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, 2004
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
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 ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes No X
--- ---
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of October 31, 2003 - $56,400,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 23, 2004 - 8,440,832
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 September 30, 2004.
(Cover page 1 of 59 pages)
Exhibit Index at Page 52
PART I
Item 1. Business
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GENERAL DISCUSSION
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Frequency Electronics, Inc. (sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the technology 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.
In the mid-1990's, the Company transformed itself from primarily a defense
contract manufacturer into a high-tech provider of precision time and frequency
products for commercial applications found in both ground-based communication
stations and on-board satellites. The Company also continues to support the
United States government with products for defense and space applications.
The Company is a world leader in the design, development and manufacture
of high-technology frequency, timing and synchronization products for satellite
and terrestrial voice, video and data telecommunications. The Company's
technologies provide unique solutions that are essential building blocks for the
next generation of broadband wireless and for the ongoing expansion of existing
wireless and wireline networks. The Company's mission is to provide the most
advanced control of frequency and time - essential factors for synchronizing
communication networks and for providing reference frequencies for certain
military, commercial and scientific, terrestrial and space applications.
The Company has divided its operations into four principal markets:
(1) Products for commercial communications which are based either on the
ground or in space. 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
(2) Products used by the United States Government for defense or space
applications. The Company's subsidiary, FEI Government Systems, Inc.
("FEI-GSI"), was formed to focus on supplying the Company's technology and
legacy proprietary products to the United States military and other U.S.
government agencies.
(3) Products for wireline and network synchronization systems. These
products are produced by Gillam-FEI, the Company's Belgian subsidiary, acquired
in September 2000. Products delivered by Gillam-FEI provide essential network
monitoring and wireline synchronization for a variety of industries and
telecommunications providers in Europe, Africa, the Middle East and Asia.
(4) Products that incorporate global positioning systems ("GPS")
technology. These precision time and frequency generation and synchronization
products are manufactured by the Company's newly-acquired subsidiary FEI-Zyfer,
Inc. ("FEI-Zyfer"). As described more fully below, early in fiscal year 2004,
the Company acquired the business and net assets of Zyfer, Inc. forming a new
wholly-owned subsidiary. FEI-Zyfer's GPS capability complements the Company's
existing technologies and permits the combined entities to provide a broader
range of embedded systems for a variety of timing functions.
During fiscal year 2002, the Company formed two new wholly-owned
subsidiaries to provide broader manufacturing capabilities and worldwide reach
for the Company's proprietary products. Frequency Electronics, Inc. Asia
("FEI-Asia") was established as an Asian-based low cost manufacturer of certain
of the Company's commercial communications products. FEI-Europe, GmbH
("FEI-Europe") was established as a European sales and marketing office to
promote the Company's new line of crystal
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oscillators as well as other proprietary products. FEI-Asia and FEI-Europe are
included in the Company's commercial communications operations.
Also in fiscal 2002 the Company made a strategic investment in Morion,
Inc., a Russian crystal oscillator manufacturer located in St. Petersburg,
Russia. The Company's equity investment in Morion permits the Company to secure
a low cost source for high precision quartz resonators and crystal oscillators,
many of which will be based on the Company's design and development work. In
late fiscal 2004, the Company increased its investment in Morion. (See Note 8 to
the financial statements.)
FISCAL 2004 AND 2003 SIGNIFICANT EVENTS
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Acquisition of FEI-Zyfer, Inc.
On May 9, 2003, the Company acquired the business and net assets of Zyfer,
Inc., a wholly-owned subsidiary of Odetics, Inc., in a cash transaction. (Note-
Subsequent to this transaction, Odetics changed its corporate name to Iteris,
Inc.) The Company paid $2.3 million at closing, plus acquisition costs of
approximately $400,000. According to the terms of the purchase agreement, the
Company will pay up to a maximum of $1 million to Iteris, Inc. in each of fiscal
years 2004 and 2005 if FEI-Zyfer achieves certain revenue levels in those years.
The contingent payments are based on a percentage of revenues in excess of $6
million in fiscal 2004 and as a percentage of revenues in excess of $8 million
in fiscal 2005. Based on FEI-Zyfer's performance in fiscal year 2004, the
Company will pay an additional $140,000 to Iteris, Inc. FEI-Zyfer, with its own
management team, is a fourth reportable segment in the Company's financial
statements.
Tax Adjustments
During fiscal year 2004, the Company realized a tax benefit of $400,000 as
the result of the reversal of certain tax liabilities. Such liabilities were
established in prior years to recognize the potential tax contingency for
certain judgmental tax adjustments and tax estimates. The Company's income tax
returns were examined by the Internal Revenue Service and no changes were
required for the years under audit. Accordingly, the tax liabilities established
in those years are no longer required and the reversal of such liabilities was
recorded as a tax benefit in the current year.
Goodwill Impairment
In the fourth quarter of fiscal year 2003, the Company performed an
impairment test of the Gillam-FEI reporting unit. The fair value of this
reporting unit was determined based upon valuations utilized in recent industry
acquisition transactions and current market values of publicly-traded
competitors and customers in the same industry as Gillam-FEI. Based on this
test, the Company further analyzed its investment in Gillam-FEI and concluded
that the goodwill associated with this acquisition was impaired. Consequently,
the Company recorded a non-cash charge of $6.2 million against operating income
for fiscal 2003 to reflect the write down of the full value of goodwill related
to the Gillam-FEI acquisition.
Inventory Adjustments
The Company reduced the value of its inventory by approximately $3.6
million during the fourth quarter of fiscal 2003 due to events occurring at the
end of the fiscal year. First, in April 2003, a customer notified the Company
that the customer had cancelled an export-related contract which required the
Company to write-off the related work-in-process inventory. Second, after
experiencing modest improvement in telecommunications-related revenues earlier
in the year, fourth quarter Commercial Communications segment revenue declined
nearly 40% from the third quarter of fiscal year 2003. As a consequence, noting
the competitive environment, the Company reduced certain inventory to estimated
realizable value based on lowered sales volume expectations. Finally, during the
fourth quarter of fiscal 2003, the Company completed certain process and product
improvement projects which resulted in re-valuation or disposal of certain
products built under previous designs.
REPORTABLE SEGMENTS
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The Company operates under four reportable segments, aligned with the four
markets described above: (1) Commercial Communications; (2) U.S. Government; (3)
Gillam-FEI; and (4) FEI-Zyfer. Within
3
each segment the Company designs, develops, manufactures and markets precision
time and frequency control products for different markets as described below.
The products for the Commercial Communications segment are principally
marketed to wireless communications networks and to the commercial satellite
market. The operations of FEI-Asia and FEI-Europe are included in the Commercial
Communications segment. Both the Commercial Communication segment and the US
Government segment are under common management and most product design,
development and manufacturing is conducted in the Company's facility located in
New York. The Company identifies the U.S Government business as a reportable
segment 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. The Gillam-FEI
segment designs, develops and manufactures products for wireline and network
synchronization. Its products are currently sold to non-U.S. customers. The
FEI-Zyfer segment designs and manufactures products which incorporate GPS
technologies. FEI-Zyfer sells its products to both commercial and US Government
customers and collaborates with other FEI segments on joint product development
activities.
During fiscal years 2004, 2003 and 2002 approximately 56%, 47%, and 63%,
respectively, of the Company's sales were for products used for terrestrial or
space-based commercial communications and foreign governments. Sales for
Gillam-FEI were approximately 17%, 25% and 26% of fiscal 2004, 2003 and 2002
revenues, respectively. For the years ended April 30, 2004, 2003 and 2002,
approximately 14%, 28% and 11%, respectively, of the Company's sales were for
U.S. Government end-use. In fiscal 2004, sales for the FEI-Zyfer segment were
13% of consolidated revenues. Sales information for the Commercial
Communications, U.S. Government, Gillam-FEI, and FEI-Zyfer markets during each
of the last five years are set forth in Item 6 (Selected Financial Data).
Consolidated revenues include sales to end-users in countries located
outside of the United States. During fiscal years 2004, 2003 and 2002, foreign
sales comprised 54%, 38% and 42%, respectively, of consolidated revenues.
Segment information regarding revenues, including foreign sales, operating
profits, depreciation and assets is more fully disclosed in Note 15 to the
accompanying financial statements.
Commercial Communications segment:
The Company provides high-tech precision time and frequency products that
are found in both ground-based communication stations and on-board commercial
satellites. The Company has made a substantial investment in research and
development to apply its core technologies to the commercial markets. In
previous years, the Company experienced accelerated growth in commercial
communications revenues. However, this revenue growth trend was interrupted in
fiscal years 2002 and 2003. Current overall market conditions in the
telecommunications industry have improved in the latter half of fiscal year
2004. The Company anticipates that this industry will provide an opportunity for
future sales growth based on increased capital spending by telecommunication
companies and new or replacement orders for commercial communication satellites.
Terrestrial- Wireless
The development of new or improved technologies brings expanded and more
reliable telecommunications services to the public. As digital cellular systems
and PCS networks grow they require more base stations to meet the demand for
better connectivity, higher data rates and quality of cell phone service.
Cellular infrastructure integrators and original equipment manufacturing
companies, consisting of some of the world's largest telecommunications
companies, are building out existing networks even as they develop new
technologies, such as EDGE (Enhanced Data rates for Global Evolution), 3G (3rd
Generation) and other systems, to provide not only improved voice connectivity
but also Internet, video and data transmission.
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 and enhanced
systems such as CDMA (Code Division Multiple Access). These upgrades require
more precise frequency control at the base stations to achieve a higher degree
of services.
With increased demand for wireless services on limited bandwidth, the
requirement for precise timing becomes paramount. The Company manufactures a
Rubidium Atomic Standard, a small, low cost,
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stable atomic "clock" as well as temperature stable quartz crystal oscillators,
which are ideally suited for use in advanced cellular communications base
stations. Whether the network uses CDMA, TDMA (Time Division Multiple Access) or
GSM (Global System for Mobile Communications) or a hybrid, such as EDGE, timing
to ensure signal synchronization is essential.
Space-based
The commercial use of satellites launched for communications, navigation,
weather forecasting, video and data transmissions has increased the need to
transmit information to earth-based receivers. This requires precise timing and
frequency control at the satellite. 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 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. Commercial satellite programs such as Intelsat, ANIK, Eutelsat,
Inmarsat and Worldstar have utilized the Company's space-qualified products.
U.S. Government segment:
The Company's sales in the U.S. Government segment are made under fixed
price contracts either directly with U.S. Government agencies or indirectly
through subcontracts intended for government end-use. 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, the MILSTAR Satellite System and the AEHF Satellite System, are 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.
Gillam-FEI segment:
Gillam-FEI extends the Company's competencies into wire-line
synchronization, network monitoring, specialized test equipment, and power
supply products. With the advent of new digital broadband transmission
technologies, reliable synchronization has become the warranty to quality of
service for telecom operators. Gillam-FEI is among the world leaders in the
field of wireline synchronization, and its products are targeted for
telecommunication operators and network equipment manufacturers that utilize
modular and flexible platforms to build reliable digital-network-systems
worldwide. Telecommunications operators such as Belgacom, France Telecom,
Telefonica and other service providers are among Gillam-FEI's major customers.
5
Network monitoring systems marketed under the brand name LYNX, are a
flexible suite of complementary software modules that are arranged to satisfy
the specific needs of telecom operators, electrical utilities, and other
operators of distribution networks. The multi-task capability of the LYNX system
allows operators to supervise and manage the distribution of electricity, gas,
video cables, public lighting, and other networks. Deregulation of utilities,
especially in Europe, has created a greater demand for the LYNX product. Major
customers presently using LYNX include SIG Electrical Services of Geneva,
Switzerland; Electricity Distribution Management for the city of Lausanne,
Switzerland; UEM Electricity Distribution Management for the city of Metz,
France; Brussels International Airport and Belgian Railways.
Specialized test equipment and power supply products are mainly targeted
for the telecommunications industry.
FEI-Zyfer segment:
FEI-Zyfer designs, develops and manufactures products for precision time
and frequency generation and synchronization, primarily incorporating GPS
technology. The products make use of both "in-the-clear" civil and
"crypto-secured" military signals from GPS. In most cases, FEI-Zyfer's products
are integrated into communications systems, computer networks, test equipment,
and military command and control terminals for ground and satellite link
applications. Approximately 50% of revenues are derived from sales where the end
user is the US Government. FEI-Zyfer's products are an important extension of
FEI's core product line, particularly in the area of GPS capabilities.
PRODUCTS
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The Company's products are manufactured from raw material which, when
combined with conventional electronic parts available from multiple sources,
become finished products used for commercial wireless and wireline
communications, satellite applications, space exploration, position location,
radar, sonar and electronic counter-measures. These products are employed in
ground-based earth stations, fixed, transportable, portable and mobile
communications installations, domestic and international satellites, 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, purchased quantity and delivery schedule.
Components - The Company's key technologies utilize quartz, rubidium and
cesium to manufacture precision time and frequency standards and higher level
assemblies which allow the users to generate, transmit, and receive synchronous
signals in order to communicate effectively, locate their position, secure a
communications system, or guide a missile. The components class of the Company's
products includes crystal filters and discriminators, surface acoustic wave
resonators, and high-reliability thick and thin film hybrid assemblies for space
and other applications.
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 and low-g sensitivity units for
moving platforms and satellite systems, and fast warm-up, low power consumption
units for mobile applications, including wideband-CDMA voice and data
communications.
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 electronically controlled
using a temperature sensitive device to directly compensate for the effect of
temperature on the oscillator's frequency.
