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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended April 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-1986657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
516-794-4500
Registrant's telephone number,including area code:
Securities registered pursuant to Section 12 (b) of the Act:
Securities registered pursuant to Section 12 (g) of the Act: None
COMMON STOCK (PAR VALUE $1.00 PER SHARE) AMERICAN STOCK EXCHANGE, INC.
---------------------------------------- -----------------------------
Title of each class Name of each exchange on
which registered
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 21, 2000 - $181,000,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 21, 2000 - 8,046,066
DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by
reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held on or about October 19, 2000.
(Cover page 1 of 59 pages)
Exhibit Index at Page 52
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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 or the Company are to
Frequency Electronics, Inc. and its subsidiaries. References to "FEI" are to the
parent company alone and do not refer to any of the subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became the
successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500 and its website is
WWW.FREQUENCYELECTRONICS.COM.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 7,992,707 shares were
outstanding at April 30, 2000, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.
The Company is a high-tech provider of precision time and frequency
products used to synchronize voice, data and video transmissions in satellite
and terrestrial commercial communications. The Company has segmented its
operations into two principal industries: products for commercial communications
which are based either on the ground or in space and products used by the United
States Government for defense or space applications. The Company's space and
terrestrial commercial communications programs are produced by its wholly owned
subsidiary, FEI Communications, Inc. ("FEIC"). FEIC was incorporated in Delaware
in December 1991, and was created as a separate subsidiary company to provide
ownership and management of assets and other services appropriate for commercial
clients, both domestic and foreign.
At its inception, the Company was involved principally in military defense
contracting by way of the design, development, manufacture, and marketing of
precision time and frequency control products. Its products are used in guidance
and navigation, communications, surveillance and electronic counter-measure and
timing systems. Such products are used on many of the United States' most
sophisticated military aircraft, satellites, and missiles. The Company's
business was highly dependent upon the defense and space spending policies of
the U.S. Government. In recent years, changing defense priorities and severe
federal government budget pressures have significantly changed the market
environment for defense related products.
The Company has focused its internal research and development on
re-engineering its core technologies for the commercial markets. The Company
believes a substantial commercial market exists for its legacy technologies and
has developed several new commercial product lines as discussed later in this
Item 1.
REPORTABLE SEGMENTS
The Company designs, develops, manufactures and markets precision time and
frequency control products for two principal markets: (1) commercial
communications applications, either space- or ground-based and (2) the
traditional heritage government and military markets.
The Company's products for the two reportable segments are similar in
function and are manufactured by the same personnel in a single production
facility. The Company has chosen these two reportable segments based upon the
regulatory environment (Federal Acquisition
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Regulations or "FAR") under which it operates when dealing with U.S. Government
procurement contracts versus the less restrictive commercial environment.
During fiscal 2000, 1999 and 1998 approximately 85%, 77%, and 82%,
respectively, of the Company's sales were for products used for terrestrial or
space-based commercial communications and foreign governments. For the years
ended April 30, 2000, 1999 and 1998, approximately 15%, 23%, and 18%,
respectively, of the Company's sales were for U.S. Government end-use. Sales
summaries for the Commercial Communications and U.S. Government markets during
each of the last five years are set forth in Item 6 (Selected Financial Data).
Segment information regarding revenues, operating profits, depreciation and
assets is more fully disclosed in Note 13 to the accompanying financial
statements.
COMMERCIAL COMMUNICATIONS SEGMENT:
The Company has transformed itself from a defense contract manufacturer
into a high-tech provider of time and frequency products used to synchronize
voice, data and video transmissions in satellites and digital commercial
communications. The Company has focused its internal research and development on
re-engineering its core technologies for the commercial markets. As a result,
the Company has experienced accelerating growth in commercial communications
revenues and anticipates continued substantial sales growth in these areas.
TERRESTRIAL
The telecommunications industry is rapidly expanding as a result of the
conversion from analog to digital systems, the expansion of cellular and PCS
networks including the introduction of data and video transmissions and Internet
access through cellular phones and other handheld devices. Wireless
communication services have become an integral part of the telecommunications
market.
Wireless communication networks consist of numerous installations located
throughout a service area, each with its own base station connected by wire or
microwave radio through a network switch. Network operators are in the process
of converting older networks from analog to digital technology in order to
expand network coverage, increase capacity and improve transmission quality.
This upgrade requires very accurate frequency control at the base stations
accomplished through quartz or rubidium oscillators to achieve a higher degree
of precision.
Currently three leading digital technologies are utilized: Time Division
Multiple Access, Code Division Multiple Access and Global System for Mobile
Communications. These transmission protocols are segmented and transmitted over
a wider spectrum of bandwidths than available under analog systems. Wide-band
digital systems such as wideband-CDMA, have a need for more accurate
synchronization which is accomplished through use of precise timing devices
located throughout the system. The Company manufactures a Rubidium Atomic
Standard, an extremely small, low cost, low phase noise, stable atomic standard
and temperature stable quartz crystal oscillators ideally suited for use in
advanced wireless and wireline telecommunications, including fiber optics.
SPACE-BASED
The commercial use of satellites launched for communications, navigation,
weather forecasting, video and data transmissions has led to the increased need
and ability to transmit information to earth based receivers. This requires
precise timing and frequency control at the satellite. For example, the Company
manufactures the master clocks (quartz, rubidium and cesium) and other
significant timing products for many satellite communication systems. The
Company's space hybrid assemblies are used onboard spacecraft for command,
control and
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power distribution. Efficient and reliable DC-DC power converters are also
manufactured for the Company's own instruments and as stand-alone products for
space applications. The Company's subminiature oven-controlled quartz crystal
oscillator is a low cost, small size, precision crystal oscillator suited for
high-end performance required in satellite transmissions, airborne telephony and
geophysical survey positioning systems. Commercial satellite programs such as
Globalstar, Eutelsat, Inmarsat and Worldstar have utilized the Company's
space-qualified products. New products based on the Company's heritage military
designs are being introduced to take advantage of this emerging market. These
new products include local frequency generators, up and down converters, low
noise amplifiers and complete satellite transponders.
U.S. GOVERNMENT SEGMENT:
The Company's sales in the U.S. Government segment are made under fixed
price contracts either directly with U.S. Government agencies or indirectly
through subcontracts intended for government end-use. The price paid to the
Company is not subject to adjustment by reason of the costs incurred by the
Company in the performance of the contract, except for costs incurred due to
contract changes ordered by the customer. These contracts are on a negotiated
basis under which the Company bears the risk of cost overruns and derives the
benefit from cost savings.
Negotiations on U.S. Government contracts are sometimes based in part on
Certificates of Current Costs. An inaccuracy in such certificates may entitle
the government to an appropriate recovery. From time to time, the Defense
Contracts Audit Agency ("DCAA") of the Department of Defense audits the
Company's accounts with respect to these contracts. The Company is not aware of
any basis for recovery with respect to past certificates.
All government end-use contracts are subject to termination by the
purchaser for the convenience of the U.S. Government and are subject to various
other provisions for the protection of the U.S. Government. In the event of such
termination, the Company is entitled to receive compensation as provided under
such contracts and in the applicable U.S. Government regulations.
The Company's proprietary products have been used in guidance, navigation,
communications, radar, sonar surveillance and electronic countermeasure and
timing systems. Products are built in accordance with Department of Defense
standards and are in use on many of the United States' most sophisticated
military aircraft, satellites and missiles. The Global Positioning Satellite
System, as well as the MILSTAR Satellite System, are two examples of the
programs in which the Company participates. The Company has manufactured the
master clock for the Trident missile, the basic timing system for the Voyager I
and Voyager II deep space exploratory missions and the quartz timing system for
the Space Shuttle. The Company's cesium beam atomic clock is presently employed
in low frequency secure communications, surveillance and positioning systems for
the United States Air Force, Navy and Army.
PRODUCTS
The Company's products are manufactured from raw material which, when
combined with conventional electronic components available from multiple
sources, become finished products, subsystems and systems used for commercial
wireless and wireline communications, satellite applications, space exploration,
position location, radar, sonar and electronic counter-measures. These products,
subsystems and systems are employed in ground-based earth stations, fixed,
transportable, portable and mobile communications installations, domestic and
international satellites, as well as aircraft, ships, submarines and missiles.
The Company's
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products are marketed as components, instruments, or complete systems. Prices
are determined based upon the complexity, design requirement and delivery
schedule.
COMPONENTS - The Company's key technologies include quartz, rubidium and
cesium from which it manufactures precision time and frequency standards and
higher level assemblies which allow the users to generate, synchronize,
transmit, and receive signals in order to locate their position, secure a
communications system, or guide a missile. The components class of the Company's
products is rounded out with crystal filters and discriminators, surface
acoustic wave resonators, and high-reliability thick and thin film hybrid
assemblies for space and other applications.
Precision quartz oscillators use quartz resonators in conjunction with
electronic circuitry to produce signals with accurate and stable frequency. The
Company's products include several types of quartz oscillators, suited to a wide
range of applications, including ultrastable units for satellite systems, and
fast warm-up, low power consumption units for mobile applications, including
wideband-CDMA voice and data communications.
The ovenized quartz oscillator is the most accurate type, wherein the
oscillator crystal is enclosed in a temperature controlled environment called a
proportional oven. The Company manufactures several varieties of temperature
controlling devices and ovens.
The voltage-controlled quartz oscillator is an electronically controlled
device wherein the frequency may be stabilized or modulated, depending upon the
application.
The temperature compensated quartz oscillator is an electronically
controlled device using a temperature sensitive device to directly compensate
for the effect of temperature on the oscillator's frequency.
The key components for the atomic instrument products (cesium and rubidium)
are manufactured totally from raw materials. The rubidium lamp, filter and
resonance cell provide the optical subassembly used in the manufacture of the
Company's optically pumped atomic rubidium frequency standards. The cesium tube
resonator is also manufactured totally from raw materials and is used in the
manufacture of the Company's cesium primary standard atomic clocks.
High reliability, MIL-M-38510 Class S and B, hybrid assemblies are
manufactured in thick and thin film technologies for applications from DC to 44
GHz. These are used in manufacturing the Company's products and also supplied
directly to customers, for space and other high reliability systems.
Efficient and reliable DC-DC power converters are manufactured for the
Company's own instruments and as stand alone products, for space applications.
The Company manufactures filters and discriminators using its crystal
resonators for its own radio-frequency and microwave receiver, signal
conditioner and signal processor products.
INSTRUMENTS - The Company's instrument line consists of three basic time
and frequency generating instruments and a number of instruments which test and
distribute the time and frequency. The Company's time and frequency generating
instruments are the quartz frequency standard, rubidium atomic standard, cesium
beam atomic standards and VSAT transceivers.
The quartz frequency standard is an electronically controlled solid-state
device which utilizes a quartz crystal oscillator to produce a highly stable
output signal at a standardized frequency. The Company's frequency standard is
used in communications, guidance and navigation and time synchronization. The
Company's products also include a precision frequency standard with battery
back-up and memory capability enabling it to remain in operation if a loss of
power has occurred.
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The optically pumped atomic rubidium frequency standard is a solid-state
instrument which provides both timing and low phase noise frequency references
used in commercial communications systems. Rubidium oscillators combine
sophisticated glassware, light detection devices and electronics packages to
generate a highly stable frequency output. Rubidium, when energized by a
specific radio frequency, will absorb less light. The oscillator's electronics
package generates this specific frequency and the light detection device
ensures, through monitoring the decreased absorption of light by the rubidium
and the use of feedback control loops, that this specific frequency is
maintained. This highly stable frequency is then captured by the electronics
package and generated as an output signal. Rubidium oscillators provide atomic
oscillator stability, at lower costs and in smaller packages.
The cesium beam atomic standard utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency several orders of
magnitude more accurate than other types of quartz frequency generators. The
atomic standard is a compact, militarized solid-state device which generates
these precision frequencies for use with advanced communications and navigation
equipment. A digital time-of-day clock is incorporated which provides visual
universal time display and digital timing for systems use. The atomic standard
manufactured by the Company is a primary standard, capable of producing time
accuracies of better than one second in seven hundred thousand years.
The VSAT transceivers consisting of C and KU Bands are intended for use in
satellite communications primarily for private data and voice earth stations.
As communications systems become more precise, the requirement for precise
frequency signals to drive a multitude of electronic equipment is greatly
expanded. To meet this requirement, the Company manufactures a distribution
amplifier which is an electronically controlled solid-state device that receives
frequency from a frequency standard and provides multiple signal outputs of the
input frequency. A distribution amplifier enables many items of electronic
equipment in a single facility, aircraft or ship to receive a standardized
frequency and/or time signal from a quartz, rubidium or cesium atomic standard.
SYSTEMS - Essentially, the Company's systems portion of its business is
achieved by manufacturing and integrating selections of its products into
subsystems and systems that meet customer-defined needs. This is done by
utilizing its unique knowledge of interfacing these technologies and experience
in applying them to a wide range of systems. The Company's systems generate
electronic frequencies of predetermined value and then divide, multiply, mix,
convert, modulate, demodulate, filter, distribute, combine, separate, switch,
measure, analyze, and/or compare these signals depending on the system
application.
The Systems portion of the business includes a complete line of time and
frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. The time and
frequency control systems combine the Company's cesium, rubidium and/or crystal
instruments with its other products, to provide systems for space and ground
based communications, space exploration, satellite tracking stations,
satellite-based navigation and position location, secure communication,
submarine and ship navigation, calibration, and electronic counter-measures
applications. A number of these time and frequency control systems provide up to
quadruple redundancy to assure operational longevity.
BACKLOG
As of April 30, 2000, the Company's consolidated backlog amounted to
approximately $24 million (see Item 7) and includes orders for the commercial
communications segment of approximately $23 million. Approximately 67% of this
backlog is expected to be filled during the Company's fiscal year ending April
30, 2001. The backlog, which includes firm purchase orders and contracts, is
subject to change by reason of several factors including possible cancellation
of orders, change orders, terms of the contracts and other factors beyond the
Company's
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control. Accordingly, the backlog is not necessarily indicative of the revenues
or profits (losses) which may be realized when the results of such contracts are
reported.
CUSTOMERS AND SUPPLIERS
The Company markets its products both directly and through 27 independent
sales representative organizations located principally in the United States.
Sales to non-U.S. customers totaled approximately 12%, 20% and 18% of net sales
in fiscal years 2000, 1999 and 1998, respectively.
The Company's products are sold to a variety of customers, both commercial
and governmental. For the years ended April 30, 2000, 1999 and 1998,
approximately 15%, 23% and 18%, respectively, of the Company's sales were made
under contracts to the U.S. Government or subcontracts for U.S. Government
end-use.
