SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended April 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to _____
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- ----------------------- --------------------------
Common Stock (par value American Stock Exchange, Inc.
$1.00 per share)
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 12,1996 - $24,488,500.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 12,1996 - 4,848,395.
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 August 27,1996.
(Cover Page 1 of 63 pages)
Exhibit Index at Page 52
<PAGE>
PART I
Item 1. Business
GENERAL DISCUSSION
Frequency Electronics, Inc.(sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the area of time and frequency control. Unless the context
indicates otherwise, references to the Registrant are to Frequency Electronics,
Inc. and its subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became
the successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 4,846,395 shares were
outstanding at April 30, 1996, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.
Since its inception, Registrant has been involved principally in
military defense contracting by way of the design, development, manufacture, and
marketing of precision time and frequency control products. Its products are
used in guidance and navigation, communications, surveillance and electronic
counter measure and timing systems. Such products are used on many of the United
States' most sophisticated military aircraft, satellites, and missiles. In
recent years, changing defense priorities and severe federal government budget
pressures have significantly changed the market environment for defense related
products. Total U.S. Government defense and space acquisitions have declined
steeply and further cuts cannot be discounted over the coming years. As a
consequence, many major U.S. Government contracts have been subjected to program
stretch-outs. The Registrant's business was highly dependent upon the defense
and space spending policies of the U.S. Government when fiscal 1996 began.
Although this dependence will be less significant in the future, as discussed
below, any substantial reduction in government spending or change in emphasis in
the government's defense and space programs would still have a material adverse
effect upon the Registrant's business. For additional factors which may have had
an adverse effect on Registrant's business with the U.S. Government, the
materiality, if any, or extent of which effect is not readily ascertainable by
Registrant at this time, reference is made to the subtopic "Material
Developments" of this Item 1 and to Item 3 (Legal Proceedings).
In an effort to better serve customers on a more competitive basis,
Registrant has segmented its operations into two principal industries: Defense
and space for United States Government end use, and commercial communications
and non-U.S. defense and space. The Registrant's commercial communications and
commercial space programs have been transferred to and are now produced by its
wholly owned subsidiary FEI Communications, Inc. ("FEIC"). FEIC was incorporated
in Delaware in December 1991, and was created as a separate subsidiary company
to provide ownership and management of assets and other services appropriate for
commercial clients, both domestic and foreign. Registrant believes that as a
separate entity operational flexibility and efficiency isenhanced.
For the years ended April 30, 1996, 1995 and 1994, approximately 55%,
75% and 69%, respectively of the Registrant's sales were for U.S. Government end
use. During fiscal 1996, approximately 45% of the Registrant's sales were for
commercial products, used for commercial communications, commercial space
applications and foreign government end use. Registrant believes a substantial
commercial market exists and has developed several new product lines as
discussed later in this Item 1.
MATERIAL DEVELOPMENTS
On November 17, 1993, Registrant was indicted on criminal charges
alleging conspiracy and fraud in connection with six contracts for which
Registrant was a subcontractor. In addition, two derivative actions have been
filed against the Board of Directors essentially seeking recovery on behalf of
the Company for any losses it incurs as a result of the indictment. On December
14, 1993, Registrant was notified by the U.S. Department of the Air Force that
it had been suspended from contracting with any agency of the government.
Current contracted programs are not affected by this suspension. Certain
exceptions will apply if a compelling reason exists. The suspension is temporary
subject to the outcome of the legal proceedings in connection with the
indictment. The Company and the individual defendants have pleaded not guilty to
all criminal charges, have denied all civil allegations, and will vigorously
contest all charges and allegations. See Item 3 - Legal Proceedings.
PRODUCTS
Since its inception, Registrant has been involved in the design,
development, manufacture and marketing of precision time and frequency control
products. Using the technology the Registrant has developed in time and
frequency products for limited applications, the Registrant has modified a
number of products for wider application in the much broader navigation,
communications and electronic warfare markets and non-military commercial
markets.
The Registrant's products are used in guidance and navigation,
communications, surveillance and electronic countermeasure and timing systems.
These products are built in accordance with Department of Defense or customer
standards and are used on many of the United States' most sophisticated military
aircraft, satellites and missiles.
Registrant designs and manufactures the master clocks (quartz, rubidium
and cesium) for many satellite communication systems for both satellite and
ground applications. The Global Positioning Satellite System, as well as the
MILSTAR Satellite System, are but two examples of the programs in which the
Registrant participates. Registrant also supplies significant timing products
utilized with many satellite communications systems.
Registrant manufactures the master clock for the Trident missile, the
basic timing system for the Voyager I and Voyager II deep space exploratory
missions and the quartz timing system for the Space Shuttle. The Registrant's
cesium beam atomic clock is presently employed in low frequency secure
communications, surveillance and positioning systems for the United States Air
Force, Navy and Army.
The Registrant's products are marketed as components, microwave
products, instruments, or complete systems and are used in navigation,
communications, radar, sonar, guidance, surveillance and electronic
countermeasure equipment and systems. Prices are determined based upon the
complexity, design requirement and delivery schedule as determined by the
project details.
Sales summaries for each class of Registrant's products during each of
the last five years is set forth in Item 6 (Selected Financial Data).
Most of Registrant's products are manufactured from raw materials
which, when combined with conventional electronic component parts available from
multiple sources, become finished products, subsystems and systems used for
space exploration, satellite applications, communication, navigation, position
location, radar, and electronic counter-measures. These products, subsystems and
systems are employed in domestic and international satellites, earth stations,
aircraft, missiles, ships and submarines, and ground-based fixed, transportable,
portable and mobile installations.
COMPONENTS - The Registrant's key technologies include quartz, rubidium
and cesium from which it manufactures accurate time and frequency standards and
higher level assemblies which allow the users to locate their position, secure a
communications system, or guide a missile with precision. The components class
of Registrant's products is rounded out with crystal filters and discriminators,
surface acoustic wave resonators, and space and high-reliability custom thick
and thin film hybrid integrated circuits.
Quartz is the key element in making quartz resonators used for
oscillators and filters utilized in most of its products.
Precision quartz oscillators use quartz resonators in conjunction with
electronic circuitry to produce signals with accurate and stable frequency. The
Registrant's products include several types of quartz oscillators, suited to a
wide range of applications, including: ultrastable units for critical satellite
and strategic systems, and fast warm-up, low power consumption units for mobile
and tactical applications.
The ovenized quartz oscillator is the most accurate type, wherein the
oscillator crystal is enclosed in a temperature controlled environment called a
proportional oven. The Registrant manufactures several varieties of temperature
controlling devices and ovens.
The voltage-controlled quartz oscillator is an electronically
controlled device wherein the frequency may be stabilized or modulated,
depending upon the application.
The temperature compensated quartz oscillator is an electronically
controlled device using a temperature sensitive device to directly compensate
for the effect of temperature on the oscillator's frequency.
The key components for the atomic instrument products are manufactured
totally from raw materials. The rubidium lamp, filter and resonance cell provide
the optical subassembly used in the manufacture of the Registrant's optically
pumped atomic rubidium frequency standards. The cesium tube resonator is also
manufactured totally from raw materials and is used in the manufacture of the
Registrant's cesium primary standard atomic clocks.
Efficient and reliable DC-DC power converters are manufactured for the
Registrant's own instruments, and as stand alone products, for space and
satellite applications.
The Registrant manufactures filters and discriminators using its
crystal resonators, for use in its own radio-frequency and microwave receiver,
signal conditioner and signal processor products.
High reliability, MIL-M-38510 Class S and B, custom hybrids are
manufactured in thick and thin film technologies for applications from DC to 44
GHz. These are used in manufacturing the Registrant's products, and also
supplied directly to customers, for space and other high reliability systems.
MICROWAVE PRODUCTS - The Registrant, under an agreement with TRW's
Electronics and Technology Division, markets their extensive line of
millimeter/microwave monolithic integrated circuits ("MIMICs") developed by TRW
for the Department of Defense, and microwave monolithic integrated circuits
("MMICs") developed at TRW's own cost. These devices are incorporated into
"supercomponents" and integrated subassemblies.
INSTRUMENTS - The Registrant's instrument line consists of three basic
time and frequency generating instruments and a number of instruments which test
and distribute the time and frequency. The Registrant's time and frequency
generating instruments are the quartz frequency standard, rubidium atomic
standard, and the cesium beam atomic clock.
The quartz frequency standard is an electronically controlled
solid-state device which utilizes a quartz crystal oscillator to produce a
highly stable output signal at a standardized frequency. The Registrant's
frequency standard is used in communications, guidance and navigation and time
synchronization. The Registrant's products also include a precision frequency
standard with battery back-up and memory capability enabling it to remain in
operation if a loss of power has occurred. The optically pumped atomic rubidium
frequency standard is a rugged, compact, militarized solid-state instrument
which provides both timing and low phase noise references used in communications
systems.
The cesium beam atomic clock utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency, several orders of
magnitude more accurate than other types of quartz frequency generators. The
atomic clock is a compact, militarized solid-state device which generates these
precision frequencies for use with advanced communications and navigation
equipment. A digital time-of-day clock is incorporated which provides visual
universal time display and provides digital timing with ten-billionths of a
second accuracy for systems use. The atomic clock manufactured by Registrant is
a primary standard, capable of producing time accuracies of better than one
second in seven hundred thousand years.
As communications systems become more precise, the requirement for
precise frequency signals to drive a multitude of electronic equipment is
greatly expanded. To meet this requirement, the Registrant manufactures a
distribution amplifier which is an electronically controlled solid-state device
that receives frequency from a frequency standard and provides multiple signal
outputs of the input frequency. A distribution amplifier enables many items of
electronic equipment in a single facility, aircraft or ship to receive a
standardized frequency and/or time signal from a quartz, rubidium or cesium
atomic standard.
<PAGE>
SYSTEMS - Essentially, the Registrant's systems portion of its business
is manufactured by integrating selections of its products into subsystems that
meet customer-defined needs. This is done by utilizing its unique knowledge of
interfacing these technologies, and experience in applying them to a wide range
of systems. In general, though not limited to, the Registrant's systems generate
electronic frequencies of predetermined value, and then divide, multiply, mix,
convert, modulate, demodulate, filter, distribute, combine, separate, switch,
measure, analyze, and/or compare, depending on the system application.
The Systems portion of the business includes a complete line of time
and frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. The time and
frequency control systems combine Registrant's cesium, rubidium and/or crystal
instruments, with its other products, to provide systems for space exploration,
satellite tracking stations, satellite-based navigation and position location,
secure communication, submarine and ship navigation calibration, and electronic
counter-measures applications. A number of these time and frequency control
systems provide up to quadruple redundancy to assure operational longevity.
For example, the Registrant manufactured the Common Time and Frequency
System (CTFS) for the first and second Time Data Relay Satellite System (TDRSS)
Ground System. It includes redundant cesium standards and redundant Disciplined
Standards, redundant switches, time code generators, buffer amplifiers, and
displays; and integrates WWVB, LORAN and GPS receivers and antennas, and various
instrumentation and non-interruptible power supplies.
As a second example, the Registrant manufactured a triple-redundant
quartz crystal oscillator and frequency distribution sub-system for MILSTAR
Satellite Flight #1 and quadruple-redundant rubidium standards and
dual-redundant frequency distribution and DC-DC power converter sub-systems for
MILSTAR Flights #2 through #5.
The Registrant also manufactures satellite communications subsystems
such as the up and down converters for the TDRSS satellites and the 30 channel,
triple conversion element separator for the TDRSS earth stations, and the LNA's
up/down converters and receiver subsystems for the DSP.
See Item 6 - Selected Financial Data - for sales data for each of these
product lines.
BACKLOG
As of April 30, 1996, the Registrant's backlog amounted to
approximately $15 million of which approximately $13.7 million is funded as
compared to approximately $15 million of funded backlog at April 30, 1995 (see
Item 7). The backlog includes purchase orders and contracts from commercial and
foreign customers of approximately $8.6 million. A substantial portion of this
backlog is expected to be filled during Registrant's fiscal year ending April
30, 1997. While the backlog includes firm purchase orders and contracts and may
be a guideline in determining the value of orders which may be deliverable in
the period indicated, it is subject to change by reason of several factors
including possible cancellation of orders, change orders, terms of the contracts
and other factors beyond the Registrant's control. Accordingly, the backlog is
not necessarily indicative of the revenues or profits (losses) which may be
realized when the results of such contracts are reported.
CUSTOMERS AND SUPPLIERS
The Registrant markets its products both directly and through 35
independent sales representative organizations located principally in the United
States. Sales to non-U.S. customers totaled approximately 17% of net sales in
1996 and 16% in fiscal years 1995 and 1994.
The Registrant's products are sold to a variety of customers, both
governmental and private. For the years ended April 30, 1996, 1995 and 1994,
approximately 55%, 75% and 69%, respectively, of the Registrant's sales were
made under contracts to the U.S. Government or subcontracts for U.S. Government
end-use. The Registrant's business is highly dependent upon the defense and
space spending policies of the U.S. Government. Any substantial reduction in
government spending or change in emphasis in the government's defense and space
programs would have a material adverse effect upon the Registrant's business
(see Item 3).
Sales to Hughes Aircraft Company (HAC) and Space Systems Loral each
exceeded 10% of the Company's consolidated sales for the year ended April 30,
1996. Collectively these two companies accounted for approximately 39% of the
Company's consolidated sales for the same period. For the year ended April 30,
1995, sales to HAC, TRW and Raytheon Corp. exceeded 10% individually and 56%
collectively of consolidated sales. For the year ended April 30, 1994, sales to
HAC and Raytheon Corp. exceeded 10% individually and 40% collectively of
consolidated sales. For the fiscal year ended April 30, 1996, the sales to HAC
were substantially all for U.S. Government end use while the sales to Space
Systems Loral were for commercial communication and foreign defense and space
applications. Sales to the above named customers in the fiscal years ended April
30, 1995 and 1994 were substantially all for U.S. government end use. The loss
by the Company of any one of these customers or, for those customers contracting
with the U.S. Government, the loss of any contracts which are partially
subcontracted to the Company, would have a material adverse effect on the
Company's business. The Company believes its relationship with these companies
to be mutually satisfactory and, except for the pending legal proceedings
discussed in Item 3, is not aware of any prospect for the cancellation of or
significant reduction of any of their U.S. Government contracts in which the
Company is involved.
The Registrant purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Registrant is not dependent upon any one supplier or source of
supply for any of its component part purchases and maintains alternative sources
of supply for all of its purchased components. The Registrant has found its
suppliers generally to be reliable and price-competitive.
GOVERNMENT CONTRACTS
During the fiscal years ended April 30, 1996, 1995 and 1994,
approximately 55%, 75% and 69%, respectively, of the Registrant's sales were
made either directly with U.S. Government agencies or indirectly with government
agencies through subcontracts intended for government end-use. All but a few of
these contracts are on a fixed price basis. Under a fixed price contract the
price paid to the Registrant is not subject to adjustment by reason of the costs
incurred by the Registrant in the performance of the contract, except for costs
incurred due to contract changes ordered by the customer. These contracts are on
a negotiated basis under which the Registrant bears the risk of cost overruns
and derives the benefit from cost savings.
Negotiations on U.S. Government contracts are sometimes based in part
on Certificates of Current Costs. An inaccuracy in such certificates may entitle
the government to an appropriate recovery. From time to time, the Defense
Contracts Audit Agency ("DCAA") of the Department of Defense audits the
Registrant's accounts with respect to these contracts. The Registrant is not
aware of any basis for recovery with respect to past certificates.
