SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K/A
(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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock (par value $1.00 per share) American Stock Exchange, Inc.
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes __ No X
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of October 31, 2002 - $48,000,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 22, 2003 - 8,356,350.
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 16, 2003.
(Cover page 1 of 61 pages)
Exhibit Index at Page 51
EXPLANATORY NOTE
This Amendment to Form 10K for the Fiscal Year Ended April 30, 2003 is filed
solely to indicate that Frequency Electronics 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 and has been subject to such filing requirements for the
past 90 days.
PART I
Item 1. Business
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GENERAL DISCUSSION
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Frequency Electronics, Inc. (sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the technology of time and frequency control. Unless the
context indicates otherwise, references to the Registrant or the Company are to
Frequency Electronics, Inc. and its subsidiaries. References to "FEI" are to the
parent company alone and do not refer to any of the subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became the
successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500 and its website is
www.frequencyelectronics.com.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 8,339,201 shares were
outstanding at April 30, 2003, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.
The Company is a world leader in the design, development and manufacture of
high-technology frequency, timing and synchronization products for satellite and
terrestrial voice, video and data telecommunications. The Company's technologies
provide unique solutions that are essential building blocks for the next
generation of broadband wireless and fiber optic communications systems, and for
the ongoing expansion of existing wireless and wireline networks. The Company's
mission is to provide the most advanced control of frequency and time- essential
factors for synchronizing communication networks and for certain military and
space applications.
The Company has segmented its operations into three principal industries:
(1) products for commercial communications which are based either on the ground
or in space, (2) the business of Gillam-FEI, principally wireline and network
synchronization systems and (3) 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. Gillam-FEI is the Company's Belgian subsidiary, acquired
in September 2000, which currently sells its products in non-U.S. markets.
During fiscal 2002, the Company formed three wholly-owned subsidiaries and made
a strategic investment in a Russian crystal oscillator manufacturer to provide
broader manufacturing capabilities and worldwide reach for the Company's
proprietary products. FEI Government Systems, Inc. ("FEI-GSI") was formed to
focus on supplying the Company's technology and legacy proprietary products to
the United States military and other U.S. government agencies. This
organizational step was taken in response to the increasing demand for the
Company's products by the U.S. Government. Frequency Electronics, Inc. Asia
("FEI-Asia") was established as an Asian-based low cost manufacturer of certain
of the Company's commercial communications products. FEI- Europe, GmbH
Communications ("FEI-Europe") was established as a European sales and marketing
office to promote the Company's new line of crystal oscillators as well as other
proprietary products. The operations of FEI-Asia and FEI-Europe are included in
the commercial communications segment. The Company's equity investment in
Morion, Inc., a Russian manufacturer, permits the Company to secure a low cost
source for high precision quartz resonators and crystal oscillators, many of
which will be based on the Company's design and development work.
As described more fully below, shortly after the end of fiscal year 2003,
the Company acquired the business and net assets of Zyfer, Inc. from Odetics,
Inc., forming a new wholly-owned subsidiary, FEI-Zyfer, Inc. ("FZI"). FZI is a
designer and manufacturer of precision time and frequency generation and
synchronization products which incorporate global positioning systems ("GPS")
technology. This
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capability complements the Company's existing technologies and permits the
combined entities to provide a broader range of embedded systems for a variety
of timing functions.
In the mid-1990's, the Company transformed itself from a defense contract
manufacturer into a high-tech provider of precision time and frequency products
found in both ground-based communication stations and on-board commercial
satellites. The Company also continues to support the United States government
with products for defense and space applications with emphasis on Commercial
Off-The-Shelf products. Products delivered by Gillam-FEI provide essential
network monitoring and wireline synchronization products for a variety of
industries and telecommunications providers in Europe, Africa, the Middle East
and Asia.
FISCAL 2003 AND 2002 SIGNIFICANT EVENTS
Goodwill Impairment
In the fourth quarter of 2003, the Company performed an impairment test of
the Gillam-FEI reporting unit. The fair value of this reporting unit was
determined based upon valuations utilized in recent industry acquisition
transactions and current market values of publicly-traded competitors and
customers in the same industry as Gillam-FEI. Based on this test, the Company
further analyzed its investment in Gillam-FEI and concluded that the goodwill
associated with this acquisition was impaired. Consequently, the Company
recorded a non-cash charge of $6.2 million against operating income for fiscal
2003 to reflect the write down of the full value of goodwill related to the
Gillam-FEI acquisition.
