income over the term of the lease with the balance
recognized in income upon sale or conversion of the REIT units into shares of
Reckson Associates Realty Corp., a publicly-traded company. Preceeding the sale
of its building, the Company prepaid the balance of its Nassau County Industrial
Development Bonds in the amount of $820,000, including accrued interest.
During fiscal 1998, the Company determined that a writeoff or reserve of
$4.8 million of certain work-in-progress and component parts inventory related
to U.S. Government programs was appropriate. These inventory adjustments result
from the Company's transformation to a commercial wireless telecommunications
equipment manufacturer as well as its expectation for reduced procurement
volumes by the U.S. Government due to both smaller Defense Department budgets
and the Government's migration to alternate technologies.
As of the end of fiscal 1999, the Company has utilized most of its tax net
operating loss carryforward. In addition, with the settlement of the U.S.
Government litigation, the uncertainty regarding realizability of the Company's
net deferred income tax asset was removed, thus eliminating the need for a
valuation allowance on such amount. Accordingly, during fiscal 1998, the Company
recorded a deferred tax benefit of $2.6 million (net).
Without these significant events, the Company's fiscal 1999 and 1998
operating profit, pre-tax earnings and net earnings would be materially
different from that reported in the financial statements as illustrated below:
1999 1998 1997
---- ---- ----
Operating (loss) profit- as reported ......... $ (701) $(9,105) $ 2,675
Less:
Insurance reimbursement .............. (4,500) -- --
Add back:
Litigation settlement and expenses ... -- 8,150 --
Inventory writedowns and reserves .... -- 4,764 --
------ ------- -------
Adjusted operating (loss) profit ............. (5,201) 3,809 2,675
------ ------- -------
Other income (expense) - as reported ......... 2,274 7,769 2,388
Less:
Gain on building sale, net of expenses -- (4,927) --
------ ------- -------
Adjusted Other income (expense) .............. 2,274 2,842 2,388
------ ------- -------
Adjusted pretax (loss) earnings .............. ($2,927) $ 6,651 $ 5,063
====== ======= =======
Operating (Loss) Profit
The operating loss for the year ended April 30, 1999, decreased by $8.4
million from fiscal 1998. Excluding the one-time items discussed above and as
shown in the preceding table, the Company would have incurred a loss of $5.2
million or a decrease of $9.0 million from fiscal 1998's adjusted operating
profit. This decline is due to the sizable increase ($4.3 million) in research
and development spending during fiscal 1999 versus fiscal 1998, coupled with a
$13 million decrease in sales volume in 1999 compared to fiscal 1998.
Operating profit for the year ended April 30, 1998 decreased by $11.8
million from fiscal 1997. Without the litigation settlement and the inventory
adjustments described above, the operating loss would have been a profit of $3.8
million or an increase of $1.1 million (42%) over fiscal 1997's results. This
results from the 15% increase in net sales, a relatively constant gross margin
rate (34% vs. 35%) and a small decline in selling and administrative expenses.
Net Sales
Net sales for fiscal 1999 decreased by $13 million (41%) over fiscal 1998
sales. The largest decline ($11.8 million or 45%) was in the commercial wireless
communications segment, principally in sales to the space industry. Significant
launch failures by the major satellite manufacturers in the past 18-month period
coupled with the economic slowdown in Asia, has resulted in major delays in new
satellite programs. This also led to lower levels of outsourcing for component
parts for existing satellite programs. Although detrimental to the current
year's financial results, the Company believes these program delays provide a
window of opportunity to complete development of its line of generic transponder
components before major satellite orders are released.
Sales of the Company's products to the terrestrial wireless communications
market were also negatively impacted by the Company's decision to renegotiate an
exclusive contract with a customer for the Company's VSAT product line. This
action resulted in a fiscal 1999 fourth quarter reduction of sales and cost of
sales of approximately $1.7 million and $1.0 million, respectively. During
fiscal 1999, the Company was developing this product for the customer under a
fixed-unit contract and recorded revenues through the third quarter of the year.
As a result of the renegotiations, the Company expects to remove the exclusivity
feature of the contract, thus broadening its customer base and increasing sales
of this product in the future.
Sales to the U.S. Government were down by $1.2 million (22%) from fiscal
1998 levels. The decrease in U.S. Government revenue was anticipated by the
Company as it de-emphasizes this aspect of its business.
Net sales in fiscal 1998 increased by $4.1 million (15%) over fiscal 1997
with sales to commercial wireless communications customers increasing by $6.8
million (34%). The increasing proportion of commercial wireless communications
sales illustrates the Company's successful transformation into a non-U.S.
Government provider of specialty timing devices for space and terrestrial
commercial wireless applications. Both fiscal 1998 and 1997 wireless
communications revenues reflect increasing sales of the Company's commercial
rubidium product line for application primarily in the cellular telephone
industry. Shipments of this product line have approximately doubled in each of
the last three years and are expected to continue to grow at a rapid pace as the
Company further advances its products into the marketplace.
The Company believes that its 37-year legacy in building high-reliability,
precision timing and frequency generation devices for U.S. Government programs
(principally DOD and NASA), uniquely positions it to successfully exploit the
much greater emerging commercial markets in wireless communications both in
space and on the ground. The Company therefore intends to focus its energies on
these markets and is de-emphasizing its business with the U.S. Government.
However, the Company will continue to fulfill its current contractual
obligations to U.S. Government programs and will make its proprietary technology
available for these programs. Consequently, in fiscal 2000 and beyond, the
proportion of sales to be generated from U.S. Government programs is expected to
continue to decline. This will be significantly offset by increasing demands for
the Company's wireless communications products used in commercial space hardware
and terrestrial base stations.
Gross margins
Gross margins for the fiscal year ended April 30, 1999, were 32% versus
19% overall in fiscal 1998. Excluding the inventory writedowns and reserves in
fiscal 1998's results, the gross margin rate realized in fiscal 1999 was 2% less
than fiscal 1998's 34% rate. The overall gross margin realized on U.S.
Government sales improved from 16% in fiscal 1998 to 18% in fiscal 1999 as the
Company completed certain low margin projects. Aggregate margins on the
Company's commercial wireless communications revenues declined from 38% to 35%.
Margins were negatively impacted by the lower volume of business that required a
smaller number of projects to absorb fixed costs.
Gross margins for the fiscal year ended April 30, 1998 were negatively
impacted by the inventory writedowns and reserves described above. Without such
charges, gross margins would have been 34%. During fiscal 1998, the
profitability of wireless communications programs versus U.S. Government
programs became more distinct. Aggregate gross margins on wireless
communications programs were 38%. U.S. Government programs showed margins of 16%
before inventory adjustments and recorded negative margins of 69% after such
adjustments.
Included in the Company's manufacturing overhead pool, a component of cost
of sales, is a charge for amortization of the Company's ESOP program (see Notes
11 and 12 to the financial statements). The Company recognizes an annual expense
based upon the average market value of the underlying shares of Company stock
which are allocated to the ESOP each year. As a result of the significant
increase in the value of the Company's stock during fiscal 1998, the charge to
ESOP amortization also increased significantly. The amount charged to the
Company's overhead pool was approximately $900,000 in fiscal 1999 and $1.2
million in fiscal 1998 compared to $552,000 in fiscal 1997. These amounts
include a substantial non-cash charge, as the actual cash obligation of the
Company is $500,000 annually through fiscal 2000. Without this excess
amortization charge, aggregate gross margins on the Company's wireless
communications sales during fiscal 1999 and 1998 would have improved by
approximately 1.5% and 2.5%, respectively. The impact of this charge in fiscal
1997 was negligible. If the Company's stock value remains at current or higher
levels during fiscal 2000, gross margins will continue to be dampened by the
additional noncash ESOP amortization expense. Despite this potential reduction
in margins, with the continuing growth in sales of its commercial wireless
communications products, the Company anticipates that future gross margins will
be significantly higher than that experienced during fiscal 1999.