The rubidium lamp, filter and resonance cell provide the optical
subassembly for the manufacture of the Company's optically pumped atomic
rubidium frequency standards. The cesium tube resonator is used in the
manufacture of the Company's cesium primary standard atomic clocks.
6
High reliability 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 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 and
cesium beam atomic standard.
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 frequency references
used in commercial 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 and stable than other types of quartz frequency
generators. The Company's 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.
As the demands on communications systems increase, 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 a base 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 - The systems portion of the Company's business includes
manufacturing and integrating selections of its specialized components into
higher level subsystems and systems that meet customer-defined needs. The
Company has a unique knowledge of interfacing these technologies and experience
in applying them to a wide range of systems. The 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.
This portion of the Company's 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. Time and frequency
control systems combine the Company's cesium, rubidium and/or crystal
instruments with its other components, to provide systems for wireless,
wireline, space and defense applications.
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For the wireless industry, the Company integrates its core components such
as quartz oscillators and rubidium atomic standards with software applications,
microprocessors, and other digital circuitry into complete subsystems. These
subsystems supply frequency and time reference signals that facilitate wireless
communications and are necessary for the various wireless technologies to
operate properly. The customers for these subsystems are global wireless
infrastructure manufacturers.
For the wireline industry, the Company integrates its core components with
other electronic modules into high-level platforms that provide a total
synchronization solution. These signal synchronization units ("SSUs") are
primarily designed and manufactured by Gillam-FEI. SSUs are inserted into
digital telecommunication networks and provide reliable synchronization for
proper operation of the network. The systems are primarily sold to
telecommunication operators and vary from a few SSUs for a simple network to
hundreds of units for complex networks. For operators of distribution networks
such as electrical utilities and telecommunications operators, the Company
offers the LYNX system--a flexible suite of complementary software modules that
are distinctively combined to satisfy the requirements of the users. With the
advent of digital broadband transmission technologies, reliable synchronization
has become the Quality of Service for telecommunications operators world-wide.
For the space and defense sectors the Company combines its core products
in a wide range of diverse applications that 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. These time and frequency control systems can provide up to
quadruple redundancy to assure operational longevity and dependability.
The Company's new subsidiary, FEI-Zyfer, manufactures products
incorporating GPS technology by utilizing GPS signals to derive time and
frequency information. These systems and subsystems are used in Enhanced
wireless 911 (E911), secure government (SAASM- Selective Acquisition
Anti-spoofing Module) and commercial communications and other applications.
The GPS expertise of FEI-Zyfer has been joined with the technological
capabilities and experience of FEIC in building crystal oscillators for harsh
environments, to jointly develop a new system to be utilized in deep earth
drilling.
BACKLOG
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As of April 30, 2004, the Company's consolidated backlog amounted to
approximately $36 million (see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations). Approximately 80% of this
backlog is expected to be filled during the Company's fiscal year ending April
30, 2005. The backlog, which reflects only 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
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The Company markets its products both directly and through approximately
50 independent sales representative organizations located in the United States,
Europe and Asia. Sales to non-U.S. customers, including all of the sales of
Gillam-FEI, totaled approximately 54%, 38% and 42% of net sales in fiscal years
2004, 2003 and 2002, respectively.
The Company's products are sold to a variety of customers, both commercial
and governmental. For the years ended April 30, 2004, 2003 and 2002,
approximately 14%, 28% and 11%, respectively, of the Company's sales were made
under contracts to the U.S. Government or subcontracts for U.S. Government
end-use.
The Company's consolidated sales for each of the years ended April 30,
2004, 2003 and 2002 included sales to Motorola Corp. ("Motorola") of
approximately $16.1 million, $10.0 million and $15.5 million, respectively.
These amounts represent 32%, 32% and 38%, respectively, of consolidated sales
for each of those years. Lucent Technologies ("Lucent") accounted for $5.5
million of revenues in fiscal year 2004 or 11% of consolidated sales. In fiscal
year 2003, Northrop Grumman Corporation ("Northrop") accounted for $3.5 million
of revenues or 11% of consolidated sales.
8
During the three years ended April 30, 2004, sales to Motorola and Lucent
were made by the Company's Commercial Communications segment, accounting for 74%
in fiscal 2004, 73% in fiscal 2003 and 59% in fiscal 2002 of that segment's
total sales.
Fiscal year 2004 and 2003 revenues in the U.S. Government segment included
sales to three customers, Northrop, Raytheon Missile Systems, Inc. ("Raytheon")
and BAE Systems Aerospace, Inc. ("BAE"), accounting for 82% and 76%,
respectively, of total segment sales. In fiscal year 2002, Boeing Satellite
Systems, Inc. ("Boeing"), Raytheon and BAE accounted for 77% of total segment
revenues.
During fiscal years 2004, 2003 and 2002, France Telecom and Belgacom were
major customers of the Gillam-FEI segment. These European telecom companies
accounted for 31%, 23% and 30%, respectively, of the segment's revenues in those
fiscal years.
In fiscal year 2004, General Dynamics accounted for 19% of the revenues in
the FEI-Zyfer segment. 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
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The Company's technological expertise continues to be an important factor
to support future growth in revenues and earnings. The Company has focused its
internal research and development efforts on improving the core physics and
electronic packages in its time and frequency products, conducting research to
develop new time and frequency technologies, improving product manufacturability
by seeking to reduce its production costs through product redesign and process
improvements 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 satellite and terrestrial commercial
communications systems, including wireless, wireline and GPS-related systems.
During fiscal years 2004, 2003 and 2002, the Company expended $5.3 million, $4.6
million and $6.6 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 2005, the
Company is targeting to spend from $4.5 million to $6.0 million on research and
development in similar areas. The actual amount spent will depend on market
conditions and identification of new opportunities.
PATENTS AND LICENSES
- --------------------
The Company believes that for the most part, 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. In certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses the government has funded. During fiscal 2003, the Company
received a broad and significant patent for new, proprietary quartz oscillator
technology which the Company will exploit in both legacy and new applications.
COMPETITION
- -----------
The Company experiences competition in 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 under
severe conditions, such as in space or other extreme hostile environments,
prompt and
9
responsive contract performance, technical competence and price. The Company has
a unique and broad product line which includes all three frequency standards -
quartz, rubidium, and cesium. Because of the very high precision of certain of
its components, the Company has few competitors. For lower precision components
there is significant competition from a number of suppliers.
In recent years, the Company has successfully outsourced certain component
manufacturing processes to third parties and more recently to its wholly-owned
subsidiary, FEI-Asia in Tianjin, China and to Russian-based Morion, Inc., in
which the Company is a minority shareholder. The Company expects this
outsourcing to enhance its competitive position on cost while maintaining its
high quality standards. The Company believes its ability to obtain raw
materials, manufacture finished products, integrate them into systems and
sub-systems and interface these systems with end-user applications provides a
strong competitive advantage.
Certain of the Company's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs.
With respect to its instruments and systems, the Company competes with
Hewlett-Packard Company, Symmetricom, Inc, E. G. and G., Inc. and others.
Systems for the wireline industry produced by the Gillam-FEI segment compete
with Symmetricom, Inc. which recently merged with another competitor. The
Company's principal competition for space products is the in-house capability of
its major customers.
EMPLOYEES
- ---------
The Company employs approximately 460 persons worldwide. None of the U.S.
employees are represented by labor unions, while in Europe approximately five
employees in one facility are represented by a French labor union.
OTHER ASPECTS
- -------------
The Company's business is not seasonal although it expects to experience
some fluctuation in revenues during the second fiscal quarter as a result of
extended holiday periods in August. No unusual working capital requirements
exist.
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.
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, President of FEI Government Systems,
Inc. and Assistant Secretary
Michel Gillard - President, Gillam-FEI
Hugo Fruehauf - President, FEI-Zyfer
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Marketing and Sales
Oleandro Mancini - Vice President, 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.
10
Joseph P. Franklin, age 70, has served as a Director of the Company since
March 1990. In December 1993 he was elected Chairman of the Board of Directors.
He also served as Chief Executive Officer from December 1993 through October
1998 and as Chief Financial Officer from September 1996 through October 1998.
From August 1987 to November 1993, he was the Chief Executive Officer of
Franklin S.A., 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 68, has been a Director of the Company and of its
predecessor since 1961. Mr. Bloch is the Company's President and Chief Executive
Officer and has held such positions since inception of the Company, except for
the period from December 1993 through October 1998 when General Franklin held
the CEO position. Previous to forming the Company, Mr. Bloch served as chief
electronics engineer of the Electronics Division of Bulova Watch Company.
Markus Hechler, age 58, 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. In October 2001, he was named
President of the Company's subsidiary, FEI Government Systems, Inc. He has
served as Assistant Secretary since 1978.
Michel Gillard, age 63, became an officer and director of the Company when
Gillam S.A. was acquired in September 2000. Gillam S.A., a company engaged in
the design, manufacture and marketing of wireline and network synchronization
systems, was founded by Mr. Gillard in 1974.
Hugo Fruehauf, age 65, became an officer of the Company when Zyfer, Inc.
was acquired in May 2003. Mr. Fruehauf served as CEO and CTO of Zyfer, Inc. for
6 years. Prior to joining Zyfer, Mr. Fruehauf was vice president of Alliant
Techsystems from 1995 to 1997 and from 1982 to 1995 was president of
Datum-Efratom and its predecessor, Ball-Efratom.
Charles S. Stone, age 73, 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 67, 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, Marketing and
Sales.
Oleandro Mancini, age 55, joined the Company in August 2000 as Vice
President, Business Development. Prior to joining the Company, Mr. Mancini
served from 1998 as Vice President, Sales and Marketing at Satellite
Transmission Systems, Inc. and from 1995 to 1998 as Vice President, Business
Development at Cardion, Inc., a Siemens A.G. company. From 1987 to 1995, he held
the position of Vice President, Engineering at Cardion, Inc.
Thomas McClelland, age 49, joined the Company as an engineer in 1984 and
was elected Vice President, Commercial Products in March 1999.
Alan Miller, age 55, 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 57, Secretary, 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.
11
Item 2. Properties
- -------------------
The Company operates out of several facilities located around the world.
Each facility is used for manufacturing its products and for administrative
activities. The following table presents the location, size and terms of
ownership/occupation:
Location Size (sq. ft.) Own or Lease
-------- -------------- ------------
Long Island, NY 93,000 Lease
Anaheim, CA 20,000 Lease
Liege, Belgium 34,000 Own
Chalon Sur Saone, France 37,000 Own
Tianjin, China 6,000 Lease
The Company's facility located in Mitchel Field, Long Island, New York, is
part of the building that 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 to Reckson Associates Realty Corp.
("Reckson"), leasing back the space that 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 domestic operational needs which encompasses the principle operations
of the Commercial Communication and US Government segments.
The sale of its building to Reckson, a real estate investment trust
("REIT") whose shares are traded on the New York Stock Exchange, 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.)
The properties located in Belgium and France were acquired upon completion
of the Gillam S.A. acquisition. These facilities are adequate to meet the
present and future operational requirements of Gillam-FEI. During the year ended
April 30, 2003, the Company sold a portion of the building owned by its
subsidiary in France, receiving proceeds of $275,000 and realizing a gain of
$152,000 which amount is included in other income and expense.
The Tianjin, China facility is the location of the Company's wholly-owned
subsidiary, FEI-Asia. Space has been leased within a manufacturing facility
located in the Trade-Free Zone. The lease is renewable annually with rent of
$9,850 payable quarterly. The amount of space is adequate for the near-term
manufacturing expectations for the Company.
The Anaheim, California facility is leased by the Company's newly acquired
subsidiary, FEI-Zyfer, Inc. The facility consists of a combination office and
manufacturing space. The lease, which expires in November 2004, requires monthly
payments of $20,400.
12
Item 3. Legal Proceedings
- --------------------------
A judgment in favor of the Company, dated September 3, 2002, was entered
by the United States District Court for the Eastern District of New York in
connection with its dismissal of a qui tam action which was brought in March
1994 by Ralph Muller, a former FEI employee. 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 judgment is based on the Court's decision
on the merits in favor of Frequency Electronics, Inc. and its CEO, Martin B.
Bloch, dated August 23, 2002. The judgment preserves all of FEI's rights to
recover costs and its causes of action against the plaintiff and third party
defendants. (For a more complete description of the litigation brought against
the Company and the related settlement actions, see Item 3. Legal Proceedings in
the Company's Annual Report on Form 10-K for the year ended April 30, 2001, a
copy of which is on file with the Securities and Exchange Commission.)
Directors' and Officers' Insurance Coverage
-------------------------------------------
On April 30, 2002, FEI settled the arbitration proceeding it had commenced
in June 2001 before the American Arbitration Association against The Home
Insurance Company ("Home") under a $2.0 million excess directors and officers
liability insurance policy. FEI had asserted claims for its loss relating to,
among other matters, sums it paid in connection with the Settlement Agreement
and Global Disposition with the Government on June 19, 1998. (For a description
of these litigations, the Settlement Agreement and Global Disposition, refer 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.) Under the terms of the settlement agreement, Home paid FEI $1.5
million, FEI released its claims and the arbitration was discontinued.
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 2004.
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.
FISCAL QUARTER HIGH SALE LOW SALE
-------------- --------- --------
2004 -
FIRST QUARTER $10.80 $ 8.00
SECOND QUARTER 11.05 9.35
THIRD QUARTER 14.99 10.18
FOURTH QUARTER 17.13 12.25
2003 -
FIRST QUARTER $13.04 $ 5.62
SECOND QUARTER 8.00 5.00
THIRD QUARTER 11.50 7.34
FOURTH QUARTER 10.25 8.16
13
As of July 23, 2004, the approximate number of holders of record of common
stock was 600. The closing share price of the Company's stock on April 30, 2004
was $13.60. The closing share price of the Company's stock on July 23, 2004 was
$12.20.