The Company's consolidated sales for each of the years ended April 30,
2000, 1999 and 1998 included sales to Motorola Corp. ("Motorola") of
approximately $14.0 million, $6.5 million and $6.9 million, respectively. These
amounts represent 53%, 34% and 22%, respectively, of consolidated sales for each
of those years. For the year ended April 30, 1998, sales to Space Systems Loral
("SSL") were $8.9 million or 28% of the Company's consolidated sales. During the
three years ended April 30, 2000, sales to Motorola and SSL were made by the
Company's commercial communications segment, accounting for 62% in fiscal 2000,
45% in fiscal 1999 and 60% in fiscal 1998 of that segments total sales. The loss
by the Company of any one of these customers would have a material adverse
effect on the Company's business. The Company believes its relationship with
these companies to be mutually satisfactory and is not aware of any prospect for
the cancellation or significant reduction of any of its commercial or existing
U.S. Government contracts.
The Company purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Company is not dependent upon any one supplier or source of supply
for any of its component part purchases and maintains alternative sources of
supply for all of its purchased components. The Company has found its suppliers
generally to be reliable and price-competitive.
RESEARCH AND DEVELOPMENT
The Company's technological expertise continues to be an important factor
in its recent growth. Until a few years ago, virtually all research and
development activities had taken place in connection with customer-sponsored
development-oriented products conducted under fixed price contracts and
subcontracts in support of U.S. Government programs. The Company was successful
in applying its resources to develop prototypes and preproduction hardware for
use in navigation, communication, guidance and electronic countermeasure
programs and space application. The output of these customer-sponsored projects,
in all cases, was of a proprietary nature.
In the last two years, the Company has focused its internal research and
development efforts on improving the core physics and electronic packages in its
time and frequency products; conducting research to develop new time and
frequency technologies; improving product manufacturability by seeking to reduce
its production costs through product redesign and other measures to take
advantage of lower cost components.
The Company continues to focus a significant portion of its own resources
and efforts on developing hardware for satellite and terrestrial commercial
communications systems which it anticipates will result in future growth and
increased profits. During fiscal 2000, 1999 and 1998, the Company expended $5.4
million, $5.8 million and $1.4 million of its own funds, respectively, on such
research and development activity. (See also Item 7. Management's Discussion and
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Analysis of Financial Condition and Results of Operations.) For fiscal year
2001, the Company is targeting to spend approximately 10% of revenues on
research and development of third generation (3G) cellular telephony products,
completion of high-precision crystal oscillators for the telecommunications
marketplace as well as other emerging wireless and wireline communications
technologies.
PATENTS AND LICENSES
The Company believes that its business is not dependent on patent or
license protection. Rather, it is primarily dependent upon the Company's
technical competence, the quality of its products and its prompt and responsible
contract performance. However, the rights to inventions of employees working for
the Company are assigned to the Company and the Company presently holds such
patents and licenses. Also, in certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses it has funded. The Company does not believe that patents and
licenses are material to its business.
COMPETITION
The Company experiences intense competition with respect to all areas of
its business. The Company competes primarily on the basis of the accuracy,
performance and reliability of its products, the ability of its products to
function in severe environments encountered in space, prompt and responsive
contract performance, and the Company's technical competence and price. The
Company has a unique and broad product line which includes all three frequency
standards - quartz, rubidium, and cesium. The Company believes its ability to
take such raw materials, manufacture finished products, integrate them into
systems and sub-systems, and to interface these systems with end-user
applications, all under one roof, provides the Company with an advantage over
many of its competitors.
Many of the Company's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs.
With respect to the cesium beam atomic clock, quartz crystal standard and
rubidium frequency standard, the Company competes with Hewlett-Packard Company,
Datum, Inc., and E. G. and G., Inc. The Company's principal competition for
space products is the in-house capability of its major customers.
EMPLOYEES
The Company employs 248 persons, none of whom are represented by labor
unions.
OTHER ASPECTS
The Company's business is not seasonal and no unusual working capital
requirements exist.
ITEM 2. PROPERTIES
The Company occupies 93,000 square feet of a manufacturing and office
facility located in Mitchel Field, Long Island, New York. This facility is part
of the building that the Company constructed in 1981 and expanded in 1988 on
land leased from Nassau County. In January 1998, the Company sold this building
and the related land lease with the County of Nassau, to Reckson Associates
Realty Corp. ("Reckson"), and leased back the space that it presently occupies.
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The Company leases its manufacturing and office space from Reckson under an
11-year lease at an annual rental of $400,000 per year with the Company paying
its pro rata share of real estate taxes along with the costs of utilities and
insurance. The lease provides for two 5-year renewal periods, exercisable at the
option of the Company, with annual rentals of $600,000 during the first renewal
period and $800,000 during the second renewal period. Under the terms of the
lease, new office and engineering facilities for the Company were constructed at
the cost of Reckson. The leased space is adequate to meet the Company's present
and future operational needs.
The sale of its building to Reckson, a real estate investment trust
("REIT") whose shares are traded on the New York Stock Exchange, was effected
through a tax-deferred exchange of the building for approximately 486,000
participation units of Reckson Operating Partnership, L.P. ("REIT units") which
were valued at closing at $12 million. Each REIT unit is convertible into one
share of the common stock of the REIT. In addition, approximately 27,000 REIT
units have been placed in escrow which may be released to the Company based upon
the price per share of the REIT on the date of conversion of REIT units. Under
the accounting provisions for sale and leaseback transactions, the sale of this
building is considered a financing and the REIT units received are reflected as
a noncurrent liability while the related building continues to be reflected as
an asset. Upon liquidation of the REIT units, a portion of the resulting gain on
this sale will be deferred and recognized into income over the term of the
leaseback with the balance recognized in income on the date of liquidation. (See
Note 6 to the accompanying financial statements.)
ITEM 3. LEGAL PROCEEDINGS
A qui tam action was commenced in the United States District Court for the
Eastern District of New York entitled, "The United States of America ex rel.
Ralph Muller, Plaintiff, against Frequency Electronics, Inc., Raytheon Company,
Raytheon Company Subsidiaries #1-10, fictitious names for subsidiaries of
Raytheon Company, Hughes Aircraft Company, Hughes Aircraft Company subsidiaries
#1-20, fictitious names for subsidiaries of Hughes Aircraft Company, and Martin
Bloch, Defendants", index number CV-92 5716 ("Muller Qui Tam Action"). The
Muller Qui Tam Action was brought pursuant to the provisions of the False Claims
Act and is an action by which an individual may, under certain circumstances,
sue one or more third persons on behalf of the Government for damages and other
relief.
The complaint was filed on or about December 3, 1992, in camera and under
seal pursuant to the provisions of the False Claims Act. The Court unsealed the
complaint by order dated December 3, 1993, after FEI complained to the United
States Attorney for the Eastern District of New York regarding newspaper
articles that charged FEI with manufacturing defective products based upon
claims in an unspecified and undisclosed qui tam action. It is believed that the
Government made applications to the Court on one or more occasions after
December 3, 1992, to continue to have the file in the Muller Qui Tam Action
remain under seal. The complaint was served on FEI and Martin B. Bloch on March
28, 1994 and March 30, 1994, respectively. Under the provisions of the False
Claims Act, the Government is permitted to take over the prosecution of the
action. The Government has declined to prosecute the Muller Qui Tam Action and
the plaintiff, Ralph Muller ("Muller"), is proceeding with the action on behalf
of the Government as is permitted under the False Claims Act. Moreover, while
the action named as parties defendant, Hughes Aircraft Company ("Hughes") and
Raytheon Company ("Raytheon"), along with several of their subsidiaries, the
Muller Qui Tam Action was dismissed voluntarily by Muller on April 6, 1994, as
to Hughes, Raytheon and their respective subsidiaries. FEI and Martin Bloch
moved to dismiss the complaint on various grounds and at the oral argument of
the motion to dismiss, the Court granted the motion to the extent that the
complaint failed to plead fraud with sufficient particularity as is required
under the Federal Rules of Civil Procedure and the plaintiff was
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directed to serve an amended complaint. On February 6, 1996, plaintiff served an
amended complaint ("Amended Complaint").
The Amended Complaint, insofar as it pertains to FEI and Martin Bloch,
contains a series of allegations to the effect that Hughes and Raytheon
contracted with the Government to supply it with Advanced Medium Range Air to
Air Missiles ("AMRAAMS"); Hughes and Raytheon (collectively, the "Contractors")
entered into a subcontract with FEI pursuant to which FEI was to design,
manufacture, test, sell and deliver to the Contractors certain oscillators which
constituted components of the AMRAAMS; that FEI improperly designed,
manufactured and tested the oscillators; that numerous faulty and defective
oscillators were delivered to the Contractors; that the oscillators did not meet
contract specifications; that FEI was aware of the defective and faulty nature
of the oscillators; that FEI and Martin Bloch knowingly directed non-disclosure
of the design flaws; that the concealed design defects in developmental
oscillators permitted FEI to manufacture additional defective oscillators which
were used in operational missiles; that as a direct result of FEI's fraudulent
concealment of the defects, FEI was contracted to design and manufacture
additional oscillators; that when missiles were returned to FEI for repair, FEI
charged the Government for repair even though FEI knew the units had been
defective at the time of delivery; that FEI falsified test results and FEI and
Martin Bloch directed the falsification of test results; and that FEI sold and
delivered the oscillators to the Contractors; as a result of the faulty and
defective oscillators, many of the AMRAAMS failed to function properly; and that
the Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act,
and that the plaintiff Muller be awarded a bounty. Under the False Claims Act, a
recovery can be made in favor of the Government for a civil penalty of not less
than $5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses.
FEI has determined to vigorously defend the Muller Qui Tam Action. It has
answered the Amended Complaint, denied the material allegations, asserted
seventeen affirmative defenses, and counterclaims for: libel and product libel -
demanding damages of $3,000,000; republication of the libel and product libel -
demanding damages of $3,000,000; slander - demanding damages of $3,000,000;
tortious interference with prospects for additional business relations -
demanding damages of $1,865,010; prima facie tort - demanding damages of
$1,865,010; conversion - demanding damages of $11 plus an amount to be
determined at trial; breach of employment contract - demanding damages of
$1,865,010; breach of fiduciary duty - demanding damages of $1,865,010; plus
punitive damages in the amount of $30,000,000 on each of the tort causes of
action, and legal fees and expenses. The substance of the counterclaims alleged
against Muller are predicated upon a letter dated November 23, 1992 ("November
23 Letter") written by Muller's attorneys Schneider, Harris, Harris and Furman
("SHHF") to the Government which allegedly contained false and libelous
statements concerning FEI's design, manufacture and production of components for
Hughes and Raytheon in connection with the AMRAAMS.
In addition, FEI has instituted a third party action against SHHF, Robert
Harris, Esq. and Rod Kovel, Esq., attorneys for Muller, in connection with their
alleged authoring and publishing of the November 23 Letter provided to the
Government. The third-party complaint asserts the same claims against the
attorneys as are asserted in the counterclaims against Muller, for libel and
product libel, republication of the libel and product libel, slander, tortious
interference with contractual relations, prima facie tort and conversion. The
counterclaims and third-party complaint have been served. Muller has replied to
the counterclaims asserted in FEI's answer to the Amended Complaint, denied the
substantive allegations and asserted various affirmative defenses. The
third-party defendants have replied to the third-party complaint and have denied
the allegations and asserted various affirmative defenses.
10
<PAGE>
Muller moved to dismiss the counterclaims in the answer and the third party
defendants moved to dismiss the third-party complaint. FEI and Martin Bloch
moved to dismiss the complaint in the Muller Qui Tam Action. The motions were
argued on January 5, 1996 and at the time the Court directed the plaintiff to
serve the Amended Complaint. At the oral argument, the Court deferred a portion
of its decision and, in addition, it indicated a formal decision and order would
be provided as to certain of the relief requested. By order dated August 29,
1996, the Court stated that on January 5, 1996, the Government had agreed to
unseal the case file and that the balance of the relief requested was denied or
otherwise dealt with as reflected on the record at the oral argument on January
5, 1996. On April 11, 1997, in open Court and on the record, the Court ordered
that the Muller Qui Tam Action was stayed pending resolution of the Criminal
Cases. (For a description of the Litigations including the Criminal Cases,
Indictment, Superceding Indictment, related matters and the Settlement Agreement
concluding a Global Disposition with the Government, reference is made to Item 3
of the Registrant's Annual Report on Form 10-K for the year ended April 30,
1998, a copy of which is on file with the Securities and Exchange Commission.)
Since the disposition of the Criminal Cases, litigation has resumed. To date,
the parties have engaged in limited discovery since the Government has
determined that all classified and unclassified documents relating to this
action are deemed classified documents subject to Department of Defense security
regulations. As a result, extraordinary procedures have been put in place for
purposes of conducting discovery. On January 21, 2000, the Court stayed further
proceedings pending a decision of the Supreme Court of the United States in a
case where certain legal issues were raised that could have been dispositive of
certain legal issues in the Muller Qui Tam Action. That case was recently
decided and on July 21, 2000, the Court determined that this litigation will
resume.
No opinion can be offered as to the outcome of the Muller Qui Tam Action,
the FEI counterclaims, or the third-party action.
On December 1, 1993, FEI was served with a complaint in an action entitled,
"In the Court of Chancery of the State of Delaware In and For New Castle County,
Diane Solash Derivatively, on behalf of Frequency Electronics, Inc., a Delaware
corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark, Joseph P. Franklin,
Joel Girsky, Abraham Lazar, John C. Ho, E. John Rosenwald, Jr., individuals,
Defendants and Frequency Electronics, Inc., a Delaware Corporation, Nominal
Defendant", Civil Action No. 13266 ("Solash Action"). At the time this action
was instituted, all of the individual defendants named in the complaint were
directors of FEI, Martin B. Bloch was president and chairman of the board of
directors and Abraham Lazar was a vice-president. Joseph P. Franklin is
presently chairman of the board of directors, Lazar has retired and is no longer
a vice president. On January 24, 1994, plaintiff served an amended complaint
adding as named defendants Harry Newman, FEI's then secretary/treasurer and
Marvin Norworth, then FEI's contracts manager 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 naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
11
<PAGE>
similar allegations. For a description of the Litigations including the Criminal
Cases, Indictment, Superceding Indictment, related matters and the Settlement
Agreement concluding a Global Disposition with the Government, reference is made
to Item 3 of the Registrant's Annual Report on Form 10-K for the year ended
April 30, 1998, a copy of which is on file with the Securities and Exchange
Commission.); the misconduct of FEI's personnel as alleged in the Indictment is
such that FEI is exposed to material and substantial monetary judgments and
penalties as well as the loss of significant Government business; such
misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The amended complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the amended complaint, together with interest, costs, legal and other
experts' fees.