Selling and administrative expenses
Selling and administrative costs in fiscal 1999 decreased by $407,000 (7%)
from those incurred in fiscal 1998. During fiscal 1999, the Company made
adjustments to deferred compensation benefits which resulted in a charge to
earnings which was approximately $800,000 greater than the normally expected
amortization expense (see Note 11 to the financial statements). Without that
adjustment and excluding the litigation settlement and related costs incurred in
fiscal 1998, the decline in selling and administrative costs would have been
$1.1 million (19%). This significant decrease in expenses is a result of greater
efficiencies gained from the move to new operating space (lower property taxes,
utility charges, and depreciation expense), lower legal fees due to the
settlement of the litigation with the U.S. Government, reduction in non-cash
charges tied to the value of the Company's stock and reduced accruals for
bonuses due to lower operating profits in fiscal 1999.
Selling and administrative costs, excluding the litigation settlement and
related costs, declined by $77,000 or 1% for the year ended April 30, 1998, over
fiscal 1997. This decline resulted from reduced litigation-related spending
during much of the fiscal year, reduced accrual for bonuses and lower deferred
compensation expense to certain officers. These reductions were offset by
increased spending for computer system expenses and stock-based compensation
amortization expenses, including $236,000 of ESOP amortization expense (see
discussion above under Gross Margins). The fiscal 1998 ESOP amortization is
$115,000 (95%) greater than the amount recorded in fiscal 1997 and exceeds the
actual cash outflow by $150,000.
As sales increase, the ratio of selling and administrative expenses to net
sales is expected to decrease. As a result of its June 1998 settlement of all
outstanding criminal and civil cases brought by the U.S. Government (see Item 3.
Legal Proceedings), the Company expects the future level of legal costs to be
significantly less than that experienced in the preceding two years. Because
fewer Company personnel are included in the selling and administrative category
than are engaged in the production process, the proportional impact of
increasing ESOP amortization will be less than that incurred in cost of sales.
Research and development expenses
The Company expended $5.79 million on research and development efforts
during fiscal 1999 compared to $1.44 million in fiscal 1998, an increase of $4.4
million or 302%. Such efforts also included developing the next generation of
commercial rubidium and VSAT products and other new products for the terrestrial
wireless communication markets and successfully designing more efficient
manufacturing procedures to keep its products competitive.
The level of effort in Company-funded research and development projects
during fiscal 1998 was comparable to that of fiscal 1997 with costs decreasing
by $20,000 (1%) from fiscal 1997 levels. Such costs reflect the successful
development of the early-generation rubidium and VSAT commercial product lines
(see Item 1. Business) but do not reflect satellite hardware development costs
which were partially funded by customer projects. While the Company retains
production rights to any technology which results from customer-funded,
non-recurring engineering efforts, the costs of such development are recorded in
cost of sales.
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 2000, the Company will continue to make a substantial investment of
capital and technical resources to complete development of the generic products
for the satellite transponder market, continue to invest in more efficient
product designs and manufacturing procedures and develop new products to meet
the needs of the wireless communications marketplace. Where possible, the
Company will attempt to secure partial customer funding for such development
efforts but is expecting to spend between $3 and $4 million of its own funds in
order to bring such products to market during fiscal 2000.
Other Income (Expense)
Other income (expense) declined by $5.5 million (71%) in fiscal 1999
compared to fiscal 1998 and increased by $5.4 million (225%) in fiscal 1998
compared to fiscal 1997. Excluding the $4.9 million net gain on the sale of the
Company's real estate holdings in fiscal 1998, other income (expense) decreased
by $568,000 (20%) in fiscal 1999 over fiscal 1998 and increased by $455,000
(19%) over fiscal 1997
During fiscal 1999, the Company realized increased investment income
($640,000 or 30%) over fiscal 1998. This increase is attributable to the fiscal
1999 realized gains on the sale of marketable securities of $678,000. Such gains
include a realized gain of $508,000 on the sale of 41,000 shares of stock which
the Company received as the result of a "spinoff" company from Reckson
Associates. Without these gains, fiscal 1999 investment income would have
decreased by $38,000 (2%) over fiscal 1998. This decline is attributable to the
Company's decision to invest a substantial portion of its marketable securities
in certain tax-free instruments which carry a lower interest rate. Fiscal 1998
investment income increased by $592,000 (38%) over fiscal 1997. This result is
due principally to an increase in income-earning assets over fiscal 1997 levels.
Such assets grew significantly in the last quarter of fiscal 1998 as a result of
the net proceeds from the real estate sales. In addition to interest income, the
Company also realizes quarterly dividend income on its REIT units. The Company
anticipates that investment income in future years will decline modestly due to
the lower level of interest rates on its tax-free investments and assuming a
relatively stable interest rate environment.
Interest expense in fiscal 1999 decreased by $342,000 or 51% from fiscal
1998 and fiscal 1998 interest expense decreased by $207,000 (24%) from fiscal
1997. During the third quarter of fiscal 1998, the Company repaid its real
estate-related loans thus realizing significant reductions in its interest
payments. As a result of the loan paydowns, declining debt balances and a stable
interest rate environment, the Company anticipates that interest expense will be
lower in fiscal 2000 when compared to earlier fiscal years.
Other income, net, in addition to the net gain on the sale of the
Company's real estate holdings also included rental income through December 1997
under the long-term direct finance lease with Laboratory Corporation of America.
Without the one-time gain, this category declined by $1.6 million during fiscal
1999 compared to fiscal 1998 and by $345,000 during fiscal 1998 from fiscal
1997. This decrease is principally attributable to the cessation of finance
lease income as a result of the sale of the leased property during January 1998.
In addition, the Company incurred costs during fiscal 1998 and early fiscal 1999
to move its operations to new and more efficient space within the leased back
property. The Company anticipates that in future years other income, net, will
be an insignificant contributor to pretax earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $59.8 million at April 30, 1999. Included in working
capital at April 30, 1999 is $39.3 million of cash, cash equivalents and
short-term investments, including approximately $12 million of REIT units which
are convertible to Reckson Associates Realty Corp. common stock. (see Note 6 to
the financial statements.) The Company's current ratio at April 30, 1999 is 13.2
to 1 compared to a 5.7 to 1 ratio at April 30, 1998. The lower ratio at April
30, 1998 is due to the accrual of $8 million related to the U.S. Government
litigation settlement which was paid in June 1998. Excluding such accrual from
both cash and accrued liabilities resulted in a current ratio of 12.4 to 1 at
April 30, 1998.
Net cash used in operating activities for the year ended April 30, 1999,
was approximately $1.8 million compared to $3.2 million provided by operations
for fiscal 1998. This decrease in cash inflow is due to increased levels of
research and development spending and the June 1998 $8 million litigation
settlement offset by receipt of $4.5 million from directors and officers
liability insurance coverage. Reversing a trend of the previous two years,
unbilled receivables decreased by $6.96 million (51%) as the Company shipped and
billed more product on maturing projects. Inventories have grown by $3.2 million
(50%) over fiscal 1998 levels as the Company builds more product to have
available for customers on a quick turn-around basis. Accounts payable and
accrued expenses, exclusive of the 1998 litigation accrual, decreased by 20%
from the balances at April 30, 1998. This decline is related to the timing of
the purchases of capitalizable assets related to the early fiscal 1999
relocation of the Company's office space within its leased back portion of the
building as well as smaller accruals for bonuses based on lower operating
profits in fiscal 1999.
Net cash used in investing activities for the year ended April 30, 1999,
was $3.7 million. The Company used $2 million (net) to acquire certain U.S.
government and agency securities and an additional $339,000 to acquire the
common stock of certain unrelated companies for investment purposes. 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 approximately $700,000 in production
equipment which will improve the efficiency of its manufacturing operations;
used an additional $500,000 to obtain new computer hardware and enterprise-wide
software to improve its financial and operational information systems and
acquired approximately $200,000 of furniture and fixtures for its newly
renovated office space. The Company will continue to acquire more efficient
equipment to automate its production process and intends to spend approximately
$1 million on capital equipment during fiscal 2000. Internally generated cash
will be adequate to acquire this capital equipment.
Net cash used by financing activities for the year ended April 30, 1999,
was $2.6 million. Of this amount, $1.54 million was used to pay the Company's
semi-annual cash dividends to shareholders, $665,000 was used to make regularly
scheduled long-term liability payments and $487,000 was used to acquire 70,000
shares of the Company's stock for treasury. These outflows were partially offset
by payments of $73,000 received from the sale of shares of common stock from
treasury to satisfy the exercise of stock options granted to certain employees.