All government end-use contracts are subject to termination by the
purchaser for the convenience of the U.S. Government and are subject to various
other provisions for the protection of the U.S. Government. In the event of such
termination, the Registrant is entitled to receive compensation as provided
under such contracts and in the applicable U.S.Government regulations.
COMMERCIAL MARKETS
During the fiscal year ended April 30, 1996, the Registrant continued
to focus a significant portion of its resources and efforts on developing
hardware for commercial satellite programs and commercial ground communication
systems which management believes will result in future growth and increases in
profits. In fiscal 1994, Registrant transferred all commercial communications
and space programs to its wholly owned subsidiary, FEIC. The foregoing
developments have been implemented with a view towards enabling Registrant to
achieve long-term substantial increases in sales from other than Defense
Department programs.
Some of the product lines which the Registrant has developed for the
commercial market are as follows:
Commercial Rubidium Atomic Standard:
An extremely small,low cost, low phase noise,stable atomic standard
ideally suited for use in advanced cellular communications, wireless
telecommunications and navigation applications.
Subminiature Oven Controlled Commercial Quartz Crystal Oscillator:
A low cost, small size, precision crystal oscillator suited for high
end performance required in satellite transmissions, airborne
telephony, and geophysical survey positioning systems.
VSAT Transceivers:
Used in satellite communications for private data and voice earth
stations and are currently under test and evaluation. The objective is
to manufacture VSAT products for both the domestic and export markets
through joint venture arrangements. Registrant is presently marketing
its other products through a representative Chinese Company engaged in
the electronics business. A family of two product lines is planned to
meet customer needs. The Registrant has received its first contract
for VSAT's in China.
RESEARCH AND DEVELOPMENT
The Registrant's technological expertise has been an important factor
in its growth. Until recently, virtually all of its research and development
activities have taken place in connection with customer-sponsored research and
development oriented projects conducted under fixed price contracts and
subcontracts in support of U.S. Government programs. These projects constituted
non-recurring engineering and were a substantial portion of the Registrant's
business. The Registrant has been successful in applying its resources to
providing prototypes and preproduction hardware for use in military navigation,
communication, guidance and electronic countermeasure programs and space
applications. The output of these customer-sponsored projects, in all cases, are
proprietary to the Registrant.
The Registrant continues to focus a significant portion of its own
resources and efforts on developing hardware for commercial satellite programs,
commercial ground communication systems and wireless communications systems
which it anticipates will result in future growth and increases in profits.
Through its wholly owned subsidiary, FEIC, the Registrant is aggressively
pursuing markets for its commercial rubidium product line and its C and KU-Band
VSAT transceivers. The foregoing developments have been implemented with a view
towards enabling Registrant to achieve long-term increases in sales from other
than Defense Department programs. During fiscal 1996, 1995 and 1994, the
Registrant expended $1.1 million, $1.9 million, and $1.4 million of its own
funds, respectively, on such research and development activity.
PATENTS AND LICENSES
The Registrant believes that its business is not dependent on patent or
license protection. Rather, it is primarily dependent upon the Registrant's
technical competence, the quality of its products and its prompt and responsible
contract performance. However, the rights to inventions of employees working for
the Registrant are assigned to the Registrant and the Registrant presently holds
such patents and licenses. Registrant does not believe that patents and licenses
are material to its business.
COMPETITION
The Registrant experiences intense competition with respect to all
areas of its business. The Registrant competes primarily on the basis of the
accuracy, performance and reliability of its products, the ability of its
products to perform in severe environments encountered in military and aerospace
applications, prompt and responsive contract performance, and the Registrant's
technical competence and price. The Registrant has a unique and broad product
line which includes all three frequency standards - quartz, rubidium, and
cesium. The Registrant believes its ability to take such raw materials,
manufacture finished products, integrate them into systems and sub-systems, and
to interface these systems with end-user applications by determining the most
appropriate type, all under one roof, provides the Registrant with an advantage
over many of its competitors. The Registrant believes that it is a significant
supplier of time and frequency products for the military and aerospace markets.
Many of the Registrant's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs than the
Registrant. With respect to the cesium beam atomic clock, quartz crystal
standard and rubidium frequency standard, the Registrant competes with
Hewlett-Packard Company, Datum, Inc., Austron, Inc., and E. G. and G., Inc.
EMPLOYEES
The Registrant employs 208 persons.
OTHER ASPECTS
The Registrant's business is not seasonal and no unusual working
capital requirements exist.
Item 2. Properties
Registrant established its headquarters in December, 1981 in a 131,000
square foot manufacturing and office facility located in Mitchel Field, Long
Island, New York (the "Mitchel Field Complex"). The Mitchel Field Complex was
built and equipped, in part, with the proceeds of a $5,000,000 Industrial
Development Bond financing arrangement concluded through the Nassau County
Industrial Development Agency and various lending institutions ("Financing
Arrangement"). The Mitchel Field Complex is erected on land leased from the
County of Nassau ("Nassau County Lease") dated as of February 24, 1981 for an
aggregate period of 99 years (including renewal options exercisable at
Registrant's sole discretion). Registrant paid total base rentals under this
lease of approximately $167,000 during fiscal year ended April 30, 1996. The
Nassau County Lease provides for increases generally at 10 year intervals.
Registrant has granted to the lending banks a security interest in all personal
property purchased with the proceeds of this financing and a mortgage on the
Nassau County Lease.
In June 1988, Registrant completed construction of an additional 90,000
square feet of manufacturing and office facility contiguous to the Mitchel Field
Complex. These additional facilities were financed with the proceeds of a
$3,500,000 Industrial Development Bond Financing arrangement with the Nassau
County Industrial Development Agency and a lending institution, as part of its
plan to finance the new plant and equipment ("Financing Arrangement II").
Under the terms of the Financing Arrangement and Financing Arrangement
II, interest is payable at 65% and 79% respectively of the lending banks' prime
commercial lending rates. This advantageous interest rate is made available
under an exemption from the taxation of interest payments received by the
lenders as provided by the Internal Revenue Code ("Code"). In fiscal 1995 the
Financing Arrangement was fully repaid. Registrant has no reason to believe that
the exemption with respect to Financing Arrangement II will be challenged by the
Internal Revenue Service.
Such interest rate formula will remain in effect during the 15-year
period required to amortize Financing Arrangement II. Registrant has the right
to prepay the loan at any time. Financing Arrangement II contains certain
restrictions with respect to the maintenance of net worth and encumbering the
building.
In December 1990, a subsidiary of the Registrant signed a 15 year lease
with Lab Corporation of America ("LCA", formerly National Health Laboratories
Incorporated). The terms require that the subsidiary of the Registrant have a
building constructed for use by LCA for which construction was completed in
November 1992. The Registrant provided $9,000,000 of financing for the cost of
the building for which a six-year term loan has been negotiated. This loan has
been guaranteed and collateralized by LCA assets. Annual rental income of
$1,650,000 commenced in November 1992 upon completion of the building. Minimum
rentals are subject to adjustment based on the difference between the actual
rate of interest incurred on the borrowing used to construct the facility and
the targeted range of 9.75% to 10.25%. Under the terms of the lease agreement
annual rent escalations of 5% will commence in the fourth year of the lease.
This lease is accounted for as a direct finance lease and income is recognized
by a method which produces a constant periodic rate of return on the outstanding
investment in the lease.
Item 3. Legal Proceedings
U.S. Government Indictment
On November 17, 1993, a Federal Grand Jury in the United States
District Court for the Eastern District of New York returned an indictment in a
criminal proceeding entitled, "United States District Court, Eastern District of
New York, United States of America, Plaintiff, against Frequency Electronics,
Inc., Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants", index number CR 93-1261 ("Indictment"). As the caption in the
proceeding indicates, the Indictment named as defendants Frequency Electronics,
Inc ("FEI"), Martin Bloch - its then board chairman, president and chief
executive officer, Abraham Lazar - one of its directors, Harry Newman- its
secretary/treasurer, and Marvin Norworth its then contracts manager. The
eighteen count Indictment charges violations of Title 18, United States Code
("U.S.C.") Sections 286 and 3551 et seq., 1031(a), 2 and 3551 et seq., 1001, 2
and 3551 et seq.
The Indictment makes allegations, generally, as follows: TRW, Inc.
("TRW") was a prime contractor on a contract with the United States Government
("Government") to build satellites; FEI was a subcontractor of TRW under six
contracts to manufacture electronic devices for space satellites pursuant to
TRW's contracts with the Government; in February 1988, three of the subcontracts
were terminated by TRW and three of the subcontracts were partially terminated
by TRW and restructured; in connection with such terminations, FEI submitted
detailed statements of information setting out its costs incurred in connection
with the subcontracts, for the unpaid portion of which it was eligible for
compensation, directly or indirectly, by the Government; among the costs for
which it was eligible for compensation were labor costs, overhead and general
and administrative costs (collectively "costs"); settlement proposals were
submitted by FEI with respect to the three terminated subcontracts; the
proposals contained, among other things, the cost information described above
and FEI was compensated, directly or indirectly, by the Government; contract
pricing proposals were submitted by FEI with respect to the three partially
terminated and restructured subcontracts and such proposals contained, among
other things, the cost information described above. FEI and TRW entered into an
agreement restructuring such subcontracts and FEI was paid settlement expenses
in connection with such restructured subcontracts.
The general substance of the criminal charges against FEI and the
individual defendants named in the Indictment is that FEI and the individual
defendants conspired to defraud and did defraud the Government and that some or
all of them committed, among others, the following criminal acts: they agreed to
defraud the Government; they submitted statements and invoices with respect to
FEI's costs incurred in connection with the terminated and/or partially
terminated and restructured subcontracts for the purpose of FEI obtaining
compensation thereunder, which statements and invoices were intentionally false;
the statements and invoices included claims for labor costs and other costs
which were intentionally false; FEI and the individual defendants destroyed or
caused to be destroyed important records relating to labor costs; FEI and the
individual defendants altered or caused to be altered FEI's records and vendor
invoices with respect to FEI's cost of labor, materials and services; FEI and
the individual defendants intentionally made false statements to Government
officials; and FEI and the individual defendants intentionally submitted false
documents to Government officials. The Indictment does not specify the dollar
amount as to which it is claimed the Government was defrauded.
Subsequent to the return of the Indictment, FEI and the individual
defendants moved to dismiss the Indictment on various grounds ("Motion(s)"). The
Motions were heard on May 13, 1994 and the Court rendered its decision and
denied the Motions. Discovery has not been completed. FEI has determined to
vigorously defend the Indictment.
On April 6, 1994, a Federal Grand Jury in the United States District
Court for the Eastern District of New York returned a superseding indictment in
a criminal proceeding entitled, "United States District Court, Eastern District
of New York, United States of America, Plaintiff, against Frequency Electronics,
Inc., Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants", index number CR 93-0176 ("Superseding Indictment"). As the caption
in the proceeding indicates, the Superseding Indictment named as defendants all
of the same parties as in the Indictment. The nineteen count Superseding
Indictment charges violations of Title 18, U.S.C. Sections 371 and 3551 et seq.,
1001, 2 and 3551 et seq. It is believed that the Superseding Indictment
primarily represents an attempt by the Government to meet and cure certain of
the asserted deficiencies in the Indictment which were specified in the Motions.
The Superseding Indictment enlarged Count One of the Indictment from an 18
U.S.C. Section 286 conspiracy to a conspiracy charged under Title 18, U.S.C.
Section 371. In addition, the Superseding Indictment contained an additional
count charging a violation of Section 1001 of Title 18, i.e., making a false
statement to a Government agency. Other than the foregoing, there are no other
substantial differences between the Indictment and the Superseding Indictment.
The Superseding Indictment does not specify the dollar amount as to which it is
claimed the Government was defrauded. The Government takes the position that it
may proceed to trial on either the Indictment or the Superseding Indictment. The
Government has not advised as to whether it intends to proceed under the
Indictment or the Superseding Indictment and the Court has not ruled on this
subject. FEI and the other defendants moved to dismiss the Superseding
Indictment and those motions were also heard on May 13, 1994. The Court denied
the motions addressed to the Superseding Indictment. Discovery has not been
completed. FEI has determined to vigorously defend the Superseding Indictment.
In connection with the defense of the Indictment and the Superseding
Indictment, FEI and the other defendants have sought the production of United
States Government classified information and documents pursuant to the
provisions of the Classified Information Procedures Act ("CIPA"). A formal
hearing under CIPA commenced on April 29, 1996. The CIPA process is continuing
and no assessment can be made as to when it will be concluded or the outcome.
Upon a conviction of FEI, the Government may be awarded fines,
penalties, restitution, forfeitures, treble damages or other conditional relief.
On November 17, 1993, the Government commenced a civil action for
damages in the United States District Court for the Eastern District of New York
entitled, "United States District Court, Eastern District of New York, United
States of America, Plaintiff, against Frequency Electronics, Inc., Martin Bloch,
Abraham Lazar, Harry Newman and Marvin Norworth, Defendants", index number CV
93-5200 ("Government Civil Action"). The Government Civil Action sets forth four
causes of action against each of the named defendants alleging, in substance,
fraud under 31 U.S.C. Section 3729, et seq, (the "False Claims Act"), fraud,
unjust enrichment and breach of contract. In the complaint, demand is made for
treble damages in an unspecified sum based upon the alleged violations under the
False Claims Act, plus costs and attorneys fees in an unspecified amount, plus
$10,000 for each false claim and for each false record and statement. Pursuant
to an order of the Court dated January 12, 1994, all proceedings in the
Government Civil Action including, without limitation, discovery are stayed
pending a jury verdict of the Indictment. Under the False Claims Act, a recovery
can be made in favor of the Government for a civil penalty of not less than
$5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses. No opinion can be
offered as to the outcome of the Government Civil Action. FEI has determined to
vigorously defend the Government Civil Action.
A qui tam action was commenced in the United States District Court for
the Eastern District of New York entitled, "The United States of America ex rel.
Ralph Muller, Plaintiff, against Frequency Electronics, Inc., Raytheon Company,
Raytheon Company Subsidiaries #1-10, fictitious names for subsidiaries of
Raytheon Company, Hughes Aircraft Company, Hughes Aircraft Company subsidiaries
#1-20, fictitious names for subsidiaries of Hughes Aircraft Company, and Martin
Bloch, Defendants", index number CV-92 5716 ("Muller Qui Tam Action"). The
Muller Qui Tam Action was brought pursuant to the provisions of the False Claims
Act and is an action by which an individual may, under certain circumstances,
sue one or more third persons on behalf of the Government for damages and other
relief.
The complaint was filed on or about December 3, 1992, in camera and
under seal pursuant to the provisions of the False Claims Act. The Court
unsealed the complaint by order dated December 3, 1993, after FEI complained to
the United States Attorney for the Eastern District of New York regarding
newspaper articles that charged FEI with manufacturing defective products based
upon claims in an unspecified and undisclosed qui tam action. It is believed
that the Government made applications to the Court on one or more occasions
after December 3, 1993 to continue to have the file in the Muller Qui Tam Action
remain under seal. The complaint was served on FEI and Martin Bloch on March 28,
1994 and March 30, 1994, respectively. Under the provisions of the False Claims
Act, the Government is permitted to take over the prosecution of the action. The
Government has declined to prosecute the Muller Qui Tam Action and the
plaintiff, Ralph Muller ("Muller"), is proceeding with the action on behalf of
the Government as is permitted under the False Claims Act. Moreover, while the
action names as parties defendant, Hughes Aircraft Company ("Hughes") and
Raytheon Company ("Raytheon"), along with several of their subsidiaries, it
appears that the Muller Qui Tam Action was dismissed voluntarily by Muller on
April 6, 1994, as to Hughes, Raytheon and their respective subsidiaries. FEI and
Martin Bloch moved to dismiss the complaint on various grounds and, at the oral
argument of the motion to dismiss, the Court granted the motion to the extent
that the complaint failed to plead fraud with sufficient particularity as is
required under the Federal Rules of Civil Procedure and the plaintiff was
directed to serve an amended complaint. On February 6, 1996, plaintiff served an
amended complaint ("Amended Complaint").