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.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------
Number of Securities
Remaining available for
Number of Securities to Weighted-Average Future Issuance under
be Issued upon exercise Exercise Price of Equity Compensation Plans
of Outstanding Options Outstanding Options (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a))
- ------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity Compensation Plans
Approved by Security Holders 412,250 $8.61 169,250
Equity Compensation Plans Not
Approved by Security Holders 802,737 $12.62 219,500
------- ------ -------
TOTAL 1,214,987 $11.26 388,750
========= ====== =======
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, 2004. The
information has been derived from the audited financial statements of the
Company for the respective periods.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
------------------------------------------
Years Ended April 30,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Commercial Communications $29,066 $15,051 $26,663 $36,290 $22,554
U.S. Government 7,053 8,906 4,513 3,727 3,981
Gillam-FEI 12,197(1) 8,137 11,223 9,276 --
FEI-Zyfer 6,560 -- -- -- --
less intersegment sales (4,770)(1) (567) (1,220) (83) --
----------- ----------- ----------- ----------- ----------
Total Net Sales $50,106 $31,527 $41,179 $49,210 $26,535
=========== =========== =========== =========== ==========
Operating (Loss) Profit $(1,646) ($12,490)(3) $89(4) $5,939(6) $1,008
=========== =========== =========== =========== ==========
Net Income (Loss) $162(2) ($8,860) $1,378(5) $5,644(7) $3,144
=========== =========== =========== =========== ==========
Average Common Shares Outstanding
Basic 8,374,399 8,331,785 8,350,735 8,198,569 7,673,497
Diluted 8,542,575 8,331,785 8,529,175 8,431,823 8,043,727
Earnings per Common Share
Basic $0.02 ($1.06) $0.17 $0.69 $0.41
=========== =========== =========== =========== ==========
Diluted $0.02 ($1.06) $0.16 $0.67 $0.39
=========== =========== =========== =========== ==========
14
CONSOLIDATED BALANCE SHEET DATA
- -------------------------------
Total Assets $92,660 $85,729 $96,011 $102,039 $80,847
=========== =========== =========== =========== ==========
Long-Term Obligations
and Deferred Items $17,610 $17,903 $17,796 $18,074 $16,849
=========== =========== =========== =========== ==========
Cash dividend declared
per common share $0.20 $0.20 $0.20 $0.20 $0.20
=========== =========== =========== =========== ==========
(1) Includes intercompany sale to FEI Communications of $3.52 million for
development of US5G product.
(2) Includes $400,000 reversal of tax liabilities established in prior years.
(3) Includes goodwill impairment of $6.2 million and adjustments to inventory
of $3.6 million.
(4) Includes insurance reimbursement of $1.5 million for expenses related to
certain litigation with the U.S. Government less inventory reserves and
writeoffs aggregating $1.0 million.
(5) In addition to items in (3) above, includes $300,000 investment loss for
an other than temporary decline of value in a marketable security.
(6) Includes insurance reimbursement of $2.8 million (net of professional
fees) for expenses related to certain litigation with the U.S. Government,
increased inventory reserves of $2.0 million related to certain product
lines and $300,000 of acquisition-related nonrecurring costs.
(7) In addition to items in (5) above, includes $287,000 investment loss for
an other than temporary decline of value in a marketable security.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995:
The statements in this Annual Report on Form 10K regarding future earnings
and operations and other statements relating to the future constitute
"forward-looking" statements pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. Factors that would cause
or contribute to such differences include, but are not limited to, continued
acceptance of the Company's products in the marketplace, competitive factors,
new products and technological changes, product prices and raw material costs,
dependence upon third-party vendors, competitive developments, changes in
manufacturing and transportation costs, the availability of capital, and the
outcome of certain litigation and arbitration proceedings. By making these
forward-looking statements, the Company undertakes no obligation to update these
statements for revisions or changes after the date of this report.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 1 to
the consolidated financial statements. The Company believes its most critical
accounting policies to be the recognition of revenue and costs on production
contracts and the valuation of inventory. Each of these areas requires the
Company to make use of reasoned estimates including estimating the cost to
complete a contract, the realizable value of its inventory or the market value
of its products. Changes in estimates can have a material impact on the
Company's financial position and results of operations.
Revenue 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. Each month management reviews
estimated contract costs. The effect of any change in the estimated gross margin
percentage for a contract is reflected in revenues in the period in which the
change is known. Provisions for anticipated losses on contracts are made in the
period in which they become determinable.
15
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
on contracts are made in the period in which they become determinable.
For contracts in the Company's Gillam-FEI and FEI-Zyfer segments, smaller
contracts or orders in the other business segments and 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. When
payment is contingent upon customer acceptance of the installed system, revenue
is deferred until such acceptance is received and installation completed.
Costs and Expenses
------------------
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.
Inventory
---------
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. Inventory reserves are established
for slow-moving and obsolete items and are based upon management's experience
and expectations for future business. Any changes in reserves arising from
revised expectations are reflected in cost of sales in the period the revision
is made.
Equity-based Compensation
-------------------------
The Company applies the disclosure-only provisions of FAS No. 148,
"Accounting for Stock-Based Compensation- Transition and Disclosure" 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 FAS No. 148, 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.
The following table illustrates the effect on the Company's consolidated
statements of operations 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 FAS No. 148:
(in thousands, except per share data)
2004 2003 2002
---- ---- ----
Net Income (Loss), as reported $162 ($8,860) $1,378
----------- ----------- -----------
Cost of stock options, net of taxes (772) (714) (904)
----------- ----------- -----------
Net (Loss) Income - pro forma ($610) ($9,574) $474
=========== =========== ===========
Earnings (Loss) per share, as reported:
Basic $0.02 ($1.06) $0.17
=========== =========== ===========
Diluted $0.02 ($1.06) $0.16
=========== =========== ===========
(Loss) Earnings per share- pro forma
Basic ($0.07) ($1.15) $0.06
=========== =========== ===========
Diluted ($0.07) ($1.15) $0.06
=========== =========== ===========
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 each of the three years ended
April 30, 2004, 2003 and 2002; dividend yield of 1.83%; expected volatility of
63% (65% in fiscal year 2002), risk free interest rate of 5.5%; and expected
lives of ten years.
16
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:
2004 2003 2002
---- ---- ----
Net Sales
Commercial Communications 55.5% 46.9% 63.4%
U.S. Government 14.1 28.3 11.0
Gillam-FEI 17.3 24.8 25.6
FEI-Zyfer 13.1 -- --
--------- --------- ---------
100.0 100.0 100.0
Cost of Sales 68.9 81.5 65.8
--------- --------- ---------
Gross Margin 31.1 18.5 34.2
Selling and Administrative expenses 22.9 24.0 21.7
Restructuring Charge 0.9 -- --
Goodwill impairment -- 19.5 --
Insurance Reimbursement, net -- -- (3.6)
Research and Development expenses 10.6 14.6 15.9
--------- --------- ---------
Operating (Loss) Profit (3.3) (39.6) 0.2
Other Income,net & Minority Interest 3.8 5.9 3.9
Provision (Benefit) for Income Taxes 0.2 (5.6) 0.8
--------- --------- ---------
Net Income (Loss) 0.3% (28.1%) 3.3%
========= ========= =========
Significant Events
------------------
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal year 2004, 2003 and 2002
results of operations were materially impacted by several specific events.
During fiscal year 2004, the Company acquired the business and net assets of
Zyfer, Inc. In addition to the purchase price, the Company invested an
additional $2.5 million of working capital to support the operations of
FEI-Zyfer until it could return to profitability. Also, in fiscal year 2004, the
Company realized a $400,000 tax benefit as the result of the reversal of certain
tax liabilities established in prior years. In fiscal 2003, the Company
determined that the goodwill associated with its investment in Gillam-FEI had
become impaired and wrote off the full amount of goodwill in the amount of $6.2
million. In fiscal year 2002, the Company recovered $1.5 million from an
insurance company related to expenses incurred in defense and settlement of the
Company's litigation with the U.S. Government. (See Item 3. Legal Proceedings
and Note 9 to the financial statements.)
Without these significant events, the Company's operating (loss) profit,
pre-tax earnings (loss) and net earnings (loss) would be materially different
from that reported in the financial statements. See Note 12 to the financial
statements for pro forma presentation related to the acquisition of FEI-Zyfer,
Inc.
Operating Loss
--------------
The operating loss for the year ended April 30, 2004, decreased $10.8
million (87%) to $1.6 million from the operating loss of $12.5 million reported
in fiscal year 2003. The improvement is directly attributable to the
year-over-year increase in sales volume during fiscal year 2004 as well as the
significant fiscal year 2003 events which did not recur in fiscal year 2004: the
$6.2 million goodwill impairment and $3.6 million in inventory adjustments (see
next paragraph). These improvements were offset by the fiscal year 2004
operating loss of $1.1 million recorded by FEI-Zyfer. Much of the improvement in
sales occurred in the second half of the fiscal year but these increases were
not sufficient to overcome the operating losses recorded in the first half of
the year. During the first half of the year, the Company continued to experience
the effects of a slow-down in the telecommunications industry, a trend which
appears to have reversed itself in the latter half of fiscal year 2004 and is
expected to show continued strength into fiscal year 2005.
17
The operating loss for the year ended April 30, 2003, was $12.5 million
compared to an operating profit of $89,000 reported for fiscal year 2002. The
primary causes of this decline were reduced revenues in fiscal year 2003 plus
the $6.2 million goodwill impairment and the write-off or reserve against
certain work-in-process and component inventory in the amount of $3.6 million.
Also, in fiscal year 2002, the Company obtained a $1.5 million insurance
reimbursement which was offset by $1.0 million of inventory adjustments.
Revenues declined by 23% while gross margins decreased to 19% of revenue from
37% in fiscal year 2002. This includes the fiscal year 2003 inventory
adjustments which reduced gross margins by 11% of revenues compared to a 2%
effect in fiscal year 2002. These results reflect the low level of
telecommunication-related business during these fiscal years. The Company's
response was to reduce costs in all categories, while maintaining its core
operational capabilities and continuing to invest in new products, efficient
manufacturing processes and development of non-US manufacturing capacity.
Net Sales
---------
Net sales for fiscal year 2004 increased by $18.6 million (59%) to $50.1
million from fiscal year 2003 revenues of $31.5 million. These revenues include
$6.5 million from FEI-Zyfer or 21% of the year-over-year increase while sales
from the other segments increased by $12.0 million (38%) over the prior year.
This increase is attributable to strong second half revenues in the Commercial
Communications segment and in the Gillam-FEI segment compared to both the first
half of the fiscal year as well as to fiscal year 2003 revenues. Commercial
Communication revenues were up 93% ($14 million) over the prior year on the
strength of increased capital spending on cellular network infrastructure and
sales related to commercial satellites. Gillam-FEI revenues (exclusive of $3.5
million in intersegment sales related to a research and development program)
increased by over $500,000 (6%) from the prior year, benefiting primarily from
the 20% year-over-year increase in the value of the euro to the dollar. Fiscal
year 2004 revenues from the US Government segment declined by $1.8 million (20%)
from the prior year as the Company worked on several developmental programs
under US Government contracts as compared to more production-type contracts in
the prior year.
Net sales for fiscal year 2003 decreased by $9.7 million (23%) to $31.5
million from fiscal year 2002 net sales of $41.2 million. The principal cause
for the decline was attributable to the world-wide slowdown in capital spending
in the telecommunications industry which the Company serves. Revenues for the
Commercial Communications segment decreased by $11.6 million (44%) and
Gillam-FEI revenues decreased by $3.1 million (28%). Offsetting these declines,
revenues for the US Government segment almost doubled from the fiscal year 2002
levels, to $8.9 million, as the Company responded to the US Government's need
for more sophisticated secure communications and weaponry.
The telecommunications markets appear to be rebounding from a period of
low activity. World-wide capital spending on commercial satellites, cellular
network infrastructure and wireline synchronization systems is increasing.
Accordingly, the Company believes future sales in the Commercial Communications,
Gillam-FEI and FEI-Zyfer segments will continue at the levels achieved in the
second half of fiscal year 2004. The Company anticipates revenues for its U.S.
Government segment to also increase as more funding is provided by the
government for such projects as secure radios, new communication satellites,
unmanned aerial vehicles and weapons guidance systems.
Gross Margin Rates
------------------
The gross margin rate for fiscal year 2004 improved to 31% of net sales
compared to 19% in fiscal year 2003. The fiscal year 2003 rate was reduced by
11% due to the $3.6 million inventory adjustment as previously discussed.
Although fiscal year 2004 sales increased substantially over the prior year, the
volume was insufficient to fully absorb the overhead, particularly in the first
half of the current fiscal year when lower revenues were recorded. In the second
half of the year, the Company experienced rising revenues but also built up its
support structure to sustain the expected higher level of sales. The Company
also reduced the value of its inventory by $530,000 as the result of an
inventory revaluation.
The gross margin rate for fiscal year 2003 decreased to 19% of net sales
compared to 34% in fiscal year 2002. As noted above, the fiscal year 2003
inventory adjustments reduced the gross margin rate by 11% compared to a 2%
reduction for inventory adjustments in fiscal year 2002. The additional decline
in the fiscal year 2003 gross margin rate were due to the lower level of sales
which were unable to absorb a greater percentage of fixed overhead costs and the
higher level of warranty expenses the Company experienced which reduced gross
margin rates by approximately 3%.