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
products for wireless communication systems for commercial satellite programs
and terrestrial-based operations, which management believes will result in
future growth and continued profitability. During fiscal 2000, the Company will
continue to make a substantial investment of capital and technical resources to
complete development of the generic products for the satellite transponder
market, continue to invest in more efficient product designs and manufacturing
procedures and develop new products to meet the needs of the wireless
communications marketplace. Where possible, the Company will attempt to secure
partial customer funding for such development efforts but is expecting to spend
up to $4 million of its own funds in order to bring such products to market
during fiscal 2000. Internally generated cash will be adequate to fund these
development efforts.
As of April 30, 1999, the Company's consolidated backlog amounted to
approximately $21 million (see Item 7) and includes orders for the commercial
wireless communications segment of approximately $19 million. Approximately 55%
of this backlog is expected to be filled during the Company's fiscal year ending
April 30, 2000. Although the current backlog is comparable to the backlog at
April 30, 1998, the character of the backlog is changing. In previous years, the
backlog of custom-built products could represent 12 to 18 months of production.
As the Company evolves into a more product-oriented manufacturer and seller of
generic wireless communication products, its cycle-time will be significantly
reduced. Consequently, the backlog will be less predictive of future results.
The Company also has available for income tax purposes, approximately $1.7
million of net operating loss carryforwards which may be applied against future
taxable income.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk related to changes in interest rates
and market values of securities, including participation units in the Reckson
Operating Partnership, L.P. (REIT units; see Item 2. Properties and Note 6 to
the financial statements). The Company's investments in fixed income and equity
securities were $25.5 million and $13.2 million, respectively, at April 30,
1999. The investments are carried at fair value with changes in unrealized gains
and losses recorded as adjustments to stockholders' equity. The fair value of
investments in marketable securities is generally based on quoted market prices.
Typically, the fair market value of investments in fixed interest rate debt
securities will increase as interest rates fall and decrease as interest rates
rise. Based on the Company's overall interest rate exposure at April 30, 1999, a
10 percent change in market interest rates would not have a material effect on
the fair value of the Company's fixed income securities or results of operations
(investment income).
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
or hardware that have date-sensitive software or embedded computer chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
During the first quarter of fiscal 2000, the Company intends to complete
installation of newly acquired, integrated financial and manufacturing software,
the cost of which is not expected to exceed $500,000. The purchase of the
financial software will satisfactorily address the issue of compliance with the
year 2000 problem for financial transactions and reporting purposes. The Company
has sufficient resources to acquire, install and implement such software.
Beginning in the latter portion of fiscal 1998 and concluding during the
second quarter of fiscal 1999, the Company acquired new desktop computers of
sufficient size and speed to operate the new financial software. The cost of
these computers, included in capital equipment, was approximately $220,000. The
Company identified the additional operational, nonfinancial software which must
be obtained to resolve the year 2000 issue in certain production and support
areas. Such software will be installed by the end of the first quarter of fiscal
2000 at a cost of less than $50,000.
The Company's products do not contain imbedded microchips or other
components which are date sensitive. The same is generally true of the products
which are acquired from third-party vendors. Consequently, the Company's
products are already compliant with the year 2000. In addition, the Company has
received assurances from its "critical" vendors that their systems are or will
be Y2K compliant prior to the year 2000. Consequently, the Company does not
anticipate any interruption in services or supplies from vendors.
In the event its financial and manufacturing software is not timely
installed and the Company is unable to prepare appropriately dated invoices,
payments or other documentation, the Company will employ alternative strategies.
This will consist principally of hiring additional clerical personnel to assure
that the Company's records and documentation are properly and accurately
maintained until such time that the software implementation can be completed. In
the event one or more of its vendors suffers a "Y2K" failure, the Company will
obtain its component parts from other sources. Since the majority of the
important components used in the Company's products can be obtained from
multiple sources, the Company does not anticipate a problem in purchasing needed
parts as a result of Y2K issues. For those component parts, which can be
obtained from only a limited number of sources, the Company will evaluate the
need to increase its on-hand inventory prior to the end of calendar 1999.
OTHER MATTERS
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 the Company.
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 1999, as in the two prior fiscal years, the impact of
inflation on the Company's business has not been materially significant.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------
The information required by this item is included in the text in response
to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, above and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Frequency Electronics, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 53 present fairly, in all material
respects, the financial position of Frequency Electronics, Inc. and Subsidiaries
as of April 30, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended April 30, 1999 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) on page 53 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
July 13, 1999
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1999 and 1998
-----------
ASSETS: 1999 1998
---- ----
(In thousands)
Current assets:
Cash and cash equivalents ............... $ 567 $ 8,725
Marketable securities (Note 5) .......... 38,720 36,661
Accounts receivable, net of allowance for
doubtful accounts of $190 (Note 3) ... 12,190 18,640
Inventories (Note 4) .................... 9,696 6,475
Deferred income taxes (Note 12) ......... 2,336 5,000
Prepaid expenses and other .............. 1,182 986
------- -------
Total current assets ............. 64,691 76,487
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization (Note 6) ................. 9,489 9,159
Deferred income taxes (Note 12) ............. 500 --
Other assets ................................ 3,675 3,134
------- -------
Total assets ..................... $78,355 $88,780
======= =======
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1999 and 1998
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 1999 1998
---- ----
(In thousands)
Current liabilities:
Current maturities of long-term debt (Note 7) ...... $ 489 $ 479
Accounts payable - trade ........................... 837 1,283
Accrued liabilities (Note 8) ....................... 2,342 10,854
Dividend payable ................................... 766 771
Income taxes payable ............................... 455 145
------- -------
Total current liabilities .............. 4,889 13,532
Long-term debt, net of current maturities (Note 7).... -- 500
Deferred compensation (Note 11) ...................... 5,165 3,905
Deferred income taxes (Note 12) ...................... -- 2,400
Other liabilities (Note 6) ........................... 11,794 12,036
------- -------
21,848 32,373
------- -------
Commitments and contingencies (Notes 6 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 - 9,009,259 shares 9,009 9,009
Additional paid-in capital ......................... 36,940 36,306
Retained earnings .................................. 15,653 15,983
------- -------
61,602 61,298
Common stock reacquired and held in treasury -
at cost (1,346,850 shares in 1999 and
1,296,913 shares in 1998) .................... (4,058) (3,632)
Unamortized ESOP debt (Notes 7 and 11) ............ (500) (1,000)
Notes receivable-common stock (Note 10) ........... (287) (287)
Unearned compensation ............................. (47) (89)
Accumulated other comprehensive (loss) income ..... (203) 117
------- -------
Total stockholders' equity ................... 56,507 56,407
------- -------
Total liabilities and stockholders' equity ....... $78,355 $88,780
======= =======
The accompanying notes are an integral part of these
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 1999, 1998 and 1997
-----------
1999 1998 1997
---- ---- ----
(In thousands, except share data)
Net sales (Note 13) .......................... $ 18,958 $ 31,997 $ 27,929
-------- -------- --------
Cost of sales ................................ 12,985 25,870 18,075
Selling and administrative expenses (Note 9) . 5,384 5,791 5,718
Insurance reimbursement (Note 9) ............. (4,500) -- --
Litigation settlement (Note 9) ............... -- 8,000 --
Research and development expenses ............ 5,790 1,441 1,461
-------- -------- --------
Total operating expenses ............... 19,659 41,102 25,254
-------- -------- --------
Operating (loss) profit ............ (701) (9,105) 2,675
Other income (expense):
Investment income ...................... 2,775 2,135 1,543
Interest expense ....................... (330) (672) (879)
Other, net (Note 6) .................... (171) 6,306 1,724
-------- -------- --------
Earnings (Loss) before provision (benefit)
for income taxes .......................... 1,573 (1,336) 5,063
Provision (Benefit) for income taxes (Note 12) 400 (1,400) 200
-------- -------- --------
Net Earnings ................................. $ 1,173 $ 64 $ 4,863
======== ======== ========
Net Earnings per common share:
Basic .................................. $ 0.16 $ 0.01 $ 0.70
======== ======== ========
Diluted ................................ $ 0.15 $ 0.01 $ 0.66
======== ======== ========
Average shares outstanding (Note 2):