The Amended Complaint, insofar as it pertains to FEI and Martin Bloch,
contains a series of allegations to the effect that Hughes and Raytheon
contracted with the Government to supply it with Advance Medium Range Air to Air
Missiles ("AMRAAMS"); Hughes and Raytheon (collectively, the "Contractors")
entered into a subcontract with FEI pursuant to which FEI was to design,
manufacture, test, sell and deliver to the Contractors certain oscillators which
constituted components of the AMRAAMS; that FEI improperly designed,
manufactured and tested the oscillators; that numerous faulty and defective
oscillators were delivered to the Contractors; that the oscillators did not meet
contract specifications; that FEI was aware of the defective and faulty nature
of the oscillators; that FEI and Martin Bloch knowingly directed non-disclosure
of the design flaws; that the concealed design defects in developmental
oscillators permitteed FEI to manufacture additional defective oxcillators which
were used in operational missiles; that as a direct result of FEI's fraudulent
concealment of the defects, FEI was contracted to design and manufacture
additional oscillators; that when missiles were returned to FEI for repair, FEI
charged the Government for repair even though FEI knew the units had been
defective at the time of delivery; that FEI falsified test results and FEI and
Martin Bloch directed the falsification of test results; and that FEI sold and
delivered the oscillators to the Contractors; as a result of the faulty and
defective oscillators, many of the AMRAAMS failed to function properly; and that
the Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act,
and that the plaintiff Muller be awarded a bounty. Under the False Claims Act, a
recovery can be made in favor of the Government for a civil penalty of not less
than $5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses.
FEI has determined to vigorously defend the Muller Qui Tam Action. It
has answered the Amended Complaint, denied the material allegations, asserted
seventeen affirmative defenses, and counterclaims for: libel and product libel
demanding damages of $3,000,000; republication of the libel and product libel -
demanding damages of $3,000,000; slander demanding damages of $3,000,000;
tortious interference with prospects for additional business- demanding damages
of $1,865,010; prima facie tort - demanding damages of $1,865,010; conversion -
demanding damages of $11 plus an amount to be determined at trial; breach of
employment contract - demanding damages of $1,865,010; breach of fiduciary duty
- - demanding damages of $1,865,010; plus punitive damages in the amount of
$30,000,000 on each of the tort causes of action, and legal fees and expenses.
The substance of the counterclaims alleged against Muller are predicated upon a
letter dated November 23, 1992 ("November 23 Letter") written by Muller's
attorneys Schneider, Harris, Harris and Furman ("SHHF") to the Government which
allegedly contained false and libelous statements concerning FEI's design,
manufacture and production of components for Hughes and Raytheon in connection
with the AMRAAMS.
In addition, FEI has instituted a third party action against SHHF,
Robert Harris, Esq. and Rod Kovel, Esq., attorneys for Muller, in connection
with their alleged authoring and publishing of the November 23 Letter provided
to the Government. The third-party complaint asserts the claims against the
attorneys for libel and product libel, republication of the libel and product
libel, slander, tortious interference with contractual relations, prima facie
tort and conversion.
The counterclaims and third-party complaint have been served. Muller has
replied to the counterclaims asserted in FEI's answer to the Amended Complaint,
denied the substantive allegations and asserted various affirmative defenses.
The third-party defendants have replied to the third-party complaint and have
denied the substantive allegations and asserted various affirmative defenses.
Discovery has not commenced.
Muller moved to dismiss the counterclaims in the answer and the
third-party defendants moved to dismiss the third-party complaint. FEI and
Martin Bloch moved to dismiss the complaint in the Muller Qui Tam Action. The
motions were argued on January 5, 1996 and, at the time, the Court directed the
plaintiff to serve the Amended Complaint. At the oral argument, the Court
deferred a portion of its decision and, in addition, it indicated a formal
decision and order would be provided as to certain of the relief requested. To
date, the Court has not rendered its formal decision and order.
No opinion can be offered as to the outcome of the Muller Qui Tam
Action, the FEI counterclaims, third-party action or the pending motions.
On December 1, 1993, FEI was served with a complaint in an action
entitled, "In the Court of Chancery of the State of Delaware In and For New
Castle County, Diane Solash Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, Abraham Lazar, John C. Ho, E. John Rosenwald,
Jr., individuals, Defendants and Frequency Electronics, Inc., a Delaware
Corporation, Nominal Defendant", Civil Action No. 13266 ("Solash Action"). All
of the individual defendants named in the complaint are or were directors of
FEI, Martin B. Bloch was president and chairman of the board of directors,
Abraham Lazar was a vice-president, and Joseph P. Franklin is presently chairman
of the board of directors. On January 24, 1994, plaintiff served an amended
complaint adding as named defendants Harry Newman, FEI's secretary/treasurer and
Marvin Norworth, FEI's contracts manager, who has since retired. This is a
derivative action which is permitted by law to be instituted by a shareholder
for the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. FEI is named as a
nominal defendant. In the Solash Action, the complaint alleges that the members
of FEI's board of directors may not reasonably be expected to authorize an
action against themselves.
The substance of the amended complaint contains allegations, in
general, as follows: the Indictment was issued (reciting certain of the
allegations contained in the Indictment); the misconduct of FEI's personnel as
alleged in the Indictment is such that FEI is exposed to material and
substantial monetary judgments and penalties as well as the loss of significant
Government business; such misconduct is likely to continue; the individual
defendants were under a fiduciary obligation to FEI and its shareholders to
supervise, manage and control with due care and diligence the business
operations of FEI and the business conduct of its personnel; that they failed to
do so and as a direct consequence, the matters alleged in the Indictment
occurred; and that the individual defendants breached their fiduciary duty. The
amended complaint seeks judgment against the individual defendants in the amount
of all losses and damages suffered by FEI and indemnification, on account of the
matters alleged in the amended complaint, together with interest, costs, legal
and other experts' fees. See additional comment with respect to the Solash
Action below.
On February 4, 1994, FEI was served with a complaint in an action
entitled "Supreme Court of the State of New York, County of New York, Moise
Katz, Plaintiff, against Martin B. Bloch, Joseph P. Franklin, Joel Girsky, John
C. Ho, Abraham Lazar, E. John Rosenwald, Jr., Defendants, and Frequency
Electronics, Inc., Nominal Defendant", Index Number 93-129450 ("Katz Action").
This is a derivative action which is permitted by law to be instituted by a
shareholder for the benefit of a corporation to enforce an alleged right or
claim of the corporation where it is alleged that such corporation has either
failed and refused to do so or may not reasonably be expected to do so. FEI is
named as a nominal defendant. In the Katz Action, the complaint alleges that the
members of FEI's board of directors may not reasonably be expected to authorize
an action against themselves. All of the individual defendants named in the
complaint are directors of FEI, Martin B.Bloch was president and chairman of the
board of directors, Abraham Lazar was a vice president, and Joseph P. Franklin
is presently chairman of the board of directors.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued (reciting certain of the allegations
contained in the Indictment); the misconduct of FEI's personnel as alleged in
the Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a
consequence, the matters alleged in the Indictment occurred; that the individual
defendants were grossly negligent and as a consequence the matters alleged in
the Indictment occurred; that the individual defendants voluntarily participated
in such wrongdoing and attempted to conceal it; and that the individual
defendants intentionally and negligently breached their fiduciary duty to FEI
and its shareholders. The complaint seeks judgment against these defendants in
favor of FEI in the amount of all losses and damages suffered by FEI on account
of the facts alleged in the complaint, together with interest, costs, legal and
other experts' fees.
FEI and all of the defendants have moved to dismiss the complaint in
the Katz Action ("Motion(s)"). At the time of the Motions, the plaintiff moved
to amend the complaint by setting forth certain additional allegations of
wrongdoing including, among others, amplifying allegations with respect to the
Indictment, setting forth allegations relating to the Muller Qui Tam Action, and
allegations attempting to clarify the relationship of the parties to the New
York forum, the latter allegations having been attacked on the Motions. In
connection with the Motions, the defendants stipulated that they would not
object to any application by the plaintiff Katz to intervene in the Solash
action. By order dated September 21, 1994, the Court granted the defendants'
Motions, dismissed the complaint and denied the plaintiff's cross-motions.
On or about November 17, 1994, FEI was served with a complaint in an
action entitled, "In the Court of Chancery of the State of Delaware In and For
New Castle County, Moise Katz Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, John C. Ho, Abraham Lazar, E. John Rosenwald,
Jr., Harry Newman, Marvin Norworth, individuals, Defendants and Frequency
Electronics, Inc., a Delaware corporation, Nominal Defendant", Civil Action No.
13841 ("Katz Delaware Action"). All of the individual defendants named in the
complaint, with the exception of Harry Newman ("Newman") and Marvin Norworth
("Norworth"), were all directors of FEI, Martin B. Bloch was president and
chairman of the board of directors, Abraham Lazar was a vice-president, and
Joseph P. Franklin is presently chairman of the board of directors. Newman is
FEI's secretary/treasurer and Norworth was FEI's contracts manager and has since
retired. This is a derivative action which is permitted by law to be instituted
by a shareholder for the benefit of a corporation to enforce an alleged right or
claim of the corporation where it is alleged that such corporation has either
failed or refused to do so or may not reasonably be expected to do so. FEI is
named as a nominal defendant. In the Katz Delaware Action, the complaint alleges
that the members of FEI's board of directors may not reasonably be expected to
authorize an action against themselves.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued (reciting certain of the allegations
contained in the Indictment); the misconduct of FEI's personnel as alleged in
the Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage, and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the complaint, together with interest, costs, legal, and other experts' fees.
Pursuant to the order of the Court, the Solash Action and the Katz
Delaware Action have been consolidated under consolidated Civil Action No.
13266, with the caption "In Re Frequency Electronics Derivative Litigation"
("Derivative Litigation").
In the Derivative Litigation, FEI and all of the individual defendants
have moved to dismiss the consolidated complaint and to stay the Derivative
Litigation pending a disposition of the Indictment and the Superseding
Indictment ("Motion(s)"). To date, the Motions have not been heard by the Court.
However, as a result of the Motions, pursuant to a Stipulation and Order of the
Court dated May 17,1995 and a Stipulation and Order of the Court dated June 14,
1995, the Derivative Litigation has been dismissed as to Newman and Norworth and
is otherwise stayed pending a disposition of the Indictment, Superseding
Indictment and related investigations until the further order of the Court. FEI
has determined to vigorously defend the Derivative Litigation. Discovery has not
been commenced. No opinion can be offered as to the outcome of the Motion(s) or
with respect to the Derivative Litigation.
A qui tam action was commenced in the United States District Court for
the Eastern District of New York entitled, "United States of America, ex rel.
Howard B. Geldart, Plaintiff - Relator v. Frequency Electronics, Inc., Markus
Hechler, Harry Newman, Marvin Norworth, and Steven Calceglia, Defendants"
(Geldart Qui Tam Action"). The Geldard Qui Tam Action was brought pursuant to
the False Claims Act, which is described above.
The complaint was originally filed on or about October 19, 1993 in
camera and under seal pursuant to the provisions of the False Claims Act. An
amended complaint was filed on or about April 4, 1995. The Court unsealed the
amended complaint on or about June 2, 1995. The amended complaint was served on
FEI on or about July 27, 1995. The Government has exercised its right under the
False Claims Act to take over the prosecution of this action.
The amended complaint alleges that FEI created and used materially
false cost data to justify cost estimates in bid packages and otherwise,
affecting prices and fees charged and paid for defense procurement contracts
relating to the AMRAAM missile, and to a program for the replacement of cesium
standard parts, and to continue to justify the award of and payments under such
contracts; that the false claims caused the United States unknowingly to pay
more than the actual cost (plus a reasonable profit) of the products and
services; that FEI knowingly made transfers to costs from contract to contract
that were unjustified and materially false and otherwise overstated the costs of
its contracts; that this materially false cost data was used to support false
cost estimates by FEI to the United States or its contractors, to fradulently
accelerate costs incurred so as to obtain progress payments, to justify cost
estimates in bids for contracts of a nature similar to ones already awarded FEI,
and to misrepresent cost information to the United States and its contractors.
FEI has determined to vigorously defend the Geldart Qui Tam Action. The
time of the defendants to answer or move with respect to the amended complaint
has been extended up to and including August 16, 1996. To date, none of the
defendants have answered the amended complaint.
On December 22, 1993, February 10, 1994, February 24, 1994, May 10,
1994 and June 7, 1994, Grand Jury Subpoenas Duces Tecum were served on FEI
("Subpoenas"), the Subpoenas were each returnable before a Grand Jury sitting in
the United States District Court for the Eastern District of New York. The
Subpoenas called for the production of a variety of finance, accounting and
other documents, computer records and computer tapes relating to the AMRAAMS. A
number of FEI employees have been subpoenaed to appear before the Grand Jury.
The prosecutor has not advised as to the theory of this investigation. Based
upon the FEI documents subpoenaed, it appears that the inquiry relates to
finance and/or pricing matters. FEI is advised the notices provided with the
Subpoenas to FEI employees indicate their testimony is required in connection
with an investigation related to false statements (18 U.S.C. Section 1001),
false claims (18 U.S.C. Section 287), and conspiracy to present fraudulent
claims (18 U.S.C. Section 286). FEI regards charges or claims of violations of
Government laws and regulations as extremely serious and recognizes that such
charges or claims could have a material adverse affect on it. FEI's business is
primarily dependent upon contracts with the Government and contracts and
subcontracts with other companies as to which the Government or its agencies are
the end-user. Under the law, a Grand Jury indictment of FEI or any of its
officers, directors or employees, can result in suspension or debarment of FEI
from receiving Government contracts for a specified period of time. Registrant
is currently subject to such a suspension by reason of its indictment on
November 17, 1993. Upon conviction of FEI or in a civil proceeding, the
Government may seek fines, penalties, restitution, forfeitures, treble damages
or other conditional relief. To date, no charges have been filed, nor claims
asserted against FEI as a result of the Grand Jury investigation related to
AMRAAM.
Robert H. Harris, Esq. ("Harris"), a counsel to one of FEI's former
employees who was subpoenaed to testify before the Grand Jury, threatened to
file a claim against FEI, in the name of such counsel, in the form of a qui tam
action pursuant to the False Claims Act. To date, FEI has not been served with
any legal process relating to the False Claims Act other than the Government
Civil Action, the Muller Qui Tam Action and the Geldart Qui Tam Action.
FEI has filed claims with its insurance carriers pertaining to
potential coverages for directors and officers relating to the first Grand Jury
Investigation, the Indictment and the Superseding Indictment, the Government
Civil Action, the Muller Qui Tam Action, the Geldart Qui Tam Action, the Solash
Action and the Katz Action.