18
The Company's target is to achieve an overall gross margin rate of 40% or
better through greater sales volume, continued process improvements and
utilization of lower cost manufacturing in Russia and China. During fiscal year
2005, the Company expects to realize gross margin rates approaching its targeted
rate.
Restructuring Charge
--------------------
During fiscal year 2004, the Company's majority-owned subsidiary in France
substantially completed a restructuring of its operations as a result of the
Company's decision to convert it from a manufacturing facility to a regional
sales office. This resulted in a charge to earnings of $428,000 for the year
ended April 30, 2004. The Company does not expect to incur significant costs in
the future related to this restructuring although it may recognize a gain upon
the sale of the subsidiary's current manufacturing facility during fiscal year
2005.
Selling and Administrative expenses
-----------------------------------
Selling and administrative costs in fiscal year 2004 increased by $3.9
million (51%) to $11.5 million from $7.6 million in fiscal year 2003. The
largest component of this increase is the approximately $2.8 million of selling
and administrative expenses incurred at newly-acquired FEI-Zyfer. The additional
$1.1 million of expenses is commensurate with the increased volume of business
that the Company experienced in fiscal year 2004. Costs such as commission
expenses, salaries of additional marketing and support personnel and performance
related compensation all contributed to increased selling and administrative
expenses in fiscal year 2004. These increases were offset by declines in
deferred compensation expenses. In addition, the value of the euro to the US
dollar continued to rise throughout fiscal year 2004. As a result, Gillam-FEI's
euro-denominated selling and administrative costs declined by 5% but, when
converted to US dollars, reflected a 13% increase over fiscal year 2003.
Selling and administrative costs in fiscal year 2003 decreased by $1.4
million (15%) to $7.6 million from $8.9 million in fiscal year 2002 as the
Company responded to the lower level of business volume. During the year,
Gillam-FEI lowered its administrative support costs by 18% when denominated in
euros but the savings were reduced to $175,000 (7%) when translated to US
dollars due to the 13% increase in the value of the euro to the US dollar during
fiscal 2003. Costs associated with the establishment of the Company's FEI-Asia
facility were halved (approximately $250,000 lower) as less time was required by
US-based personnel to support that operation and more costs were borne in the
China facility where operating expenses are much lower than in the US.
Offsetting those cost reductions was an increase in the costs to support the new
European sales office. In the US subsidiaries, cost savings in fiscal 2003 of
$1.1 million were related to personnel reductions, lower charges to deferred
compensation expense, reduced sales commissions and reduction in legal and other
professional fees.
As a percentage of sales, selling and administrative expenses were 22.8%
in fiscal year 2004; 24.0% in fiscal year 2003 and 21.7% in fiscal year 2002.
The Company targets selling and administrative expenses not to exceed 20% of
consolidated sales. The lower level of sales in fiscal year 2003 and into the
first half of fiscal year 2004 prevented the Company from achieving its target.
As revenues improve in fiscal year 2005, the Company expects to achieve its
targeted level of selling and administrative expenses.
Research and Development expenses
---------------------------------
Research and development expenses in fiscal year 2004 increased by
$731,000 (16%) to $5.3 million from $4.6 million in fiscal year 2003. This
increase is entirely attributable to development costs incurred at FEI-Zyfer
which approximated $840,000. Without FEI-Zyfer, research and development expense
would have declined by 2% from fiscal year 2003. During fiscal year 2004, those
resources previously devoted to the Company's internal research and development
efforts were often redirected to funded research projects. Consequently, the
costs of these resources are reflected in cost of sales rather than in research
and development expenses. Internal development efforts during fiscal year 2004
were focused on completion of Gillam-FEI's US5G (wireline synchronization
system), developing a digital rubidium oscillator, further improving the
performance of crystal oscillators, including low-g (gravity) sensitivity
crystal oscillators which have broad applications in both commercial and US
Government systems.
19
Research and development expenses in fiscal year 2003 decreased $2.0
million (30%) to $4.6 million from $6.6 million in fiscal 2002. During fiscal
year 2003, the Company completed development of certain manufacturing process
improvements and new product designs. Related personnel and other resources were
refocused on production activities as development projects were concluded. Other
research and development activities involved further product and process
improvements, development of a common platform for time and frequency generators
which will enable the interchange of a crystal or rubidium oscillator, and to
maintain the Company's competitive position in the markets it serves.
The Company will continue to focus its research and development activities
on those products which it expects will provide the best return on investment
and greatest prospects for the future growth of the Company. For fiscal year
2005, the Company will complete development of Gillam-FEI's US5G wireline
synchronization product and will make further investment in developing
manufacturing process improvements. Additional funds will be invested in
improving and miniaturizing the rubidium atomic clocks and further enhancing the
capabilities of its line of crystal oscillators. The Company's target is to
spend approximately 10% of revenues on research and development activities,
although the actual level of spending is dependent on new opportunites and the
rate at which it succeeds in bringing new products to market. Internally
generated cash and cash reserves will be adequate to fund these development
efforts.
Other Income, (expense)
-----------------------
Other income (expense), decreased by $49,000 (3%) to $1.78 million in
fiscal year 2004 from $1.82 million in fiscal year 2003 and increased by
$216,000 (13%) in fiscal year 2003 compared to $1.61 million in fiscal year
2002.
Investment income during fiscal year 2004 increased by $491,000 (27%) over
fiscal year 2003, and fiscal year 2003 investment income decreased by $34,000
compared to fiscal year 2002. In all three years, the Company recorded realized
gains and losses on marketable securities. In fiscal year 2004, the Company
realized gains of $590,000 on the sale of certain marketable securities. In
fiscal year 2003, realized losses on marketable securities of $130,000 were
partially offset by realized gains of $90,000. Similarly, during fiscal 2002 the
Company recorded a $300,000 writedown to market value of a certain marketable
security whose decline in value was deemed to be other than temporary which loss
was offset by realized gains on sales of marketable securities of $172,000.
Investment income also includes interest and dividends earned on marketable
securities, including dividend income from its REIT units. Interest income has
declined in each of fiscal years 2004 and 2003 from that realized in prior years
due to a combination of lower interest rates and a decreased level of invested
assets as a result of the FEI-Zyfer acquisition early in fiscal year 2004. The
Company anticipates that investment income in fiscal year 2005 will remain
approximately the same as fiscal year 2004 as interest rate increases provide
better earnings on interest sensitive investments but reduce the potential for
larger realized gains on those securities.
Interest expense for the year ended April 30, 2004 increased by $82,000
(29%) compared to fiscal year 2003 and decreased by $19,000 (6%) compared to
fiscal 2002. The increase in fiscal 2004 is attributable to short-term
borrowings by the Company to fund its working capital requirements. Rather than
liquidating certain marketable securities, the Company established a credit line
with a financial institution and borrowed approximately $3 million. The interest
rate on this line (approximately half of what marketable securities are earning
for the Company) plus similar short-term financing in the European subsidiaries
increased interest expense during fiscal year 2004. As the Company retires its
short and long-term financing obligations, interest expense is expected to
decline. The Company also incurs interest expense on the financing arrangement
for the leaseback of the U.S. manufacturing facility and for certain deferred
compensation payments. The Company anticipates that interest expense in fiscal
year 2005 will be lower than that recorded in fiscal year 2004.
Other, net was net expense of $181,000 in fiscal year 2004 compared to net
income of $277,000 in fiscal year 2003 and net income of $46,000 in fiscal year
2002. The variances in this account were impacted primarily by costs and income
recorded at the Company's French subsidiary. During fiscal year 2004, this
subsidiary incurred certain one-time charges of approximately $100,000 whereas
during fiscal year 2003, the same subsidiary realized a gain of approximately
$150,000 on the sale of a portion of real property and received a government
agency subsidy of approximately $200,000 to support a
20
development activity. The Company anticipates that in future years other, net,
will not be a significant contributor to pretax earnings.
Income Taxes
------------
The Company is subject to taxation in several countries. The statutory
federal rates vary from 34% in the United States to 35% in Europe. The effective
rate for the Company for the year ended April 30, 2004 was 41% compared to a 17%
(benefit) in fiscal year 2003 and 19% in fiscal year 2002. In fiscal year 2004,
the rate was higher than the statutory rates primarily because the Company was
unable to benefit from the losses incurred by certain of its European and Asian
subsidiaries. Offsetting this increased provision was the reversal of certain
tax liabilities which had been established in prior years to cover certain tax
contingencies. During fiscal year 2004, the Company's income tax returns were
examined by the Internal Revenue Service and no changes were required for the
years under audit. Accordingly, the tax liabilities established for the audited
years are no longer required and the reversal of such tax liabilities were
recorded as a tax benefit in the current year.
In fiscal year 2003, the effective tax rate was impacted by the
non-deductibility of goodwill impairment. In fiscal year 2002, the effective
rate was lower than the statutory rate primarily due to the availability of
research and development tax credits in the United States. (See Note 14 to the
Consolidated Financial Statements.)
The Company's European subsidiaries have available net operating loss
carryforwards of approximately $2.6 million to offset future taxable income.
These loss carryforwards have no expiration date.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $61.0 million at April 30, 2004. Included in working
capital at April 30, 2004 is $31.4 million consisting of cash, cash equivalents
and short-term investments, including approximately $12.0 million representing
the fair market value 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, 2004 is 6.2 to 1.
Net cash used in operating activities for the year ended April 30, 2004,
was $2.6 million compared to cash provided by operations of $2.4 million in
fiscal year 2003. In fiscal year 2004, cash was absorbed primarily during the
first half of the fiscal year as the Company's European subsidiaries recorded
operating losses and the Company made working capital investments in the
operations of newly-acquired FEI-Zyfer to enable it to return to profitability.
With increasing sales in the second half of fiscal year 2004, the Company
realized net inflows of cash but these were not sufficient to overcome the
larger outlays in the earlier part of the year. In fiscal year 2003, the Company
recorded an $8.9 million net loss which included substantial non-cash charges,
such as the writedown of goodwill for $6.2 million and certain adjustments to
inventory. Additionally, cash was provided by collections on accounts receivable
and reductions of inventory offset by payments against accounts payable and
other liabilities.
Net cash provided by investing activities for the year ended April 30,
2004, was $529,000. Approximately $4.4 million was generated by the sale or
maturity of certain marketable securities, net of purchases. Most of this cash
was used to acquire FEI-Zyfer for $2.5 million (excludes $120,000 of acquisition
expenses paid in fiscal year 2003) and to provide additional working capital
support for this subsidiary as indicated above. (See Note 12 to the accompanying
financial statements.) Approximately $1.3 million was used to acquire additional
capital equipment. Investing activities in fiscal year 2003 resulted in cash
inflow of $506,000 consisting of net transactions in marketable securities of
$1.2 million offset by capital expenditures of $834,000. 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 and
acquisition strategies. The Company will continue to acquire more efficient
equipment to automate its production process. It intends to spend less than $2
million on capital equipment during fiscal year 2005. Internally generated cash
will be adequate to acquire this capital equipment.
In fiscal year 2004, the Company established a $5 million line of credit
with the financial institution which also manages a substantial portion of its
investment in marketable securities. The line is secured
21
by the investments which earn, on average, approximately a 5.5% annual return.
Rather than liquidate some of these investments to meet short-term working
capital requirements, during the year the Company borrowed $2.7 million against
the line of credit at fixed and variable interest rates between 2.39% and 2.77%.
The Company must annually repay any borrowings under the line of credit on their
anniversary date but may also obtain new funding up to the credit limit. In
addition, the Company's European subsidiaries have available approximately $7.6
million in bank credit lines to meet short-term cash flow requirements. As of
April 30, 2004, $634,000 was outstanding under such lines of credit. The rate of
interest on these borrowings was 2.056% based on the one month EURO Interbank
Offered Rate (EURIBOR).
Net cash provided by financing activities in fiscal year 2004 was $1.5
million. The principal source of funds was short-term financing from financial
institutions in the amount of $3.4 million. (See above and Note 7 to the
financial statements.) Cash was used to pay the Company's semi-annual cash
dividend of $1.7 million and $479,000 was used to make regularly scheduled
long-term liability payments. These outflows were partially offset by the
receipt of $252,000 for repayment of a stock loan and the exercise of stock
options. Net cash used by financing activities for the year ended April 30,
2003, was $2.7 million and included dividend payments of $1.7 million and
long-term liability payments of $741,000. During fiscal year 2003, the Company
also acquired 80,000 shares of its common stock for treasury at a cost of
$501,000. These outflows were partially offset by proceeds of $111,000 from new
borrowings and payments of $67,000 received from the sale of shares of common
stock from treasury to satisfy the exercise of stock options granted to certain
officers and employees in prior years. The Company will continue to use treasury
shares to satisfy the future exercise of stock options granted to officers and
employees. 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 resources to develop and improve
products for wireless and wireline communication systems which management
believes will result in future growth and continued profitability. During fiscal
year 2005, the Company intends to make a substantial investment of capital and
technical resources to develop new products to meet the needs of the commercial
communications marketplace and to invest in more efficient product designs and
manufacturing procedures. Where possible, the Company will secure partial
customer funding for such development efforts but is targeting to spend its own
funds at a rate of approximately 10% of revenues to achieve its development
goals. Internally generated cash will be adequate to fund these development
efforts.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
CONTRACTUAL OBLIGATIONS
- -----------------------
As of April 30, 2004
Total Less than More than More than
Contractual Obligations (in thousands) 1 Year 1 to 3 Years 3 to 5 Years 5 Years
- ------------------------------- -------------- ----------- ------------ ------------ -----------
Long-Term Debt Obligations $ 63 $ 24 $ 39 $ 0 $ 0
Operating Lease Obligations 2,049 582 800 667 0
Lease Financing Liability 1,606 305 1,041 260 0
Deferred Compensation 6,854* 244 425 342 5,843
Other Long -Term Liabilities 9,110**
----------- ----------- ----------- ----------- -----------
Total $19,682 $1,155 $2,305 $1,269 $5,843
=========== =========== =========== =========== ===========
*Deferred Compensation liability (See Note 12 in the accompanying
financial statements) reflects payments due to current retirees receiving
benefits. The amount of $5,843 in the more than 5 years
22
column includes benefits due to participants in the plan who are not yet
receiving benefits although some participants may opt to retire and begin
receiving benefits within the next 5 years.