FEI and all of the individual defendants moved to dismiss the complaint in
the Solash Action ("Motion(s)"). To date, the Motions have not been heard by the
Court. FEI has determined to vigorously defend the Solash Action. Discovery has
not commenced. No opinion can be offered as to the outcome of the Motions or
with respect to the Solash Action.
On February 4, 1994, FEI was served with a complaint in an action entitled
"Supreme Court of the State of New York, County of New York, Moise Katz,
Plaintiff, against Martin B. Bloch, Joseph P. Franklin, Joel Girsky, John C. Ho,
Abraham Lazar, E. John Rosenwald, Jr., Defendants, and Frequency Electronics,
Inc., Nominal Defendant", Index Number 93-129450 ("Katz Action"). This was a
derivative action which is permitted by law to be instituted by a shareholder
for the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. FEI is named as a
nominal defendant. In the Katz Action, the complaint alleges that the members of
FEI's board of directors may not reasonably be expected to authorize an action
against themselves. At the time this action was instituted, all of the
individual defendants named in the complaint were directors of FEI, Martin B.
Bloch was president and chairman of the board of directors and Abraham Lazar was
a vice president. Joseph P. Franklin is presently chairman of the board of
directors. Lazar has retired and is no longer a vice president.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations. For a description of the Litigations including the Criminal
Cases, Indictment, Superceding Indictment, related matters and the Settlement
Agreement concluding a Global Disposition with the Government, reference is made
to Item 3 of the Registrant's Annual Report on Form 10-K for the year ended
April 30, 1998, a copy of which is on file with the Securities and Exchange
Commission.); 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
12
<PAGE>
Indictment occurred; that the individual defendants voluntarily participated in
such wrongdoing and attempted to conceal it; and that the individual defendants
intentionally and negligently breached their fiduciary duty to FEI and its
shareholders. The complaint seeks judgment against these defendants in favor of
FEI in the amount of all losses and damages suffered by FEI on account of the
facts alleged in the complaint, together with interest, costs, legal and other
experts' fees.
FEI and all of the defendants moved to dismiss the complaint in the Katz
Action ("Motion(s)"). At the time of the Motions, the plaintiff moved to amend
the complaint by setting forth certain additional allegations of wrongdoing
including, among others, amplifying allegations with respect to the Indictment,
setting forth allegations relating to the Muller Qui Tam Action, and allegations
attempting to clarify the relationship of the parties to the New York forum, the
latter allegations having been attacked on the Motions. In connection with the
Motions, the defendants stipulated that they would not object to any application
by the plaintiff Katz to intervene in the Solash action. By order dated
September 21, 1994, the Court granted the defendants' Motions, dismissed the
complaint and denied the plaintiff's cross-motions.
On or about November 17, 1994, FEI was served with a complaint in an action
entitled, "In the Court of Chancery of the State of Delaware In and For New
Castle County, Moise Katz Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, John C. Ho, Abraham Lazar, E. John Rosenwald,
Jr., Harry Newman, Marvin Norworth, individuals, Defendants and Frequency
Electronics, Inc., a Delaware corporation, Nominal Defendant", Civil Action No.
13841 ("Katz Delaware Action"). All of the individual defendants named in the
complaint, with the exception of Harry Newman ("Newman") and Marvin Norworth
("Norworth"), were all directors of FEI, Martin B. Bloch was president and
chairman of the board of directors, Abraham Lazar was a vice-president, and
Joseph P. Franklin is presently chairman of the board of directors. Lazar has
retired and is no longer a vice president. Newman was FEI's secretary/treasurer
and is FEI's secretary and Norworth was FEI's contracts manager and is retired.
This is a derivative action which is permitted by law to be instituted by a
shareholder for the benefit of a corporation to enforce an alleged right or
claim of the corporation where it is alleged that such corporation has either
failed or refused to do so or may not reasonably be expected to do so. FEI is
named as a nominal defendant. In the Katz Delaware Action, the complaint alleged
that the members of FEI's board of directors may not reasonably be expected to
authorize an action against themselves.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations. For a description of the Litigations including the Criminal
Cases, Indictment, Superceding Indictment, related matters and the Settlement
Agreement concluding a Global Disposition with the Government, reference is made
to Item 3 of the Registrant's Annual Report on Form 10-K for the year ended
April 30, 1998, a copy of which is on file with the Securities and Exchange
Commission.); 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
13
<PAGE>
of its personnel; that they failed to do so and as a direct consequence, the
matters alleged in the Indictment occurred; and that the individual defendants
breached their fiduciary duty. The complaint seeks judgment against the
individual defendants in the amount of all losses and damages suffered by FEI
and indemnification, on account of the matters alleged in the complaint,
together with interest, costs, legal, and other experts' fees.
Pursuant to the order of the Court, the Solash Action and the Katz Delaware
Action have been consolidated under consolidated Civil Action No. 13266, with
the caption "In Re Frequency Electronics Derivative Litigation" ("Derivative
Litigation").
In the Derivative Litigation, FEI and all of the individual defendants have
moved to dismiss the consolidated complaint and to stay the Derivative
Litigation pending a disposition of the Indictment and the Superseding
Indictment ("Motion(s)"). To date, the Motions have not been heard by the Court.
However, as a result of the Motions, pursuant to a Stipulation and Order of the
Court dated May 17, 1995, and a Stipulation and Order of the Court dated June
14, 1995, the Derivative Litigation has been dismissed as to Newman and Norworth
and was otherwise stayed pending a disposition of the Indictment, Superseding
Indictment and related investigations until the further order of the Court. The
Indictment, Superseding Indictment and the related investigations have been
disposed of by reason of the Global Disposition. Since the disposition of the
Criminal Cases, the litigation has resumed, the plaintiff in the Derivative
Litigation has served an amended complaint. FEI is attempting to settle the
Derivative Litigation, which settlement would be subject to execution of a final
settlement agreement by counsel for all parties, notice to shareholders and
Court approval. Management believes that such settlement, if finalized, would
not have a material adverse affect on the Company's financial position or
results of operations. In the event a settlement cannot be reached, no opinion
can be offered as to the outcome of the Motion(s) or with respect to the
Derivative Litigation.
FEI has filed claims with its insurance carriers as follows: (1) National
Union Fire Insurance Company of Pittsburgh, PA ("National") and (2) the Home
Insurance Company ("Home"). The claims filed pertain to potential coverages for
directors and officers relating to the Muller Qui Tam Action, the Solash Action,
the Katz Action, the Katz Delaware Action, the Derivative Litigation, the AMRAAM
Investigation and the Geldart Qui Tam Action (the last two matters were included
in the Settlement Agreement and Global Disposition; refer to Item 3 of the
Registrant's Annual Report on Form 10-K for the year ended April 30, 1998, a
copy of which is on file with the Securities and Exchange Commission).
On November 17, 1998, FEI settled its claim with Associated International
Insurance Company and FEI received payment from Associated in the amount of $4.5
million. The remaining carriers with respect to certain of these matters have
made certain disclaimers of coverage. No opinion can be offered as to coverage
or the extent of coverage under any of the foregoing policies. FEI believes any
recovery under these policies will require litigation. On March 14, 2000, FEI
commenced an action in the Supreme court of the State of New York, Nassau
County, entitled "Frequency Electronics, Inc. Plaintiff, against National Union
Fire Insurance of Pittsburgh, PA, Defendants," index number 004075/00 ("National
Action"). The National Action sets forth causes of action for a declaratory
judgment and breach of contract relating to certain directors and officers
liability insurance policies in connection with the Muller Qui Tam Action, the
AMRAAM Grand Jury Investigation, the Geldart Qui Tam Action, the Solash Action,
the Katz Action, the Katz Delaware Action and the Derivative Litigation. After
the complaint was served, the defendant made a motion to dismiss, which was
returnable and submitted to the Court on June 28, 2000. No opinion can be
offered as to the outcome of the National Action. The Home policy is excess
insurance coverage above the National policy during certain periods. Home's
liability will not be triggered until National pays the full amount of its
policy for a period to which the Home coverage is applicable.
14
<PAGE>
Included in selling and administrative expenses are legal fees incurred in
connection with the above matters of approximately $274,000, $221,000 and
$741,000 for fiscal years 2000, 1999 and 1998, respectively.
GOVERNMENT CONTRACT SUSPENSION AND DEBARMENT
By letter dated July 9, 1998, FEI was notified by the U.S. Department of
the Air Force of FEI's debarment from Government contracting and from directly
or indirectly receiving the benefits of federal assistance programs. The
debarment was based upon FEI's guilty plea entered in connection with the Global
Disposition and the Settlement Agreement. Such debarment was terminated on
December 12, 1998 and, as a consequence, FEI may engage in projects related to
U.S. Government military and space related efforts if it chooses to do so.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were required to be submitted by Registrant to a vote of
security holders during the fourth quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the American Stock Exchange
under the symbol "FEI". The following table shows the high and low sale price
for the Company's Common Stock for the quarters indicated, as reported by the
American Stock Exchange.
<TABLE>
<CAPTION>
FISCAL QUARTER HIGH SALE LOW SALE
-------------- --------- --------
<S> <C> <C> <C> <C>
2000 -
FIRST QUARTER $10 7/8 $ 7 1/2
SECOND QUARTER 13 8 5/8
THIRD QUARTER 11 15/16 8 1/8
FOURTH QUARTER 30 1/4 10 5/8
1999 -
FIRST QUARTER $19 3/8 $10
SECOND QUARTER 11 5 9/16
THIRD QUARTER 11 3/4 6 7/8
FOURTH QUARTER 9 1/8 6 3/16
</TABLE>
As of July 21, 2000, the approximate number of holders of record of common
stock was 762.
15
<PAGE>
DIVIDEND POLICY
On March 24, 1997, the Company announced a policy of distributing a cash
dividend to shareholders of record on April 30 and October 31, payable on June 1
and December 1, respectively. The Board of Directors will determine dividend
amounts prior to each declaration based on the Company's financial condition and
financial performance.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data including net sales
and operating profit (loss) for the five-year period ended April 30, 2000. The
information has been derived from the audited financial statements of the
Company for the respective periods.
<TABLE>
<CAPTION>
Years Ended April 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Net Sales
Commercial Communications $ 22,554 $ 14,547 $ 26,364 $ 19,612 $ 11,220
U.S. Government 3,981 4,411 5,633 8,317 13,872
--------- --------- --------- --------- ---------
Total Net Sales $ 26,535 $ 18,958 $ 31,997 $ 27,929 $ 25,092
========= ========= ========= ========= =========
Operating Profit (Loss) $ 1,008 $ (701)(1) $ (9,105)(2) $ 2,675 $ 1,047
========= ========= ========= ========= =========
Net Earnings $ 3,144 $ 1,173 $ 64(3) $ 4,863 $ 2,822
========= ========= ========= ========= =========
Average Common Shares Outstanding (4)
Basic 7,673,497 7,502,260 7,368,472 6,967,109 6,939,872
Diluted 8,043,727 7,820,742 7,787,140 7,319,250 6,995,133
Earnings (Loss) per Common Share (4)
Basic $ 0.41 $ 0.16 $ 0.01 $ 0.70 $ 0.41
========= ========= ========= ========= =========
Diluted $ 0.39 $ 0.15 $ 0.01 $ 0.66 $ 0.40
========= ========= ========= ========= =========
Total Assets $ 80,847 $ 78,355 $ 88,780 $ 74,866 $ 68,770
========= ========= ========= ========= =========
Long-Term Obligations
and Deferred Items $ 16,849 $ 16,959 $ 18,841 $ 5,460 $ 14,877
========= ========= ========= ========= =========
Cash dividend declared
per common share (4) $ 0.20 $ 0.20 $ 0.20 $ 0.10 -
========= ========= ========= ========= =========
</TABLE>
(1) Includes insurance reimbursement of $4.5 million for legal fees
related to certain litigation with the U.S. Government.
(2) Includes litigation settlement of $8 million and U.S.
Government-related inventory writedowns and reserves of $4.8 million.
(3) In addition to items in (2) above, includes net gain on sale of
buildings of $4.9 million and the reversal of the valuation allowance
on deferred tax assets of $2.6 million.
(4) All share and per share amounts have been adjusted to reflect a
3-for-2 stock split in the form of a 50% stock dividend, effective
October 31, 1997.
16
<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:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net Sales
Commercial Communications 85.0% 76.7% 82.4%
U.S. Government 15.0 23.3 17.6
------ ------ ------
100.0 100.0 100.0
Cost of Sales 56.1 68.5 80.9
Selling and administrative expenses 19.9 28.4 18.1
Insurance reimbursement - (23.7) -
Litigation settlement - - 25.0
Research and development expenses 20.2 30.5 4.5
----- ----- ------
Operating profit (loss) 3.8 (3.7) (28.5)
Other income (expense) 12.9 12.0 24.3
Provision (benefit) for income taxes 4.8 2.1 (4.4)
------ ----- -------
Net Earnings 11.9% 6.2% 0.2%
===== ===== =====
</TABLE>
FISCAL 2000 PERFORMANCE
The fiscal year 2000 results of operations reflect a refocused Frequency
Electronics. After the year of significant investment and other special events
in fiscal 1999, as detailed below, the Company was able to build an expanded
base for its evolving communications products. Sales of the Company's rubidium
atomic standard continued to grow at nearly a 100% rate as it realized the
benefits of the first full year of the two-year pricing agreement with Motorola.
In addition, the Company was successful in selling this and related
communications products to other original equipment manufacturers (OEMs). The
Company is becoming a product-oriented entity versus the historical
contract-based business. The Company continues to devote significant resources
to research and development in order to remain at the leading edge of the
continually evolving communications marketplace.
SIGNIFICANT FISCAL 1999 & 1998 EVENTS
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal 1999 and 1998 results of
operations were materially impacted by several specific events as well as a
strategic management decision. In fiscal 1999, the Company recovered $4.5
million from an insurance company related to legal expenses incurred in defense
of the Company's litigation with the U.S. Government. (Item 3. Legal Proceedings
and Note 9 to the financial statements.) In addition, the Company recognized an
opportunity to provide generic satellite transponder components for the
anticipated growth in the space-based wireless communications industry.
Accordingly, during fiscal 1999, the Company committed significant resources to
developing a line of generic satellite transponder products to meet the expected
demand while it also continued development of generic terrestrial commercial
communications products. The Company spent an aggregate of $5.8 million on
research and development efforts during fiscal year 1999 as compared to
approximately $1.4 million in each of the preceding two years.