Certain disclaimers of coverage have been made by the carriers with
respect to certain of these matters. No opinion can be offered as to coverage or
the extent of coverage under any of the foregoing policies. At the appropriate
time, FEI intends to vigorously pursue its rights with respect to these
insurance policies.
Included in selling and administrative expenses are legal fees incurred
in connection with the above matters of approximately $919,000, $2,300,000 and
$1,819,000 for fiscal years 1996, 1995 and 1994, respectively.
Government Contract Suspension
On December 14, 1993, Registrant was notified by the U.S. Department of
the Air Force that, effective December 13, 1993, it had been suspended from
contracting with, or acting as subcontractor under any contract with any agency
of the U.S. Government and that such suspension is effective throughout the
executive branch of the Government. The suspension is also applicable to
Registrant's former chairman and chief executive officer, one of Registrant's
directors and former vice presidents, Registrant's secretary and treasurer, who
went on leave of absence from such position, and Registrant's contract manager,
who went on leave of absence from such position and has since retired. The
suspension is temporary, subject to the outcome of legal proceedings against
Registrant and certain individuals named above presently pending in the United
States District Court as discussed above.
The suspension does not preclude the completion by Registrant of its
performance of Government contracts or subcontracts awarded to it and pending on
the date of suspension. The Government may also conduct business with Registrant
during the period of suspension when a Government department or agency
determines that a compelling reason exists for it to do so. Examples of
compelling reasons are: (1) only Registrant can provide the supplies or services
required; (2) urgency requires contracting with Registrant; and (3) the national
defense requires continued dealings with Registrant. However, except for all of
the foregoing, during the period of suspension:
(1) Offers will not be solicited from, contracts will not be
awarded to, existing contracts will not be renewed or
otherwise extended for, and subcontracts requiring Government
approval will not be approved for Registrant by any agency in
the executive branch of the Government, unless the head of the
agency taking the contracting action, or a designee, states in
writing the compelling reason for continued business between
Registrant and the agency.
(2) Registrant may not conduct business with the Government as an
agent or representative of other contractors and it may not
act as an individual surety for other contractors.
(3) No government contractor may award Registrant a subcontract
equal to or in excess of $25,000 unless there is a compelling
reason to do so and the contractor first notifies the
contracting officer and further complies with certain
Government registrations.
(4) Registrant's affiliation with or relation with any
organization doing business with the Government will be
carefully examined to determine the impact of these ties on
the responsibility of that organization to be a government
contractor or subcontractor.
The suspension regulations allow Registrant the opportunity to contest
the suspension by submitting to the suspending agency information and argument
in opposition to the suspension. Since Registrant and all of the individual
defendants have pleaded not guilty to the Indictment and the Superseding
Indictment and denied the charges alleged in the Government's related civil
action, denied the allegations in the Muller Qui Tam Action and, it is
anticipated, will deny the allegations in the Geldart Qui Tam Action, the
Registrant believes that the suspension is unwarranted and, accordingly,
Registrant has undertaken to vigorously contest the suspension. However, to
date, the suspension has not been withdrawn and no opinion can be provided as to
removing the suspension pending a favorable disposition of the above-described
If the Indictment results in conviction, the period of suspension could
be extended by way of the debarment of Registrant from any future Government
contracts or subcontracts. Debarment is imposed for a period commensurate with
the seriousness of the causes. Generally, debarment does not exceed three years.
The duration of Registrant's suspension will be considered in determining the
debarment period. The debarring official may also extend the debarment for an
additional period if that official determines that an extension is necessary to
protect the Government's interest. A debarment may not be extended solely on the
basis of the facts and circumstances upon which the initial debarment action was
based. The debarring official may likewise reduce the period or extent of
debarment, upon Registrant's request, supported by documentation for reasons
such as: 1) newly discovered material evidence; 2) reversal of the conviction or
civil judgment upon which the debarment was based; (3) bona fide change in
ownership or management; 4) elimination of other causes for which the debarment
was imposed; or 5) other reasons the debarring official deems appropriate.
Approximately 55% of Registrant's business is comprised of prime and
subcontracts in which the Government is the end-user. The other category of
Registrant's business, which it has been expanding in recent years, is in
commercial and export markets unrelated to the Government. In view of the extent
to which Registrant is currently reliant on Government contracts and
subcontracts and the effect which the suspension, unless withdrawn, will have on
Registrant's ability to continue to obtain such business, Registrant believes
that the suspension and possible debarment is an extremely serious matter which
is likely to have a material adverse effect on Registrant's business prospects,
financial condition, results of its operations and cash flows. However,
Registrant is unable to ascertain at this time whether or not this has been the
case.
Environmental Matters
The State of California Regional Water Quality Control Board has issued
certain abatement orders relative to ground water contaminations originating
from the site of premises obtained by the Company in connection with an
acquisition. In June, 1988, the U.S. Environmental Protection Agency proposed
that such premises be added to the National Priorities List, which would subject
the premises to the Super-fund requirements of federal law. No estimate as to
the cost to clean up the premises has been made or provided to Registrant.
Pursuant to the terms of the Purchase Agreement, the seller, a financially
capable party, has indemnified Registrant from any damages arising from this
environmental matter. Since Registrant has only secondary responsibility, it is
of the opinion that the outcome will not have a significant impact on financial
condition, results of operations or cash flows.
<PAGE>
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 1996.
Item 4(a) Executive Officers of the Registrant
The executive officers hold office until the annual meeting of the
Board of Directors following the annual meeting of stockholders, subject to
earlier removal by the Board of Directors. Since fiscal 1994 certain officers
have taken voluntary leaves of absence as discussed in Registrant's Form 8-K
dated November 17, 1993.
The names of all executive officers of Registrant and all positions and
offices with the Registrant which they presently hold are as follows:
Joseph P. Franklin - Chairman of the Board of Directors, Chief Executive
Officer, Chief Financial Officer.
Martin B. Bloch - President(1), Chief Scientist
John C. Ho - Vice President of Research and Development and Director
Marvin Meirs - Vice President, Engineering
Alfred Vulcan - Vice President, Systems Engineering
Markus Hechler - Vice President, Manufacturing and Acting Secretary
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Space Systems and Business Development
Harry Newman - Secretary and Treasurer(2)
None of the officers and directors are related.
(1) In connection with the indictment as discussed under item 3 - Legal
Proceedings, Martin B. Bloch has taken a leave of absence as
president, and no one has been elected as acting president.
(2) In connection with the indictment as discussed under item 3 - Legal
Proceedings, Harry Newman has taken a leave of absence as secretary
and treasurer and Markus Hechler, a vice president of Registrant, has
been elected acting secretary.
Joseph P. Franklin, age 62, has served as a Director of the Company
since March 1990. In December 1993 he was elected Chairman of the Board of
Directors, Chief Executive Officer and, since September 15, 1995, has served as
Chief Financial Officer. He has been the Chief Executive Officer of Franklin
S.A., since August 1987, a Spanish business consulting company located in
Madrid, Spain, specializing in joint ventures, and was a director of several
prominent Spanish companies. General Franklin was a Major General in the United
States Army until he retired in July 1987.
Martin B. Bloch, age 60, has been a Director of the Company and of its
predecessor since 1961. He recently resigned as Chairman of the Board of
Directors and Chief Executive Officer and is currently its President and Chief
Scientist. Previously, he served as chief electronics engineer of the
Electronics Division of Bulova Watch Company.
John C. Ho, age 63, has been employed by the Company and its
predecessor since 1961 and has served as a Vice President since 1963 and as a
Director since 1968.
Marvin Meirs, age 58, was employed by the Company in an engineering
capacity from 1966 to 1972 and rejoined the Company in such capacity in 1973,
serving as Vice President, Engineering since 1978.
Alfred Vulcan, age 59, joined the Company as an engineer in 1973 and
has served as its Vice President, Systems Engineering since 1978.
Markus Hechler, age 50, joined the Company in 1967, and has served as
its Vice President, Manufacturing since 1982, and as Assistant Secretary since
1978. He was elected Acting Secretary in December 1993 when Harry Newman took a
leave of absence.
Charles S. Stone, age 65, 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 59, joined the Company in August 1987 and served
as Executive Vice President of FEI Microwave, Inc., the Company's wholly owned
subsidiary until May 1993 when he was elected Vice President, Space Systems.
Harry Newman, age 49, has been employed by the Company as Secretary and
Treasurer since 1979, prior to which he served as Divisional Controller of
Jonathan Logan, Inc., apparel manufacturers, from 1976 to 1979, and as
supervising Senior Accountant with Clarence Rainess and Co., Certified Public
Accountants, from 1971 to 1975.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Registrant is listed on the American Stock
Exchange under the symbol "FEI". The following table shows the high and low sale
price for the Registrant's Common Stock for the quarters indicated, as reported
by the American Stock Exchange.
FISCAL QUARTER HIGH SALE LOW SALE
-------------- --------- --------
1996 -
FIRST QUARTER $5 $3 1/8
SECOND QUARTER 5 1/8 3 5/8
THIRD QUARTER 6 1/2 3 5/16
FOURTH QUARTER 8 1/2 4 7/8
1995 -
FIRST QUARTER $4 1/4 $3 5/8
SECOND QUARTER 4 3 1/8
THIRD QUARTER 5 1/2 2 7/8
FOURTH QUARTER 5 1/8 3 13/16
As of July 12, 1996, the approximate number of holders of record of common
stock was 969.
DIVIDEND POLICY
The Registrant has paid no cash dividends on its Common Stock and
currently intends to follow a policy of retaining earnings for use in its
business.
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected financial data including net
sales and operating income for the five year period ended April 30, 1996.
Years Ended April 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Components $ 9,349 $ 5,602 $ 1,965 $ 5,216 $ 6,998
Microwave
Products 1,216 93 2,687 17,335 25,432
Instruments 9,524 14,065 15,921 17,495 17,398
Systems 3,801 4,321 6,891 3,185 3,375
Purchase Services 1,202 -- -- -- --
------ -------- -------- -------- --------
Total Net Sales $ 25,092 $ 24,081 $ 27,464 $ 43,231 $ 53,203
======== ======== ======== ======== ========
Operating Profit
(Loss) $ 1,047 ($ 6,025) ($ 6,174) ($12,279) $ 2,952
======== ======== ======== ======== ========
Net Earnings
(Loss) $ 2,822 ($ 3,843) ($ 4,622) ($ 7,966) $ 462
======== ======== ======== ======== ========
Average Common
Shares and
Common Equiv-
alent Shares
Outstanding 4,626,581 4,835,367 5,410,762 5,596,788 5,751,408
Earnings (Loss)
per Common and
Common Equiv-
alent Shares $ .61 ($ .80) ($ .85) ($1.42) $.08
===== ===== ===== ===== =====
Total Assets $68,770 $65,032 $72,655 $97,065 $99,592
======= ======= ======= ======= =======
Long-Term
Obligations $14,877 $14,959 $15,327 $24,945 $25,124
======= ======= ======= ======== =======
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The table below sets forth for the fiscal years ended April 30 the
percentage of consolidated net sales represented by certain items in the
Company's consolidated statements of operations:
1996 1995 1994
---- ---- ----
Net Sales
US Government 55.3% 74.7% 68.7%
Commercial 44.7 25.3 31.3
----- ----- -----
100.0 100.0 100.0
Cost of Sales 66.5 85.5 91.3
Selling and administrative expenses 25.1 31.4 26.2
Research and development expenses 4.2 8.1 5.0
----- ----- -----
Operating income (loss) 4.2 (25.0) (22.5)
Other income (expense)- net 7.8 8.5 5.5
(Provision) benefit for income taxes (0.8) (0.3) 0.2
----- ----- -----
Income (loss) before cumulative effect
of change in accounting principle 11.2 (16.8) (16.8)
Net income (loss) 11.2% (16.0%) (16.8%)
===== ===== =====
Operating Income
Operating income for the year ended April 30, 1996, improved by $7.1
million over the year ended April 30, 1995 and by $7.2 million over fiscal year
1994. This result was achieved through increased sales to non-U.S. Government
contract customers coupled with significant improvement in gross margins due to
cost cutting efforts and the conclusion of certain unprofitable contracts
initiated by the Company's former west coast operations. Reduced selling and
administrative expenses and more focused research and development costs, as
discussed below, further enhanced the operating results for the current fiscal
year.
Net Sales
Net sales in fiscal 1996 increased by over $1 million over fiscal 1995
but were lower than fiscal 1994 by $2.4 million. As illustrated in the table
above, commercial sales have become a much more significant portion of the
Company's business. Sales to such customers for the fiscal year ended April 30,
1996 increased by $5.1 million over fiscal 1995 and by $2.6 million over fiscal
1994. Sales to non-U.S. Government contract customers are expected to become the
dominant source of revenues in subsequent fiscal years. The Company will
continue to engage in contracts for which the end user is the U.S. Government
but such sales are not expected to increase significantly in absolute sales
dollars due mainly to the overall decline in U.S. Government (principally DOD
and NASA) spending.
<PAGE>
Sales in fiscal 1994 were higher than in both 1996 and 1995 as a result
of the completion of two significant programs that year which were effectively
not replaced in subsequent periods. On one of these projects, the customer
decided not to exercise certain contract options. Also, as noted above,
reductions in DOD and NASA programs have had a negative impact on revenues.
Included in fiscal 1996 commercial sales is approximately $1.2 million
of revenues related to parts procurement and screening services on behalf of the
Globalstar Satellite program. The Company expects to recognize an additional $1
million in incentive revenues in fiscal 1997 and intends to actively promote its
procurement services on other satellite programs. Fiscal 1996 commercial
revenues also benefited from a combined $1.8 million increase in sales of the
Company's commercial rubidium product line and the TRW MIMIC/MMIC product lines;
sales of which were not significant in fiscal 1994. Sales of these product lines
are expected to continue to grow, particularly for commercial rubidium, as the
Company further advances its products into the marketplace.
Gross margins
Gross margins for the fiscal year ended April 30, 1996, showed
continued improvement over fiscal years 1995 and 1994, increasing to 33.5% from
14.5% and 8.7%, respectively. These results have been obtained through
meaningful cost reductions primarily in the areas of personnel and compensation
coupled with operational efficiencies and product mix. Fiscal 1994 gross margins
were negatively impacted by higher than anticipated technical development costs
incurred during the engineering, design, and production stages of certain
projects. The impact of these items was greatly reduced in fiscal 1995 and 1996.
In addition, fiscal years 1995 and 1994 incurred costs associated with the
restructuring and consolidation of the Company's former west coast facility. The
assets and activities of that entity were relocated to the Company's
headquarters location during fiscal 1995.
Gross margin in fiscal 1996 was negatively impacted by the
establishment of reserves for certain slow moving or obsolete inventory items
and accruals for employee bonuses. Without these charges to earnings, the 1996
gross margin would have been approximately 35.7%. While the Company cannot
reasonably predict the need for future inventory reserves or the possibility of
cost overruns on existing or future contracts, the Company anticipates that
future gross margins will be comparable to that experienced during fiscal 1996.