**Consists of deferred income and related liabilities associated with the
REIT units received on sale of the Company's building to Reckson Associates in
1998. (See Item 2. Properties and Note 6. Property, Plant and Equipment in the
accompanying financial statements.) These liabilities have no defined maturity.
As of April 30, 2004, the Company's consolidated backlog amounted to
approximately $36 million (see Item 1). Approximately 80% of this backlog is
expected to be filled during the Company's fiscal year ending April 30, 2005.
*******
The Company's liquidity is adequate to meet its foreseeable operating and
investment needs. In addition, with its available cash and marketable
securities, the Company is able to continue paying semi-annual dividends,
subject to the review and approval of its Board of Directors.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
The Company has evaluated all recent accounting pronouncements and their
related effective dates. The adoption of these statements did not have a
material impact on the Company's financial position, results of operations or
cash flows.
OTHER MATTERS
- -------------
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 2004, 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
- --------------------------------------------------------------------
Interest Rate 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 $13.7 million and $12.0 million, respectively, at April 30,
2004. The investments are carried at fair value with changes in unrealized gains
and losses, net of taxes, 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, 2004, a 10% 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).
Foreign Currency Risk
With its investment in Gillam-FEI, FEI-Europe and FEI-Asia, the Company is
subject to foreign currency translation risk. For each of these investments, the
Company does not have any near-term intentions to repatriate its invested cash.
For this reason, the Company does not intend to initiate any exchange rate
hedging strategies which could be used to mitigate the effects of foreign
currency fluctuations. The effects of foreign currency rate fluctuations will be
recorded in the equity section of the balance sheet as a component of other
comprehensive income. As of April 30, 2004, the amount related
23
to foreign currency exchange rates is a $3,561,000 unrealized gain. Note that
the value of the Chinese Yuan is "pegged" to the value of the US dollar.
Accordingly, no foreign currency gains or losses have been realized or are
included in the unrealized gain indicated above. If the Chinese government
decides to change its policy and permits the Yuan to "float" against other world
currencies, the Company would report the effect in other comprehensive income,
as appropriate.
The results of operations of foreign subsidiaries, when translated into US
dollars, will reflect the average rates of exchange for the periods presented.
As a result, similar results in local currency can vary significantly upon
translation into US dollars if exchange rates fluctuate significantly from one
period to the next.
24
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
------------------
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 15(a)(1) on page 50 present fairly, in all material
respects, the financial position of Frequency Electronics, Inc. and Subsidiaries
at April 30, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended April 30, 2004 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) on page 50 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
July 6, 2004
25
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2004 and 2003
-----------
ASSETS: 2004 2003
---- ----
(In thousands)
Current assets:
Cash and cash equivalents $ 5,699 $ 5,952
Marketable securities 25,690 27,829
Accounts receivable, net of allowance for
doubtful accounts of $140 in 2004 and $124 in 2003 15,036 9,565
Inventories, net 21,925 17,734
Deferred income taxes 2,585 4,435
Income taxes receivable 242 1,223
Prepaid expenses and other 1,658 1,198
----------- -----------
Total current assets 72,835 67,936
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,486 11,105
Deferred income taxes 593 436
Goodwill and other intangible assets 616 --
Cash surrender value of life insurance 5,355 4,869
Other assets 1,775 1,383
----------- -----------
Total assets $92,660 $85,729
=========== ===========
Continued
26
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2004 and 2003
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 2004 2003
---- ----
(In thousands)
Current liabilities:
Short-term credit obligations $ 3,408 $ 179
Accounts payable - trade 3,470 1,294
Accrued liabilities 4,106 3,615
Dividend payable 843 834
----------- -----------
Total current liabilities 11,827 5,922
Deferred compensation 6,854 6,752
REIT liability and other liabilities 10,755 11,151
----------- -----------
Total liabilities 29,436 23,825
----------- -----------
Minority interest in consolidated subsidiary 48 195
----------- -----------
Commitments and contingencies (Notes 6 and 9)
Stockholders' equity:
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 - 9,163,940 shares 9,164 9,164
Additional paid-in capital 44,442 43,806
Retained earnings 8,897 10,415
----------- -----------
62,503 63,385
Common stock reacquired and held in treasury -
at cost (738,428 shares in 2004 and
824,739 shares in 2003) (2,797) (3,062)
Other stockholders' equity (17) (116)
Accumulated other comprehensive income 3,487 1,502
----------- -----------
Total stockholders' equity 63,176 61,709
----------- -----------
Total liabilities and stockholders' equity $92,660 $85,729
=========== ===========
The accompanying notes are an integral part of these financial statements.
27
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 2004, 2003 and 2002
-----------
2004 2003 2002
---- ---- ----
(In thousands, except share data)
Net sales $50,106 $31,527 $41,179
Cost of sales 34,529 25,681 27,090
----------- ----------- -----------
Gross margin 15,577 5,846 14,089
Selling and administrative expenses 11,459 7,573 8,932
Restructuring charge 428 -- --
Research and development expenses 5,336 4,605 6,568
Insurance reimbursement, net -- -- (1,500)
Goodwill impairment -- 6,158 --
----------- ----------- -----------
Operating (loss) profit (1,646) (12,490) 89
Other income (expense):
Investment income 2,321 1,830 1,864
Interest expense (365) (283) (302)
Other, net (181) 277 46
----------- ----------- -----------
Income (loss) before minority interest and
provision (benefit) for income taxes 129 (10,666) 1,697
Minority interest in loss of
consolidated subsidiary (144) (33) (1)
----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes 273 (10,633) 1,698
Provision (benefit) for income taxes 111 (1,773) 320
----------- ----------- -----------
Net income (loss) $162 ($8,860) $1,378
=========== =========== ===========
Net income (loss) per common share:
Basic $0.02 ($1.06) $0.17
=========== =========== ===========
Diluted $0.02 ($1.06) $0.16
=========== =========== ===========
Average shares outstanding:
Basic 8,374,399 8,331,785 8,350,735
=========== =========== ===========
Diluted 8,542,575 8,331,785 8,529,175
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
28
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity Years ended
April 30, 2004, 2003 and 2002
(In thousands, except share data)
Treasury stock
Common Stock Additional (at cost)
------------ paid in Retained ---------
Shares Amount capital earnings Shares Amount
------ ------ ------- -------- ------ ------
Balance at May 1, 2001 9,163,940 9,164 42,860 21,226 872,669 (3,127)
- ----------------------
Exercise of stock options 52 (14,375) 43
Amortization of independent
contractor stock options 45
Contribution of stock to 401(k) plan 120 (28,220) 278
Amortization of unearned
compensation
Cash dividend (1,665)
Increase in market value of
marketable securities
Foreign currency translation
adjustment
Net income 1,378
Comprehensive income- 2002
-------- ----- ------- ------- ------- ------
Balance at April 30, 2002 9,163,940 9,164 43,077 20,939 830,074 (2,806)
- -------------------------
Exercise of stock options 29 (11,000) 38
Issuance of stock for Gillam 447 (35,000) 88
acquisition
Contribution of stock to 401(k) plan 253 (39,335) 119
Repurchase of stock for treasury 80,000 (501)
Cash dividend (1,664)
Decrease in market value of
marketable securities
Foreign currency translation
adjustment
Net loss (8,860)
Comprehensive loss- 2003
-------- ----- ------- ------- ------- ------
Balance at April 30, 2003 9,163,940 9,164 43,806 10,415 824,739 (3,062)
- -------------------------
Exercise of stock options 74 (25,300) 79
Stock grant to officer 236 (20,000) 61
Contribution of stock to 401(k) plan 326 (41,011) 125
Repayment of receivable common stock
Cash dividend (1,680)
Increase in market value of
marketable securities
Foreign currency translation
adjustment
Net income 162
Comprehensive income- 2004
-------- ----- ------- ------- ------- ------
Balance at April 30, 2004 9,163,940 $9,164 $44,442 $ 8,897 738,428 ($2,797)
- ------------------------- ========= ====== ======= ======= ======= =======
Accumulated
Other other
Stockholders' comprehensive
equity income (loss) Total
------ ------------- -----
Balance at May 1, 2001 (122) 204 70,205
- ----------------------
Exercise of stock options 95
Amortization of independent
contractor stock options 45
Contribution of stock to 401(k) plan 398
Amortization of unearned 6 6
compensation
Cash dividend (1,665)
Increase in market value of
marketable securities 17 17
Foreign currency translation (137) (137)
adjustment
Net income 1,378
-------
Comprehensive income- 2002 1,258
------ ------ -------
Balance at April 30, 2002 (116) 84 70,342
- -------------------------
Exercise of stock options 67
Issuance of stock for Gillam 535
acquisition
Contribution of stock to 401(k) plan 372
Repurchase of stock for treasury (501)
Cash dividend (1,664)
Decrease in market value of
marketable securities (1,039) (1,039)
Foreign currency translation 2,457 2,457
adjustment
Net loss (8,860)
-------
Comprehensive loss- 2003 (7,442)
------ ------ -------
Balance at April 30, 2003 (116) 1,502 61,709
- -------------------------
Exercise of stock options 153
Stock grant to officer 297
Contribution of stock to 401(k) plan 451
Repayment of receivable common stock 99 99
Cash dividend (1,680)
Increase in market value of
marketable securities 991 991
Foreign currency translation 994 994
adjustment
Net income 162
-------
Comprehensive income- 2004 2,147
------ ------ -------
Balance at April 30, 2004 ($17) $3,487 $63,176
- ------------------------- ====== ====== =======
The accompanying notes are an integral part of these financial statements.
29
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2004, 2003 and 2002
-----------
2004 2003 2002
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income (loss) $162 ($8,860) $1,378
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Goodwill impairment -- 6,158 --
Deferred tax expense (benefit) 411 (123) 358
Depreciation and amortization 2,098 1,600 1,460
Provision for losses on accounts
receivable and inventories 710 3,634 1,009
(Gain) loss on marketable securities and
other assets, net (618) (67) 128
Stock grant to officer 297 -- --
Minority interest in loss of consolidated subsidiary (147) (34) (1)
Changes in assets and liabilities, exclusive of assets and liabilities
acquired:
Accounts receivable (4,149) 4,515 3,360
Inventories (3,035) (1,115) (11)
Prepaid and other (379) 370 308
Other assets (497) (548) (341)
Accounts payable trade 1,004 (2,209) (21)
Insurance reimbursement receivable -- -- 3,000
Accrued liabilities 200 (823) (2,524)
Liability for employee benefit plans 719 973 1,429
Income taxes receivable 975 (19) (3,698)
Other liabilities (320) (1,004) (939)
----------- ----------- -----------
Net cash (used in) provided by operating activities (2,569) 2,448 4,895
----------- ----------- -----------
Cash flows from investing activities:
Payment for acquisition (2,538) (120) --
Purchase of minority interest in manufacturing partner -- -- (313)
Purchase of marketable securities (6,053) (7,378) (21,154)
Proceeds from sale or redemption of marketable
securities 10,435 8,598 23,615
Capital expenditures (1,343) (834) (1,541)
Other- net 28 240 --
----------- ----------- -----------
Net cash provided by investing activities 529 506 607
----------- ----------- -----------
Continued
30
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2004, 2003 and 2002
(Continued)
-----------
2004 2003 2002
---- ---- ----
(In thousands)
Cash flows from financing activities:
Principal payments of long-term debt and
other long-term obligations (479) (741) (750)
Proceeds from short-term debt 3,361 111 88
Payment of cash dividend (1,671) (1,664) (1,661)
Repurchase of stock for treasury -- (501) --
Repayment of officer loan 99 -- --
Exercise of stock options 153 67 95
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,463 (2,728) (2,228)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents
before effect of exchange rate changes (577) 226 3,274
Effect of exchange rate changes on cash and
cash equivalents 324 343 (12)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (253) 569 3,262
Cash and cash equivalents at beginning of year 5,952 5,383 2,121
----------- ----------- -----------
Cash and cash equivalents at end of year $5,699 $5,952 $5,383
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $271 $264 $283
=========== =========== ===========
Income taxes $450 $0 $3,352
=========== =========== ===========
Other activities which affect assets or liabilities but
did not result in cash flow during the fiscal years:
Declaration of cash dividend, not paid $843 $834 $833
=========== =========== ===========
Acquired net assets of Zyfer, Inc.
Accounts receivable $894 -- --
Inventory 1,397 -- --
Customer Lists 602 -- --
Goodwill 140 -- --
Other current assets 25 -- --
Fixed assets 787 -- --
Accounts payable (974) -- --
Accrued expenses (71) -- --
-----------
$2,800 -- --
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
31
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
15 for information regarding the Company's Commercial Communications (which
includes the subsidiaries FEI Communications, Inc., FEI-Europe, GmbH and
FEI-Asia, Inc.), Gillam-FEI, U.S. Government (subsidiary FEI-Government Systems,
Inc.) and FEI-Zyfer business segments. Intercompany accounts and significant
intercompany transactions are eliminated in consolidation. To accommodate the
different fiscal periods of Gillam-FEI, the company recognizes its share of net
income or loss on a one month lag. Any material events which may occur during
the intervening month at Gillam-FEI will be accounted for in the consolidated
financial statements.