17
<PAGE>
Fiscal 1998 results were impacted by: (1) the settlement of litigation with
the U.S. Government (Item 3. Legal Proceedings and Note 9 to the financial
statements); (2) the sale of its real estate holdings (Item 2. Properties and
Note 6 to the financial statements) and (3) the writedown or reserve for
inventories related to phasing out U.S. Government business.
In June 1998, the Company settled all outstanding criminal and civil cases
brought by the U.S. Government and made total payments of $8 million (Item 3.
Legal Proceedings). Accordingly, including related accrued litigation expenses,
the Company recorded a charge of $8.15 million against fiscal 1998 earnings.
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust, and leased back
a portion of the building which it occupies. (Item 2. Properties and Note 6 to
the financial statements.) In one sale transaction, the Company sold the
building which it had leased to Laboratory Corporation of America, receiving
cash of approximately $15.6 million and realizing a gain of approximately $5.4
million after selling expenses. A portion of the proceeds were used to repay the
$9 million loan obtained to finance the original construction of this building.
In the other sale, the Company effected a tax-deferred exchange of the building
which it occupies for approximately 486,000 participation units of Reckson
Operating Partnership, L.P. ("REIT units") which were valued at closing at $12
million. The Company leased back approximately 43% of this building from Reckson
and incurred approximately $500,000 of relocation expenses related to this
leaseback during fiscal 1998. Under the accounting provisions for sale and
leaseback transactions, a portion of the resulting gain on this sale will be
deferred and recognized into income over the term of the lease with the balance
recognized in income upon sale or conversion of the REIT units into shares of
Reckson Associates Realty Corp., a publicly-traded company. Preceeding the sale
of its building, the Company prepaid the balance of its Nassau County Industrial
Development Bonds in the amount of $820,000, including accrued interest.
During fiscal 1998, the Company determined that a writeoff or reserve of
$4.8 million of certain work-in-progress and component parts inventory related
to U.S. Government programs was appropriate. These inventory adjustments result
from the Company's transformation to a commercial communications equipment
manufacturer as well as its expectation for reduced procurement volumes by the
U.S. Government due to both smaller Defense Department budgets and the
Government's migration to alternate technologies.
As of the end of fiscal 1998, the Company had utilized most of its tax net
operating loss carryforward. In addition, with the settlement of the U.S.
Government litigation, the uncertainty regarding realizability of the Company's
net deferred income tax asset was removed, thus eliminating the need for a
valuation allowance on such amount. Accordingly, during fiscal 1998, the Company
recorded a deferred tax benefit of $2.6 million (net).
18
<PAGE>
Without these significant events, the Company's fiscal 1999 and 1998
operating profit, pre-tax earnings and net earnings would be materially
different from that reported in the financial statements as illustrated below:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating profit (loss)- as reported $ 1,008 $ (701) $(9,105)
Less:
Insurance reimbursement - (4,500) -
Add back:
Litigation settlement and expenses - - 8,150
Inventory writedowns and reserves - - 4,764
------- ------- -------
Adjusted operating profit (loss) 1,008 (5,201) 3,809
------- ------- -------
Other income (expense) - as reported 3,416 2,274 7,769
Less:
Gain on building sale, net of expenses - - (4,927)
------- ------- -------
Adjusted other income (expense) 3,416 2,274 2,842
------- ------- -------
Adjusted pretax earnings (loss) $ 4,424 ($2,927) $6,651
======= ======= ======
</TABLE>
OPERATING PROFIT (LOSS)
The operating profit for the year ended April 30, 2000, increased by $1.7
million over the operating loss of the preceding fiscal year. Excluding the
insurance reimbursement, as noted above, the increase in operating profits for
fiscal 2000 was $6.2 million. The increase is the result of a 40% increase in
sales and significantly improved gross margins.
The operating loss for the year ended April 30, 1999, decreased by $8.4
million from fiscal 1998. Excluding the one-time items discussed above and as
shown in the preceding table, the Company would have incurred a loss of $5.2
million or a decrease of $9.0 million from fiscal 1998's adjusted operating
profit. This decline is due to the sizable increase ($4.3 million) in research
and development spending during fiscal 1999 versus fiscal 1998, coupled with a
$13 million decrease in sales volume in 1999 compared to fiscal 1998.
NET SALES
Net sales for fiscal 2000 increased by $7.6 million (40%) over fiscal 1999
sales. Sales in the commercial communications segment improved by $8.0 million
(55%) over fiscal 1999 while revenues from the U.S. Government segment declined
by $430,000 (10%). Revenues in the commercial communications segment were led by
the growing demand for the Company's rubidium atomic standard which is the key
synchronization element of many cellular network base stations. The Company
expects demand to remain high for such products as OEMs continue the buildout of
the cellular network infrastructure and particularly as they move to the next
generation (3G) of such systems. Commercial communications revenues related to
space programs remained at low levels as the industry continued to experience
low demand for its products. The Company anticipates that this trend will
reverse in the next few years as replacement satellites and new communications
programs will increase the demand for the Company's time, frequency and
synchronization product lines.
Net sales for fiscal 1999 decreased by $13 million (41%) over fiscal 1998
sales. The largest decline ($11.8 million or 45%) was in the commercial
communications segment, principally in sales to the space industry. Significant
launch failures by the major satellite manufacturers in the 18-month period
ended April 30, 1999, coupled with the 1998 economic slowdown in Asia, resulted
in major delays in new satellite programs. This also led to lower levels of
outsourcing for component parts for existing satellite programs.
19
<PAGE>
Sales of the Company's products to the terrestrial commercial
communications market in fiscal 1999 were also negatively impacted by the
Company's decision to renegotiate an exclusive contract with a customer for the
Company's VSAT product line. This action resulted in a fiscal 1999 fourth
quarter reduction of sales and cost of sales of approximately $1.7 million and
$1.0 million, respectively. During fiscal 1999, the Company was developing this
product for the customer under a fixed-unit contract and recorded revenues
through the third quarter of the year. As a result of the renegotiations, the
Company removed the exclusivity feature of the contract, thus broadening its
potential customer base.
Sales to the U.S. Government were down by $1.2 million (22%) from fiscal
1998 levels. The decrease in U.S. Government revenue was anticipated by the
Company as it de-emphasizes this aspect of its business.
The Company believes that its 37-year legacy in building high-reliability,
precision timing and frequency generation devices for U.S. Government programs
(principally DOD and NASA), uniquely positions it to successfully exploit the
much greater emerging markets in commercial communications both in space and on
the ground. The Company therefore intends to focus its energies on these markets
and has de-emphasized its business with the U.S. Government. However, the
Company will continue to fulfill its current contractual obligations to U.S.
Government programs and will make its proprietary technology available for these
and future programs where applicable. Consequently, the proportion of sales
generated from U.S. Government programs is expected to continue to decline in
future years. This will be significantly offset by increasing demands for the
Company's commercial communications products used in space and terrestrial
applications.
GROSS MARGINS
Gross margins for the fiscal year ended April 30, 2000 were 44% versus 32%
in fiscal 1999. The improved margins are a result of the successful migration to
producing components and systems in higher volumes versus the Company's legacy
of contract manufacturing which generally included the costs of unique product
designs and smaller, less efficient, production quantities. This larger-quantity
production mode is also applicable to U.S. Government sales as the Company sells
more of its Commercial Off-the-Shelf (COTS) products under contracts for U.S.
Government programs. Margins were also favorably impacted by the higher volume
of business which permitted fixed costs to be absorbed over a broader range of
orders.
Gross margins for the fiscal year ended April 30, 1999, were 32% versus 19%
in fiscal 1998. Excluding the inventory writedowns and reserves in fiscal 1998's
results, the gross margin rate realized in fiscal 1999 was 2% less than fiscal
1998's 34% rate. The gross margin realized on U.S. Government sales improved
from 16% in fiscal 1998 to 18% in fiscal 1999 as the Company completed certain
low margin projects. Aggregate margins on the Company's commercial
communications revenues declined from 38% to 35%. Margins were negatively
impacted by the lower volume of business that required a smaller number of
projects to absorb fixed costs.
Gross margins for the fiscal year ended April 30, 1998 were negatively
impacted by the inventory writedowns and reserves described above. Without such
charges, gross margins would have been 34%. During fiscal 1998, the
profitability of commercial communications programs versus U.S. Government
programs became more distinct. Aggregate gross margins on commercial
communications programs were 38%. U.S. Government programs showed margins of 16%
before inventory adjustments and recorded negative margins of 69% after such
adjustments.
Included in the Company's manufacturing overhead pool, a component of cost
of sales, is a charge for amortization of the Company's ESOP program (see Notes
11 and 12 to the financial statements). The Company recognized an annual expense
based upon the average market
20
<PAGE>
value of the underlying shares of Company stock which were allocated to the ESOP
each year. As a result of the significant increase in the value of the Company's
stock over the last three years, the charge to ESOP amortization also increased
significantly. The amount charged to the Company's overhead pool was
approximately $870,000 in fiscal 2000, $915,000 in fiscal 1999 and $1.2 million
in fiscal 1998. These amounts included a substantial non-cash charge, as the
actual cash obligation of the Company was $500,000 annually through fiscal 2000.
Without this excess amortization charge, aggregate gross margins on the
Company's sales during fiscal years 2000, 1999 and 1998 would have improved by
approximately 1.5%, 1.5% and 2.5%, respectively. As of December 1999, the ESOP
program has contributed all of its shares to participants in the plan. As a
consequence, the non-cash amortization charge will not occur in fiscal 2001 and
beyond. Thus, the Company believes that gross margins can be maintained at or
near the current level realized in fiscal 2000.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative costs in fiscal 2000 decreased by $109,000 (2%)
from those incurred in fiscal 1999. The lower costs are the result of several
factors including an $800,000 reduction in amortization expense of deferred
compensation costs (a return to normal levels) and a reduction of $200,000 in
computer software and related services as a result of implementation of new
enterprise software and consolidation of computer hardware. These savings were
offset by accruals for bonuses as a result of improved profit margins, increased
selling expenses as the Company seeks to continue the expansion of its
commercial markets, increased amortization of certain stock-based compensation
and higher depreciation due to the installation of new computer hardware and
software.
Selling and administrative costs in fiscal 1999 decreased by $407,000 (7%)
from those incurred in fiscal 1998. During fiscal 1999, the Company made
adjustments to deferred compensation benefits which resulted in a charge to
earnings which was approximately $800,000 greater than the normally expected
amortization expense (see Note 11 to the financial statements). Without that
adjustment and excluding the litigation settlement and related costs incurred in
fiscal 1998, the decline in selling and administrative costs would have been
$1.1 million (19%). This significant decrease in expenses is a result of greater
efficiencies gained from the move to new operating space (lower property taxes,
utility charges, and depreciation expense), lower legal fees due to the
settlement of the litigation with the U.S. Government, reduction in non-cash
charges tied to the value of the Company's stock and reduced accruals for
bonuses due to lower operating profits in fiscal 1999.
As sales increase, the ratio of selling and administrative expenses to net
sales is expected to decrease.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development spending in fiscal 2000 was $5.37 million compared
to $5.79 million in fiscal 1999, a 7% decrease. These costs were incurred to
develop a high-precision quartz oscillator, improvement of rubidium atomic
standards for wireless communications infrastructure, finalization of certain
generic space transponder components and to continue the development of more
efficient manufacturing procedures.
The Company expended $5.79 million on research and development efforts
during fiscal 1999 compared to $1.44 million in fiscal 1998, an increase of $4.4
million or 302%. Such efforts included development of the next generation of
commercial rubidium and VSAT products and other new products for the terrestrial
wireless communication markets and successfully designing more efficient
manufacturing procedures to keep its products competitive.
The Company will continue to focus its research and development activities
on those commercial products which it expects will provide the best return on
investment and greatest prospects for the future growth of the Company. For
fiscal 2001, the Company will continue to
21
<PAGE>
devote substantial financial and technical resources to development of new
products for the burgeoning cellular infrastructure buildout as well as continue
to invest in more efficient product designs and manufacturing procedures. The
Company's target is to spend approximately 10% of revenues on research and
development activities, although the actual level of spending is dependent on
new opportunites and the rate at which it succeeds in bringing new products to
market. Internally generated cash and cash reserves will be adequate to fund
these development efforts.
OTHER INCOME (EXPENSE)
Other income (expense) increased by $1.1 million (50%) in fiscal 2000
compared to fiscal 1999 but declined by $5.5 million (71%) in fiscal 1999
compared to fiscal 1998. Excluding the $4.9 million net gain on the sale of the
Company's real estate holdings in fiscal 1998, other income (expense) decreased
by $568,000 (20%) in fiscal 1999 compared to fiscal 1998.
Investment income in fiscal 2000 includes $1.6 million of realized gains on
the sale of marketable securities as compared to $678,000 of realized gains in
fiscal 1999. There were no comparable realized gains in fiscal 1998. Excluding
these gains, investment income in fiscal 2000 was $178,000 (8%) higher than
fiscal 1999 and fiscal 1999 investment income was $38,000 (2%) lower than fiscal
1998. In addition to interest income, the Company also realizes quarterly
dividend income on its REIT units. The Company anticipates that investment
income in future years will remain fairly constant assuming a relatively stable
interest rate environment and if the level of investments remains the same.
Interest expense in fiscal 2000 decreased by $26,000 (7%) from fiscal 1999
and fiscal 1999 interest expense decreased by $342,000 or 51% from fiscal 1998.
During the third quarter of fiscal 1998, the Company repaid its real
estate-related loans thus realizing significant reductions in its interest
payments. As of April 30, 2000, the Company has repaid all outstanding loans. It
will continue to incur interest expense on the financing arrangement for the
leaseback of its building and for certain deferred compensation payments. As a
result, the Company anticipates that interest expense in fiscal 2001 will be
approximately the same as the expense for fiscal 2000.
During fiscal 2000, other income, net was reduced by $36,000 (21%) from
fiscal 1999. Excluding the fiscal 1998 one-time gain on the sale of the
Company's real estate holdings, this category declined by $1.6 million during
fiscal 1999 compared to fiscal 1998. This decrease is principally attributable
to the cessation of finance lease income from Laboratory Corporation of America
as a result of the sale of the leased property during January 1998. In addition,
the Company incurred costs during fiscal 1998 and early fiscal 1999 to move its
operations to new and more efficient space within the leased back property. The
Company anticipates that in future years other income, net, will not be a
significant contributor to pretax earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $62.2 million at April 30, 2000. Included in working
capital at April 30, 2000 is $41.0 million of cash, cash equivalents and
short-term investments, including approximately $10 million representing the
fair market value of REIT units which are convertible to Reckson Associates
Realty Corp. common stock. (See Note 6 to the financial statements.) The
Company's current ratio at April 30, 2000 is 13.4 to 1 which is comparable to
the ratio at April 30, 1999.