Selling and administrative expenses
Selling and administrative costs declined by $1.3 million or 17% for
the year ended April 30, 1996, over fiscal 1995 and by $0.9 million or 12% over
fiscal 1994. The principal cause of these decreases was a reduced level of
activity in 1996 related to the Company's defense of the ongoing litigation with
the government and related actions. Related legal fees were $1.4 million less in
1996 than in 1995 and $0.9 million less than in 1994. Offsetting such reduced
legal expenses in fiscal 1996, was the increased provision for certain
uncollectible accounts receivable and accrued officers and employee bonuses. Bad
debt expense for fiscal 1996 was approximately $580,000 compared to nominal bad
debt expense in fiscal years 1995 and 1994. Without regard to bad debt expenses,
bonuses and the legal fees related to the government litigation, selling and
administrative costs in fiscal 1996 were $632,000 lower (12%) than in 1995 and
$737,000 lower (14%) than in 1994. This result was achieved through a reduction
in the number of personnel, reduced insurance costs and improved operating
efficiencies. As sales increase, the ratio of selling and administrative
expenses, excluding legal costs, to net sales is expected to decrease. The
Company is unable to predict the future level of legal costs for any specific
period as this is dependent on factors outside of its immediate control.
<PAGE>
Research and development expenses
Company-funded research and development costs in the year ended April
30, 1996, decreased by $890,000 (46%) and $317,000 (23%) from the levels of
spending in fiscal 1995 and 1994, respectively. The decreases in Company-funded
costs are the result of an effort to focus research and development activities
on a narrower band of commercial projects which will provide the best return on
investment. Research and development spending in fiscal 1995 was higher than in
1994 principally due to an intense effort to develop the two VSAT product lines.
In fiscal 1996, spending on these product lines continued but at a lower level
as development of one line was completed and development on the other line is
nearing the preproduction stage. For fiscal 1997, the Company expects to
continue to invest in research and development at approximately the same rate as
it did for fiscal 1996.
Other Income and Expense
For the year ended April 30, 1996, other income (expense)-net decreased
by $74,000 (4%) from fiscal 1995 and increased by $473,000 (31%) over fiscal
1994. During fiscal year 1995, the Company realized a gain of approximately $1.2
million on the sale of certain marketable securities. Excluding that one-time
gain, 1996 other income (expense)-net were significantly improved over both the
fiscal 1995 and 1994 results.
In particular, interest income increased by $535,000 and $424,000 over
fiscal 1995 and 1994, respectively, as the result of both higher interest rates
and a notable increase in interest-earning assets in fiscal 1996. Interest
income in fiscal 1994 included interest earned on federal income tax refunds
which did not recur to the same extent in fiscal 1996 or 1995. Excluding such
interest, interest income in fiscal 1996 and 1995 increased by 92% and 13%,
respectively, over the comparable 1994 levels. On the other hand, interest
expense in fiscal 1996 decreased by $67,000 and $6,000, respectively, from
fiscal 1995 and 1994 levels. This was the result of declining long-term debt
balances as the Company makes scheduled principal payments, offset by increased
interest rates during 1996. Although the Company is unable to predict the future
levels of interest rates, at current rates the Company anticipates that interest
income will continue to increase and interest expense will continue to decrease
when compared to earlier fiscal years.
Other income, net, which consists principally of rental income under
the long-term direct finance lease with Lab Corporation of America, should
continue at moderately increasing levels over the 15-year term of the lease. As
noted above, in fiscal 1995, the Company also realized a one-time gain on the
sale of certain marketable securities which was recorded in this line item of
the statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working
capital position of $41.8 million and $39.1 million at April 30, 1996 and 1995,
respectively. Included in working capital at April 30, 1996 is $21.5 million of
cash, cash equivalents and short-term investments which are readily convertible
to cash should the need arise. The Company's current ratio at April 30, 1996 is
10 to 1 compared to a 13 to 1 ratio at April 30, 1995. The decline in the
current ratio is due principally to an increase in trade accounts payable as a
consequence of the parts procurement and screening services for the Globalstar
Satellite program and to the accrual of certain year-end incentive bonuses as
the result of the profitable year experienced by the Company.
Net cash provided by operating activities for the year ended April 30,
1996, was almost $7 million compared to $4.3 million for fiscal 1995. This
significant increase in cash inflow is the result of the return to profitability
in 1996 with net income of $2.8 million, certain noncash charges of an
additional $2.9 million and the net change in assets and liabilities of $1.3
million.
Net cash provided by investing activities for the year ended April 30,
1996, was $6.1 million. Of this amount, $5.9 million was provided by the
conversion of certain U.S. government and agency securities to short-term money
market investments. The Company may continue to convert short-term investments
to cash equivalents or invest cash equivalents in longer-term securities as
dictated by its investment strategies. An additional $500,000 was received upon
the sale of the building owned by the Company's former west coast operation. In
addition to cash, the Company received a promissory note in the amount of $1.8
million for the balance of the sale price. The promissory note for the building
sale will be repaid in monthly installments over a period of 5 years with a
balloon payment at the end.
During fiscal 1996, the Company acquired new computer software to
manage its financial and operational systems. Installation of the software will
occur in the early part of fiscal 1997. The total capitalized cost of the
software and installation costs is expected to be less than $500,000. The
Company has no other material commitments for capital expenditures. Total fixed
asset purchases in fiscal 1996 approximated $330,000, including the capitalized
software costs.
Net cash used in financing activities for the year ended April 30,
1996, was $1.4 million compared to $3.3 million in fiscal 1995. Of this amount,
$749,000 was used to make regularly scheduled long-term debt payments and
$698,000 was used to acquire 185,500 shares of common stock to be held in
treasury. The Company may continue to purchase shares for its treasury whenever
appropriate opportunities arise but it has neither a formal repurchase plan nor
commitments to purchase additional shares in the future.
The Company will continue to expend its resources and efforts to
develop hardware for commercial satellite programs and commercial ground
communication and navigation systems which management believes will result in
future growth and continued profitability. Internally generated cash will be
adequate to fund development efforts in these markets.
At April 30, 1996, the Company's backlog amounted to approximately $15
million of which approximately $13.7 million is funded. This is compared to the
approximately $15 million backlog at April 30, 1995. The April 30, 1996, backlog
consists of approximately $8.6 million (57%) for commercial and foreign
customers and $6.4 million (43%) for U.S. Government contracts. As discussed
more thoroughly in Material Developments, Item 3 and Note 9 to the consolidated
financial statements, the Company is temporarily suspended from contracting with
any agency of the U.S. Government. Although the Company is becoming less
dependent on U. S. Government contracts, the suspension, unless withdrawn, is
likely to have a material adverse effect on the Company's business prospects,
financial condition and results of operations.
The Company also has available for income tax purposes, approximately
$11.4 million of net operating loss carryforwards which may be applied against
future taxable income.
OTHER MATTERS
On May 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement 115"). Pursuant to Statement 115,
investments in certain debt and equity securities are categorized as
available-for-sale and are carried at fair value, with unrealized gains and
losses excluded from income and recorded directly to stockholders' equity. In
accordance with Statement 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The favorable cumulative
effect of this change in accounting principle was approximately $215,000 or $.04
per share which was recorded during the year ended April 30, 1995.
Effective May 1, 1994, the Company changed its method of accounting for
its Employee Stock Ownership Plan ("ESOP") in accordance with Statement of
Position ("SOP") 93-6. In fiscal years 1996 and 1995, in accordance with SOP
93-6, the annual expense related to the leveraged ESOP is determined as interest
incurred on the note plus compensation cost based on the fair value of the
shares released. For the year ended April 30, 1994, compensation cost was based
on the cost of the shares released. The effect of this change on the statement
of operations for the year ended April 30, 1995 was a benefit of $208,000 or
$.04 per share. The SOP also requires that ESOP shares that are committed to be
released are considered outstanding for purposes of calculating earnings per
share. Prior to fiscal 1995 all ESOP shares were considered outstanding for
purposes of calculating earnings per share.
The financial information reported herein is not necessarily indicative of
future operating results or of the future financial condition of Registrant.
Except as noted, management is unaware of any impending transactions or events
that are likely to have a material adverse effect on results from operations.
INFLATION
During fiscal 1996, as in the two prior fiscal years, the impact of
inflation on the Registrant's business has not been materially significant.
<PAGE>
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
------------------
To the Board of Directors and Stockholders of Frequency Electronics, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES listed in
Item 14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Frequency Electronics, Inc. and Subsidiaries as of April 30, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended April 30, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
As more fully discussed in Note 9 to the consolidated financial
statements, the Company and certain of its employees were indicted and served
with a civil suit by the United States Government (the "Government") commencing
in November 1993 in the United States District Court for the Eastern District of
New York (the "Eastern District") alleging fraud and certain criminal acts
relating to certain Government contracts. In addition, certain derivative
actions have been filed against the Company, as a nominal defendant, its board
of directors, and certain individuals essentially seeking recovery on behalf of
the Company for any losses it may incur as a result of the Government indictment
and civil actions. The Company, its former chief executive officer and others
have also been named as defendants in certain qui tam actions in which claims
are made by individuals on behalf of the Government that the Company
manufactured certain defective components which were ultimately sold to the
Government. The Company was notified by an agency of the Government that it has
been temporarily suspended from contracting with the government pending the
outcome of the legal proceedings in the Eastern District. The Company and the
individual defendants have pleaded not guilty to the indictment and have denied
the allegations of the Government, derivative and qui tam actions and will
vigorously contest all such civil and criminal proceedings. The government civil
action has been stayed pending the resolution of the indictment. The ultimate
outcome of these actions and the government's suspension, as well as their
impact, if any, on the consolidated financial statements and operations cannot
presently be determined. Accordingly, no provision for any liability that may
result has been made in the accompanying consolidated financial statements.
In 1995, as discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for certain investments
in debt and equity securities and, as discussed in Note 11, changed its method
of accounting for contributions to its Employee Stock Ownership Plan.
COOPERS & LYBRAND L.L.P.
Melville, New York
June 26, 1996.
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1996 and 1995
-----------
ASSETS: 1996 1995
---- ----
(In thousands)
Current assets:
Cash and cash equivalents $15,915 $ 4,291
Marketable securities (Note 3) 5,632 11,387
Accounts receivable, net of allowance for
doubtful accounts of $483 in 1996 and $562
in 1995 (Note 4) 13,415 13,894
Inventories (Note 5) 10,281 11,168
Prepaid expenses and other 1,026 1,257
Refundable income taxes 318
------- -------
Total current assets 46,269 42,315
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization (Notes 6 and 7) 8,839 9,192
Investment in direct finance lease (Note 8) 9,607 9,452
Other assets 4,055 1,777
Asset held for sale (Note 2) 2,296
------- -------
Total assets $68,770 $65,032
======= =======
The accompanying notes are an integral part of these
financial statements.
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1996 and 1995
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 1996 1995
---- ----
(In thousands)
Current liabilities:
Current maturities of long-term debt (Note 7) $ 750 $ 750
Accounts payable - trade 1,379 727
Accrued liabilities 2,262 1,782
Income taxes payable 79
------- -------
Total current liabilities 4,470 3,259
Long-term debt, net of current maturities (Note 7) 11,438 12,187
Deferred compensation (Note 11) 3,302 2,628
Other 137 144
------- -------
19,347 18,218
------- -------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity (Note 11):
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued- 6,006,300
shares in 1996 and 1995 6,006 6,006
Additional paid-in capital 35,024 35,131
Retained earnings 16,265 13,443
------- -------
57,295 54,580
Common stock reacquired and held in treasury -
at cost (1,159,905 shares in 1996 and
964,305 shares in 1995) (5,075) (4,387)
Unamortized ESOP debt (Notes 7 and 11) (2,000) (2,500)
Notes receivable - common stock (Note 10) (740) (822)
Unearned compensation (113) (18)
Unrealized holding gain (loss) 56 (39)
-------- --------
Total stockholders' equity 49,423 46,814
-------- --------
Total liabilities and stockholders' equity $ 68,770 $ 65,032
======== ========
The accompanying notes are an integral part of these
financial statements.
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 1996, 1995, and 1994
-----------
1996 1995 1994
(In thousands, except share data)
Net sales (Note 13) $25,092 $24,081 $27,464
------- ------- -------
Cost of sales 16,689 20,602 25,083
Selling and administrative expenses 6,306 7,564 7,188
Research and development expenses 1,050 1,940 1,367
------- ------- -------
Total operating expenses 24,045 30,106 33,638
------- ------- -------
Operating profit (loss) 1,047 (6,025) (6,174)
Other income (expense):
Interest income 1,293 758 869
Interest expense (967) (1,034) (973)
Other, net (Notes 3 and 8) 1,649 2,325 1,606
------- ------- -------
Earnings (Loss) before (provision)
benefit for income taxes 3,022 (3,976) (4,672)
(Provision) benefit for income
taxes (Note 12) (200) (82) 50
------- ------- -------
Net Earnings (Loss) before cumulative
effect of change in accounting principle 2,822 (4,058) (4,622)
Cumulative effect of change in
accounting principle 215
------- ------- -------
Net Earnings (Loss) $ 2,822 ($3,843) ($4,622)
======= ======= =======
Earnings (Loss) per common share before
cumulative effect of change in
accounting principle (Note 1) $ .61 ($ .84) ($ .85)
Cumulative effect of change in
accounting principle .04
----- ------- -------
Earnings (Loss) per common share $ .61 ($ .80) ($ .85)
===== ======= =======
Weighted average common shares and
common share equivalents outstanding
(Note 1) 4,626,581 4,835,367 5,410,762
========= ========= =========
The accompanying notes are an integral part of these
financial statements.