Inventory Adjustments
The Company reduced the value of its inventory by approximately $3.6 million
during the 4th quarter of fiscal 2003 due to events occurring at the end of the
fiscal year. In April, the Company was notified by a customer it had cancelled
an export-related contract which required the Company to write-off the related
work-in-process inventory. Second, after experiencing modest improvement in
telecommunications-related revenues earlier in the year, fourth quarter
Commercial Communications segment revenue declined nearly 40% from the third
quarter. As a consequence, noting the competitive environment, the Company
reduced certain inventory to estimated realizable value based on lowered sales
volume expectations. Finally, during the fourth quarter, the Company completed
certain process and product improvement projects which resulted in re-valuation
or disposal of certain products built under previous designs.
Insurance Reimbursement
On April 30, 2002, the Company settled an arbitration proceeding FEI had
commenced in June 2001 against The Home Insurance Company of Illinois ("Home")
under an excess directors and officers liability insurance policy. FEI had
asserted claims for its loss relating to, among other matters, sums it paid in
connection with the Global Settlement and Disposition with the Government on
June 19, 1998. (See Item 3. Legal Proceedings and Note 9 to the accompanying
financial statements.) Under the terms of the settlement agreement, Home paid
FEI $1.5 million, FEI released its claims and the arbitration was discontinued.
SUBSEQUENT EVENT
----------------
On May 9, 2003, the Company acquired the business and net assets of Zyfer,
Inc., a wholly-owned subsidiary of Odetics, Inc., in a cash transaction. The
Company paid $2.3 million at closing, plus acquisition costs estimated at
approximately $400,000. According to the terms of the purchase agreement, the
Company will pay up to a maximum of $1 million in each of fiscal years 2004 and
2005 if the new subsidiary, FEI-Zyfer, Inc., achieves certain revenue levels in
those years. The contingent payments are based on a percentage of revenues in
excess of $6 million in fiscal 2004 and as a percentage of revenues in excess of
$8 million in fiscal 2005. The acquired business recorded revenue of $6.5
million for the year ended March 31, 2003 and $4.5 million in the prior fiscal
year. FEI-Zyfer, with its own management team, will be a fourth reportable
segment in the Company's future financial statements.
4
REPORTABLE SEGMENTS
-------------------
The Company designs, develops, manufactures and markets precision time and
frequency control products for three principal markets: (1) commercial
communications applications, either space- or ground-based, (2) wireline
synchronization and network monitoring systems produced by Gillam-FEI, and (3)
its heritage U.S. Government and military markets.
Wireline and network synchronization products manufactured by the Company's
wholly-owned subsidiary, Gillam-FEI, are currently sold to non-U.S. customers.
The products for the other two reportable segments are similar in function and
are currently manufactured in the Company's production facility located in New
York. The operations of its FEI-Asia facility are included in the Commercial
Communications segment. The Company identifies the U.S Government business as a
reportable segment based upon the regulatory environment (Federal Acquisition
Regulations or "FAR") under which it operates when dealing with U.S. Government
procurement contracts versus the less restrictive commercial environment.
During fiscal 2003, 2002 and 2001 approximately 47%, 63% and 74%,
respectively, of the Company's sales were for products used for terrestrial or
space-based commercial communications and foreign governments. Sales for
Gillam-FEI, which was acquired in September 2000, were approximately 25%, 26%
and 19% of fiscal 2003, 2002 and 2001 revenues, respectively. For the years
ended April 30, 2003, 2002 and 2001, approximately 28%, 11% and 7%,
respectively, of the Company's sales were for U.S. Government end-use. Sales
summaries for the Commercial Communications, Gillam-FEI 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 14 to the accompanying
financial statements.
Commercial Communications segment:
The Company provides high-tech precision time and frequency products that
are found in both ground-based communication stations and on-board commercial
satellites. The Company has made a substantial investment in research and
development to apply its core technologies to the commercial markets. In
previous years, the Company experienced accelerated growth in commercial
communications revenues. However, under current overall market conditions in the
telecommunications industry, the revenue growth trend has been interrupted. The
Company anticipates that this industry will provide an opportunity for
substantial future sales growth based on increased capital spending by
telecommunication companies and new or replacement orders for commercial
communication satellites.
Terrestrial- Wireless
The development of new or improved technologies will bring expanded and more
reliable telecommunications services to the public. As digital cellular systems
and PCS networks grow they will require more base stations to meet the demand
for better connectivity and quality of cell phone service. Cellular
infrastructure original equipment manufacturing companies, consisting of some of
the world's largest telecommunications companies, are building out existing
networks even as they develop new technologies, such as EDGE (Enhanced Data
rates for Global Evolution), 3G (3rd Generation) and other systems, to provide
not only improved voice connectivity but also Internet, video and data
transmission.