Net cash provided by operating activities for the year ended April 30,
2000, was approximately $3.5 million compared to $1.8 million used by operations
in fiscal 1999. This increase in cash inflow is due to increased profits in
fiscal 2000 and the absence of certain
22
<PAGE>
litigation items as compared to fiscal 1999. In June 1998, the Company paid $8
million in settlement of certain litigation matters which was partially offset
in November 1998 by receipt of $4.5 million from directors' and officers'
liability insurance coverage. Unbilled receivables decreased by $4.1 million
(61%) as the Company shipped and billed more product on maturing long-term
contracts. Inventories have grown by $3.7 million (37%) over fiscal 1999 levels
as the Company acquires more component parts and builds more product to have
available for customers on a quick turn-around basis. Accounts payable and
accrued expenses increased by 32% from the balances at April 30, 1999,
principally due to accruals for amounts due to customers under certain
contractual agreements.
Net cash provided by investing activities for the year ended April 30,
2000, was $2.2 million. This net cash inflow resulted principally from the gains
realized on the sale of certain marketable securities. Other investment activity
included buying and selling marketable securities offered by certain agencies of
the U.S. Government. The Company may continue to invest cash equivalents in
longer-term securities or to convert short-term investments to cash equivalents
as dictated by its investment strategies. The Company also invested
approximately $668,000 in production equipment which will improve the efficiency
of its manufacturing operations. The Company will continue to acquire more
efficient equipment to automate its production process and intends to spend
approximately $1 million on capital equipment during fiscal 2001. Internally
generated cash will be adequate to acquire this capital equipment.
Net cash used by financing activities for the year ended April 30, 2000,
was $1.3 million. Of this amount, $1.53 million was used to pay the Company's
semi-annual cash dividends to shareholders and $700,000 was used to make
regularly scheduled long-term liability payments. These outflows were partially
offset by payments of $927,000 received from the sale of shares of common stock
from treasury to satisfy the exercise of stock options granted to certain
employees and repayment of certain notes for the purchase of the Company's stock
in prior years. The Company will continue to use treasury shares to satisfy the
future exercise of stock options granted to officers and employees in previous
years. The Company may repurchase shares of its common stock for treasury
whenever appropriate opportunities arise but it has neither a formal repurchase
plan nor commitments to purchase additional shares in the future.
The Company will continue to expend its resources and efforts to develop
products for commercial communication systems for satellite programs and
terrestrial-based operations, which management believes will result in future
growth and continued profitability. During fiscal 2001, the Company intends to
make a substantial investment of capital and technical resources to continue to
develop new products to meet the needs of the commercial communications
marketplace and to invest in more efficient product designs and manufacturing
procedures. Where possible, the Company will secure partial customer funding for
such development efforts but is targeting to spend its own funds at a rate of
approximately 10% of revenues to achieve its development goals. Internally
generated cash will be adequate to fund these development efforts.
As of April 30, 2000, the Company's consolidated backlog amounted to
approximately $24 million (see Item 1) and includes orders for the commercial
communications segment of approximately $23 million. Approximately 67% of this
backlog is expected to be filled during the Company's fiscal year ending April
30, 2001.
23
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
and market values of securities, including participation units in the Reckson
Operating Partnership, L.P. (REIT units, see Item 2. Properties and Note 6 to
the financial statements). The Company's investments in fixed income and equity
securities were $24.3 million and $11.7 million, respectively, at April 30,
2000. The investments are carried at fair value with changes in unrealized gains
and losses recorded as adjustments to stockholders' equity. The fair value of
investments in marketable securities is generally based on quoted market prices.
Typically, the fair market value of investments in fixed interest rate debt
securities will increase as interest rates fall and decrease as interest rates
rise. Based on the Company's overall interest rate exposure at April 30, 2000, a
10 percent change in market interest rates would not have a material effect on
the fair value of the Company's fixed income securities or results of operations
(investment income).
YEAR 2000 ISSUE
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
computer programs or hardware that have date-sensitive software or embedded
computer chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company's products do not contain imbedded microchips or other
components which are date sensitive. The same is generally true of the products
that are acquired from third-party vendors. Consequently, the Company's products
are Y2K compliant. The Company has not experienced any transactional or
operational problems due to Y2K issues.
OTHER MATTERS
The financial information reported herein is not necessarily indicative of
future operating results or of the future financial condition of the Company.
Except as noted, management is unaware of any impending transactions or events
that are likely to have a material adverse effect on results from operations.
INFLATION
During fiscal 2000, as in the two prior fiscal years, the impact of
inflation on the Company's business has not been materially significant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in the text in response
to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, above and is incorporated herein by reference.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------
To the Board of Directors and Stockholders of Frequency Electronics, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 51 present fairly, in all material
respects, the financial position of Frequency Electronics, Inc. and Subsidiaries
as of April 30, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended April 30, 2000 in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 51 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
June 20, 2000
25
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2000 and 1999
-----------
<TABLE>
<CAPTION>
ASSETS: 2000 1999
---- ----
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,994 $ 567
Marketable securities (Note 5) 36,013 38,720
Accounts receivable, net of allowance for
doubtful accounts of $190 (Note 3) 9,590 12,190
Inventories (Note 4) 13,307 9,696
Deferred income taxes (Note 12) 1,940 2,336
Prepaid expenses and other 1,329 1,182
--------- ---------
Total current assets 67,173 64,691
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization (Note 6) 9,040 9,489
Deferred income taxes (Note 12) 600 500
Other assets 4,034 3,675
--------- ---------
Total assets $80,847 $78,355
======= =======
</TABLE>
Continued
26
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2000 and 1999
(Continued)
-----------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY: 2000 1999
---- ----
(In thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 7) $ - $ 489
Accounts payable - trade 1,019 837
Accrued liabilities (Note 8) 3,190 2,342
Dividend payable 799 766
Income taxes payable - 455
---------- --------
Total current liabilities 5,008 4,889
Deferred compensation (Note 11) 5,276 5,165
Other liabilities (Note 6) 11,573 11,794
------- -------
21,857 21,848
------- -------
Commitments and contingencies (Notes 6 and 9)
Stockholders' equity (Note 11):
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued - -
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued - 9,009,259 shares 9,009 9,009
Additional paid-in capital 37,929 36,940
Retained earnings 17,239 15,653
------- -------
64,177 61,602
Common stock reacquired and held in treasury -
at cost (1,016,552 shares in 2000 and
1,346,850 shares in 1999) (3,644) (4,058)
Unamortized ESOP debt (Notes 7 and 11) - (500)
Notes receivable-common stock (Note 10) (115) (287)
Unearned compensation (20) (47)
Accumulated other comprehensive loss (1,408) (203)
--------- ---------
Total stockholders' equity 58,990 56,507
-------- --------
Total liabilities and stockholders' equity $80,847 $78,355
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 2000, 1999 and 1998
-----------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands, except share data)
<S> <C> <C> <C>
Net sales (Note 13) $ 26,535 $ 18,958 $ 31,997
--------- --------- ---------
Cost of sales 14,884 12,985 25,870
Selling and administrative expenses (Note 9) 5,275 5,384 5,791
Insurance reimbursement (Note 9) - (4,500) -
Litigation settlement (Note 9) - - 8,000
Research and development expenses 5,368 5,790 1,441
--------- --------- ---------
Total operating expenses 25,527 19,659 41,102
--------- --------- ---------
Operating profit (loss) 1,008 (701) (9,105)
Other income (expense):
Investment income 3,929 2,775 2,135
Interest expense (306) (330) (672)
Other, net (Note 6) (207) (171) 6,306
--------- --------- ---------
Earnings (Loss) before provision (benefit)
for income taxes 4,424 1,573 (1,336)
Provision (Benefit) for income taxes (Note 12) 1,280 400 (1,400)
--------- --------- ---------
Net Earnings $ 3,144 $ 1,173 $ 64
========= ========= =========
Net Earnings per common share:
Basic $ 0.41 $ 0.16 $ 0.01
========= ========= =========
Diluted $ 0.39 $ 0.15 $ 0.01
========= ========= =========
Average shares outstanding (Note 2):
Basic 7,673,497 7,502,260 7,368,472
========= ========= =========
Diluted 8,043,727 7,820,742 7,787,140
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 2000, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
TREASURY STOCK
COMMON STOCK ADDITIONAL (AT COST)
------------ PAID IN RETAINED --------- UNAMORTIZED
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT ESOP DEBT
--------- -------- -------- --------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 1, 1997 6,006,300 $6,006 $35,190 $20,414 1,032,812 ($4,612) ($1,500)
Exercise of stock options (83) (162,495) 938
Amortization of ESOP debt 976 500
Shares issued under restricted
stock plan 15 (7,500) 42
Independent Contractor stock
options granted 208
Payment received for common
stock subscribed
Amortization of unearned
compensation
Stock dividend, 3-for-2 3,002,959 3,003 (3,007) 434,096
Cash dividend (1,488)
Increase in market value of
marketable securities
Net Earnings 64
Comprehensive income- 1998
--------- -------- -------- --------- --------- ------- ----------
BALANCE AT APRIL 30, 1998 9,009,259 9,009 36,306 15,983 1,296,913 (3,632) (1,000)
Exercise of stock options 12 (20,063) 61
Purchase of treasury stock 70,000 (487)
Amortization of Independent
Contractor stock options 58
Amortization of ESOP debt 564 500
Amortization of unearned
compensation
Cash dividend (1,503)
Decrease in market value of
marketable securities
Net Earnings 1,173
Comprehensive income- 1999
--------- -------- -------- --------- --------- ------- ----------
BALANCE AT APRIL 30, 1999 9,009,259 9,009 36,940 15,653 1,346,850 (4,058) (500)
Exercise of stock options 341 (330,298) 414
Amortization of Independent
Contractor stock options 170
Amortization of ESOP debt 478 500
Payment received for common
stock subscribed
Amortization of unearned
compensation
Cash dividend (1,558)
Decrease in market value of
marketable securities
Net Earnings 3,144
Comprehensive income- 2000
--------- -------- -------- --------- --------- ------- ----------
Balance at April 30, 2000 9,009,259 $9,009 $37,929 $17,239 1,016,552 ($3,644) $0
========= ====== ======= ======= ========= ======= ==========
<CAPTION>
Note Accumulated
receivable other
common Unearned comprehensive
STOCK COMPENSATION INCOME (LOSS) TOTAL
---------- ------------ ------------- --------
<S> <C> <C> <C> <C>
BALANCE AT MAY 1, 1997 ($435) ($77) $80 $55,066
Exercise of stock options 855
Amortization of ESOP debt 1,476
Shares issued under restricted
stock plan (52) 5
Independent Contractor stock
options granted 208
Payment received for common
stock subscribed 148
Amortization of unearned
compensation 40 40
Stock dividend, 3-for-2 (4)
Cash dividend (1,488)
Increase in market value of
marketable securities 37 37
Net Earnings 64
--------
Comprehensive income- 1998 101
---------- ------------ ------------- --------
BALANCE AT APRIL 30, 1998 (287) (89) 117 56,407
Exercise of stock options 73
Purchase of treasury stock (487)
Amortization of Independent
Contractor stock options 58
Amortization of ESOP debt 1,064
Amortization of unearned
compensation 42 42
Cash dividend (1,503)
Decrease in market value of
marketable securities (320) (320)
Net Earnings 1,173
--------
Comprehensive income- 1999 853
---------- ------------ ------------- --------
BALANCE AT APRIL 30, 1999 (287) (47) (203) 56,507
Exercise of stock options 755
Amortization of Independent
Contractor stock options 170
Amortization of ESOP debt 978
Payment received for common
stock subscribed 172
Amortization of unearned
compensation 27 27
Cash dividend (1,558)
Decrease in market value of
marketable securities (1,205) (1,205)
Net Earnings 3,144
--------
Comprehensive income- 2000 1,939
---------- ------------ ------------- --------
Balance at April 30, 2000 ($115) ($20) ($1,408) $58,990
========== ============ ============= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2000, 1999 and 1998
-----------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $3,144 $ 1,173 $ 64
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Deferred tax expense (benefit) 840 (100) (2,600)
Depreciation and amortization 1,117 1,224 963
Provision for losses on accounts
receivable and inventories 151 186 4,537
Gains on marketable securities and
notes receivable (1,654) (678) (42)
Gain on sale or disposal of
property, plant and equipment - - (5,869)
Amortization resulting from
allocation of ESOP shares 978 1,064 1,476
Employee benefit plan provisions 766 1,461 444
Noncash interest on finance lease - - (15)
Changes in assets and liabilities:
Accounts receivable 2,583 6,414 (3,843)
Inventories (3,745) (3,546) 48
Prepaid and other (174) 312 247
Other assets (359) (554) (579)
Accounts payable trade 182 (446) 401
Litigation settlement accrual - (8,150) 8,150
Accrued liabilities 773 (362) (217)
Income taxes payable (676) 310 72
Other liabilities (383) (137) (81)
------ ------- ------
Net cash provided by (used in) operating activities 3,543 (1,829) 3,156
------- ------- ------
Cash flows from investing activities:
Purchase of marketable securities (24,611) (22,920) (13,030)
Proceeds from sale or redemption of marketable
securities 27,468 20,575 9,560
Capital expenditures (668) (1,366) (1,043)
Proceeds from sale of property, plant and equipment - - 6,587
------ ------- -----
Net cash provided by (used in) investing activities 2,189 (3,711) 2,074
------ ------- -----
</TABLE>
Continued
30
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2000, 1999 and 1998
(Continued)
-----------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments of long-term debt and
other long-term obligations (700) (665) (1,374)
Purchase of treasury stock - (487) -
Payment of cash dividend (1,532) (1,539) (1,520)
Payment on notes
receivable from employees 172 - 148
Proceeds from loan receivable - - 1,879
Exercise of stock options 755 73 914
----- ------- -----
Net cash (used in) provided by
financing activities (1,305) (2,618) 47
------ ------- -----
Net increase (decrease) in cash and cash equivalents 4,427 (8,158) 5,277
Cash and cash equivalents at beginning of year 567 8,725 3,448
----- ------- -----
Cash and cash equivalents at end of year $ 4,994 $ 567 $8,725
===== ======= ======
Supplemental disclosures of cash flow
information (Note 15):
Cash paid during the year for:
Interest $ 312 $ 331 $ 766
==== ======= ======
Income taxes $ 1,159 $ 190 $1,128
===== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<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". References to "FEI" are to the parent company alone and do not
refer to any of its subsidiaries). The Company is principally engaged in the
design, development and manufacture of precision time and frequency control
products and components for microwave integrated circuit applications. See Note
13 for information regarding the Company's commercial communications and U.S.
government business segments. Intercompany accounts and significant intercompany
transactions are eliminated in consolidation.