<PAGE>
<TABLE>
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 1996, 1995 and 1994
(In thousands, except share data)
---------------------------
<CAPTION>
Unrealized
gain or
(loss) on
Additional Treasury stock Receivable noncurrent
Common Stock paid-in Retained (at cost) Unamortized Common Unearned marketable
Shares Amount capital earnings Shares Amount ESOP debt Stock compensation securities Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------ ------ ------- -------- ------ ------ --------- ----- ------------ ---------- -------
Balance at May 1, 1993 6,006,300 $6,006 $35,339 $21,908 496,505 ($2,423) ($3,500) ($215) $57,115
Exercise of restricted
stock purchase rights (4,000) 4 (33) (29)
Amoritization of unearned
compensation 169 169
Purchase of treasury 126,800 (556) (556)
stock
Amortization of ESOP debt
as a result of shares
allocated 500 500
Net loss (4,622) (4,622)
--------- ----- ------ ------ ------- ------ ------ ----- ------ ------ -------
Balance at April 30, 1994 6,006,300 6,006 35,339 17,286 619,305 (2,975) (3,000) (79) 52,577
Amortization of unearned
compensation 61 61
Purchase of treasury 345,000 (1,412) (1,412)
stock
Amortization of ESOP debt
as a result of shares
allocated (208) 500 292
Decrease in market value
of marketable (39) (39)
securities
Advances to officers and
employees for the
purchase of stock (822) (822)
Net loss (3,843) (3,843)
--------- ----- ------ ------ ------- ------ ------ ----- ------ ------ -------
Balance at April 30, 1995 6,006,300 6,006 35,131 13,443 964,305 (4,387) (2,500) (822) (18) (39) 46,814
Amortization of ESOP debt
as a result of shares
allocated (156) 500 344
Shares issued under
restricted stock plan 49 (25,000) 92 (116) 25
Purchase of treasury 200,600 (698) (698)
stock
Restricted stock
surrendered
to treasury stock 20,000 (82) 82
Amortization of unearned
compensation 21 21
Increase in market value
of marketable securities 95 95
Net earnings 2,822 2,822
--------- ------ ------- ------- --------- ------- ------- ----- ------ ---- -------
Balance at April 30, 1996 6,006,300 $6,006 $35,024 $16,265 1,159,905 ($5,075) ($2,000) ($740) ($113) $ 56 $49,423
========= ====== ======= ======= ========= ======= ======= ===== ====== ==== =======
</TABLE>
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1996, 1995 and 1994
-----------
1996 1995 1994
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net earnings (loss) $2,822 ($3,843) ($4,622)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization
Property 974 995 1,576
Other 20 20 (425)
Provision for losses on accounts
receivable and inventories 996
(Gains) losses on marketable securities (59) (1,197) (94)
Loss (gain) on sale or disposal of
property, plant and equipment (4) 560
Common stock issued for compensation
plans 4
Amortization resulting from
allocation of ESOP shares 344 292 500
Employee benefit plan provisions 765 717 237
Finance lease accretion (155) (188) (156)
Changes in assets and liabilities:
Accounts receivable (101) 8,318 10,265
Inventories 180 322 1,672
Prepaid and other 231 (360) 290
Other assets (511) 685 883
Accounts payable - trade 652 (357) (111)
Accrued liabilities 480 (800) (4,912)
Income taxes payable 79 (281)
Refundable income taxes 318 (31) 1,335
Other liabilities (78) (311) __
------ ------ ------
Net cash provided by operating activities 6,953 4,262 6,721
------ ------ ------
Cash flows from investing activities:
Purchase of marketable securities (11,094)
Proceeds from disposition of marketable 5,910 3,440
securities
Capital expenditures (330) (168) (404)
Proceeds from sale of property, plant
and equipment 513 34
------ ------ ------
Net cash provided by (used in) investing
activities 6,093 (7,822) (370)
------ ------ ------
Continued
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1996, 1995 and 1994
(Continued)
-----------
1996 1995 1994
---- ---- ----
(In thousands)
Cash flows from financing activities:
Principal payments of long-term debt (749) (1,086) (11,913)
Purchase of treasury stock (698) (1,412) (556)
Sale of stock from treasury 25
Notes receivable from employees (822)
Proceeds from long-term borrowings 800
------ ------ ------
Net cash used in financing
activities (1,422) (3,320) (11,669)
------ ------ ------
Net increase (decrease) in cash
and cash equivalents 11,624 (6,880) (5,318)
Cash and cash equivalents at
beginning of year 4,291 11,171 16,489
------ ------ ------
Cash and cash equivalents at
end of year $15,915 $ 4,291 $11,171
======= ======= =======
Supplemental disclosures of cash flow information (Note 15): Cash paid during
the year for:
Interest $942 $1,017 $833
==== ====== ====
Income taxes $ 81 $151 $383
==== ====== =====
The accompanying notes are an
integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of Frequency
Electronics, Inc. and its wholly-owned subsidiaries (the "Company" or
"Registrant"). The Company is principally engaged in the design, development
and manufacture of precision time and frequency control products and
components for microwave integrated circuit applications. Intercompany
accounts and significant intercompany transactions are eliminated in
consolidation. These financial statements have been prepared in conformity
with generally accepted accounting principles and require management to make
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. Actual results could differ from
these estimates.
Inventories:
Inventories, which consist of work-in-process and raw materials, are
accounted for at the lower of cost (specific and average) or market.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and includes interest on
funds borrowed to finance construction. Expenditures for renewals and
betterments are capitalized; maintenance and repairs are charged to income
when incurred. When fixed assets are sold or retired, the cost and related
accumulated depreciation and amortization are eliminated from the respective
accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the long-lived
asset, an impairment loss is recognized. To date, no impairment losses have
been recognized.
Depreciation and Amortization:
Depreciation of fixed assets is computed on the straight-line method based
upon the estimated useful lives of the assets (40 years for buildings and 3
to 10 years for other depreciable assets). Leasehold improvements are
amortized on the straight-line method over the shorter of the term of the
lease or the useful life of the related improvement.
Revenue and Cost Recognition:
Sales of products and services to customers are generally reported in
operating results based upon shipment of the product or the performance of
services pursuant to contractual terms.
Revenue under contracts for which shipments are an inappropriate measurement
of performance are reported in operating results using the percentage of
completion method based upon the ratio that incurred costs bear to total
estimated costs. Provisions for anticipated losses are made in the period in
which they become determinable. Changes in job performance may result in
revisions to costs and income and are recognized in the period in which
revisions are determined to be required.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as depreciation,
indirect labor and supplies. Selling, general and administrative costs are
charged to expense as incurred.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Income Taxes:
Deferred tax liabilities and assets are recognized in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Earnings Per Share:
Primary earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock and, when dilutive, common
stock equivalents outstanding. Fully diluted earnings per share are not
presented since they do not materially vary from primary earnings per share.
Marketable Securities:
Marketable securities consist of investments in common stocks, mutual funds,
and debt securities of U.S. government agencies. At April 30, 1994, these
investments were recorded at the lower of aggregate cost or market.
Substantially all of the marketable securities at April 30, 1996 and April
30, 1995 were held in the custody of one financial institution.
On May 1, 1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("Statement 115"). Pursuant to Statement 115,
investments in certain debt and equity securities are categorized as
available for sale and are carried at fair value, with unrealized gains and
losses excluded from income and recorded directly to stockholders' equity.
In accordance with Statement 115, prior period financial statements have not
been restated to reflect this change in accounting principle. For the year
ended April 30, 1995, the favorable cumulative effect of this change in
accounting principle was approximately $215,000 or $.04 per share.
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company places its temporary cash investments with high
credit quality financial institutions. Such investments may be in excess
of the FDIC insurance limit. No losses have been experienced on such
investments.
Fair Values of Financial Instruments:
Cash and cash equivalents and loans payable are reflectedin the accompanying
consolidated balance sheets at amounts considered by management to
reasonably approximate fair value. Management is not aware of any factors
that would significantly affect the value of these amounts.
Stock-based Plans:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting
standards for stock-based plans. The Statement, which becomes effective in
fiscal 1997, requires the Company to choose between accounting for issuances
of stock and other equity instruments to employees based on their fair
value or disclosing the pro forma effects such accounting would have had on
the Company's net income and earnings per share. The Company has begun to
gather the documentation necessary to address the impactof this Statement in
relation to its stock-based employee plans. The Company will likely choose
the disclosure method to report this information in future financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. Restructuring
In the fourth quarter of fiscal 1993, the Company recorded a $5.4 million
charge relating to the consolidation of the Company's west coast operations
with its east coast headquarters facility. The restructuring, which
consolidated the manufacturing, engineering and marketing functions and
resulted in the sale or disposal of certain unprofitable product lines, is
substantially complete. At April 30, 1995, the only remaining asset was a
building which had been written down to its estimated realizable value of
$2.3 million. In June 1995, the building was sold for such amount. The
Company received $500,000 in cash and a promissory note for $1.8 million.
Such note bears interest at 10% and requires monthly installments of
principal and interest of $19,343 until July 31, 2000 when the entire
remaining principal balance shall be due and payable.
3. Marketable Securities
Marketable securities at April 30, 1996 and 1995 are summarized as follows
(in thousands):
April 30,1996
Unrealized
Market Holding
Cost Value Gain (Loss)
Fixed income securities $ 4,231 $ 4,346 $ 115
Equity Securities 1,345 1,286 (59)
------ ------- -----
$ 5,576 $ 5,632 $ 56
======= ======= =====
April 30,1995
Unrealized
Market Holding
Cost Value Gain (Loss)
Fixed income securities $ 9,965 $ 10,019 $54
Equity Securities 1,461 1,368 (93)
------ ------- ---
$11,426 $ 11,387 ($39)
======= ======== ===
As of April 30, 1996, gross unrealized gains on fixed income securities were
$115. Gross unrealized losses on equity securities were $59. As of April 30,
1995, gross unrealized gains and losses on fixed income securities were $123
and $69, respectively. Gross unrealized losses on equity securities were
$93. Maturities of fixed income securities classified as available for sale
at April 30, 1996 are as follows (in thousands):
Current $ 960
Due after one year through five years 2,674
Due after five years through ten years 498
After ten years 99
-------
$4,231
======
The proceeds from sales of available-for-sale securities and the gross
realized gains (based on specific identification) were $174 thousand and $58
thousand, respectively for the year ended April 30, 1996. For the year ended
April 30, 1995, proceeds from sales of available-for-sale securities and the
gross realized gains were $2.4 million and $1.2 million, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. Accounts Receivable
Accounts receivable include costs and estimated earnings in excess of
billings on uncompleted contracts accounted for on the percentage of
completion basis of approximately $5,315,000 at April 30, 1996 and
$5,456,000 at April 30, 1995. Such amounts represent revenue recognized on
long-term contracts that has not been billed as of the balance sheet date.
5. Inventories
Inventories, which are reported net of reserves of $940,000 and $524,000,
at April 30, 1996 and 1995, respectively, consisted of the following
(in thousands):
1996 1995
---- ----
Raw Materials and Component Parts $1,998 $1,569
Work in Progress 8,283 9,599
------ -------
$10,281 $11,168
======= =======
Title to all inventories related to United States Government contracts that
provide for progress billings vests in the U.S. Government.
6. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
1996 1995
---- ----
Buildings and building improvements $ 8,751 $ 8,753
Machinery, equipment and furniture 15,191 15,079
Capitalized leases 121 152
------ ------
24,063 23,984
Less, accumulated depreciation and
amortization 15,224 14,792
------- ------
$ 8,839 $ 9,192
======= =======
Depreciation and amortization expense for the years ended April 30, 1996,
1995 and 1994 was $974,000, $995,000, and $1,576,000, respectively.
Maintenance and repairs charged to operations for the years ended April 30,
1996, 1995 and 1994 was approximately $320,000, $562,000, and $880,000,
respectively. Portions of a building owned by the Company are leased to
outside parties. Related cost and accumulated depreciation at April 30, 1996
are approximately $565,000 and $163,000, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
1996 1995
---- ----
Unsecured note payable in forty equal
quarterly installments of $125,000
through April 1, 2000 with interest at
adjusted LIBOR plus 1.00% (6.7813%
at April 30, 1996) (1) $ 2,000 $ 2,500
Nassau County Industrial Development
Bonds payable in quarterly installments
of $62,500 through September 30, 2000 at
79% of prime(6.5175%at April 30, 1996) (2) 1,188 1,437
Real Estate Construction Loan in the
amount of $9,000,000, maturity date
July 31, 1997 with interest at LIBOR
plus 1.375% (6.625% at April 30,
1996) or prime plus 0.25% (3) 9,000 9,000
------ ------
12,188 12,937
Less, current maturities 750 750
------ ------
$11,438 $12,187
======= =======
(1) This note, originally in the amount of $5,000,000, was used to
fund the purchase of 714,286 shares of the Company's common
stock for the Employee Stock Ownership Plan (see Note 11).
Under the terms of this loan the Company has the right to
borrow either at the bank's stipulated prime rate, at LIBOR
plus 1.0% or at a designated fixed rate to be determined.
(2) This obligation is collateralized by certain property, plant
and equipment having a net book value of approximately
$6,175,000 at April 30, 1996.
(3) This obligation is collateralized by the tenant's assets for
which a building was constructed (see Note 8).
Aggregate amounts of long-term debt scheduled to mature in each of the
subsequent years ending April 30, are as follows (in thousands):
1997 $ 750
1998 9,750
1999 750
2000 750
2001 188
-------
$12,188
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Leases
Operating Leases:
The Company leases land, on which its plant is located, under an operating
lease expiring in 2080. The lease provides for payments of real estate
taxes, insurance and other charges by the lessee. The lease agreement
provides for rental escalations ranging from three to ten percent at varying
periods of from four to ten years. The Company also has sublease rentals
providing for annual rental income. These sublease agreements provide for
escalations which are substantially the same as those in the Company's
lease.
Lease commitments and related sublease rental income for real property at
April 30, 1996 are as follows (in thousands):
Aggregate Lease Sublease
Commitments Rental Income
1997 $ 247 $ 66
1998 226 66
1999 191 66
2000 175 66
2001 167 66
2002 and thereafter 18,630 396
------- ----
$19,636 $726
======= ====
Lease rental expenses, including real estate taxes, charged to operations
for the years ended April 30, 1996, 1995 and 1994 were approximately
$783,000, $1,036,000 and $910,000, respectively.
Sublease rental income for the years ended April 30, 1996, 1995 and 1994 was
approximately $66,000 in each year.
Direct Finance Lease:
During 1993, construction was completed on a building which is being leased
to Laboratory Corportation of America ("LCA") formerly National Health
Laboratories, Inc. under a fifteen year direct finance lease.
Income on this direct finance lease is recognized by a method which produces
a constant periodic rate of return on the outstanding investment in the
lease. Minimum rentals are based on the specified rental rate in the
agreement and are subject to adjustment based on the difference between the
actual rate of interest incurred on the borrowing used to construct the
facility and the targeted range of 9.75% to 10.25%. During fiscal 1996, 1995
and 1994, rental reductions, representing actual interest savings, of
approximately $240,618, $286,000, and $437,000, respectively were passed
through to LCA.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company's net investment in the direct finance lease is as follows (in
thousands):
Minimum lease payments receivable $26,132
Unearned Income (16,525)
Net Investment $ 9,607
=======
The scheduled maturities for the direct financing lease receivable at April
30, 1996 are as follows (in thousands):
1997 $ 1,804
1998 1,895
1999 1,989
2000 2,089
2001 2,194
2002 and thereafter 16,161
-------
$26,132
=======
9. Commitments and Contingencies
U.S. Government Indictment:
On November 17, 1993, a Federal Grand Jury (the "Grand Jury") in the United
States District Court for the Eastern District of New York indicted the
Company and certain individuals (including certain officers) alleging that
they conspired to and did defraud the U.S. Government ("the Government") and
committed certain criminal acts in connection with six contracts (which were
terminated for the convenience of the Government) under which the Company
was a subcontractor and the Government was the end-user. Such alleged
criminal acts included submitting false documents, intentionally making
false statements and destroying or causing to be destroyed, records relating
to labor and other costs. On April 6, 1994 the Grand Jury returned a
superseding indictment for the purpose, it is believed, of curing certain
asserted deficiencies in the original indictment. Upon a conviction under
the original or superseding indictment (collectively the "Indictment") the
Government may seek fines, penalties, forfeitures, restitution, treble
damages and other conditional relief. The Company and the other defendants
have pleaded not guilty to and intend to vigorously defend the Indictment.
U.S. Government Civil Action:
Contemporaneously with the issuance of the original indictment, the
Government commenced a civil action for damages naming the same parties and
alleging essentially the identical facts and charges set forth in the
Indictment. The complaint seeks to recover treble damages in an unspecified
amount, $10,000 for each false claim, record and statement, certain costs
and attorney's fees, and such other relief the court deems proper. Neither
the Indictment nor the civil action alleges the dollar amounts as to which
the Government claims it was defrauded. The Company was reimbursed for costs
incurred for contract performance and for settlement costs in connection
with the six terminated contracts. The civil action has been stayed pending
the disposition of the Indictment. The Company and the other defendants have
denied the allegations of and intend vigorously to contest the civil action.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Private Civil Derivative Actions:
On December 1, 1993, and February 4, 1994, two separate derivative
shareholder actions (pursuant to a court order, are now consolidated under
one civil action) were served in state court actions against the Company as
a nominal defendant and the entire board of directors and certain
individuals. A derivative action is one permitted by law to be instituted by
a shareholder for the benefit of a corporation to enforce an alleged right
or claim of the corporation where it is alleged that such corporation has
either failed and refused to do so or may not reasonably be expected to do
so. The substance of the complaint in each action is similar and comprises a
series of allegations that the misconduct of Company personnel, involved in
the aforementioned Indictment, is such that it exposes the Company to
material and substantial monetary judgments and penalties and the loss of
significant business, and the directors were under a fiduciary obligation to
manage and control the business operations of the Company and the conduct
of its personnel. The complaint seeks judgment against the directors in
the amount of all losses and damages suffered by the Company on account of
the facts alleged in the complaint, together with interest costs, legal and
other professional fees. The Company and the other defendants have denied
the allegations of and intend vigorously to contest the derivative actions.