Basic ................................. 7,502,260 7,368,472 6,967,109
========= ========= =========
Diluted ............................... 7,820,742 7,787,140 7,319,250
========= ========= =========
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, 1999, 1998, and 1997
(In thousands, except share data)
Note Accumulated
Add'l Treasury stock receivable other
Common Stock paid in Retained (at cost) Unamortized common Unearned comprehensive
Shares Amount capital earnings Shares Amount ESOP debt stock compensation income (loss) Total
--------- ------ ------- -------- ------- ------- --------- ------ ------------ ---------- -------
Balance May 1, 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 of
marketable securities 24 24
Cash dividend (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
Exercise of stock options (83) (162,495) 938 855
Amortization of ESOP debt
as a result of shares
allocated 976 500 1,476
Shares issued under
restricted stock plan 15 (7,500) 42 (52) 5
Independent Contractor
stock options granted 208 208
Payment received for common
stock subscribed 148 148
Amortization of unearned
compensation 40 40
Increase in market value of
marketable securities 37 37
Stock dividend, 3-for-2 3,002,959 3,003 (3,007) 434,096 (4)
Cash dividend (1,488) (1,488)
Net Earnings 64 64
--------- ----- ------ ------ --------- ------ ------ ----- ------ ---- -------
Balance April 30, 1998 9,009,259 9,009 36,306 15,983 1,296,913 (3,632) (1,000) (287) ( 89) 117 56,407
Exercise of stock options 12 (20,063) 61 73
Purchase of treasury stock 70,000 (487) (487)
Amortization of Independent
Contractor stock options 58 58
Amortization of ESOP debt
as a result of shares
allocated 564 500 1,064
Amortization of unearned
compensation 42 42
Decrease in market value of
marketable securities (320) (320)
Cash dividend (1,503) (1,503)
Net Earnings 1,173 1,173
--------- ------ ------- ------- --------- ------- ------- ----- ----- ---- -------
Balance April 30, 1999 9,009,259 $9,009 $36,940 $15,653 1,346,850 ($4,058) ($500) ($287) ($ 47) ($203) $56,507
========= ====== ======= ======= ========= ======= ====== ===== ===== ==== =======
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, 1999, 1998 and 1997
-----------
1999 1998 1997
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net earnings .................................. $ 1,173 $ 64 $ 4,863
Adjustments to reconcile net earnings
to net cash (used in) provided by operating activities:
Deferred tax benefit ....................... (100) (2,600) --
Depreciation and amortization
Property ................................. 1,211 943 921
Other .................................... 13 20 18
Provision for losses on accounts
receivable and inventories ............... (200) 4,537 42
Gains on marketable securities and
notes receivable ......................... (678) (42) (70)
Gain on sale or disposal of
property, plant and equipment ............ -- (5,869) --
Amortization resulting from
allocation of ESOP shares ................ 1,064 1,476 672
Employee benefit plan provisions ........... 1,461 444 407
Noncash interest on finance lease .......... -- (15) (95)
Changes in assets and liabilities:
Accounts receivable .......................... 6,450 (3,843) (1,424)
Inventories .................................. (3,196) 48 (779)
Prepaid and other ............................ 312 247 (207)
Other assets ................................. (554) (579) (418)
Accounts payable - trade ..................... (446) 401 (497)
Litigation settlement accrual ................ (8,150) 8,150 --
Accrued liabilities .......................... (362) (217) 659
Income taxes payable ......................... 310 72 (6)
Other liabilities ............................ (137) (81) (37)
------- ------- -------
Net cash (used in) provided by
operating activities . (1,829) 3,156 4,049
------- ------- -------
Cash flows from investing activities:
Purchase of marketable securities ..............(22,920) (13,030) (25,927)
Proceeds from sale or redemption of marketable
securities .................................. 20,575 9,560 10,541
Capital expenditures ........................... (1,366) (1,043) (1,141)
Proceeds from sale of property, plant
and equipment -- 6,587 --
------- ------- -------
Net cash (used in) provided by
investing activities ..................... (3,711) 2,074 (16,527)
------- ------- -------
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1999, 1998 and 1997
(Continued)
-----------
1999 1998 1997
---- ---- ----
(In thousands)
Cash flows from financing activities:
Principal payments of long-term debt and
other long-term obligations ........... (665) (1,374) (751)
Purchase of treasury stock ................ (487) -- --
Payment of cash dividend .................. (1,539) (1,520) --
Payment on notes
receivable from employees ............. -- 148 305
Proceeds from loan receivable ............. -- 1,879 --
Exercise of stock options ................. 73 914 457
------- ------- -------
Net cash (used in) provided by
financing activities ................. (2,618) 47 11
------- ------- -------
Net (decrease) increase in cash and
cash equivalents ............................. (8,158) 5,277 (12,467)
Cash and cash equivalents at beginning of year . 8,725 3,448 15,915
------- ------- -------
Cash and cash equivalents at end of year ....... $ 567 $ 8,725 $ 3,448
======= ======= =======
Supplemental disclosures of cash flow information (Note 15):
Cash paid during the year for:
Interest ........................... $ 331 $ 766 $ 979
======= ======= =======
Income taxes ........................ $ 190 $ 1,128 $ 206
======= ======= =======
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". References to "FEI" are to the parent company alone and do not
refer to any of its subsidiaries). 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 wireless communications
and U.S. government business segments. 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
components, 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:
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred. On production-type contracts,
revenue is recorded as units are delivered with the related cost of sales
recognized on each shipment based upon a percentage of estimated final contract
costs. 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. Provisions for anticipated losses are made in the period in which they
become determinable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For smaller contracts and orders, sales of products and services to
customers are reported in operating results based upon shipment of the product
or performance of the services pursuant to contractual terms.
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
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:
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," became effective for the year ended April 30, 1998. In accordance
with SFAS 128, basic earnings per share are computed by dividing net earnings by
the weighted average number of shares of common stock outstanding. Diluted
earnings per share are computed by dividing net earnings by the sum of the
if-converted effect of unexercised stock options and the weighted average number
of shares of common stock.
All periods prior to April 30, 1998 have been restated to conform with the
requirements of SFAS 128.
All shares and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31, 1997.
Marketable Securities:
Marketable securities consist of investments in common stocks, mutual
funds, and debt securities of U.S. government agencies. In addition, as a result
of the sale of the Company's real estate holdings (Note 6), marketable
securities include participation units in the Reckson Operating Partnership,
L.P. ("REIT units") which are convertible to common shares of Reckson Associates
Realty Corp. Except for the REIT units and certain investments in common stock,
substantially all other marketable securities at April 30, 1999 and 1998 were
held in the custody of one financial institution. 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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock-based Plans:
The Company applies the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and continues to measure compensation
cost in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Historically, this has not resulted in
compensation cost upon the grant of options under a qualified stock option plan.
However, in accordance with SFAS No. 123, the Company provides pro forma
disclosures of net earnings (loss) and earnings (loss) per share as if the fair
value method had been applied beginning in fiscal 1996.
Newly Issued Accounting Standards
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 replaces the "industry segment"
approach with the "management" approach which is defined as the internal
organization used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position but did affect the disclosure of segment information. (See
Note 13 - Segment Information)
In fiscal 1999, the Company also adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and presentation of comprehensive income and its components in a full set of
financial statements. As shown in the Consolidated Statement of Changes in
Stockholders' Equity, comprehensive income includes all changes in equity during
a period, except those resulting from investments by and distribution to the
Company's stockholders. As this standard only requires additional information in
the financial statements, it does not affect the Company's results of operation
or financial position.
2. Earnings Per Share
Reconciliations of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Years ended April 30,
1999 1998 1997
--------- --------- ---------
Basic EPS Shares outstanding
(weighted average) ......... 7,502,260 7,368,472 6,967,109
Effect of Dilutive Securities ...... 318,482 418,668 352,141
--------- --------- ---------
Diluted EPS Shares outstanding ..... 7,820,742 7,787,140 7,319,250
========= ========= =========
Options to purchase 178,500 and 6,000 shares of common stock were
outstanding during the years ended April 30, 1999 and 1998, respectively, but
were not included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of the
Company's common shares during the respective periods. Since the inclusion of
such options would have been antidilutive they are excluded from the
computation. No options were excluded from the computation during the year ended
April 30, 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3. 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 $6,657,000 at April 30, 1999 and $13,618,000 at April 30,
1998. 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.