These financial statements have been prepared in conformity with generally
accepted accounting principles and require management to make estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from these estimates.
INVENTORIES:
Inventories, which consist of work-in-process, raw materials and components,
are accounted for at the lower of cost (specific and average) or market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is recorded at cost and includes interest on
funds borrowed to finance construction. Expenditures for renewals and
betterments are capitalized; maintenance and repairs are charged to income when
incurred. When fixed assets are sold or retired, the cost and related
accumulated depreciation and amortization are eliminated from the respective
accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
DEPRECIATION AND AMORTIZATION:
Depreciation of fixed assets is computed on the straight-line method based
upon the estimated useful lives of the assets (40 years for buildings and 3 to
10 years for other depreciable assets). Leasehold improvements are amortized on
the straight-line method over the shorter of the term of the lease or the useful
life of the related improvement.
REVENUE AND COST RECOGNITION:
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred. On production-type contracts,
revenue is recorded as units are delivered with the related cost of sales
recognized on each shipment based upon a percentage of estimated final contract
costs. Changes in job performance may result in revisions to costs and income
and are recognized in the period in which revisions are determined to be
required. Provisions for anticipated losses are made in the period in which they
become determinable.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For smaller contracts and orders, sales of products and services to
customers are reported in operating results based upon shipment of the product
or performance of the services pursuant to contractual terms.
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year.
INCOME TAXES:
The Company recognizes deferred tax liabilities and assets based on the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
EARNINGS PER SHARE:
Basic earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share are computed by dividing net earnings by the sum of the weighted
average number of shares of common stock and the if-converted effect of
unexercised stock options.
All shares and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31, 1997.
MARKETABLE SECURITIES:
Marketable securities consist of investments in common stocks, mutual funds,
and debt securities of U.S. government agencies. In addition, as a result of the
sale of the Company's real estate holdings (Note 6), marketable securities
include participation units in the Reckson Operating Partnership, L.P. ("REIT
units") which are convertible to common shares of Reckson Associates Realty
Corp. Except for the REIT units and certain investments in common stock,
substantially all other marketable securities at April 30, 2000 and 1999 were
held in the custody of two financial institutions. Investments in certain debt
and equity securities are categorized as available for sale and are carried at
fair value, with unrealized gains and losses excluded from income and recorded
directly to stockholders' equity. The Company recognizes gains or losses when
securities are sold using the specific identification method.
CASH EQUIVALENTS:
The Company considers certificates of deposit and other highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company places its temporary cash investments with high credit
quality financial institutions. Such investments may be in excess of the FDIC
insurance limit. No losses have been experienced on such investments.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Cash and cash equivalents and loans payable are reflected in the
accompanying consolidated balance sheets at amounts considered by management to
reasonably approximate fair value based upon the nature of the instrument and
current market conditions. Management is not aware of any factors that would
significantly affect the value of these amounts.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
STOCK-BASED PLANS:
The Company applies the disclosure-only provisions of SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," and continues to measure compensation
cost in accordance with Accounting Principles Board Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES." Historically, this has not resulted in
compensation cost upon the grant of options under a qualified stock option plan.
However, in accordance with SFAS No. 123, the Company provides pro forma
disclosures of net earnings (loss) and earnings (loss) per share as if the fair
value method had been applied beginning in fiscal 1996.
2. EARNINGS PER SHARE
Reconciliations of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Basic EPS Shares outstanding
(weighted average) 7,673,497 7,502,260 7,368,472
Effect of Dilutive Securities 370,230 318,482 418,668
---------- ---------- ---------
Diluted EPS Shares outstanding 8,043,727 7,820,742 7,787,140
========= ========= =========
</TABLE>
For the year ended April 30, 2000, all exercisable options were included in
the computation of diluted earnings per share. Options to purchase 178,500 and
6,000 shares of common stock were outstanding during the years ended April 30,
1999 and 1998, respectively, but were not included in the computation of diluted
earnings per share because the exercise price of the options was greater than
the average market price of the Company's common shares during the respective
periods. Since the inclusion of such options would have been antidilutive they
are excluded from the computation.
3. ACCOUNTS RECEIVABLE
Accounts receivable include costs and estimated earnings in excess of
billings on uncompleted contracts accounted for on the percentage of completion
basis of approximately $2,584,000 at April 30, 2000 and $6,657,000 at April 30,
1999. Such amounts represent revenue recognized on long-term contracts that has
not been billed, pursuant to contract terms, and was not billable at the balance
sheet date.
4. INVENTORIES
Inventories, which are reported net of reserves of $1,188,000 and $1,054,000
at April 30, 2000 and 1999, respectively, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw Materials and Component Parts $ 6,188 $3,028
Work in Progress 7,119 6,668
------- ------
$ 13,307 $9,696
======== ======
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. MARKETABLE SECURITIES
Marketable securities at April 30, 2000 and 1999 are summarized as follows
(in thousands):
APRIL 30, 2000
---------------------------------------------
Unrealized
Market Holding
Cost Value Gain (Loss)
---- ----- -----------
REIT units $ 12,000 $ 10,297 ($ 1,703)
Fixed income securities 24,867 24,269 (598)
Equity Securities 1,494 1,447 (47)
--------- -------- ---------
$ 38,361 $ 36,013 ($ 2,348)
======== ======== =======
APRIL 30, 1999
-----------------------------------------------
Unrealized
Market Holding
Cost Value Gain (Loss)
---- ----- -----------
REIT units $12,000 $ 11,548 ($ 452)
Fixed income securities 25,376 25,484 108
Equity Securities 1,683 1,688 5
--------- -------- ------
$39,059 $38,720 ($ 339)
======== ======== ======
Maturities of fixed income securities classified as available-for-sale at
April 30, 2000 are as follows (in thousands):
Current $6,360
Due after one year through five years 15,807
Due after five years through ten years 2,700
------
$24,867
=======
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
2000 1999
---- ----
Buildings and building improvements $ 8,751 $ 8,751
Machinery, equipment and furniture 19,523 18,915
------- ------
28,274 27,666
Less, accumulated depreciation and amortization 19,234 18,177
------- ------
$ 9,040 $ 9,489
======= =======
Depreciation and amortization expense for the years ended April 30, 2000,
1999 and 1998 was $1,117,000, $1,211,000, and $943,000, respectively.
Maintenance and repairs charged to operations for the years ended April 30,
2000, 1999 and 1998 was approximately $369,000, $353,000, and $369,000,
respectively.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust ("REIT") whose
shares are traded on the New York Stock Exchange. In one sale transaction, the
Company sold the building which it had leased to Laboratory Corporation of
America ("LCA"), receiving cash of approximately $15.6 million and realizing a
gain of approximately $5.4 million after selling expenses which amount was
included in "Other income, net" in fiscal year 1998.
In the other sale, the Company effected a tax-deferred exchange of the
building which it occupies for approximately 486,000 participation units of
Reckson Operating Partnership, L.P. ("REIT units") which were valued at closing
at $12 million. Each REIT unit is convertible into one share of the common stock
of the REIT. In addition, approximately 27,000 REIT units have been placed in
escrow which may be released to the Company based upon the price per share of
the REIT on the date of conversion of REIT units.
The Company leased back approximately 43% of the latter building from the
purchaser (the "Reckson lease"). Under the accounting provisions for sale and
leaseback transactions, the sale of this building is considered a financing and
the REIT units received are reflected as a noncurrent liability while the
related building continues to be reflected as an asset. Upon liquidation of the
REIT units, a portion of the resulting gain on this sale will be deferred and
recognized into income over the term of the leaseback with the balance
recognized in income on the date of liquidation. The Company's annual rental
payment of $400,000 is characterized as repayment of the financing with a
portion allocated to interest expense at an assumed interest rate of 6.5% and
the balance is considered repayment of principal. During the years ended April
30, 2000 and 1999, the Company charged $180,000 and $194,000, respectively, to
interest expense under the financing agreement. Lease rental expense charged to
operations under the Company's former land lease with Nassau County and for
certain equipment was approximately $308,000 for the year ended April 30, 1998.
The Reckson lease contains two five-year renewal periods at the option of
the Company. Annual rental payments are $400,000 for the initial 11-year term
which ends in January 2010. Under the terms of the lease the Company is required
to pay its proportional share of real estate taxes, insurance and other charges.
Future minimum lease payments required by the lease are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ending
April 30,
---------
<S> <C> <C>
2001 $ 400
2002 400
2003 400
2004 400
2005 400
2006 and thereafter 1,467
-----
$3,467
======
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. LONG-TERM DEBT
Long-term debt consisted of a note payable, originally in the amount of
$5,000,000, which was used to fund the purchase of 1,071,652 shares of the
Company's common stock for the Employee Stock Ownership Plan (ESOP). The note
was payable in forty equal quarterly installments of $125,000 through April 1,
2000 with interest at adjusted LIBOR plus 1.00% (6.439% at April 30, 1999).
Dividends received on ESOP shares ($11,000 and $21,000 at April 30, 2000 and
1999, respectively) which had not been allocated to participant accounts were
used to pay a portion of the principal of this note. (see Note 11.) The note was
collateralized by a portion of the Company's common stock held in treasury.
During the year ended April 30, 2000, the Company made the remaining principal
payments on the debt which aggregated $489,000.
8. ACCRUED LIABILITIES
Accrued liabilities at April 30, 2000 and 1999 consist of the following (in
thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Due customers $ 1,470 $ -
Accrued Bonus 535 325
Other Compensation 201 187
Vacation accrual 390 395
Sales commissions 84 797
Other 510 638
------ ------
$ 3,190 $2,342
======= ======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LITIGATION SETTLEMENT:
On June 19, 1998, FEI and the United States Government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and Related Documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters with the Government. Under the terms of the Settlement
Agreement, FEI paid an aggregate of $8 million to the Government. These
settlement payments are reflected in the Company's consolidated results of
operations for the fiscal year ended April 30, 1998. Included in selling and
administrative expenses for that year are accruals for additional legal fees
related to this settlement in the amount of $150,000.
PRIVATE CIVIL DERIVATIVE ACTIONS:
On December 1, 1993, and February 4, 1994, two separate derivative
shareholder actions (pursuant to a court order, now consolidated under one civil
action) were served in state court naming FEI, as a nominal defendant, and its
directors at the time and certain of its officers and employees as defendants.
The shareholder actions generally allege, based upon a November 1993 federal
grand jury indictment, that the defendants defrauded the government, submitted
false statements and invoices on government projects, destroyed and altered
records, and made false statements and submitted false documents to government
officials. (The indictment has been dismissed with prejudice. FEI pled guilty to
a single charge under a superseding indictment, of submitting a false statement
which failed to disclose the full explanation of costs on a highly
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
classified government project, and the superseding indictment was otherwise
dismissed with prejudice as to all defendants. The indictment and superseding
indictment generally contained similar allegations.) The shareholder actions
assert that, as a result of the indictment, FEI is exposed to material and
substantial monetary judgments and penalties and the loss of significant
business and the directors were under a fiduciary obligation to manage and
control the business operations of FEI and the conduct of its personnel. A
derivative action is one permitted by law to be instituted by a shareholder for
the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. The complaint seeks
judgment against the directors in the amount of all losses and damages suffered
by FEI on account of the facts alleged in the complaint, together with interest
costs, legal and other professional fees. FEI and the other defendants have
denied the allegations. Since the disposition of the criminal cases covered by
the Settlement Agreement executed on June 19, 1998, the litigation has resumed.
FEI is attempting to settle the Derivative Litigation, which settlement would be
subject to execution of a final settlement agreement by counsel for all parties,
notice to shareholders and Court approval. Management believes that such
settlement, if finalized, would not have a material adverse affect on the
Company's financial position or results of operations. In the event a settlement
cannot be reached, no opinion can be offered as to the outcome of the Motion(s)
or with respect to the Derivative Litigation.
QUI TAM ACTION:
In March 1994, a qui tam action brought by Ralph Muller, a former FEI
employee, was served upon FEI and Martin Bloch, its president. A qui tam action
is an action wherein an individual may, under certain circumstances, bring a
legal action against one or more third persons on behalf of the Government for
damages and other relief by reason of one or more alleged wrongs perpetrated
against the Government by such third persons. The complaint alleges that FEI, in
connection with its subcontract to design and manufacture certain oscillators
which are components of the Government's Advance Medium Range Air to Air
Missiles ("AMRAAMS"), improperly designed, manufactured and tested the
oscillators and as a result the Government sustained damages. The complaint
demands an unspecified amount of damages allegedly suffered by the Government,
and asks that the Court determine the damages and assess civil penalties as
provided under the False Claims Act. Under the False Claims Act, a recovery can
be made in favor of the Government for a civil penalty of not less than $5,000
and not more than $10,000 as to each false claim and for each false record and
statement, plus three times the amount of damages it is determined the
Government sustained, plus legal fees and expenses. Under the provisions of the
False Claims Act, the Government is permitted to take over the prosecution of
the action. The Government has declined to prosecute the action and Muller is
proceeding with the action on behalf of the Government.
The Company and Mr. Bloch have denied the allegations of and intend to
vigorously defend the qui tam action. On April 11, 1997, the Court ordered the
qui tam action stayed pending resolution of the criminal cases. Since the
disposition of the criminal cases, litigation has resumed. Limited discovery has
taken place due to the government's determination that all documents related to
this action are classified which has necessitated extraordinary procedures,
recently put in place, for purposes of conducting discovery. On January 21,
2000, the Court stayed further proceedings pending a decision of the U.S.
Supreme Court in an unrelated case with certain legal issues that could have
bearing on the qui tam action. That case was recently decided and the Court
determined that this litigation will resume.
COMPANY POSITION AND LEGAL FEES:
FEI and the individual defendants in each of the legal matters described
above consider the allegations and the charges asserted to be unjustified. They
further consider the actions of FEI and the individual defendants with respect
to the subject matter of these charges to have been
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
taken in good faith and without wrongful intent, criminal or otherwise. Because
of the uncertainty associated with the foregoing matters, FEI is unable to
estimate the potential liability or loss that may result, if any, and,
accordingly, no provision has been made in the accompanying consolidated
financial statements. However, an unfavorable outcome of these matters could
have a material impact on the Company's financial position, results of
operations and cash flows.
Included in selling and administrative expenses are legal fees incurred in
connection with the litigation settlement and the above matters of approximately
$274,000, $221,000 and $741,000 for the fiscal years ended April 30, 2000, 1999
and 1998, respectively.