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.
Reclassifications:
Certain prior year amounts have been reclassified to conform to current
year presentation. These reclassifications had no effect on reported
consolidated earnings.
Inventories:
Inventories, which consist of finished goods, 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 are recorded at cost and include 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.
Amortization of identifiable intangible assets is based upon the expected
lives of the assets and is recorded at a rate which approximates the Company's
utilization of the assets
Goodwill:
The Company records goodwill as the excess of purchase price over the fair
value of identifiable net assets acquired. In accordance with Statement of
Financial Accounting Standards ("FAS") No. 142 "Goodwill and Other Intangible
Assets," goodwill is tested for impairment on at least an annual basis. When it
is determined that the carrying value of investments may not be recoverable, the
Company writes down the related goodwill to an amount commensurate with the
revised value of the acquired assets. The Company measures impairment based on
revenue projections, recent transactions involving similar businesses and
price/revenue multiples at which they were bought and sold, price/revenue
multiples of competitors, and the present market value of publicly-traded
companies in the Company's industry.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Intangible Assets
Intangible assets consist of customer lists which result from the excess
purchase price over the fair value of acquired tangible assets. The customer
lists are measured at fair value and amortized over the estimated useful life of
3 to 5 years.
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 revenue 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.
For contracts in the Company's subsidiaries, and smaller contracts or
orders in the other business segments, sales of products and services to
customers are reported in operating results 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.
Shipping and Handling costs:
The Company charges certain of its customers for the cost of shipping and
handling. Such billings are generally offset by the expenses paid to shipping
companies. As a result, freight out expense (net) is immaterial to the Company's
financial statements.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains or losses, net of
tax, on securities available for sale during the year and the effects of foreign
currency translation adjustments.
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:
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 weighted
average number of shares of common stock and the if-converted effect of
unexercised stock options.
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.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, 2004 and 2003 were
held in the custody of two financial institutions. Investments in debt and
equity securities are categorized as available for sale and are carried at fair
value, with unrealized gains and losses excluded from income and recorded
directly to stockholders' equity. The Company recognizes gains or losses when
securities are sold using the specific identification method.
Research and Development expenses:
The Company engages in research and development activities to identify new
applications for its core technologies, to improve existing products and to
improve manufacturing processes to achieve cost reductions and manufacturing
efficiencies. Research and development costs include direct labor, manufacturing
overhead, direct materials and contracted services. Such costs are expensed as
incurred. In the normal course of business the Company is also contracted to
perform research and development for others. The costs incurred under such
contracts are recorded in cost of sales.
Equity-based Compensation:
The Company applies the disclosure-only provisions of FAS No. 148,
"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 FAS No. 148, 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.
The following table illustrates the effect on the Company's consolidated
statements of operations 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 FAS No. 123:
(in thousands, except per share data)
2004 2003 2002
---- ---- ----
Net Income (Loss), as reported $162 ($8,860) $1,378
---- -------- ------
Cost of stock options, net of tax (772) (714) (904)
----- ----- -----
Net (Loss) Income - pro forma ($610) ($9,574) $474
===== ======= ====
Earnings (Loss) per share, as reported:
Basic $0.02 ($1.06) $0.17
===== ====== =====
Diluted $0.02 ($1.06) $0.16
===== ====== =====
(Loss) Earnings per share- pro forma
Basic ($0.07) ($1.15) $0.06
====== ====== =====
Diluted ($0.07) ($1.15) $0.06
====== ====== =====
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 each of the three years ended
April 30, 2004, 2003 and 2002: dividend yield of 1.83%; expected volatility of
63% (65% in fiscal year 2002), risk free interest rate of 5.5%; and expected
lives of ten years.
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Foreign Currency Adjustments
The local currency is the functional currency of each of the Company's
non-US subsidiaries. No foreign currency gains or losses are recorded on
intercompany transaction since they are effected at current rates of exchange.
The results of operations of foreign subsidiaries, when translated into US
dollars, reflect the average rates of exchange for the periods presented. The
balance sheets of foreign subsidiaries, except for equity accounts, are
translated into US dollars at the rates of exchange in effect on the date of the
balance sheet. As a result, similar results in local currency can vary
significantly upon translation into US dollars if exchange rates fluctuate
significantly from one period to the next.
New Accounting Pronouncements:
The Company has evaluated all recent accounting pronouncements and their
related effective dates. The adoption of these statements did not have a
material impact on the Company's financial position, results of operations or
cash flows.
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,
---------------------------------
2004 2003 2002
---- ---- ----
Basic EPS Shares outstanding
(weighted average) 8,374,399 8,331,785 8,350,735
Effect of Dilutive Securities 168,176 *** 178,440
--------- --------- ---------
Diluted EPS Shares outstanding 8,542,575 8,331,785 8,529,175
========= ========= =========
*** Dilutive securities are excluded for the year ended April 30, 2003
since the inclusion of such shares would be antidilutive due to the net loss for
the year then ended.
Options to purchase 471,750, 677,362 and 483,250 shares of common stock
were outstanding during the years ended April 30, 2004, 2003 and 2002,
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.
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 $2,428,000 at April 30, 2004 and $3,023,000 at April 30,
2003. 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 $3,495,000 and $3,598,000
at April 30, 2004 and 2003, respectively, consisted of the following (in
thousands):
2004 2003
---- ----
Raw Materials and Component Parts $ 8,608 $ 7,349
Work in Progress and Finished Goods 13,317 10,385
--------- ---------
$ 21,925 $ 17,734
======== ========
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. Marketable Securities
---------------------
Marketable securities at April 30, 2004 and 2003 are summarized as follows
(in thousands):
April 30, 2004
----------------------------------------
Unrealized
Market Holding
Cost Value (Loss)
---- ----- ------
REIT units $ 12,000 $ 12,000 $ -
Fixed income securities 13,767 13,672 (95)
Equity securities 46 18 (28)
-------- -------- -------
$ 25,813 $ 25,690 ($ 123)
======== ======== =======
April 30, 2003
----------------------------------------
Unrealized
Market Holding
Cost Value (Loss) Gain
---- ----- ------
REIT units $ 12,000 $ 9,675 ($2,325)
Fixed income securities 17,298 17,841 543
Equity securities 306 313 7
-------- -------- -------
$ 29,604 $ 27,829 ($ 1,775)
======== ======== =======
Maturities of fixed income securities classified as available-for-sale at
April 30, 2004 are as follows (in thousands):
Current $1,017
Due after one year through five years 1,007
Due after five years through ten years 11,743
------
$13,767
=======
During fiscal year 2002, the decline in market value of certain fixed
income securities was deemed to be other than temporary. Accordingly, during
that fiscal year, the Company charged $300,000 against investment income to
record the impairment in value of these securities.
6. Property, Plant and Equipment
-----------------------------
Property, plant and equipment consists of the following (in thousands):
2004 2003
---- ----
Buildings and building improvements $ 12,726 $ 12,250
Machinery, equipment and furniture 29,377 27,647
------ ------
42,103 39,897
Less, accumulated depreciation 30,617 28,792
------ ------
$ 11,486 $ 11,105
======== ========
Depreciation expense for the years ended April 30, 2004, 2003 and 2002 was
$1,969,000, $1,600,000 and $1,460,000, respectively.
Maintenance and repairs charged to operations for the years ended April
30, 2004, 2003 and 2002 was approximately $437,000, $242,000 and $440,000
respectively.
In January 1998, the Company sold the Long Island New York building that
it occupies to Reckson Associates Realty Corp., a real estate investment trust
("REIT") whose shares are traded on the New York Stock Exchange. The sale
involved a tax-deferred exchange of the building for approximately 486,000
participation units of Reckson Operating Partnership, L.P. ("REIT units") which
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
The Company leased back approximately 43% of the 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 of $10,534,000
and $10,820,000 at April 30, 2004 and 2003, respectively. 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 remaining 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 years ended April 30, 2004, 2003
and 2002, the Company charged $114,000, $132,000 and $149,000, respectively, to
interest expense under the financing agreement.
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 2009. Under the terms of the lease, the Company is
required to pay its proportional share of real estate taxes, insurance and other
charges. The lease for the FEI-Asia facility is for a one-year term with rent of
$9,850 payable quarterly. The lease for the FEI-Zyfer facility is for an initial
term of one and one-half years at a rate of $20,400 per month.
Future minimum lease payments required by the leases are as follows (in
thousands):
Years ending
April 30,
---------
2005 582
2006 400
2007 400
2008 400
2009 267
------
$2,049
======
7. Debt Obligations
----------------
In fiscal year 2004, the Company established a $5 million line of credit
with the financial institution which also manages a substantial portion of its
investment in marketable securities. The line is secured by the investments.
During the year, the Company borrowed $2.7 million against the line of credit at
fixed and variable interest rates between 2.39% and 2.77%.
The Company's European subsidiaries have available approximately $7.6
million in bank credit lines to meet short-term cash flow requirements. As of
April 30, 2004 and 2003, $634,000 and $144,000, respectively, was outstanding
under such lines of credit. One of the credit lines is collateralized by the
$1.5 million in accounts receivable of the Company's French subsidiary. Interest
on these credit lines varies from 0.5% to 1.5% over the EURO Interbank Offered
rate (EURIBOR). At April 30, 2004 and 2003, the rate was 2.056% and 3.574%,
respectively, based on the 1 month EURIBOR.
The Company also has one long-term debt obligation of approximately
$63,000 collateralized by certain capital equipment at one of the Company's
European subsidiaries. The loan matures in 2005 through 2007, and is payable in
monthly installments of $2,200, including interest at 5.34%.
Debt scheduled to mature in each of the subsequent years ending April 30,
are as follows: (in thousands)
2005 $ 3,408
2006 23
2007 16
---------
$ 3,447
=========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Accrued Liabilities
-------------------
Accrued liabilities at April 30, 2004 and 2003 consist of the following
(in thousands):
2004 2003
---- ----
Payment due for investment in affiliated companies $ 666(A) $ --
Due customers 222 766
Other compensation including payroll taxes 2,062 1,456
Vacation accrual 476 456
Other 680 937
--------- ---------
$ 4,106 $ 3,615
========= =========
(A) In April 2004, the Company increased its investment in Morion, Inc., a
Russian producer of low cost, high precision quartz resonators and crystal
oscillators. Settlement of the additional investment did not occur until
after year end. The Company's investment in Morion represents less than
20% of the outstanding shares of Morion, accordingly the investment is
carried at cost. During the years ended April 30, 2004, 2003 and 2002, the
Company acquired product from Morion in the aggregate amount of
approximately $730,000, $350,000 and $670,000, respectively.
9. Commitments and Contingencies
-----------------------------
Qui Tam Action:
A judgment in favor of the Company, dated September 3, 2002, was entered
by the United States District Court for the Eastern District of New York in
connection with its dismissal of a qui tam action. The qui tam action was served
upon FEI and Martin Bloch, its President, in March 1994 by Ralph Muller, a
former FEI employee. 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 judgment is based on the Court's decision on the merits in favor of
Frequency Electronics, Inc. and its President, dated August 23, 2002. The
judgment preserves all of FEI's rights to recover costs and its causes of action
against the plaintiff and third party defendants.
Directors' and Officers' Insurance Coverage:
On April 30, 2002, FEI settled the arbitration proceeding it had commenced
in June 2001 before the American Arbitration Association against The Home
Insurance Company of Illinois ("Home") under an excess directors and officers
liability insurance policy. FEI had asserted claims for its loss relating to,
among other matters, sums it paid in connection with certain litigation with the
US government which was settled in 1998. Under the terms of the settlement
agreement, Home paid FEI $1.5 million, FEI released its claims and the
arbitration was discontinued.
Legal Fees:
Included in selling and administrative expenses are legal fees incurred in
connection with the above matters of approximately $64,000 and $150,000 for
fiscal years 2003 and 2002, respectively. No legal fees were incurred in fiscal
year 2004 related to such matters.
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 (4.5% at
April 30, 2004) which is payable and adjusted annually. The principal was
originally due in its entirety at the earlier of termination of employment or
October 1999 but was
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
extended until October 2004 for certain officers. In fiscal year 2004, one
officer repaid his loan in the amount of $99,000. No payments were received
during fiscal year 2003. The remaining balance of $16,500 will be repaid by the
extended due date of October 31, 2004.
11. Acquisition of Gillam-FEI.
--------------------------
During fiscal year 2001, using a combination of cash and FEI's common
stock, the Company acquired Gillam-FEI, a Belgian-based company which also is
the majority shareholder of a French company. Under terms of the purchase
agreement, the market value of FEI's stock was measured on July 25, 2002, and
required that an additional 35,000 shares of FEI stock be issued to certain
former shareholders of Gillam-FEI during fiscal year 2003.
Goodwill Impairment
-------------------
The Gillam-FEI acquisition was treated as a purchase. The purchase price
was allocated to net assets acquired and to goodwill. In the fourth quarter of
2003, the Company performed an impairment test of the Gillam-FEI reporting unit.
The fair value of this reporting unit was determined based upon valuations
utilized in recent industry acquisition transactions and current market values
of publicly-traded competitors and customers in the same industry as Gillam-FEI.