4. Inventories
Inventories, which are reported net of reserves of $1,054,000 and
$1,400,000 at April 30, 1999 and 1998, respectively, consisted of the following
(in thousands):
1999 1998
---- ----
Raw Materials and Component Parts $ 3,028 $ 2,857
Work in Progress 6,668 3,618
------- -------
$ 9,696 $ 6,475
======= =======
5. Marketable Securities
Marketable securities at April 30, 1999 and 1998 are summarized as follows
(in thousands):
April 30, 1999
Unrealized
Market Holding
Cost Value Gain (Loss)
---- ----- -----------
REIT units $ 12,000 $ 11,548 ($ 452)
Fixed income securities 25,376 25,484 108
Equity Securities 1,683 1,688 5
--------- --------- -----
$ 39,059 $ 38,720 ($ 339)
======== ======== =====
April 30, 1998
Unrealized
Market Holding
Cost Value Gain
---- ----- ------
REIT units $12,000 $12,000 -
Fixed income securities 23,200 23,253 $ 53
Equity Securities 1,344 1,408 64
--------- --------- -----
$ 36,544 $ 36,661 $ 117
======== ======== =====
Maturities of fixed income securities classified as available-for-sale at
April 30, 1999 are as follows (in thousands):
Current .................................. $11,576
Due after one year through five years .... 6,100
Due after five years through ten years.... 7,700
-------
$25,376
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
1999 1998
------- -------
Buildings and building improvements.. $ 8,751 $ 8,751
Machinery, equipment and furniture... 18,915 17,374
------- -------
27,666 26,125
Less, accumulated depreciation
and amortization .................. 18,177 16,966
------- -------
$ 9,489 $ 9,159
======= =======
Depreciation and amortization expense for the years ended April 30, 1999,
1998 and 1997 was $1,211,000, $943,000 and $921,000, respectively.
Maintenance and repairs charged to operations for the years ended April 30,
1999, 1998 and 1997 was approximately $353,000, $369,000 and $347,000,
respectively.
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust whose shares are
traded on the New York Stock Exchange ("REIT"). In one sale transaction, the
Company sold the building which it had leased to Laboratory Corporation of
America ("LCA"), receiving cash of approximately $15.6 million and realizing a
gain of approximately $5.4 million after selling expenses which amount is
included in "Other income, net."
In the other sale, the Company effected a tax-deferred exchange of the
building which it occupies for approximately 486,000 participation units of
Reckson Operating Partnership, L.P. ("REIT units") which were valued at closing
at $12 million. Each REIT unit is convertible into one share of the common stock
of the REIT after January 6, 1999. In addition, approximately 27,000 REIT units
have been placed in escrow which may be released to the Company based upon the
price per share of the REIT on the date of conversion of REIT units.
The Company leased back approximately 43% of the latter building from the
purchaser (the "Reckson lease"). Under the accounting provisions for sale and
leaseback transactions, the sale of this building is considered a financing and
the REIT units received are reflected as a noncurrent liability while the
related building continues to be reflected as an asset. Upon liquidation of the
REIT units, a portion of the resulting gain on this sale will be deferred and
recognized into income over the term of the leaseback with the balance
recognized in income on the date of liquidation. The Company's annual rental
payment of $400,000 is characterized as repayment of the financing with a
portion allocated to interest expense at an assumed interest rate of 6.5% and
the balance is considered repayment of principal. During the year ended April
30, 1999, the Company charged $194,000 to interest expense under the financing
agreement. Lease rental expense charged to operations under the Company's former
land lease with Nassau County and for certain equipment was approximately
$308,000 and $223,000, respectively, for the years ended April 30, 1998 and
1997.
The Reckson lease contains two five-year renewal periods at the option of
the Company. Annual rental payments are $400,000 for the initial 11-year term
which ends in January 2010. Under the terms of the lease the Company is required
to pay its proportional share of real estate taxes, insurance and other charges.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Future minimum lease payments required by the lease are as follows:
Years ending
April 30,
2000 $ 400
2001 400
2002 400
2003 400
2004 400
2005 and thereafter 1,867
------
$3,867
======
7. Long-Term Debt
Long-term debt consists of a note payable, originally in the amount of
$5,000,000, which was used to fund the purchase of 1,071,652 shares of the
Company's common stock for the Employee Stock Ownership Plan (ESOP). The note is
payable in forty equal quarterly installments of $125,000 through April 1, 2000
with interest at adjusted LIBOR plus 1.00% (6.439% at April 30, 1999). Dividends
received on ESOP shares ($11,000 and $21,000 at April 30, 1999 and 1998,
respectively) which have not been allocated to participant accounts are used to
pay a portion of the principal of this note. (see Note 11.) The note is
collateralized by a portion of the Company's common stock held in treasury.
1999 1998
---- ----
Outstanding balance ........ $489 $979
Less, current maturities.... 489 479
---- ----
Long-term debt ............. $ -- $500
==== ====
8. Accrued Liabilities
Accrued liabilities at April 30, 1999 and 1998 consist of the following (in
thousands):
1999 1998
------ ------
Litigation settlement (Note 9)... $ -- $ 8,150
Sales commissions ............... 797 800
Compensation .................... 512 753
Vacation accrual ................ 395 368
Other ........................... 638 783
------- -------
$ 2,342 $10,854
======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
9. Commitments and Contingencies
Litigation Settlement:
On June 19, 1998, FEI and the United States Government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and Related Documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters with the Government. Under the terms of the Settlement
Agreement, FEI paid an aggregate of $8 million to the Government. These
settlement payments are reflected in Registrant's consolidated results of
operations for the fiscal year ended April 30, 1998. Included in selling and
administrative expenses for that year are accruals for additional legal fees
related to this settlement in the amount of $150,000.
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 naming FEI, as a nominal defendant, and
its directors at the time and certain of its officers and employees as
defendants and, generally alleges, based upon a November 1993 federal grand jury
indictment, that they defrauded the government, submitted false statements and
invoices on government projects, destroyed and altered records, and made false
statements and submitted false documents to government officials (The indictment
has been dismissed with prejudice. FEI pled guilty to a single charge under a
superseding indictment, of submitting a false statement which failed to disclose
the full explanation of costs on a highly classified government project, and the
superseding indictment was otherwise dismissed with prejudice as to all
defendants. The indictment and superseding indictment generally contained
similar allegations.); and that, as a result FEI is exposed 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 FEI and the conduct of its personnel. 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 complaint seeks
judgment against the directors 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 professional fees. FEI and the other defendants have
denied the allegations of and intend vigorously to contest the derivative
actions. These actions were stayed pending disposition of the criminal cases
covered by the Settlement Agreement. The plaintiff is presently seeking to serve
an amended complaint and vacate the stay.
Qui Tam Action:
In March 1994, a qui tam action brought by Ralph Muller, a former FEI
employee, was served upon FEI and Martin Bloch, its president. A qui tam action
is an 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 complaint alleges that FEI, 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. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
$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. 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 action and Muller is proceeding with
the action on behalf of the Government.
The Company and Mr. Bloch have denied the allegations of and intend to
vigorously defend the qui tam action. On April 11, 1997, the Court ordered the
qui tam action stayed pending resolution of the criminal cases. Since the
disposition of the criminal cases, litigation has resumed. Limited discovery has
taken place due to the government's determination that all documents related to
this action are classified which has necessitated extraordinary procedures,
recently put in place, for purposes of conducting discovery.
Company Position and Legal Fees:
FEI 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 FEI 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, FEI 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 litigation settlement and the above matters of approximately $221,000,
$741,000 and $890,000 for the fiscal years ended April 30, 1999, 1998 and 1997,
respectively.
On November 17, 1998, the Company received $4.5 million in settlement of
its claim against Associated International Insurance Company under applicable
directors and officers insurance coverage. This payment related to legal fees
incurred by FEI in previous years in defense of the litigation brought against
it by agencies of the U.S. Government.