On November 17, 1998, the Company received $4.5 million in settlement of its
claim against Associated International Insurance Company under applicable
directors and officers insurance coverage. This payment related to legal fees
incurred by FEI in previous years in defense of the litigation brought against
it by agencies of the U.S. Government.
On March 14, 2000, FEI commenced an action in the state court against
National Union Fire Insurance of Pittsburgh, PA ("National"). The complaint sets
forth causes of action for a declaratory judgment and breach of contract
relating to certain directors' and officers' liability insurance policies in
connection with the Muller qui tam action, the AMRAAM Grand Jury Investigation,
the Geldart qui tam action, and the derivative actions. After the complaint was
served, the defendant made a motion to dismiss, which was returnable and
submitted to the Court. No opinion can be offered as to the outcome of this
action. FEI also has coverage from the Home Insurance Company (the "Home") which
policy is excess insurance coverage above the National policy during certain
periods. Home's liability will not be triggered until National pays the full
amount of its policy for a period to which the Home coverage is applicable.
GOVERNMENT CONTRACT SUSPENSION AND DEBARMENT:
By letter dated July 9, 1998, FEI was notified by the U.S. Department of the
Air Force of FEI's debarment from Government contracting and from directly or
indirectly receiving the benefits of federal assistance programs. The debarment
was based upon FEI's guilty plea entered in connection with the Global
Disposition and the Settlement Agreement. Such debarment was terminated on
December 12, 1998 and, as a consequence, FEI may engage in projects related to
U.S. Government military and space related efforts if it chooses to do so.
OTHER:
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position of the Company.
10. NOTES RECEIVABLE - COMMON STOCK
In October 1994, certain officers and employees acquired an aggregate of 375,000
shares of the Company's common stock in the open market. The purchase price of
these shares of approximately $822,000 was financed by advances from the Company
to such officers and employees. The notes, collateralized by the shares of
common stock purchased, accrue interest at 1/2% above prime (8.5% at April 30,
2000) which is payable and adjusted annually. The principal was due in its
entirety at the earlier of termination of employment or October 1999. (Certain
officers requested and received an extension of the due date of the notes to
October 2001.) During the years ended April 30, 2000 and 1998, certain officers
and employees made payments on their notes in the aggregate amount of $172,000
and $148,000, respectively. No payments were received during fiscal 1999.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
11. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN:
The Company adopted a profit sharing plan and trust under section 401(k) of
the Internal Revenue Code. This plan allows all eligible employees to defer a
portion of their income through voluntary contributions to the plan. In
accordance with the provisions of the plan, the Company can make discretionary
matching contributions in the form of cash or common stock. For the year ended
April 30, 2000, the Company will contribute 3,976 shares of common stock with an
approximate value at the date of issuance of $75,000. There were no such
contributions in fiscal 1999 or 1998.
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 $175,000 and $490,000 to
operations under these plans for the fiscal years ended April 30, 2000 and 1998,
respectively. The Company incurred no expenses for such bonuses for the year
ended April 30, 1999 due to lower operating profits.
INDEPENDENT CONTRACTOR STOCK OPTION PLAN
During fiscal 1998, the Company established an Independent Contractor Stock
Option Plan under which up to 350,000 shares may be granted. An Independent
Contractor Stock Option Committee determines to whom options may be granted from
among eligible participants, the timing and duration of option grants, the
option price, and the number of shares of common stock subject to each option.
Each of the option grants in fiscal 2000 and 1998, as indicated in the table
below, were granted to certain independent contractors at a price equal to the
then fair market value of the Company's common stock. Each option grant
permitted immediate exercise of a portion of the options (24% to 34% of the
total grant) with the balance exercisable proportionately over the next two to
three years. For the years ended April 30, 2000, 1999 and 1998, the Company
recognized compensation expense of $170,000, $58,000 and $208,000, respectively,
as a result of these stock option grants.
Transactions under this plan, including the weighted average exercise prices
of the options, are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------ ------------------- ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 112,500 $15.75 112,500 $15.75 - -
Granted 12,000 $8.98 - - 112,500 $15.75
Exercised (2,200) $8.88 - - - -
-------- ------- -------
Outstanding at end of year 122,300 $15.21 112,500 $15.75 112,500 $15.75
======= ======= =======
Exercisable at end of year 89,200 $15.63 57,500 $15.75 27,250 $15.75
====== ====== ======
Available for grant at end of year 75,500 87,500 87,500
====== ====== ======
Weighted average fair value
of options granted during the year $ 4.35 $ - $15.75
====== ====== ======
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
INCENTIVE STOCK OPTION PLANS:
The Company has various Incentive Stock Option Plans ("ISOP's") for key
management employees (including officers and directors who are employees). The
ISOP's provide that eligible employees may be granted options to purchase an
aggregate of 1,725,000 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.
The excess of the consideration received over the par value of the common
stock or cost of treasury stock issued under these option plans has been
recognized as an increase in additional paid-in capital. No charges are made to
income with respect to the ISOP's.
Transactions under these plans, including the weighted average exercise
prices of the options, are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------ ------------------- ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 792,625 $6.14 505,688 $6.14 625,489 $3.38
Granted 156,500 $7.50 325,000 $8.25 106,500 $10.26
Exercised (316,825) $3.82 (20,063) $3.72 (216,551) $3.48
Expired or canceled (20,500) $7.26 (18,000) $10.84 (9,750) $5.64
-------- -------- ---------
Outstanding at end of year 611,800 $7.65 792,625 $6.14 505,688 $6.14
======= ======= =======
Exercisable at end of year 304,593 $6.83 419,346 $4.11 369,236 $3.44
======= ======= =======
Available for grant at end of year 205,000 64,000 289,500
======= ====== =======
Weighted average fair value
of options granted during the year $3.68 $4.26 $4.39
===== ===== =====
</TABLE>
The weighted average remaining contractual life of options outstanding at
April 30, 2000, 1999 and 1998 is 8.1, 6.2 and 4.7 years, respectively. At April
30, 2000, 1999 and 1998, option prices per share were from $3.25 to $18.875.
The Company applies the disclosure-only provision for SFAS No. 123 in
accounting for the ISOP's. Had compensation cost for stock option awards under
the ISOP's been determined based on the fair value at the grant dates consistent
with the provisions of SFAS No. 123, the pro forma effect on the Company's
financial statements would have been as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net Earnings, as reported $3,144 $1,173 $ 64
====== ====== ======
Net Earnings (Loss)- pro forma $2,468 $ 843 ($ 69)
====== ====== ======
Earnings per share, as reported:
Basic $ 0.41 $ 0.16 $ 0.01
====== ====== ======
Diluted $ 0.39 $ 0.15 $ 0.01
====== ====== ======
Earnings (Loss) per share- pro forma
Basic $ 0.32 $ 0.11 ($ 0.01)
====== ====== ======
Diluted $ 0.31 $ 0.11 ($ 0.01)
====== ====== =======
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in 2000, 1999 and 1998,
respectively: dividend yield of 3.0%, 1.5% and 3.0%; expected volatility of 47%,
37% and 40%; risk free interest rate (ranging from 6.5% to 8.0%); and expected
lives ranging from seven to ten years.
RESTRICTED STOCK PLAN:
During fiscal 1990, the Company adopted a Restricted Stock Plan which
provides that key management employees may be granted rights to purchase an
aggregate of 375,000 shares of the Company's common stock. The grants,
transferability restrictions and purchase price are determined at the discretion
of a special committee of the board of directors. The purchase price may not be
less than the par value of the common stock.
<TABLE>
<CAPTION>
2000 1999 1998
------------------ ------------------- ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 99,000 $3.93 105,000 $3.98 135,000 $4.00
Granted - - 1,500 $1.00 7,500 $0.67
Expired - - (7,500) $4.00 - -
Exercised (30,000) $4.00 - - (37,500) $3.40
------- ------------ --------
Outstanding at end of year 69,000 $3.94 99,000 $3.93 105,000 $3.98
====== ===== ====== ===== ======= =====
Exercisable at end of year 69,000 $3.94 98,000 $3.96 105,000 $3.98
====== ===== ====== ===== ======= =====
Balance of shares available for
grant at end of year 98,250 98,250 92,250
====== ====== ======
</TABLE>
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 was for a ten year period with forty equal quarterly
installments of $125,000, plus interest at various rates at the Company's
option. The Company reacquired 561,652 shares of its common stock during fiscal
1990. These shares plus approximately 510,000 additional shares issued by the
Company from its authorized, unissued shares were sold to the ESOP in May 1990.
Shares were released for allocation to participants based on the ratio of
the current year's debt service to the sum of the current year's debt service
plus the principal to be paid for all future years. Through April 30, 2000,
1,071,652 shares have been allocated to participant accounts of which 717,183
shares remain in the ESOP.
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 $978,000, $1,064,000, and $1,569,000 for
the years ended April 30, 2000, 1999 and 1998, respectively.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The SOP also requires that ESOP shares that are committed to be released be
considered outstanding for purposes of calculating earnings per share. The fair
value of unallocated shares approximated $830,000 at April 30, 1999.
DEFERRED COMPENSATION PLAN:
The Company has a program for key employees providing for the payment of
benefits upon retirement or death. Under the plan, each key employee receives
specified retirement payments for the remainder of the employee's life with a
minimum payment of ten years' benefits to either the employee or his
beneficiaries. The plan also provides for reduced benefits upon early retirement
or termination of employment. The Company pays the benefits out of its working
capital but has also purchased whole life insurance policies on the lives of
certain of the participants to cover the optional lump sum obligations of the
plan upon the death of the participant.
Deferred compensation expense charged to operations during the years ended
April 30, 2000, 1999 and 1998 was approximately $494,000, $1,360,000, and
$227,000, respectively. During fiscal 1999, the Company made modifications to
the benefits of certain employees and added two new participants. Accordingly,
deferred compensation expense in fiscal 1999 included approximately $800,000 to
account for the benefit modifications.
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current Federal $ 200 $ 300 $ 225
Current State and Local 240 200 975
----- ----- -----
Current provision 440 500 1,200
Deferred tax (benefit) provision 840 (100) 8
Reduction in valuation allowance - - (2,608)
---- ----- -----
Total provision (benefit) $1,280 $ 400 ($1,400)
======= ====== ======
</TABLE>
The following table reconciles the reported income tax expense (benefit)
with the amount computed using the federal statutory income tax rate.
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $1,504 $ 535 ($ 454)
State and local tax, net of federal benefit 161 161 640
Excess ESOP amortization 163 192 332
Nondeductible expenses 26 35 361
Nontaxable investment income (99) (145) (62)
Research & Development Tax Credit (330) (330) -
Adjustment to deferred tax balances
due to tax rates - - 374
Reduction in valuation allowance - - (2,608)
Other items, net, none of which individually
exceeds 5% of federal taxes at statutory rates (145) (48) 17
------ ----- ------
$ 1,280 $ 400 ($1,400)
======= ===== =======
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The components of deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Employee benefits $2,722 $2,594
Inventory 606 518
Accounts receivable 76 76
Marketable securities 940 136
Research & Development Credit - 640
Net operating loss carryforwards - 688
Miscellaneous 52 11
------ ------
Total deferred tax asset 4,396 4,663
------ ------
Deferred tax liabilities:
Property, plant and equipment 1,856 1,827
------ ------
Net deferred tax asset $2,540 $2,836
====== ======
</TABLE>
At April 30, 2000, the Company has fully applied all previously available
net operating loss carryforwards.
13. SEGMENT INFORMATION
In fiscal 1999, the Company adopted SFAS 131. The segment information for
fiscal year 1998 has been restated to present the Company's two reportable
segments for each of the three years ended April 30, 2000.
The Company's reportable segments are:
(1) Commercial communications - consists principally of time and frequency
control products used in two principal markets- commercial communication
satellites and terrestrial cellular telephone or other ground-based
telecommunication stations.
(2) U.S. Government - consists of time and frequency control products used
for national defense or space-related programs.
The accounting policies of the two segments are the same as those described
in the "Summary of Significant Accounting Policies." The Company evaluates the
performance of its segments and allocates resources to them based on operating
profit which is defined as income before investment income, interest expense and
taxes. The Company operates out of a single manufacturing facility and both
segments share the same managers, manufacturing personnel, and machinery and
equipment. Consequently, segment data includes allocations of depreciation and
corporate-wide general and administrative charges. Segment assets consist
principally of inventory and accounts receivable. All other assets are assigned
to the corporation for the benefit of both segments.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The table below presents information about reported segments for each of the
years ended April 30 with reconciliation of segment amounts to consolidated
amounts as reported in the statement of operations or the balance sheet for each
of the years:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales:
Commercial Communications $22,554 $14,547 $26,364
U.S. Government 3,981 4,411 5,633
-------- -------- ---------
Consolidated Sales $26,535 $18,958 $31,997
======= ======= =======
Operating (loss) profit:
Commercial Communications ($ 91) ($4,682) $ 6,130
U.S. Government 1,711 (137) (4,522)
Corporate (612) 4,118 (10,713)
--------- -------- -------
Consolidated Operating Profit (Loss) $ 1,008 ($ 701) ($ 9,105)
======== ======== ========
Identifiable assets:
Commercial Communications $18,447 $16,968 $18,701
U.S. Government 4,450 4,918 6,415
Corporate 57,950 56,469 63,664
-------- -------- --------
Consolidated Identifiable Assets $80,847 $78,355 $88,780
======= ======= =======
Depreciation (allocated):
Commercial Communications $ 971 $ 910 $698
U.S. Government 127 282 226
Corporate 19 19 19
------ ------ ----
Consolidated depreciation expense $1,117 $1,211 $943
====== ====== ====
</TABLE>
MAJOR CUSTOMERS
During fiscal year 2000, sales to one customer accounted for approximately
$14.0 million of the commercial communications segment's total sales. This
amount represents 62% of the commercial communications total revenues and 53% of
consolidated sales. In the U.S. Government segment, sales to three customers
accounted for $2.4 million of sales or 61% of the segment's revenue and 9% of
consolidated revenue. No U.S. Government customer accounted for more than 10% of
consolidated revenue.
Sales to one customer in the commercial communications segment were
approximately $6.5 million or 45% of that segment's revenues and 34% of
consolidated sales for fiscal 1999. In the U.S. Government segment, sales to two
customers accounted for $2.3 million of sales or 53% of the segment's revenue
and 12% of consolidated revenue. Neither U.S. Government customer accounted for
more than 10% of consolidated revenue.
During fiscal year 1998, sales to two customers accounted for approximately
$8.9 million and $6.9 million, respectively, of the commercial communications
segment's total sales. These amounts represent 60% of the commercial
communications total revenues and 49% of consolidated sales.