Based on this test, the Company further analyzed its investment in Gillam-FEI
and concluded that the goodwill associated with this acquisition was impaired.
Consequently, the Company recorded a non-cash charge of $6.2 million against
operating income for fiscal year 2003 to reflect the write down of the full
value of goodwill related to the Gillam-FEI acquisition.
12. Acquisition of Zyfer, Inc.
--------------------------
On May 9, 2003, the Company acquired the business and net assets of Zyfer,
Inc., a wholly-owned subsidiary of Odetics, Inc., in a cash transaction. The
business of the new subsidiary, FEI-Zyfer, Inc., is the design and manufacture
of products for precision time and frequency generation and synchronization,
primarily incorporating GPS technology.
The Company paid $2.3 million at closing, plus acquisition costs of
approximately $400,000. According to the terms of the purchase agreement, the
Company is required to make additional payments up to a maximum of $1 million in
each of fiscal years 2004 and 2005 if FEI-Zyfer achieves certain revenue levels
in those years. The contingent payments are based on a percentage of revenues in
excess of $6 million in fiscal year 2004 and as a percentage of revenues in
excess of $8 million in fiscal year 2005. The acquired business recorded revenue
of $6.5 million for the year ended March 31, 2003 and $4.5 million in the prior
fiscal year.
The FEI-Zyfer acquisition is treated as a purchase acquisition. The
purchase price has been allocated to net assets acquired of approximately $1.8
million. The purchase price in excess of net assets acquired, approximately
$900,000, has been allocated to fixed assets ($300,000) and to customer lists
($600,000) which will be amortized over the next 3 to 5 years. Amortization
expense for the year ended April 30, 2004 was approximately $127,000. As of
April 30, 2004, the Company has also recorded goodwill in the amount of
approximately $140,000 based on the contingent payment requirement as described
above and FEI-Zyfer's sales of $6.5 million during fiscal 2004.
The accompanying consolidated statements of operations for the year ended
April 30, 2004, includes the results of operations of FEI-Zyfer since May 9,
2003. The pro forma financial information set forth below is based upon the
Company's historical consolidated statements of operations for the years ended
April 30, 2004 and 2003, adjusted to give effect to the acquisition of FEI-Zyfer
as of the beginning of each of the periods presented. The fiscal year 2003
financial information includes the results of operations of FEI-Zyfer for the
period April 1, 2002 to March 31, 2003.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The pro forma financial information is presented for informational
purposes only and may not be indicative of what actual results of operations
would have been had the acquisition occurred on May 1, 2002, nor does it purport
to represent the results of operations for future periods.
Pro forma
(unaudited)
Years ended April 30,
2004 2003
---- ----
(In thousands except per share data)
Net Sales $ 50,207 $ 40,817
----------- -----------
Operating Loss $ (1,725) $ (12,808)
----------- -----------
Income (Loss) from
continuing operations $ 94 $ (9,209)
=========== ===========
Earnings (Loss) per share- basic $ 0.01 $ (1.11)
=========== ===========
Earnings (Loss) per share- diluted $ 0.01 $ (1.11)
=========== ===========
13. 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. For the years ended
April 30, 2004, 2003 and 2002, the Company contributed 41,011, 39,335 and 28,220
shares of common stock, respectively. The approximate value of these shares at
the date of issuance was $450,000 in fiscal year 2004, $370,000 in fiscal year
2003 and $400,000 in fiscal year 2002.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees which
are based on operating profits of the Company. The Company also adopted a plan
for the President and Chief Executive Officer of the Company, which formula is
based on pre-tax profits. The Company charged $315,000 to operations under these
plans for the fiscal year ended April 30, 2004. For fiscal years 2003 and 2002,
no amount for bonuses was recorded in selling and administrative expenses due to
the lack of earnings, exclusive of the insurance reimbursement in fiscal 2002.
Independent Contractor Stock Option Plan:
The Company has an Independent Contractor Stock Option Plan under which up to
350,000 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. Each of the option grants in fiscal year
2001 were granted to certain independent contractors at a price equal to the
then fair market value of the Company's common stock. Each option grant
permitted immediate exercise of a portion of the options (24% to 34% of the
total grant) with the balance exercisable proportionately over the next two to
three years. For the year ended April 30, 2002, the Company recognized
compensation expense of $45,000, as a result of these stock option grants. No
compensation expense was recognized during the years ended April 30, 2004 and
2003 as no new grants were made in fiscal years 2004, 2003 or 2002 and previous
grants have been fully expensed.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Transactions under this plan, including the weighted average exercise
prices of the options, are as follows:
2004 2003 2002
------------------------ ------------------------ -----------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 114,350 $ 15.31 114,350 $ 15.31 114,350 $ 15.31
Granted -- -- -- -- --
Exercised (3,300) $ 9.25 -- -- --
---------- ---------- ----------
Outstanding at end of year 111,050 $ 15.49 114,350 $ 15.31 114,350 $ 15.31
========== ========== ==========
Exercisable at end of year 111,050 $ 15.49 111,350 $ 15.29 109,350 $ 15.32
========== ========== ==========
Available for grant at end of year 219,500 219,500 219,500
========== ========== ==========
Weighted average fair value
of options granted during the year $ -- $ -- $ --
========== ========== ==========
Employee Stock Option Plans:
The Company has various stock option plans for key management employees,
including officers and directors who are employees. The plans are both
Nonqualified Stock Option ("NQSO") plans and Incentive Stock Option ("ISO")
plans. Under both types of plans, 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. Under one NQSO 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. As of April 30, 2004, eligible employees had been granted
options to purchase 1,084,000 shares of Company stock under ISO plans of which
316,500 options are outstanding and approximately 75,000 are exercisable.
Through April 30, 2004, eligible employees have been granted options to acquire
1,090,000 shares of Company stock under NQSO plans. Of the NQSO options,
approximately 765,000 are outstanding and approximately 685,000 are exercisable
(see tables below).
The excess of the consideration received over the par value of the common stock
or cost of treasury stock issued under both types of option plans has been
recognized as an increase in additional paid-in capital. No charges are made to
income with respect to the ISO or NQSO plans.
Transactions under these plans, including the weighted average exercise
prices of the options, are as follows:
2004 2003 2002
------------------------ ------------------------ -----------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 1,031,062 $ 12.63 969,062 $ 13.14 861,437 $ 13.30
Granted 128,500 $ 9.13 83,500 $ 6.62 122,000 $ 11.25
Exercised (22,000) $ 5.58 (3,500) $ 7.27 (14,375) $ 6.76
Expired or canceled (56,125) $ 5.86 (18,000) $ 12.91 --
---------- ---------- ----------
Outstanding at end of year 1,081,437 $ 11.00 1,031,062 $ 12.63 969,062 $ 13.14
========= ========= =======
Exercisable at end of year 760,312 $ 11.07 665,562 $ 11.64 514,000 $ 10.23
======= ======= =======
Available for grant at end of year 71,000 278,000 342,000
====== ======= =======
Weighted average fair value
of options granted during the year $ 5.57 $ 4.03 $ 7.00
========= ========= =========
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table summarizes information about stock options outstanding
at April 30, 2004:
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Actual Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 4/30/04 Life Price at 4/30/04 Price
--------------- ---------- ---- ----- ---------- -----
$4.375 - 9.575 533,250 6.4 $ 7.59 347,375 $ 7.18
10.167 - 16.625 466,187 5.9 12.60 351,437 12.63
23.75 82,000 6.3 23.75 61,500 23.75
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.
2004 2003 2002
--------------------- --------------------- ---------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 22,500 30,000 $ 4.00 30,000 $ 4.00
Granted -- -- -- -- -- --
Expired -- -- -- -- -- --
Exercised -- -- (7,500) $ 4.00 -- --
---------- ---------- ----------
Outstanding at end of year 22,500 $ 4.00 22,500 $ 4.00 30,000 $ 4.00
========== ========== ==========
Exercisable at end of year 22,500 $ 4.00 22,500 $ 4.00 30,000 $ 4.00
========== ========== ==========
Balance of shares available for
grant at end of year 98,250 98,250 98,250
========== ========== ==========
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.
Employee Stock Ownership Plan/Stock Bonus Plan:
During 1990 the Company amended its Stock Bonus Plan to become an Employee Stock
Ownership Plan ("ESOP"). By means of a bank note, subsequently repaid, 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 were
released for allocation to participants based on a formula as specified in the
ESOP document. By the end of fiscal 2000, all shares (1,071,652) had been
allocated to participant accounts of which 615,200 shares remain in the ESOP.
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
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Deferred compensation expense charged to operations during the years ended
April 30, 2004, 2003 and 2002 was approximately $371,000, $602,000 and $982,000,
respectively. During fiscal year 2002, the Company made modifications to the
benefits of certain employees and added two new participants. Accordingly,
deferred compensation expense in fiscal year 2002 included approximately
$400,000 to account for the benefit modifications.
14. Income Taxes
------------
The income (loss) before provision (benefit) for income taxes consisted of
(in thousands):
Year Ended April 30,
--------------------
2004 2003 2002
---- ---- ----
U.S. $ 466 ($ 3,680) $ 1,567
Foreign (193) (6,953) 130
---------- ---------- ----------
$ 273 ($ 10,633) $ 1,697
========== ========== ==========
The provision (benefit) for income taxes consists of the following (in
thousands):
2004 2003 2002
---------- ---------- ----------
Current:
Federal ($ 300) ($ 1,650) $ --
Foreign -- -- 32
State -- -- (70)
---------- ---------- ----------
Current benefit (300) (1,650) (38)
---------- ---------- ----------
Deferred
Federal -- (352) 228
Foreign 95 (171) 90
State -- (200) 40
Valuation allowance- foreign 316 600 --
---------- ---------- ----------
Deferred provision (benefit) 411 (123) 358
---------- ---------- ----------
Total provision (benefit) $ 111 ($ 1,773) $ 320
========== ========== ==========
The following table reconciles the reported income tax expense with the
amount computed using the federal statutory income tax rate (in thousands).
2004 2003 2002
---------- ---------- ----------
Computed "expected" tax (benefit) expense$ 93 ($ 3,615) $ 577
State and local tax, net of federal benefit -- (139) (46)
Minority interest in loss of consolidated subsidiary (50) (11) --
Valuation allowance on foreign deferred taxes 316 600 --
Foreign taxes -- -- 118
Nondeductible losses at foreign subsidiaries 218 135 78
Nondeductible goodwill impairment -- 2,094 --
Nondeductible expenses 121 164 60
Nontaxable life insurance cash value increase (103) (51) (86)
Reversal of tax liabilities (400) -- --
Tax credits (90) (768) (210)
Other items, net, none of which individually
exceeds 5% of federal taxes at statutory rates 6 (182) (171)
---------- ---------- ----------
$ 111 ($ 1,773) $ 320
========== ========== ==========
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The components of deferred taxes are as follows (in thousands):
2004 2003
---- ----
Deferred tax assets:
Employee benefits $ 3,465 $ 3,289
Inventory 1,200 1,505
Accounts receivable 100 50
Marketable securities 49 710
Credit and loss carryforwards 400 400
Research & development 436 510
Other liabilities 7 214
Foreign net operating loss carryforwards 594 970
Miscellaneous 308 (116)
----------- -----------
Total deferred tax asset 6,559 7,532
----------- -----------
Deferred tax liabilities:
Property, plant and equipment 2,388 2,061
----------- -----------
Net deferred tax asset 4,171 5,471
Valuation allowance (993) (600)
----------- -----------
$ 3,178 $ 4,871
=========== ===========
At April 30, 2004, the Company has available approximately $2.6 million in
net operating losses available to offset future income of certain of its foreign
subsidiaries. The Company's valuation allowance was increased by $393,000 in
fiscal year 2004 to reflect the fact that the potential benefit arising from
losses of a foreign subsidiary is not likely to be realized. The total valuation
allowance relates to deferred tax assets of foreign subsidiaries.
15. Segment Information
-------------------
The Company operates under four reportable segments:
(1) Commercial 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.
(3) Gillam-FEI - the Company's Belgian subsidiary primarily sells
wireline synchronization and network monitoring systems.
(4) FEI-Zyfer - the products of the Company's newly acquired subsidiary
incorporate Global Positioning System (GPS) technologies into
systems and subsystems for secure communications, both government
and commercial, and other locator applications.
The accounting policies of the four 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's Commercial Communications and U.S.
Government segments operate principally out of a U.S.-based manufacturing
facility with both segments sharing the same managers, manufacturing personnel,
and machinery and equipment. Consequently, data for these two segments includes
allocations of depreciation and corporate-wide general and administrative
charges. The assets of these two segments consist principally of inventory and
accounts receivable. All other U.S.-based assets are assigned to the corporation
for the benefit of all four segments.
The European-based director of Gillam-FEI and the president of FEI-Zyfer
manage the assets of these segments. All acquired assets, including intangible
assets, are included in the assets of these segments.
44
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:
(in thousands)
2004 2003 2002
---- ---- ----
Net sales:
Commercial Communications $29,066 $15,051 $26,663
U.S. Government 7,053 8,906 4,513
Gillam-FEI 12,197** 8,137 11,223
FEI-Zyfer 6,560 - -
less intersegment sales (4,770)** (567) (1,220)
------- ------- -------
Consolidated Sales $50,106 $31,528 $41,179
======= ======= =======
Operating (loss) profit:
Commercial Communications ($ 1,093)** ($7,123) ($1,394)
U.S. Government 656 1,887 733
Gillam-FEI 353** (6,972) 516
FEI-Zyfer (1,059) - -
Corporate (503) (282) 234
------- ------- -------
Consolidated Operating (Loss) Profit ($ 1,646) ($12,490) $ 89
======= ======= ========
** Includes intersegment sale of $3,518,000 to the Commercial Communications
segment for development of a wireline synchronization product for ultimate
production and sale in the United States. This amount was recorded as research
and development expense of the Commercial Communications segment, resulting in
an operating loss at that segment and an operating profit in the Gillam-FEI
segment.