Government Contract Suspension and Debarment:
By letter dated July 13, 1998, FEI was notified by the U.S. Department of
the Air Force that it terminated the suspension proceedings initiated against
FEI's president and director, Martin B. Bloch, its former vice president and
director, Abraham Lazar, its secretary/treasurer, Harry Newman and its former
contracts manager, Marvin Norworth, who has since retired. By letter dated July
9, 1998, FEI was notified by the U.S. Department of the Air Force of FEI's
debarment from Government contracting and from directly or indirectly receiving
the benefits of federal assistance programs. The debarment was based upon FEI's
guilty plea entered in connection with the Global Disposition and the Settlement
Agreement. The debarment was effective July 9, 1998. By letter dated October 21,
1998, the U.S. Department of the Air Force concluded the proceedings with
respect to the debarment and determined that the debarment of FEI would be
terminated on December 12, 1998, without condition. Such debarment, in fact,
terminated on December 12, 1998 and, as a consequence, FEI may engage in
projects related to U.S. Government military and space related efforts if it
chooses to do so.
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 STATEMENTS - Continued
10. Notes Receivable - Common Stock
In October 1994, certain officers and employees acquired an aggregate of
375,000 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 (9.0% at
April 30, 1999) which is payable and adjusted annually. The principal is due in
its entirety at the earlier of termination of employment or October 1999. No
payments were made during fiscal 1999. During the years ended April 30, 1998 and
1997, certain officers and employees made payments on their notes in the
aggregate amount of $148,000 and $305,000, respectively.
11. Employee Benefit Plans
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 1999, 1998 or 1997.
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 incurred no expenses for such bonuses for
the year ended April 30, 1999 due to lower operating profits. The Company
charged $490,000 and $500,000 to operations under these plans for the fiscal
years ended April 30, 1998 and 1997, respectively.
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 1,350,000 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.
During fiscal 1998, the Company established an Independent Contractor Stock
Option Plan under which up to 200,000 shares may be granted. An Independent
Contractor Stock Option Committee determines to whom options may be granted from
among eligible participants, the timing and duration of option grants, the
option price, and the number of shares of common stock subject to each option.
During the year ended April 30, 1998, the Company granted options to acquire
112,500 shares at a price of $15.75, the then fair market value of the Company's
common stock. Of the shares granted, 22,750 are exercisable immediately, 29,750
are exercisable one year from grant date, 30,000 are exercisable two years from
grant date, and 30,000 are exercisable three years from grant date. For the
years ended April 30, 1999 and 1998, the Company recognized compensation expense
of $58,000 and $208,000, respectively, as a result of these stock option grants.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
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 the ISOP's.
Transactions under these plans, including the weighted average exercise
prices of the options, are as follows:
1999 1998 1997
---------------- ---------------- ---------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
Outstanding at
beginning of year ...... 618,188 $ 6.84 625,489 $ 3.38 874,373 $3.43
Granted .................. 325,000 $ 8.25 219,000 $13.08 32,250 $4.38
Exercised ................ (20,063) $ 3.72 (216,551) $ 3.48 (257,884) $3.45
Expired or canceled ...... (18,000) $10.84 (9,750) $ 5.64 (23,250) $3.48
------- ------- -------
Outstanding at end of year 905,125 $ 7.34 618,188 $ 6.84 625,489 $3.38
======= ======= =======
Exercisable at end of year 476,846 $ 5.51 396,736 $ 4.29 534,026 $3.44
======= ======= =======
Available for grant at
end of year ............ 64,000 377,000 388,500
======= ======= =======
Weighted average fair value
of options granted during
the year ................ $4.26 $4.39 $1.80
===== ===== =====
The weighted average remaining contractual life of options outstanding at
April 30, 1999 and 1998 is 6.5 and 5.7 years, respectively. At April 30, 1999,
1998 and 1997, option prices per share were from $3.25 to $18.875.
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 375,000 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.
1999 1998 1997
---------------- ---------------- ---------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
Exercisable at beginning
of year..................... 105,000 $3.98 135,000 $4.00 135,000 $4.00
Granted .................... 1,500 $1.00 7,500 $0.67 -- --
Expired .................... (7,500) $4.00 -- -- -- --
Exercised .................. -- (37,500) $3.40 -- --
------- ------- -------
Outstanding at end of year . 99,000 $3.93 105,000 $3.98 135,000 $4.00
======= ===== ======= ===== ======= =====
Exercisable at end of year . 98,000 $3.96 105,000 $3.98 135,000 $4.00
======= ===== ======= ===== ======= =====
Balance of shares available
for grant at end of year . 98,250 92,250 99,750
======= ====== ======
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company applies the disclosure-only provision for 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 consistent with the provisions of SFAS No. 123, the pro forma
effect on the Company's financial statements would have been as follows:
1999 1998 1997
---- ---- ----
Net Earnings, as reported .......... $ 1,173 $ 64 $ 4,863
======= ====== =======
Net Earnings (Loss)- pro forma ..... $ 843 ($ 69) $ 4,818
======= ====== =======
Earnings per share, as reported:
Basic ........................... $ 0.16 $ 0.01 $ 0.70
====== ====== ======
Diluted ......................... $ 0.15 $ 0.01 $ 0.66
====== ====== ======
Earnings (Loss) per share- pro forma
Basic ........................... $ 0.11 ($ 0.01) $ 0.69
====== ====== ======
Diluted ......................... $ 0.11 ($ 0.01) $ 0.66
====== ====== ======
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively: dividend yield of 1.5% and 3.0%; expected volatility of 47%, 37%
and 40%; risk free interest rate (ranging from 6.5% to 8.0%); and expected lives
ranging from seven to ten years.
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 561,652 shares of its common stock during fiscal
1990. These shares plus approximately 510,000 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. Through April 30, 1999,
653,851 shares have been allocated to participant accounts.
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 $1,064,000, $1,569,000 and $797,000 for
the years ended April 30, 1999, 1998 and 1997, respectively.
The SOP also requires that ESOP shares that are committed to be released
be considered outstanding for purposes of calculating earnings per share. The
fair value of unallocated shares approximates $830,000 and $3.5 million at April
30, 1999 and 1998, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Deferred Compensation Plan:
The Company has a program for key employees providing for the payment of
benefits upon retirement or death. Under the plan, each key employee receives
specified retirement payments for the remainder of the employee's life with a
minimum payment of ten years' benefits to either the employee or his
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 participants to cover the optional lump sum obligations of the
plan upon the death of the participant.
During fiscal 1999, the Company made modifications to the benefits of
certain employees and added two new participants. Accordingly, for the year
ended April 30, 1999, the Company charged approximately $1.36 million to
deferred compensation expense, including approximately $800,000 to account for
the benefit modifications. Deferred compensation expense charged to operations
during the years ended April 30, 1998 and 1997 was approximately $227,000 and
$371,000, respectively.
12. Income Taxes
The provision (benefit) for income taxes consists of the following (in
thousands):
1999 1998 1997
---- ---- ----
Current Federal .................. $ 300 $ 225 $ 40
Current State and Local .......... 200 975 160
------ ------ ------
Current provision ....... 500 1,200 200
Deferred tax (benefit) provision . (100) 8 2,124
Reduction in valuation allowance . -- (2,608) (2,124)
------ ------ ------
Total provision (benefit) $ 400 ($1,400) $ 200
====== ====== ======
The following table reconciles the reported income tax expense (benefit)
with the amount computed using the federal statutory income tax rate
1999 1998 1997
---- ---- ----
(In thousands)
Computed "expected" tax expense (benefit) ....... $ 535 ($ 454) $1,721
State and local tax, net of federal benefit ..... 161 640 106
Excess ESOP amortization ........................ 192 332 --
Nondeductible expenses .......................... 35 361 --
Nontaxable investment income .................... (145) (62) (32)
Research & Development Tax Credit ............... (330) -- --
Loss carryforward for which no tax
benefit was recorded - ........................ -- -- 530
Adjustment to deferred tax balances
due to tax rates .............................. -- 374 --
Reduction in valuation allowance ................ -- (2,608) (2,124)
Other items, net, none of which individually
exceeds 5% of federal taxes at statutory rates (48) 17 (1)
----- ------ -----
$ 400 ($1,400) $ 200
===== ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The components of deferred taxes are as follows (in thousands):
1999 1998
---- ----
Deferred tax assets:
Employee benefits ................ $2,594 $2,138
Litigation settlement ............ -- 3,040
Inventory ........................ 518 803
Accounts receivable .............. 76 --
Marketable securities ............ 136 --
Research & Development Credit .... 640 --
Net operating loss carryforwards.. 688 614
Miscellaneous .................... 11 8
------ ------
Total deferred tax asset ...... 4,663 6,603
------ ------
Deferred tax liabilities:
Accounts receivable .............. -- 2,302
Property, plant and equipment .... 1,827 1,701
------ ------
Total deferred tax liabilities ... 1,827 4,003
------ ------
Net deferred tax asset ................. $2,836 $2,600
====== ======
At April 30, 1999, the Company has net operating loss carryforwards of
approximately $1.7 million which may be applied against future taxable income
and which expire in fiscal years 2008 through 2012.