The derivative shareholder actions have been stayed pending the disposition
of the Indictment, and related investigations.
Qui Tam Actions:
In March 1994, a qui tam action was served upon the Company and Martin
Bloch, its former chief executive officer and in July 1995, a separate qui
tam action was served upon the Company and certain employees of the Company.
A qui tam action is a form of derivative action wherein an individual may,
under certain circumstances, bring a legal action against one or more third
persons on behalf of the Government for damages and other relief by reason
of one or more alleged wrongs perpetrated against the Government by such
third persons. The March 1994 complaint alleges that the Company, in
connection with its subcontract to design and manufacture certain
oscillators which are components of the Government's Advance Medium Range
Air to Air Missiles ("AMRAAMS"), improperly designed, manufactured and
tested the oscillators and as a result the Government sustained damages. The
complaint demands an unspecified amount of damages allegedly suffered by the
Government, and asks that the Court determine the damages and assess civil
penalties as provided under the False Claims Act. The July 1995 complaint
alleges that the Company created and used materially false cost data to
justify cost estimates in bid packages and otherwise affecting prices and
fees charged and paid for defense procurement contracts relating to the
AMRAAM missile and to a program for the replacement of cesium standard
parts, and to continue to justify the award of the payments under such
contracts; that the false claims caused the United States unknowingly to pay
more than the actual cost (plus a reasonable profit) of the products and
services; that FEI knowingly made transfers to costs from contract to
contract that were unjustified and materially false and otherwise overstated
the costs of its contracts; that this materially false cost data was used to
support false cost estimates by FEI to the United States or its contractors,
to fraudulently accelerate costs incurred so as to obtain progress payments,
to justify cost estimates bids for contracts of a nature similar to ones
already awarded FEI, and to misrepresent cost information to the United
States and its contractors. Under the False Claims Act, a recovery can be
made in favor of the Government for a civil penalty of not less than $5,000
and not more than $10,000 as to each false claim and for each false record
and statement, plus three times the amount of damages it is determined the
Government sustained, plus legal fees and expenses. The Company and Mr.
Bloch have denied the allegations of and intend to vigorously defend the
March 1994, qui tam action. The Company intends to vigorously defend the
July 1995 qui tam action, but as of year end, none of the defendents have
answered the complaints. A response is not required until August 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Company Position and Legal Fees:
The Company and the individual defendants in each of the legal matters
described above consider the allegations and the charges asserted to be
unjustified. They further consider the actions of the Company and the
individual defendants with respect to the subject matter of these charges to
have been taken in good faith and without wrongful intent, criminal or
otherwise. Because of the uncertainty associated with the foregoing matters,
the Company is unable to estimate the potential liability or loss that may
result, if any, and accordingly, no provision has been made in the
accompanying consolidated financial statements. Included in selling and
administrative expenses are legal fees incurred in connection with the above
matters of approximately $919,000, $2,300,000 and $1,819,000, for fiscal
years ended 1996, 1995 and 1994, respectively.
Government Contract Suspension:
On December 14, 1993, the Company was notified by the U.S. Department of the
Air Force that, effective December 13, 1993, it had been suspended from
contracting with, or acting as subcontractor under any contract with any
agency of the Government and that such suspension is effective throughout
the executive branch of the Government. The suspension is also applicable
to: Martin Bloch, FEI's former chairman and chief executive officer,
presently on leave of absence from the position of president; Harry Newman,
FEI's secretary and treasurer, presently on leave of absence from such
positions; and Marvin Norworth, FEI's contract manager who went on a leave
of absence from such position and has since retired. The suspension is
temporary, subject to the outcome of legal proceedings against the Company
and certain individuals presently pending in the Eastern District as
discussed above. The suspension does not preclude the completion by the
Company of its performance of Government contracts or subcontracts awarded
to it and pending on the date of suspension. The Government may also conduct
business with the Company during the period of suspension when a Government
department or agency determines that a compelling reason exists for it to do
so. The suspension allows the Company the opportunity to contest the
suspension by submitting information and argument in opposition to the
suspension. Since the Company and all the individual defendants have pleaded
not guilty to the Indictment and denied the charges alleged in the
Government's related civil action, denied the allegations in the Muller Qui
Tam Action and, it is anticipated, will deny the allegations in the Geldart
Qui Tam Action, the Company believes that the suspension is unwarranted and,
accordingly, is vigorously contesting the suspension. However, to date, the
suspension has not been withdrawn and no assurance can be given as to
removing the suspension pending a favorable disposition of the
aforementioned legal proceedings. If the Indictment results in conviction,
the period of suspension could be extended by way of debarment of the
Company from any future Government contracts or subcontracts. Debarment is
imposed for a period commensurate with the seriousness of the causes.
Generally, debarment does not exceed three years. The duration of the
Company's suspension will be considered in determining the debarment period.
Approximately 55% of the Company's revenue for fiscal 1996 is comprised of
prime and subcontracts in which the Government is the end-user. The other
category of the Company's business is in commercial and export markets
unrelated to the Government. In view of the extent to which the Company is
currently reliant on government contracts and subcontracts and the effect
which the suspension, unless withdrawn, will have on the Company's ability
to continue to obtain such business, the Company believes that the
suspension and possible debarment is an extremely serious matter which is
likely to have a material adverse effect on the Company's business
prospects, financial condition, results of its operations and cash flows.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unasserted Claims:
By reason of a separate Grand Jury investigation, the Company was served at
various times with a series of Grand Jury subpoenas commencing in late
December 1993. The subpoenas, with which the Company complied, called for
the production of a variety of finance, accounting and other documents
relating to AMRAAMS. The prosecutor has not advised as to the theory of this
investigation. Based upon the documents subpoenaed, it appears that the
inquiry relates to finance and/or pricing matters. The Company regards
charges or claims of violations of Government laws and regulations as
extremely serious and recognizes that such charges or claims could have a
material adverse affect on it. In the event of an indictment and conviction
against the Company in this matter, the Government may seek fines,
penalties, restitution, forfeitures, treble damages or other conditional
relief. The Company would also be subject to the suspension and debarment
regulations of the Department of Defense described above. To date, no
charges have been filed nor claims asserted against the Company as a result
of this Grand Jury investigation.
Environmental Matters:
In connection with an acquisition in 1987, the Company obtained certain real
estate which the U.S. Environmental Protection Agency proposed be added to
the National Priorities List which would subject the premises to the
Superfund requirements of the law. No estimate as to the cost to clean up
the premises has been made or provided to the Company. Pursuant to the terms
of the purchase agreement, the seller, a financially capable party,
indemnified the Company from any liabilities arising from this environmental
matter and, accordingly, it is management's opinion that the outcome will
not have a significant impact on the Company's financial position, results
of operations or cash flows.
Other:
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or cash
flows of the Company.
10. Notes Receivable - Common Stock
In October 1994, certain officers and employees acquired an aggregate of
250,000 shares of the Company's common stock in the open market. The
purchase price of these shares of approximately $822,000 was financed by
advances from the Company to such officers and employees. The notes,
collateralized by the shares of common stock purchased, accrue interest at
1/2% above prime (8.25% at date of issuance) which is payable and adjusted
annually. The principal is due in its entirety at the earlier of termination
of employment or October 1999. During the year ended April 30, 1996, one of
the officers left the Company and surrendered 25,000 shares acquired under
this arrangement. Accordingly, the related note receivable was satisfied.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
11. Employee Benefit Plans
Stock Options:
The Company has various Incentive Stock Option Plans ("ISOP's") for key
management employees (including officers and directors who are employees).
The ISOP's provide that eligible employees may be granted options to
purchase an aggregate of 900,000 shares of the Company's common stock. Under
one Plan the options are exercisable one year after the date of grant. Under
the remaining plans the options are exercisable over a four-year period
beginning one year after the date of grant. The options expire ten years
after the date of grant and are subject to certain restrictions on
transferability of the shares obtained on exercise. The options are granted
at the discretion of the Stock Option committee at an exercise price not
less than the fair market value of the Company's common stock on the date of
grant.
Transactions under these plans are as follows:
1996 1995 1994
---- ---- ----
Outstanding at beginning of year 543,071 591,446 560,846
Granted 52,000 113,000
Expired or canceled (12,156) (48,375) (82,400)
------- ------- -------
Outstanding at end of year 582,915 543,071 591,446
======= ======= =======
Options exercisable at end of year 494,915 380,428 478,446
======= ======= =======
Options available for grant
at end of year 278,698 327,198 296,548
======= ======= =======
At April 30, 1996 and 1995 option prices per share were $4.875 - $6.875
The excess of the consideration received over the par value of the common
stock or cost of treasury stock issued under these option plans has been
recognized as an increase in additional paid-in capital. No charges are made
to income with respect to stock options.
Restricted Stock Plan:
During fiscal 1990, the Company adopted a Restricted Stock Plan which
provides that key management employees may be granted rights to purchase an
aggregate of 250,000 shares of the Company's common stock. The grants,
transferability restrictions and purchase price are determined at the
discretion of a special committee of the board of directors. The purchase
price may not be less than the par value of the common stock.
1996 1995 1994
---- ---- ----
Exercisable at beginning of year 25,000 25,000 7,500
Granted (purchase price-$1.00 per share) 90,000 25,000
Exercised and expired (25,000) (7,500)
-------- -------- --------
Exercisable at end of year 90,000 25,000 25,000
======= ======= =======
Balance of shares available for
grant at end of year 62,500 152,500 152,500
======= ======= =======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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). This amendment became effective January 1,
1990. A loan in the amount of $5,000,000 was negotiated with a bank on May
22, 1990 to fund the Trust. The loan is for a ten year period with forty
equal quarterly installments of $125,000, plus interest at various rates at
the Company's option. The Company reacquired 374,435 shares of its common
stock during fiscal 1990. These shares plus approximately 340,000 additional
shares issued by the Company from its authorized, unissued shares were sold
to the ESOP in May 1990.
Shares are released for allocation to participants based on the ratio of the
current year's debt service to the sum of the current year's debt service
plus the principal to be paid for all future years. At April 30,1996,
330,048 shares were allocated to participant accounts.
Effective May 1, 1994, the Company changed its method of accounting for its
ESOP in accordance with Statement of Position ("SOP") 93-6. In accordance
with SOP 93-6 the annual expense related to the leveraged ESOP, determined
as interest incurred on the note plus compensation cost based on the fair
value of the shares released was approximately $515,000 and $479,000 for the
years ended April 30, 1996 and 1995, respectively. For the year ended April
30,1994, compensation cost was based on the cost of the shares released and
the annual expense (including interest) was $610,000. The effect of this
change on the statement of operations for the year ended April 30, 1995 was
a benefit of $208,000 or $.04 per share.
The SOP also requires that ESOP shares that are committed to be released are
considered outstanding for purposes of calculating earnings per share. In
fiscal 1994 all ESOP shares were considered outstanding for purposes of
calculating earnings per share. The fair value of unallocated shares
approximates $1.4 million and $1.7 million at April 30, 1996 and 1995,
respectively.
Deferred Compensation Plan:
The Company has instituted a program for key employees providing for the
payment of benefits upon retirement or death. Under the plan, these
employees receive specified retirement payments for the remainder of the
employees' life with a minimum payment of ten years' benefits to either the
employee or their beneficiaries. The plan also provides for reduced benefits
upon early retirement or termination of employment. The Company has
purchased whole life insurance policies on each of the participant's lives
which it intends to use to fund the liabilities under the plan.
Deferred compensation expense charged to operations during the years ended
April 30, 1996, 1995, and 1994 was approximately $744,000, $717,000, and
$598,000, respectively.
Profit Sharing Plan:
The Company has a profit sharing plan and trust under section 401(k) of the
Internal Revenue Code. This plan allows all eligible employees to defer a
portion of their income through voluntary contributions to the plan. In
accordance with the provisions of the plan, the Company can make
discretionary matching contributions in the form of cash or common stock.
There were no such contributions in fiscal 1996, 1995 or 1994.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 $125,000 to
operations under these plans for the fiscal year ended April 30, 1996. The
Company had no charges to operations for the fiscal years ended April 30,
1995 and 1994.
12. Income Taxes
The provision (benefit) for income taxes consists of the following (in
thousands):
1996 1995 1994
---- ---- ----
Current Federal $ 45 ($92)
Current State and Local 155 $82 42
---- --- -----
$200 $82 ($50)
==== === ====
The components of deferred taxes are as follows (in thousands):
1996 1995
---- ----
Deferred tax assets:
Accounts receivable $ 84 $ 372
Employee benefits 1,708 1,350
Inventory 643 353
Asset writedowns 719
Miscellaneous 3
Net operating loss carryforwards 4,542 4,456
----- -----
Total deferred tax asset 6,980 7,250
----- -----
Deferred tax liabilities:
Property, plant and equipment 2,248 2,220
----- -----
Net deferred tax asset 4,732 5,030
Valuation allowance (4,732) (5,030)
------ ------
$ - $ -
====== ======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table reconciles the reported income tax expense (benefit)
with the amount computed using the federal statutory income tax rate.
1996 1995 1994
---- ---- ----
(In thousands)
Computed "expected" tax expense (benefit) $1,027 ($1,352) ($1,588)
State and local tax, net of federal
benefit 102 55 89
Dividend received deduction (21) (22) (22)
Loss carryforward for which no tax 1,372 1,454
benefit was recorded
Benefit of loss carryforward (917)
Other items, net, none of which
individually exceeds 5% of
federal taxes at statutory rates 9 29 17
------- ------ -------
$ 200 $ 82 ($ 50)
======= ====== =======
At April 30, 1996, the Company has net operating loss carryforwards of
approximately $11 million which may be applied against future taxable
income and which expire in fiscal years 2008 through 2010.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
13. Industry and Operations
The Company is engaged in the manufacture and sale of precision time and
frequency control products for defense and space for U.S. Government end use
and commercial communication and non-U.S. defense and space. As a result,
the Company's operations have been classified into two business segments as
follows (in thousands):
1996 1995 1994
---- ---- ----
Net sales:
Commercial $ 11,220 $ 6,103 $ 8,597
U.S. Government 13,872 17,978 18,867
Operating income (loss):
Commercial 2,140 (2,088) (1,982)
U.S. Government 1,551 281 (513)
Corporate (2,644) (4,218) (3,679)
Identifiable assets:
Commercial 10,408 6,348 10,677
U.S. Government 23,103 27,606 37,838
Corporate 35,259 31,078 24,140
Depreciation:
Commercial 427 351 275
U.S. Government 517 615 1,202
Corporate 30 29 99
Capital expenditures:
Commercial 3 40 124
U.S. Government 327 128 277
Corporate 3
Sales to Hughes Aircraft Company (HAC) and Space Systems Loral each exceeded
10% of the Company's consolidated sales for the year ended April 30, 1996.