The loss by the Company of any one of these customers would have a material
adverse effect on the Company's business. The Company believes its relationship
with these companies to be mutually satisfactory.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
FOREIGN SALES
Revenues in the commercial communications segment include sales to foreign
governments or to companies located in foreign countries. Revenues, based on the
location of the procurement entity, were derived from the following countries
(in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
United Kingdom $1,068 $ 811 $1,003
Israel 635 - -
France 616 987 855
Korea 339 638 1,881
Italy - 277 1,427
Other 591 1,028 518
------ ------ ------
$3,249 $3,741 $5,684
====== ====== ======
</TABLE>
14. INTERIM RESULTS (UNAUDITED)
Quarterly results for fiscal years 2000 and 1999 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
2000 QUARTER
--------------------------------------------
1ST 2ND 3RD 4TH
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $5,464 $6,036 $7,117 $7,918
Gross profit 2,392 2,681 3,144 3,434
Net earnings 444 478 1,203 1,019
*Earnings per share
Basic $0.06 $0.06 $0.16 $0.13
Diluted $0.06 $0.06 $0.15 $0.12
<CAPTION>
1999 QUARTER
-------------------------------------------
1ST 2ND 3RD 4TH
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $7,015 $6,180 $3,060 $2,703
Gross profit 2,389 2,025 888 671
Net earnings (loss) 518 3,209 (1,357) (1,197)
*Earnings (loss) per share
Basic $0.07 $0.43 ($0.18) ($0.16)
Diluted $0.07 $0.41 ($0.18) ($0.16)
</TABLE>
*Quarterly earnings per share data does not equal the annual amount due to
changes in the average common equivalent shares outstanding.
The Company decided to renegotiate an exclusive fixed unit contract with a
customer for one of the Company's commercial communications products. This
action resulted in a fiscal 1999 fourth quarter reduction of sales and cost of
sales of approximately $1.7 million and $1.0 million, respectively. During the
fourth quarter of fiscal 1999, the Company also recorded an additional $800,000
accrual to deferred compensation expense as a result of benefit modifications.
(see Note 11)
46
<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 did not result in cash flow
for the three years ended April 30, 2000, 1999 and 1998 and, therefore, are
excluded from the Consolidated Statements of Cash Flows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ -------
<S> <C> <C> <C>
Declaration of cash dividend $ 799 $ 766 $ 771
3-for-2 stock split in the form of a 50%
stock dividend - - 3,003
Proceeds from sale of LCA building
used to pay down construction loan - - 9,000
REIT units received in connection
with building sale - - 12,000
Transfer of work-in-process inventory
to equipment - 175 -
</TABLE>
47
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
Description Balance Charged Charged
at to costs to other Balance at
beginning and accounts- Deductions end of
of period expenses describe describe period
--------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED APRIL 30, 2000
Allowance for doubtful
accounts $190 $17 $17(a) $190
Inventory reserves $1,054 $134 - $1,188
YEAR ENDED APRIL 30, 1999
Allowance for doubtful
accounts $190 $36 $36(a) $190
Inventory reserves $1,400 $150 $496(b) $1,054
YEAR ENDED APRIL 30, 1998
Allowance for doubtful
accounts $190 $49 $49(a) $190
Inventory reserves $350 $4,488 $3,438(b) $1,400
</TABLE>
(a) Accounts written off
(b) Inventory disposed or written off
48
<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 COMPANY
ITEM 10(A) DIRECTORS OF THE COMPANY
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 19, 2000.
ITEM 10(B) EXECUTIVE OFFICERS OF THE COMPANY
The executive officers hold office until the annual meeting of the Board of
Directors following the annual meeting of stockholders, subject to earlier
removal by the Board of Directors.
The names of all executive officers of the Company and all positions and
offices with the Company which they presently hold are as follows:
<TABLE>
<CAPTION>
<S> <C>
Joseph P. Franklin - Chairman of the Board of Directors
Martin B. Bloch - President, Chief Executive Officer and Director
Markus Hechler - Executive Vice President and Assistant Secretary
Alfred Vulcan - Vice President, Systems Engineering
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Space Systems and Business Development
Thomas McClelland - Vice President, Commercial Products
Alan Miller - Treasurer and Chief Financial Officer
Harry Newman - Secretary and Assistant to the Executive Vice President
</TABLE>
None of the officers and directors is related.
Joseph P. Franklin, age 66, has served as a Director of the Company since
March 1990. In December 1993 he was elected Chairman of the Board of Directors
and Chief Executive Officer. He also served as Chief Financial Officer from
September 15, 1996 through October 5, 1998. He has been the Chief Executive
Officer of Franklin S.A., since August 1987, a Spanish business consulting
company located in Madrid, Spain, specializing in joint ventures, and was a
director of several prominent Spanish companies. General Franklin was a Major
General in the United States Army until he retired in July 1987.
Martin B. Bloch, age 64, has been a Director of the Company and of its
predecessor since 1961. Mr. Bloch is the Company's President and Chief Executive
Officer. Previously, he served as chief electronics engineer of the Electronics
Division of Bulova Watch Company.
Markus Hechler, age 54, joined the Company in 1967. He was elected to the
position of Executive Vice President in February 1999, prior to which he served
as Vice President, Manufacturing since 1982. He has served as Assistant
Secretary since 1978.
49
<PAGE>
Alfred Vulcan, age 63, joined the Company as an engineer in 1973 and has
served as its Vice President, Systems Engineering since 1978.
Charles S. Stone, age 69, 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 63, joined the Company in August 1987 and served as
Executive Vice President of FEI Microwave, Inc., the Company's wholly-owned
subsidiary until May 1993 when he was elected Vice President, Space Systems and
Business Development.
Thomas McClelland, age 45, joined the Company as an engineer in 1984 and
was elected Vice President, Commercial Products in March 1999.
Alan Miller, age 51, joined the Company in November 1995 as its corporate
controller and was elected to the position of Treasurer and Chief Financial
Officer in October 1998. Prior to joining the Company, Mr. Miller served as an
operations manager and a consultant to small businesses from 1992 through 1995
and as a Senior Audit Manager with Ernst & Young, L.L.P. from 1980 to 1991.
Harry Newman, age 53, Secretary and Assistant to the Executive Vice
President, has been employed by the Company since 1979, prior to which he served
as Divisional Controller of Jonathan Logan, Inc., apparel manufacturers, from
1976 to 1979, and as supervising Senior Accountant with Clarence Rainess and
Co., Certified Public Accountants, from 1971 to 1975.
ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 19, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 19, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 19, 2000.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) INDEX TO FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
The financial statements, financial statement schedule and exhibits are
listed below and are filed as part of this report.
(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Included in Part II of this report:
PAGE(S)
<S> <C>
Report of Independent Accountants 25
Consolidated Balance Sheets
April 30, 2000 and 1999 26-27
Consolidated Statements of Operations
-years ended April 30, 2000, 1999 and 1998 28
Consolidated Statements of Changes in Stockholders' Equity
- years ended April 30, 2000, 1999 and 1998 29
Consolidated Statements of Cash Flows
- years ended April 30, 2000, 1999 and 1998 30-31
Notes to Consolidated Financial Statements 32-47
(2) Financial Statement Schedules
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 48
Other financial statement schedules are omitted because they are
not required, or the information is presented in the consolidated
financial statements or notes thereto.
(3) EXHIBITS
Exhibit 23.1 - Consent of Independent Accountants. 58
Exhibit 27 - Article 5 Financial Data Schedule
</TABLE>
The exhibits listed on the accompanying Index to Exhibits
beginning on page 52 are filed as part of this annual report.
(b) REPORTS ON FORM 8-K
Registrant's Form 8-K, dated March 23, 2000, containing disclosure under
Item 5 thereof (dividend declaration), was filed with the Securities and
Exchange Commission during the quarter ended April 30, 2000.
51
<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:
<TABLE>
<CAPTION>
EXHIBIT NO.
AS FILED WITH
REGISTRATION
EXHIBIT NO. IDENTIFICATION STATEMENT OR
IN THIS PER REG. DESCRIPTION REPORT SPECIFIED
FORM 10-K 229.601(B) OF EXHIBIT BELOW
--------- ---------- --------------------- ----------------
<S> <C> <C> <C> <C>
1 (3) Copy of Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware (1) 3.1
2 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on March 27, 3.2
1981 (2)
3 (3) Copy of By-Laws of the
Registrant, as amended
to date (3) 3.3
4 (4) Specimen of Common Stock
certificate (1) 4.1
5 (10) Stock Bonus Plan of Registrant
and Trust Agreement
thereunder (4) 10.2
6 (10) Employment agreement
between Registrant and
Martin B. Bloch (4) 10.3
7 (10) Employment agreement
between Registrant and
Abraham Lazar (4) 10.4
8 (10) Employment agreement
between Registrant and
John C. Ho (4) 10.5
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
AS FILED WITH
REGISTRATION
EXHIBIT NO. IDENTIFICATION STATEMENT OR
IN THIS PER REG. DESCRIPTION REPORT SPECIFIED
FORM 10-K 229.601(B) OF EXHIBIT BELOW
--------- ---------- --------------------- ----------------
<S> <C> <C> <C>
9 (10) Employment agreement
between Registrant and
Marvin Meirs (4) 10.6
10 (10) Employment agreement
between Registrant and
Alfred Vulcan (4) 10.7
11 (10) Employment agreement
between Registrant and
Harry Newman (4) 10.8
12 (10) Employment agreement
between Registrant and
Marcus Hechler (4) 10.9
13 (10) Form of stock escrow
agreement between Vincenti &
Schickler as escrow agent
and certain officers of
Registrant (4) 10.10
14 (10) Form of Agreement concerning
Executive Compensation (2) 10.11
15 (10) Registrant's 1982 Incentive
Stock Option Plan (5) 15
16 (10) Amendment dated April 19,
1981 to Stock Bonus Plan
of Registrant and Trust
Agreement (3) 20.1
17 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
Secretary of State of
Delaware on October 26,
1984 (6) 17
18 (10) Registrant's 1984 Incentive
Stock Option Plan (6) 18
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
AS FILED WITH
REGISTRATION
EXHIBIT NO. IDENTIFICATION STATEMENT OR
IN THIS PER REG. DESCRIPTION REPORT SPECIFIED
FORM 10-K 229.601(B) OF EXHIBIT BELOW
--------- ---------- --------------------- ----------------
<S> <C> <C> <C>
19 (10) Registrant's Cash or Deferral
Profit Sharing Plan and
Trust under Internal Revenue
Code Section 401,
dated April 1, 1985 (7) 19
20 (10) Computation of Earnings Included in the
per Share of Common Financial
Stock Statements
21 (10) Amendment Restated Effective
as of May 1, 1984 of the
Stock Bonus Plan and Trust
Agreement of Registrant (7) 21
22 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with the
Secretary of State of Delaware
on October 22, 1986 (8) 22
23 (10) Amendment Restated Effective
as of May 1, 1984 of the Stock
Bonus Plan and Trust Agreement
of Registrant (8) 23
24 (3) Amended and Restated
Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on
October 26, 1987 (10) 24
25 (22) List of Subsidiaries
of Registrant (10) 25
26 (10) Employment agreement
between Registrant and
Charles Stone (9) 26
27 (10) Employment agreement
between Registrant and
Jerry Bloch (9) 27
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
AS FILED WITH
REGISTRATION
EXHIBIT NO. IDENTIFICATION STATEMENT OR
IN THIS PER REG. DESCRIPTION REPORT SPECIFIED
FORM 10-K 229.601(B) OF EXHIBIT BELOW
--------- ---------- --------------------- ----------------
<S> <C> <C> <C>
28 (10) Registrant's 1987
Incentive Stock Option
Plan (9) 28
29 (10) Registrant's Senior
Executive Stock Option
Plan (9) 29
30 (10) Amendment dated Jan. 1, 1988
to Registrant's Cash or
Deferred Profit Sharing Plan
and Trust under Section 401
of Internal Revenue Code (9) 30
31 (10) Executive Incentive
Compensation Plan between
Registrant and various
employees (9) 31
32 (10) Amended Certificate of In-
corporation of the Company
filed with the Secretary of
State of Delaware on
November 2, 1989 (10) 32
33 (10) Registrant's Employee Stock
Option Plan (10) 33
34 (10) Loan agreement between
Registrant and Nat West
Dated May 22, 1990 (10) 34
35 (10) Loan Agreement between
Registrant's Employee
Stock Ownership Plan and
Registrant dated
May 22, 1990 (10) 35
36 (23) Consent of Independent
Accountants to incorporation
by reference of 2000 audit report
in Registrant's Form S-8
Registration Statement. 23.1
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
AS FILED WITH
REGISTRATION
EXHIBIT NO. IDENTIFICATION- STATEMENT OR
IN THIS PER REG. DESCRIPTION REPORT SPECIFIED
FORM 10-K 229.601(B) OF EXHIBIT BELOW
--------- ---------- --------------------- ----------------
<S> <C> <C> <C>
37 (10) Registrant's 1997 Independent
Contractor Stock Option Plan (11) 4.14
38 (10) Contribution Agreement between
Registrant and Reckson Operating
Partnership L.P. dated
January 6, 1998 (12) 10.12
39 (10) Lease agreement between
Registrant and Reckson
Operating Partnership, L.P.
dated January 6, 1998 (12) 10.13
40 (10) Plea Agreement, Civil Settlement
and Related Documents dated
June 19, 1998 (12) 10.14
41 (27) Financial Data Schedule 27
</TABLE>
56
<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 10-K, File No. 1-8061, for the year ended April 30,
1987, which exhibit is incorporated herein by reference.
(9) Filed with the SEC as an exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30,
1989, which exhibit is incorporated herein by reference.
(10) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1990, which exhibit is incorporated herein by reference.
(11) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-8, File No. 333-42233, which
exhibit is incorporated herein by reference.
(12) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1999, which exhibit is incorporated herein by reference.
------------------------
57
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-42233) of Frequency Electronics, Inc. of our
report dated June 20, 2000 relating to the consolidated financial statements and
financial statement schedule, which appears in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
July 28, 2000
58
<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
By: /s/ ALAN L. MILLER
--------------------------
Alan L. Miller
Chief Financial Officer
and Controller
Dated: July 28, 2000
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ MARTIN B. BLOCH President & Director 7/28/00
--------------------------
Martin B. Bloch
/s/ JOEL GIRSKY Director 7/28/00
--------------------------
Joel Girsky
/s/ JOHN HO Director 7/28/00
--------------------------
John Ho
/s/ MARVIN MEIRS Director 7/28/00
--------------------------
Marvin Meirs
</TABLE>
59