Wireless communication networks consist of numerous installations located
throughout a service area, each with its own base station connected by wire or
microwave radio through a network switch. Network operators are in the process
of converting older networks from analog to digital technology in order to
expand network coverage, increase capacity and improve transmission quality.
This upgrade requires precise frequency control at the base stations to achieve
a higher degree of services.
With increased demand for wireless services on limited bandwidth, the
requirement for precise timing becomes paramount. The Company manufactures a
Rubidium Atomic Standard, a small, low cost,
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stable atomic "clock" as well as temperature stable quartz crystal oscillators,
which are ideally suited for use in advanced cellular communications base
stations. Whether the network uses CDMA (Code Division Multiple Access), TDMA
(Time Division Multiple Access) or GSM (Global System for Mobile Communications)
or a hybrid, such as EDGE, timing to ensure signal synchronization, is of the
essence.
Terrestrial- Optical Networks
The Company has developed products that will enable greater utilization of
the available spectrum in Fiber Optic systems. High-speed modems which convert
electronic signals to light and back again require highly sophisticated signal
synchronization. The Company provided prototypes and limited production models
for such systems in calendar 2001. These products represent a new application of
the Company's core technology. Since the products are just one of several
competing technologies of a nascent industry, the ultimate market size cannot be
determined at this time.
Space-based
The commercial use of satellites launched for communications, navigation,
weather forecasting, video and data transmissions has increased the need to
transmit information to earth-based receivers. This requires precise timing and
frequency control at the satellite. The Company manufactures the master clocks
(quartz, rubidium and cesium) and other significant timing products for many
satellite communication systems. The Company's space hybrid assemblies are used
onboard spacecraft for command, control and power distribution. Efficient and
reliable DC-DC power converters are also manufactured for the Company's own
instruments and as stand-alone products for space applications. The Company's
subminiature oven-controlled quartz crystal oscillator is a low cost, small
size, precision crystal oscillator suited for high-end performance required in
satellite transmissions, airborne telephony and geophysical survey positioning
systems. Commercial satellite programs such as Globalstar, Eutelsat, Inmarsat
and Worldstar have utilized the Company's space-qualified products.
Gillam-FEI segment:
The acquisition of Gillam-FEI in September 2000 extended the Company's
competencies into wire-line synchronization, network monitoring, specialized
test equipment, and power supply products. With the advent of new digital
broadband transmission technologies, reliable synchronization has become the
warranty to quality of service for telecom operators. Gillam-FEI is among the
world leaders in the field of wireline synchronization, and its products are
targeted for telecommunication operators and network equipment manufacturers
that utilize modular and flexible platforms to build reliable
digital-network-systems worldwide. Telecommunications operators such as
Belgacom, France Telecom, Telefonica and other service providers are among
Gillam-FEI's major customers.
Network monitoring systems marketed under the brand name LYNX, are a
flexible suite of complementary software modules that are arranged to satisfy
the specific needs of telecom operators, electrical utilities, and other
operators of distribution networks. The multi-task capability of the LYNX system
allows operators to supervise and manage the distribution of electricity, gas,
video cables, public lighting, and other networks. Deregulation of utilities,
especially in Europe, has created a greater demand for the LYNX product. Major
customers presently using LYNX include SIG Electrical Services of Geneva,
Switzerland; Electricity Distribution Management for the city of Lausanne,
Switzerland; UEM Electricity Distribution Management for the city of Metz,
France; Brussels International Airport and Belgian Railways.
Specialized test equipment and power supply products are mainly targeted for
the telecommunications industry.
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
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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
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The Company's products are manufactured from raw material which, when
combined with conventional electronic parts available from multiple sources,
become finished products used for commercial wireless and wireline
communications, satellite applications, space exploration, position location,
radar, sonar and electronic counter-measures. These products are employed in
ground-based earth stations, fixed, transportable, portable and mobile
communications installations, domestic and international satellites, as well as
aircraft, ships, submarines and missiles. The Company's products are marketed as
components, instruments, or complete systems. Prices are determined based upon
the complexity, design requirement, purchased quantity and delivery schedule.
COMPONENTS - The Company's key technologies utilize quartz, rubidium and
cesium to manufacture precision time and frequency standards and higher level
assemblies which allow the users to generate, transmit, and receive synchronous
signals in order to communicate effectively, locate their position, secure a
communications system, or guide a missile. The components class of the Company's
products includes crystal filters and discriminators, surface acoustic wave
resonators, and high-reliability thick and thin film hybrid assemblies for space
and other applications.