13. Segment Information
In fiscal 1999, the Company adopted SFAS 131. The prior year's segment
information has been restated to present the Company's two reportable segments
for each of the three years ended April 30, 1999.
The Company's reportable segments are:
(1) Commercial wireless communications - consists principally of time
and frequency control products used in two principal markets-
commercial communication satellites and terrestrial cellular
telephone or other ground-based telecommunication stations.
(2) U.S. Government - consists of time and frequency control products
used for national defense or space-related programs.
The accounting policies of the two segments are the same as those
described in the "Summary of Significant Accounting Policies." The Company
evaluates the performance of its segments and allocates resources to them based
on operating profit which is defined as income before investment income,
interest expense and taxes. The Company operates out of a single manufacturing
facility and both segments share the same managers, manufacturing personnel, and
machinery and equipment. Consequently, segment data includes allocations of
depreciation and corporate-wide general and administrative charges. Segment
assets consist principally of inventory and accounts receivable. All other
assets are assigned to the corporation for the benefit of both segments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The table below presents information about reported segments for each of
the years ended April 30 with reconciliation of segment amounts to consolidated
amounts as reported in the statement of operations or the balance sheet for each
of the years:
1999 1998 1997
---- ---- ----
Net sales:
Wireless Communications ............... $ 14,547 $ 26,364 $ 19,612
U.S. Government ....................... 4,411 5,633 8,317
-------- -------- --------
Consolidated Sales ................. $ 18,958 $ 31,997 $ 27,929
======== ======== ========
Operating (loss) profit:
Wireless Communications ............... ($ 4,682) $ 6,130 $ 3,242
U.S. Government ....................... (137) (4,522) 2,011
Corporate ............................. 4,118 (10,713) (2,578)
-------- -------- --------
Consolidated Operating (Loss) Profit ($ 701) ($ 9,105) $ 2,675
======== ======== ========
Identifiable assets:
Wireless Communications ............... $ 16,968 $ 18,701 $ 11,981
U.S. Government ....................... 4,918 6,415 13,876
Corporate ............................. 56,469 63,664 49,009
-------- -------- --------
Consolidated Identifiable Assets ... $ 78,355 $ 88,780 $ 74,866
======== ======== ========
Depreciation (allocated):
Wireless Communications ............... $ 910 $ 698 $ 649
U.S. Government ....................... 282 226 253
Corporate ............................. 19 19 19
-------- -------- --------
Consolidated depreciation expense .. $ 1,211 $ 943 $ 921
======== ======== ========
Major Customers
Sales to one customer in the wireless communications segment were
approximately $6.5 million or 45% of that segment's revenues and 34% of
consolidated sales for fiscal 1999. In the U.S. Government segment, sales to two
customers accounted for $2.3 million of sales or 53% of the segment's revenue
and 12% of consolidated revenue. Neither U.S. Government customer accounted for
more than 10% of consolidated revenue.
During fiscal year 1998, sales to two customers accounted for
approximately $8.9 million and $6.9 million, respectively, of the wireless
communications segment's total sales. These amounts represent 60% of the
wireless communications total revenues and 49% of consolidated sales.
During fiscal year 1997, wireless communications segment sales included
revenues of $11.1 million from one customer (57% of segment sales and 40% of
consolidated sales); and U.S. Government segment sales included $2.9 million
from one customer (35% of segment sales and 10% of consolidated sales).
The loss by the Company of any one of these customers would have a
material adverse effect on the Company's business. The Company believes its
relationship with these companies to be mutually satisfactory.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Foreign Sales
Revenues in the wireless communications segment include sales to
foreign governments or to companies located in foreign countries. Revenues,
based on the location of the procurement entity, were derived from the following
countries (in thousands):
1999 1998 1997
---- ---- ----
France .......... $ 987 $ 855 $ 690
Korea ........... 638 1,881 2,418
United Kingdom... 811 1,003 519
Italy ........... 277 1,427 876
Other ........... 1,028 518 1,405
------ ------ ------
$3,741 $5,684 $5,908
====== ====== ======
14. Interim Results (Unaudited)
Quarterly results for fiscal years 1999 and 1998 are as follows (in
thousands, except per share data):
1999 Quarter
------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales ................... $ 7,015 $ 6,180 $ 3,060 $ 2,703
Gross profit ................ 2,389 2,025 888 671
Net earnings (loss) ......... 518 3,209 (1,357) (1,197)
*Earnings (loss) per share
Basic ....... $ 0.07 $ 0.43 ($ 0.18) ($ 0.16)
Diluted ..... $ 0.07 $ 0.41 ($ 0.18) ($ 0.16)
The Company decided to renegotiate an exclusive fixed unit contract with
a customer for one of the Company's wireless communications products. This
action resulted in a fiscal 1999 fourth quarter reduction of sales and cost of
sales of approximately $1.7 million and $1.0 million, respectively. During the
fourth quarter, the Company also recorded an additional $800,000 accrual to
deferred compensation expense as a result of benefit modifications. (see Note
11)
1998 Quarter
------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales ................... $ 7,301 $ 8,016 $ 8,033 $ 8,647
Gross profit ................ 2,481 2,934 371 341
Net earnings (loss) ......... 1,398 1,633 2,380 (5,347)
*Earnings (loss) per share
Basic ....... $ 0.19 $ 0.22 $ 0.32 ($ 0.71)
Diluted ..... $ 0.18 $ 0.21 $ 0.31 ($ 0.71)
During the fourth quarter of fiscal 1998, the Company recorded an
accrual of $8 million for the litigation settlement (Note 9- Commitments and
Contingencies) and wrote off or reserved against inventory related to certain
government programs in the amount of $2.5 million.
*Quarterly earnings per share data does not equal the annual amount due
to changes in the average common equivalent shares outstanding. All per
share amounts have been adjusted to reflect a 3-for-2 stock split in the
form of a 50% dividend, effective October 31, 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. Other Information
The following provides information about investing and financing activities
of the Company that affect assets or liabilities but did not result in cash flow
for the three years ended April 30, 1999, 1998 and 1997 and, therefore, are
excluded from the Consolidated Statements of Cash Flows (in thousands):
1999 1998 1997
---- ---- ----
Declaration of cash dividend ........... $ 766 $ 771 $ 746
3-for-2 stock split in the form of a 50%
stock dividend ..................... -- 3,003 --
Proceeds from sale of LCA building
used to pay down construction loan . -- 9,000 --
REIT units received in connection
with building sale ................. -- 12,000 --
Transfer of work-in-process inventory
to equipment ....................... 175 -- --
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, 1999
Allowance for doubtful
accounts $190 $36 $36(a) $190
Inventory reserves $1,400 $150 $496(b) $1,054
Year ended April 30, 1998
Allowance for doubtful
accounts $190 $49 $49(a) $190
Inventory reserves $350 $4,488 $3,438(b) $1,400
Year ended April 30, 1997
Allowance for doubtful
accounts $483 $42 $335(a) $190
Inventory reserves $940 $590(b) $350
(a) Accounts written off
(b) Inventory disposed or 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 Company
- -------- -----------------------------------------------
Item 10(a) Directors of the Company
- -----------------------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 20, 1999.