Collectively these two companies accounted for approximately 39% of the
Company's consolidated sales for the same period. For the year ended April
30, 1995, sales to HAC, TRW and Raytheon Corp. exceeded 10% individually and
56% collectively of consolidated sales. For the year ended April 30, 1994,
sales to HAC and Raytheon Corp. exceeded 10% individually and 40%
collectively of consolidated sales.
For the fiscal year ended April 30, 1996, the sales to HAC were
substantially all for U.S. Government end-use while the sales to Space
Systems Loral were for commercial communication and foreign defense and
space applications. Sales to the above named customers in the fiscal years
ended April 30, 1995 amd 1994 were substantially all for U.S. government
end-use.
The loss by the Company of any one of these customers or, for those
customers contracting with the U.S. Government, the loss of any contracts
which are partially subcontracted to the Company, would have a material
adverse effect on the Company's business. The Company believes its
relationship with these companies to be mutually satisfactory and, except
for the pending legal proceedings discussed in Note 9, is not aware of any
prospect for the cancellation of or significant reduction of any of their
U.S. Government contracts in which the Company is involved.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Export sales were as follows (in thousands):
1996 1995 1994
---- --- ----
Korea $1,858 $ 100
Canada 525 1,071
Italy 9 663 $2,032
United Kingdom 871 671 903
Indonesia 427 21
Other 631 1,386 1,518
------ ------ ------
$4,321 $3,912 $4,453
====== ====== ======
14. Interim Results (Unaudited)
Quarterly results for fiscal years 1996 and 1995 are as follows (in
thousands, except per share data):
1996 Quarter
1st 2nd 3rd 4th
Net sales $5,338 $5,576 $6,513 $7,665
Gross profit 1,337 1,979 2,224 2,863
Net earnings 256 971 913 682
*Income per share 0.05 0.19 0.19 0.15
1995 Quarter
1st 2nd 3rd 4th
Net sales $6,616 $ 5,958 $ 5,479 $6,028
Gross profit 1,375 698 613 793
Loss before cumulative
effect of accounting change (613) (1,713) (470) (1,262)
Net loss (398) (1,713) (470) (1,262)
*Loss per share before
cumulative effect of
accounting change (0.11) (0.32) (0.09) (0.31)
*Loss per share (0.07) (0.32) (0.09) (0.31)
*Quarterly earnings per share data does not equal the annual amount due
to changes in the average common equivalent shares outstanding.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. Other Information
The following provides information about investing and financing activities
of the Company that affect assets or liabilities but do not result in cash
flow for the three years ended April 30, 1996, 1995 and 1994 and, therefore,
are excluded from the Consolidated Statements of Cash Flows (in thousands):
1996 1995 1994
---- ---- ----
Sale of a building, classified as
asset held for sale in 1995, for
$2.3 million consisting of $500
thousand in cash and a promissory
note for $1.8 million. $1,800
Reclassification of a building
to asset held for sale $2,700
Write-off of fully depreciated
fixed assets 543 $6,634
16. Related Party Transactions
On January 31,1995 the Company purchased 225,000 shares of its common stock
from an affiliate of Richard C. Blum & Associates L.P. (collectively, with
its affiliates, "Blum") at the then quoted bid price of $4.25 per share or
$956,250. Blum's ownership of the Company's outstanding common stock was
thereby reduced from 16.64% (876,350 shares) to 12.92% (651,350).
<PAGE>
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 to
at to costs other Balance at
beginning and accounts Deductions end of
of period expenses -describe -describe period
Year ended April 30,1996
Allowance for doubtful
accounts $562 $580 $659(a) $483
Year ended April 30,1995
Allowance for doubtful
accounts $562 $562
Year ended April 30,1994
Allowance for doubtful
accounts $562 $562
(a) Accounts written off
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
NONE
PART III
Item 10. Directors and Executive Officers of the Registrant
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
August 27, 1996.
Item 11. Executive Compensation
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
August 27, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
August 27, 1996.
Item 13. Certain Relationships and Related Transactions
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
August 27, 1996.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements and financial statement schedules are
listed below and are filed as part of this report.
Index to Financial Statements and
Financial Statement Schedules
Included in Part II of this report:
Page(s)
Report of Independent Accountants 25
Consolidated Balance Sheets 26-27
April 30, 1996 and 1995
Consolidated Statements of Operations
- years ended April 30, 1996, 1995 and 1994 28
Consolidated Statements of Changes in Stockholders' Equity
- years ended April 30, 1996, 1995 and 1994 29
Consolidated Statements of Cash Flows
- years ended April 30, 1996, 1995 and 1994 30-31
Notes to Consolidated Financial Statements 32-48
(2) FINANCIAL STATEMENT SCHEDULES
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 49
Other financial statement schedules are omitted because they
are not required or the information is presented in the
consolidated financial statements or notes thereto.
(3) EXHIBITS
Exhibit 23.1- Consent of Independent Accountants 62
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 Forms 8-K, dated July 27, 1995 and December 14, 1995,
containing disclosure under Item 5 thereof, were filed with the
Securities and Exchange Commission during the quarters ended July 31,
1995 and January 31, 1996, respectively.
<PAGE>
INDEX TO EXHIBITS
ITEM 14(a)3
Certain of the following exhibits were filed with the Securities and Exchange
Commission as exhibits, numbered as indicated below, to the Registration
Statement or report specified below, which exhibits are incorporated herein by
reference:
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ----------------
1 (3) Copy of Ceritificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware (1) 3.1
2 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on March 27,
1981 (2) 3.2
3 (3) Copy of By-Laws of the
Registrant, as amended
to date (3) 3.3
4 (4) Specimen of Common Stock
certificate (1) 4.1
5 (10) Lease agreement as amended,
between Registrant and Hyde
Park Associates (predecessor
in interest to We're
Associates Company) (4) 10.1
6 (10) Stock Bonus Plan of Registrant
and Trust Agreement
thereunder (4) 10.2
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ----------- --------------------------- ----------------
7 (10) Employment agreement
between Registrant and
Martin B. Bloch 10.3
8 (10) Employment agreement
between Registrant and
Abraham Lazar (4) 10.4
9 (10) Employment agreement
between Registrant and
John C. Ho (4) 10.5
10 (10) Employment agreement
between Registrant and
Marvin Meirs (4) 10.6
11 (10) Employment agreement
between Registrant and
Alfred Vulcan (4) 10.7
12 (10) Employment agreement
between Registrant and
Harry Newman (4) 10.8
13 (10) Employment agreement
between Registrant and
Marcus Hechler (4) 10.9
14 (10) Form of stock escrow
agreement between Vincenti &
Schickler as escrow agent
and certain officers of
Registrant (4) 10.10
15 (10) Form of Agreement concerning
Executive Compensation (2) 10.11
16 (10) Bond Purchase Agreement
between Nassau Country
Industrial Development
Agency, Long Island Trust
Company, The Bank of New
York, Bank Leumi Trust
Company of New York and
Registrant (5) 16
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ----------- -------------------------- ---------------
17 (10) Five Million dollar
Industrial Development
Bonds of Registrant
with Nassau County
Industry Development
Agency (5) 17
18 (10) Lease Agreement between
Registrant and the County
of Nassau (5) 18
19 (10) Assignment of Lease
between Registrant and
the County of Nassau by
Registrant to the Nassau
County Industrial
Development Agency and the
Acknowledgement and Consent
of the County of Nassau (5) 19
20 (10) Installment Sale Agreement
between the Nassau County
Industrial Development
Agency and Registrant, and
the promissory notes
of Registrant to the Nassau
County Industrial Development
Agency and Long Island Trust
Company, The Bank of New York
and Bank Leumi Trust Company
of New York (5) 20
21 (10) Assignment of Installment Sale
Agreement between the Nassau
County Industrial Development
Agency and Registrant, from the
Nassau County Industrial
Development Agency to Long
Island Trust Company, The Bank
of New York, Bank Leumi Trust
Company of New York, and the
Acknowledgment and Consent
of Registrant (5) 21
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- ----------------------------- ---------------
22 (10) Guaranty Agreement from
Registrant, Marlboro
Research Corporation,
Tek-Wave, Inc., Atomichron,
Frequency Electronics
International Corp. to Long
Island Trust Company, The
Bank of New York and Bank
Leumi Trust Company of
New York (5) 22
23 (10) Bill of Sale from Registrant
conveying personal property
to the Nassau County
Industrial Development
Agency (5) 23
24 (10) Leasehold Mortgage between
the Nassau County Industrial
Development Agency and Long
Island Trust Company, The
Bank of New York and Bank
Leumi Trust Company of New
York, and the Acknowledgment
and Consent of the
Registrant (5) 24
25 (10) Registrant's 1982 Incentive
Stock Option Plan (5) 25
26 (10) Amendment dated April 19,
1981 to Stock Bonus Plan
of Registrant and Trust
Agreement (3) 20.1
27 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
Secretary of State of
Delaware on October 26,
1984 (6) 27
28 (10) Registrant's 1984 Incentive
Stock Option Plan (6) 28
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- ---------------------------- ---------------
29 (10) Pledge and Assignment
dated December 1, 1985
between Registrant,
Nassau County Industrial
Development Agency and
National Westminster
Bank USA (7) 29
30 (10) Bond Purchase Agreement
dated December 1, 1985
between Registrant, Nassau
County Industrial
Development Agency and
National Westminster
Bank USA (7) 30
31 (10) Three Million Five Hundred
Thousand Dollar 1985
Industrial Development
Revenue Bond of Registrant
with Nassau County Industrial
Development Agency (7) 31
32 (10) Mortgage and Security
Agreement dated December 1,
1985 between Nassau County
Industrial Development Agency
and National Westminster
Bank USA (7) 32
33 (10) Sales Agreement dated
December 1, 1985 between
Nassau County Industrial
Development Agency and
Registrant (7) 33
34 (3) Three Million Five Hundred
Thousand Dollar Promissory
Note dated December 1,
1985 between Registrant,
Nassau County Industrial
Development Agency and
National Westminster
Bank USA (7) 34
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- ---------------------------- ----------------
35 (10) Guaranty dated
December 1, 1985, between
Registrant, Marlboro
Research Corporation,
Tek-Wave, Inc., Atomichron,
Inc., Frequency Electronics
International Corp. and
Brightline Corporation to National
Westminister Bank U.S.A (7) 35
36 (10) Registrant's Cash or Deferral
Profit Sharing Plan and
Trust under Section 401
Internal Revenue Code,
dated April 1, 1985 (7) 36
37 (22) List of subsidiaries of
Registrant (7) 37
38 (10) Computation of Earnings
Included in the Financial
Statement per Share of
Common Stock 38
39 (10) Amendment Restated Effective
as of May 1, 1984 of the
Stock Bonus Plan and Trust
Agreement of Registrant (7) 39
40 (28) Form 8-K dated January 20,
1987 and filed January 21,
1987 (File No. 1-8061) (8) No Number
41 (28) Form 8-K dated June 25,
1987 and filed June 26, 1987
(File No. 1-8061) (9) No Number
42 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with the
Secretary of State of Delaware
on October 22, 1986 (11) 42
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- ---------------------------- ---------------
43 (10) Amendment Restated Effective
as of May 1, 1984 of the Stock
Bonus Plan and Trust Agreement
of Registrant (11) 43
44 (2) Agreement of Purchase
and Sale between FEI
Microwave, Inc. and TRW
Microwave, Inc. dated as
of August 12, 1987 (10) 44
45 (3) Amended and Restated
Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on
October 26, 1987 (13) 45
46 (22) List of Subsidiaries
of Registrant (13) 46
47 (10) Employment agreement
between Registrant and
Charles Stone (12) 47
48 (10) Employment agreement
between Registrant and
Jerry Bloch (12) 48
49 (3) Employment agreement
between Registrant and
Joseph Kastenholz (12) 49
50 (10) Registrant's 1987
Incentive Stock Option
Plan (12) 50
51 (10) Registrant's Senior
Executive Stock Option
Plan (12) 51
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- ---------------------------- ---------------
52 (10) Amendment dated Jan. 1, 1988
to Registrant's Cash or
Deferred Profit Sharing Plan
and Trust under Section 401
of Internal Revenue Code (12) 52
53 (10) Amendment to Guarantee
dated as of Dec. 1, 1985
made by Registrant to
National Westminster Bank
USA ("Nat West") dated as
of Jan. 18, 1989 (12) 53
54 (10) Loan Agreement between
FEIM and Nat West dated as
of Jan. 18, 1989 (12) 54
55 (10) Note by FEIM in favor of
Nat West dated as of
Jan. 18, 1989 (12) 55
56 (10) Loan Agreement between
Tech 1 and Nat West dated
as of Jan. 18, 1989 (12) 56
57 (10) Note by Tech 1 in favor
of Nat West dated as of
Jan. 18, 1989 (12) 57
58 (10) Executive Incentive
Compensation Plan between
Registrant and various
employees (12) 58
59 (3) Amended Certificate of In-
corporation of the Registrant
filed with the Secretary of
State of Delaware on
November 2, 1989 (13) 59
60 (10) Registrant's Employee Stock
Option Plan (13) 60
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- ---------------------------- ---------------
61 (10) Loan Agreement between
Registrant and Nat West
dated May 22, 1990 (13) 61
62 (10) Loan Agreement between
Registrant's Employee
Stock Ownership Plan and
Registrant dated May 22,
1990 (13) 62
63 (23.1) Consent of Independent Accountants
to incorporation by reference of 1996
audit report in Registrant's Form S-8
Registration Statement. 63
<PAGE>
NOTES:
(1) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-29609, which
exhibit is incorporated herein by reference.
(2) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-71727, which
exhibit is incorporated herein by reference.
(3) Filed with the SEC as an exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061 for the year ended April 30,
1981, which exhibit is incorporated herein by reference.
(4) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-69527, which
exhibit is incorporated herein by reference.
(5) Filed with the SEC as an exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30,
1982, which exhibit is incorporated herein by reference.
(6) Filed with the SEC as an exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30,
1985, which exhibit is incorporated herein by reference.
(7) Filed with the SEC as exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30,
1986, which exhibit is incorporated herein by reference.
(8) Filed with the SEC as an exhibit, numbered as indicated above, to the annual
report of Registrant on Form 8-K, dated January 15, 1987, which exhibit is
incorporated herein by reference.
(9) Filed with the SEC as an exhibit, numbered as indicated above, to the annual
report of Registrant on Form 8-K, dated June 25, 1987, which exhibit is
incorporated herein by reference.
(10) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 8-K, dated August 12, 1987, which exhibit is
incorporated herein by reference.
(11) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1987, which exhibit is incorporated herein by reference.
(12) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1989, which exhibit is incorporated herein by reference.
(13) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1990, which exhibit is incorporated herein by reference.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Frequency Electronics, Inc. on Form S-8 of our report dated July 26, 1996, on
our audits of the consolidated financial statements and financial statement
schedule of Frequency Electronics, Inc. as of April 30, 1996 and 1995, and for
the years ended April 30, 1996, 1995, and 1994, which report is incorporated by
reference in this Annual Report on Form 10-K.
COOPERS & LYBRAND, L.L.P.
Melville, New York
July 26, 1996
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
Registrant
By: /s/Joseph P. Franklin
---------------------------
Joseph P. Franklin
Chairman of the Board
and Chief Executive Officer
By: /s/Alan L. Miller
-----------------------
Alan L. Miller
Controller
Dated: July 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ John Ho Director and Vice President 7/26/96
(John Ho)
/s/ Joel Girsky Director 7/26/96
(Joel Girsky)
/s/ Martin B. Bloch President & Director 7/26/96
(Martin B. Bloch)
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