Identifiable assets:
Commercial Communications $ 22,988 $14,733 $21,101
U.S. Government 5,189 6,147 3,176
Gillam-FEI 14,904 12,305 17,956
FEI-Zyfer 5,541 - -
less intersegment balances (5,673) (964) (1,575)
Corporate 49,711 53,508 55,353
-------- ------- -------
Consolidated Identifiable Assets $ 92,660 $85,729 $96,011
======== ======= =======
Depreciation and amortization (allocated):
Commercial Communications $ 1,100 $ 930 $ 995
U.S. Government 267 327 166
Gillam-FEI 307 324 280
FEI-Zyfer 405 - -
Corporate 19 19 19
-------- ------- -------
Consolidated Depreciation Expense $2,098 $1,600 $1,460
====== ====== ======
Major Customers
- ---------------
In fiscal year 2004, sales to two customers of the Commercial
Communications segment aggregated $21.6 million or 74% of that segment's total
sales. These customers accounted for 32% and 11%, respectively, of the Company's
consolidated sales for the year. In the U.S. Government segment, sales to three
customers aggregated $5.8 million or 82% of that segment's revenues in fiscal
year 2004. In the Gillam-FEI segment, sales to two customers aggregated $2.7
million or 31% of that segment's revenues (exclusive of the $3.5 million
intersegment sale). In the FEI-Zyfer segment, one customer accounted for $1.2
million or 19% of that segment's sales. None of the customers in the U.S.
Government, Gillam-FEI or FEI-Zyfer segments accounted for more than 10% of
consolidated revenues.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During fiscal year 2003, sales to one customer accounted for approximately
$10.0 million of the Commercial Communications segment's total sales. This
amount represents 66% of Commercial Communications' total revenues and 32% of
consolidated sales. In the U.S. Government segment, sales to three customers
accounted for $6.7 million of sales or 76% of the segment's revenue and 21% of
consolidated revenue. One of the U.S. Government segment's customers accounted
for $3.5 million or 11% of consolidated revenue. Sales to two customers,
aggregating $1.9 million, accounted for 24% of the revenues of the Gillam-FEI
segment. None of the customers in the Gillam-FEI segment accounted for more than
10% of consolidated revenues.
During fiscal year 2002, sales to one customer of the Commercial
Communications segment were $15.5 million or 58% of that segment's sales and 38%
of consolidated revenue. In the U.S. Government segment, sales to three
customers aggregated $3.5 million or 78% of that segment's revenues. Sales to
two customers, aggregating $3.3 million, accounted for 30% of the revenues of
the Gillam-FEI segment. None of the customers in the U.S. Government segment or
the Gillam-FEI segment accounted for more than 10% of consolidated revenues.
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.
Foreign Sales
- -------------
Revenues in the Commercial Communications and Gillam-FEI segments 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)
2004 2003 2002
---- ---- ----
China $ 14,141 $ 1,814 $ 1,129
Belgium 3,876 3,514 5,113
France 3,987 2,483 5,645
Canada 1,046 -- --
Brazil 1,021 -- 1,074
United Kingdom 436 910 261
Other 2,785 3,414 3,881
----------- ----------- -----------
$ 27,292 $ 12,135 $ 17,103
=========== =========== ===========
16. Product Warranties
------------------
The Company generally provides its customers with a one-year warranty
regarding the manufactured quality and functionality of its products. For some
limited products, the warranty period has been extended. The Company establishes
warranty reserves based on its product history, current information on repair
costs and annual sales levels. During the year ended April 30, 2004, the Company
increased the warranty reserve by $100,000 to $400,000. At April 30, 2003 and
2002, the reserve was $300,000. During fiscal years 2004, 2003 and 2002, the
Company incurred warranty expenses of approximately $280,000, $900,000 and
$884,000, respectively. The higher than expected warranty expense level in
fiscal years 2003 and 2002 was primarily related to a unique manufacturing
defect in one of the Company's products which occurred over a limited period of
time. The defect was identified and corrected and, as of April 30, 2003, the
Company had substantially completed the warranty rework related to this product.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
17. Interim Results (Unaudited)
---------------------------
Quarterly results for fiscal years 2004 and 2003 are as follows:
(in thousands, except per share data)
2004 Quarter
------------------------------------------------------
1st 2nd 3rd 4th
Net sales $ 8,754 $ 10,025 $ 14,052 $ 17,275
Gross margin 2,567 3,320 4,773 4,917
Net income (loss) (742) (234) 333 805
*Earnings (loss) per share
Basic ($ 0.09) ($ 0.03) $ 0.04 $ 0.10
Diluted ($ 0.09) ($ 0.03) $ 0.04 $ 0.09
During the fourth quarter of fiscal year 2004, the Company reduced its
inventory by $530,000 to adjust for inventory revaluation and realized a tax
benefit of $400,000 as the result of the reversal of certain tax liabilities
that were determined to be no longer required. (See Note 14.)
*Quarterly earnings per share data do not equal the annual amount due to
changes in the average common equivalent shares outstanding.
(in thousands, except per share data)
2003 Quarter
------------------------------------------------------
1st 2nd 3rd 4th
Net sales $ 6,828 $ 8,300 $ 9,390 $ 7,009
Gross margin 2,055 2,621 3,073 (1,903)
Net income (loss) (489) 251 239 (8,861)
*Earnings (loss) per share
Basic ($ 0.06) $ 0.03 $ 0.03 ($ 1.06)
Diluted ($ 0.06) $ 0.03 $ 0.03 ($ 1.06)
During the fourth quarter of fiscal 2003, the Company wrotedown the
goodwill associated with the acquisition of Gillam-FEI in the amount of $6.2
million. In addition, the Company wrote off or reserved $3.6 million of certain
excess component inventory and work-in-progress inventory due to contract
cancellations and revaluation related to market conditions and from
manufacturing process improvements.
*Quarterly earnings per share data do not equal the annual amount due to
changes in the average common equivalent shares outstanding.
47
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, 2004
Allowance for doubtful
accounts $124 $16 $140
Inventory reserves $3,598 $694 $28(c) $825(b) $3,495
Year ended April 30, 2003
Allowance for doubtful
accounts $124 -- -- $124
Inventory reserves $2,941 $3,634 $35(c) $3,012(b) $3,598
Year ended April 30, 2002
Allowance for doubtful
accounts $190 $9 $75(a) $124
Inventory reserves $2,537 $1,000 $(1)(c) $595(b) $2,941
(a) Accounts written off
(b) Inventory disposed or written off
(c) Foreign currency translation adjustments
48
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
NONE
Item 9A Controls and Procedures
-------------------------------
Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's chief executive officer and chief financial
officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's chief executive officer and chief financial officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fourth fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Company
- ---------------------------------------------------------
The information required to be furnished pursuant to this item with
respect to Directors of the Company, in compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, and the Company's code of ethics is
incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of stockholders to be held on or about September 30,
2004. The information required to be furnished pursuant to this item with
respect to Executive Officers is set forth, pursuant to General Instruction G of
Form 10-K, under Part I of this Report.
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
September 30, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- ---------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
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 September 30, 2004.
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 September 30, 2004.
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
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 September 30, 2004.
49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Index to Financial Statements, Financial Statement Schedule 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 Registered Public Accounting Firm 25
Consolidated Balance Sheets
April 30, 2004 and 2003 26-27
Consolidated Statements of Operations
-years ended April 30, 2004, 2003 and 2002 28
Consolidated Statements of Changes in Stockholders'
Equity
- years ended April 30, 2004, 2003 and 2002 29
Consolidated Statements of Cash Flows
- years ended April 30, 2004, 2003 and 2002 30-31
Notes to Consolidated Financial Statements 32-47
(2) FINANCIAL STATEMENT SCHEDULE
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 48
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 Registered Public Accounting Firm 55
Exhibit 31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 56
Exhibit 31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 57
Exhibit 32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 58
Exhibit 32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 59
The exhibits listed on the accompanying Index to Exhibits beginning
on page 52 are filed as part of this annual report.
(b) REPORTS ON FORM 8-K
Registrant's Form 8-K, dated March 10, 2004, containing disclosure under
Item 5 thereof (dividend declaration), was filed with the Securities and
Exchange Commission during the quarter ended April 30, 2004.
50
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.
By /s/ Martin B. Bloch
--------------------------
Martin B. Bloch
President and CEO
By /s/ Alan L. Miller
--------------------------
Alan L. Miller
Chief Financial Officer
and Controller
Dated: July 29, 2004
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/ Joseph P. Franklin Chairman of the Board 7/29/04
----------------------
Joseph P. Franklin
/s/ Joel Girsky Director 7/29/04
----------------------
Joel Girsky
/s/ John Ho Director 7/29/04
----------------------
John Ho
/s/ Marvin Meirs Director 7/29/04
----------------------
Marvin Meirs
/s/ Martin B. Bloch President and CEO 7/29/04
----------------------
Martin B. Bloch (Principal Executive Officer)
/s/ Alan L. Miller Chief Financial Officer 7/29/04
---------------------- and Controller
Alan L. Miller (Principal Financial Officer)
51
INDEX TO EXHIBITS
ITEM 15(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. in
this Form 10-K Description of Exhibit NOTE
- -------------- ------------------------------------------------------------------- ----
3.1 Copy of Certificate of Incorporation of the Registrant
filed with the Secretary of State of Delaware (1)
3.2 Amendment to Certificate of Incorporation of the
Registrant filed with the Secretary of State
of Delaware on March 27, 1981 (2)
3.3 Amendment to Certificate of Incorporation of the Registrant
filed with Secretary of State of Delaware on October 26, 1984 (6)
3.4 Amendment to Certificate of Incorporation of the Registrant
filed with the Secretary of State of Delaware on October 22, 1986 (8)
3.5 Amended and Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of Delaware on
October 26, 1987 (10)
3.6 Amended Certificate of Incorporation of the Company filed
with the Secretary of State of Delaware on November 2, 1989 (10)
3.7 Copy of By-Laws of the Registrant, as amended to date (3)
4.1 Specimen of Common Stock certificate (1)
10.1 Registrant's 1997 Independent Contractor Stock Option Plan (11)
10.2 Stock Bonus Plan of Registrant and Trust Agreement
thereunder (4)
10.3 Employment agreement between Registrant and Martin B. Bloch (4)
10.4 Employment agreement between Registrant and Abraham Lazar (4)
10.5 Employment agreement between Registrant and John C. Ho (4)
10.6 Employment agreement between Registrant and Marvin Meirs (4)
10.7 Employment agreement between Registrant and Alfred Vulcan (4)
10.8 Employment agreement between Registrant and Harry Newman (4)
10.9 Employment agreement between Registrant and Marcus Hechler (4)
10.10 Employment agreement between Registrant and Charles Stone (9)
10.11 Employment agreement between Registrant and Jerry Bloch (9)
10.12 Contribution Agreement between Registrant and Reckson
Operating Partnership L.P. dated January 6, 1998 (12)
10.13 Lease agreement between Registrant and Reckson Operating
Partnership, L.P. dated January 6, 1998 (12)
10.14 Plea Agreement, Civil Settlement and Related Documents dated
June 19, 1998 (12)
52
Exhibit No. in
this Form 10-K Description of Exhibit NOTE
- -------------- ------------------------------------------------------------------- ----
10.15 Registrant's 1984 Incentive Stock Option Plan (6)
10.16 Registrant's Cash or Deferral Profit Sharing Plan and
Trust under Internal Revenue Code Section 401,
dated April 1, 1985 (7)
10.17 Amendment dated April 19, 1981 to Stock Bonus Plan
of Registrant and Trust Agreement (3)
10.18 Amendment Restated Effective as of May 1, 1984 of the
Stock Bonus Plan and Trust Agreement of Registrant (7)
10.19 Amendment Restated Effective as of May 1, 1984 of the Stock
Bonus Plan and Trust Agreement of Registrant (8)
10.20 Form of stock escrow agreement between Vincenti & Schickler as
escrow agent and certain officers of Registrant (4)
10.21 Form of Agreement concerning Executive Compensation (2)
10.22 Registrant's 1987 Incentive Stock Option Plan (9)
10.23 Registrant's Senior Executive Stock Option Plan (9)
10.24 Amendment dated Jan. 1, 1988 to Registrant's Cash or
Deferred Profit Sharing Plan and Trust under Section 401
of Internal Revenue Code (9)
10.25 Executive Incentive Compensation Plan between Registrant
and various employees (9)
10.26 Registrant's Employee Stock Option Plan (10)
10.27 Loan agreement between Registrant and Nat West
dated May 22, 1990 (10)
10.28 Loan Agreement between Registrant's Employee Stock
Ownership Plan and Registrant dated May 22, 1990 (10)
11 Computation of Earnings per Share of Common Stock Included in the
Financial Statements
15 Registrant's 1982 Incentive Stock Option Plan (5)
21 List of Subsidiaries of Registrant (10)
23 Consent of Independent Registered Public Accounting Firm
to incorporation by reference of 2004 audit report in
Registrant's Form S-8 Registration Statement. Filed herewith
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith
53
Exhibit No. in
this Form 10-K Description of Exhibit NOTE
- -------------- ------------------------------------------------------------------- ----
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith
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.
54