Item 10(b) Executive Officers of the Company
- --------------------------------------------
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 had taken
voluntary leaves of absence as discussed in the Company's Form 8-K dated
November 17, 1993. With the settlement of all criminal and civil litigation
brought by the U.S. Government, such officers have resumed their positions with
the Company. The names of all executive officers of the Company and all
positions and offices with the Company which they presently hold are as follows:
Joseph P. Franklin - Chairman of the Board of Directors
Martin B. Bloch - President, Chief Executive Officer and Director
Markus Hechler - Executive Vice President and Assistant Secretary
Alfred Vulcan - Vice President, Systems Engineering
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Space Systems and Business Development
Thomas McClelland - Vice President, Commercial Products
Alan Miller - Treasurer and Chief Financial Officer
Harry Newman - Secretary and Assistant to the Executive Vice President
None of the officers and directors is related.
Joseph P. Franklin, age 65, has served as a Director of the Company since
March 1990. In December 1993 he was elected Chairman of the Board of Directors
and Chief Executive Officer. He also served as Chief Financial Officer from
September 15, 1996 through October 5, 1998. 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 63, has been a Director of the Company and of its
predecessor since 1961. Mr. Bloch is the Company's President and Chief Executive
Officer. Previously, he served as chief electronics engineer of the Electronics
Division of Bulova Watch Company.
Markus Hechler, age 53, joined the Company in 1967. He was elected to the
position of Executive Vice President in February 1999, prior to which he served
as Vice President, Manufacturing since 1982. He has served as Assistant
Secretary since 1978.
Alfred Vulcan, age 62, joined the Company as an engineer in 1973 and has
served as its Vice President, Systems Engineering since 1978.
Charles S. Stone, age 68, 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 62, 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 and
Business Development.
Thomas McClelland, age 44, joined the Company as an engineer in 1984 and
was elected Vice President, Commercial Products in March 1999.
Alan Miller, age 50, joined the Company in November 1995 as its corporate
controller and was elected to the position of Treasurer and Chief Financial
Officer in October 1998. Prior to joining the Company, Mr. Miller served as an
operations manager and a consultant to small businesses from 1992 through 1995
and as a Senior Audit Manager with Ernst & Young, L.L.P. from 1980 to 1991.
Harry Newman, age 52, Secretary and Assistant to the Executive Vice
President, has been employed by the Company 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.
Item 11. Executive Compensation
- -------- ----------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 20, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 20, 1999.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 20, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Financial Statements, Financial Statement Schedules and Exhibits
The financial statements, financial statement schedule and exhibits are
listed below and are filed as part of this report.
(1) FINANCIAL STATEMENTS
Included in Part II of this report:
Page(s)
Report of Independent Accountants 27
Consolidated Balance Sheets
April 30, 1999 and 1998 28-29
Consolidated Statements of Operations
-years ended April 30, 1999, 1998 and 1997 30
Consolidated Statements of Changes in Stockholders' Equity
- years ended April 30, 1999, 1998 and 1997 31
Consolidated Statements of Cash Flows
- years ended April 30, 1999, 1998 and 1997 32-33
Notes to Consolidated Financial Statements 34-49
(2) FINANCIAL STATEMENT SCHEDULES
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 50
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 Accountants. 60
The exhibits listed on the accompanying Index to Exhibits beginning on page
54 are filed as part of this annual report.
(b) REPORTS ON FORM 8-K
Registrant's Form 8-K, dated March 12, 1999, containing disclosure under
Item 5 thereof (dividend declaration), was filed with the Securities and
Exchange Commission during the quarter ended April 30, 1999.
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 Certificate 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) Stock Bonus Plan of Registrant
and Trust Agreement
thereunder (4) 10.2
6 (10) Employment agreement
between Registrant and
Martin B. Bloch (4) 10.3
7 (10) Employment agreement
between Registrant and
Abraham Lazar (4) 10.4
8 (10) Employment agreement
between Registrant and
John C. Ho (4) 10.5
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
- --------- ---------- -------------------------- ----------------
9 (10) Employment agreement
between Registrant and
Marvin Meirs (4) 10.6
10 (10) Employment agreement
between Registrant and
Alfred Vulcan (4) 10.7
11 (10) Employment agreement
between Registrant and
Harry Newman (4) 10.8
12 (10) Employment agreement
between Registrant and
Marcus Hechler (4) 10.9
13 (10) Form of stock escrow
agreement between Vincenti &
Schickler as escrow agent
and certain officers of
Registrant (4) 10.10
14 (10) Form of Agreement concerning
Executive Compensation (2) 10.11
15 (10) Registrant's 1982 Incentive
Stock Option Plan (5) 15
16 (10) Amendment dated April 19,
1981 to Stock Bonus Plan
of Registrant and Trust
Agreement (3) 20.1
17 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
Secretary of State of
Delaware on October 26,
1984 (6) 17
18 (10) Registrant's 1984 Incentive
Stock Option Plan (6) 18
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
- --------- ---------- -------------------------- ----------------
19 (10) Registrant's Cash or Deferral
Profit Sharing Plan and
Trust under Internal Revenue
Code Section 401,
dated April 1, 1985 (7) 19
20 (10) Computation of Earnings Included in the
per Share of Common Financial
Stock Statements
21 (10) Amendment Restated Effective
as of May 1, 1984 of the
Stock Bonus Plan and Trust
Agreement of Registrant (7) 21
22 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with the
Secretary of State of Delaware
on October 22, 1986 (8) 22
23 (10) Amendment Restated Effective
as of May 1, 1984 of the Stock
Bonus Plan and Trust Agreement
of Registrant (8) 23
24 (3) Amended and Restated
Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on
October 26, 1987 (10) 24
25 (22) List of Subsidiaries
of Registrant (10) 25
26 (10) Employment agreement
between Registrant and
Charles Stone (9) 26
27 (10) Employment agreement
between Registrant and
Jerry Bloch (9) 27
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
- --------- ---------- -------------------------- ----------------
28 (10) Registrant's 1987
Incentive Stock Option
Plan (9) 28
29 (10) Registrant's Senior
Executive Stock Option
Plan (9) 29
30 (10) Amendment dated Jan. 1, 1988
to Registrant's Cash or
Deferred Profit Sharing Plan
and Trust under Section 401
of Internal Revenue Code (9) 30
31 (10) Executive Incentive
Compensation Plan between
Registrant and various
employees (9) 31
32 (10) Amended Certificate of In-
corporation of the Company
filed with the Secretary of
State of Delaware on
November 2, 1989 (10) 32
33 (10) Registrant's Employee Stock
Option Plan (10) 33
34 (10) Loan agreement between
Registrant and Nat West
Dated May 22, 1990 (10) 34
35 (10) Loan Agreement between
Registrant's Employee
Stock Ownership Plan and
Registrant dated
May 22, 1990 (10) 35
36 (23) Consent of Independent
Accountants to incorporation
by reference of 1999 audit report
in Registrant's Form S-8
Registration Statement. 23.1
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
- --------- ---------- -------------------------- ----------------
37 (10) Registrant's 1997 Independent
Contractor Stock Option Plan (11) 4.14
38 (10) Contribution Agreement between
Registrant and Reckson Operating
Partnership L.P. dated
January 6, 1998 (12) 10.12
39 (10) Lease agreement between
Registrant and Reckson
Operating Partnership, L.P.
dated January 6, 1998 (12) 10.13
40 (10) Plea Agreement, Civil Settlement
and Related Documents dated
June 19, 1998 (12) 10.14
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 10-K, File No. 1-8061, for the year ended
April 30, 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 10-K, File No. 1-8061, for the year ended
April 30, 1989, 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 10-K, File No. 1-8061, for the year ended
April 30, 1990, which exhibit is incorporated herein by reference.
(11) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-8, File No. 333-42233, 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, 1998, which exhibit is incorporated herein by reference.
------------------------
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-42233) of Frequency Electronics, Inc. of our
report dated July 13, 1999 relating to the consolidated financial statements and
financial statement schedule, which appears in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
July 13, 1999
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
By: /s/ Alan L. Miller
------------------
Alan L. Miller
Chief Financial Officer
and Controller
Dated: July 28, 1999
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/ Martin B. Bloch President & Director 7/28/99
--------------------
Martin B. Bloch
/s/ Joel Girsky Director 7/28/99
--------------------
Joel Girsky
/s/ John Ho Director 7/28/99
--------------------
John Ho
/s/ Marvin Meirs Director 7/28/99
--------------------
Marvin Meirs