Precision quartz oscillators use quartz resonators in conjunction with
electronic circuitry to produce signals with accurate and stable frequency. The
Company's products include several types of quartz oscillators, suited to a wide
range of applications, including ultrastable 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 electronically controlled
using a temperature sensitive device to directly compensate for the effect of
temperature on the oscillator's frequency.
The rubidium lamp, filter and resonance cell provide the optical subassembly
for the manufacture of the Company's optically pumped atomic rubidium frequency
standards. The cesium tube resonator is used in the manufacture of the Company's
cesium primary standard atomic clocks.
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.
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Efficient and reliable DC-DC power converters are manufactured for the
Company's own instruments and as stand alone products, for space applications.
The Company manufactures filters and discriminators using its crystal
resonators for its own radio-frequency and microwave receiver, signal
conditioner and signal processor products.
INSTRUMENTS - The Company's instrument line consists of three basic time and
frequency generating instruments and a number of instruments which test and
distribute the time and frequency. The Company's time and frequency generating
instruments are the quartz frequency standard, rubidium atomic standard and
cesium beam atomic standard.
The quartz frequency standard is an electronically controlled solid-state
device which utilizes a quartz crystal oscillator to produce a highly stable
output signal at a standardized frequency. The Company's frequency standard is
used in communications, guidance and navigation and time synchronization. The
Company's products also include a precision frequency standard with battery
back-up and memory capability enabling it to remain in operation if a loss of
power has occurred.
The optically pumped atomic rubidium frequency standard is a solid-state
instrument which provides both timing and low phase noise frequency references
used in commercial communications systems. Rubidium oscillators combine
sophisticated glassware, light detection devices and electronics packages to
generate a highly stable frequency output. Rubidium, when energized by a
specific radio frequency, will absorb less light. The oscillator's electronics
package generates this specific frequency and the light detection device
ensures, through monitoring the decreased absorption of light by the rubidium
and the use of feedback control loops, that this specific frequency is
maintained. This highly stable frequency is then captured by the electronics
package and generated as an output signal. Rubidium oscillators provide atomic
oscillator stability, at lower costs and in smaller packages.
The cesium beam atomic standard utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency several orders of
magnitude more accurate and stable than other types of quartz frequency
generators. The Company's atomic standard is a compact, militarized solid-state
device which generates these precision frequencies for use with advanced
communications and navigation equipment. A digital time-of-day clock is
incorporated which provides visual universal time display and digital timing for
systems use. The atomic standard manufactured by the Company is a primary
standard, capable of producing time accuracies of better than one second in
seven hundred thousand years.
As the demands on communications systems increase, the requirement for
precise frequency signals to drive a multitude of electronic equipment is
greatly expanded. To meet this requirement, the Company manufactures a
distribution amplifier which is an electronically controlled solid-state device
that receives a base frequency from a frequency standard and provides multiple
signal outputs of the input frequency. A distribution amplifier enables many
items of electronic equipment in a single facility, aircraft or ship to receive
a standardized frequency and/or time signal from a quartz, rubidium or cesium
atomic standard.
SYSTEMS - The systems portion of the Company's business includes
manufacturing and integrating selections of its specialized components into
higher level subsystems and systems that meet customer-defined needs. The
Company has a unique knowledge of interfacing these technologies and experience
in applying them to a wide range of systems. The systems generate electronic
frequencies of predetermined value and then divide, multiply, mix, convert,
modulate, demodulate, filter, distribute, combine, separate, switch, measure,
analyze, and/or compare these signals depending on the system application.
This portion of the Company's business includes a complete line of time and
frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. Time and frequency
control systems combine the Company's cesium, rubidium and/or crystal
instruments with its other components, to provide systems for wireless,
wireline, space and defense applications.
For the wireless industry, the Company integrates its core components such
as quartz oscillators and rubidium atomic standards with software applications,
microprocessors, and other digital circuitry into complete subsystems. These
subsystems supply frequency and time reference signals that facilitate
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wireless communications and are necessary for the various wireless technologies
to operate properly. The customers for these subsystems are global wireless
infrastructure manufacturers.
For the wireline industry, the Company integrates its core components with
other electronic modules into high-level platforms that provide a total
synchronization solution. These signal synchronization units or "SSUs," are
primarily designed and manufactured by Gillam-FEI. SSUs are inserted into
digital telecommunication networks and provide reliable synchronization for
proper operation of the network. The systems are primarily sold to
telecommunication operators and vary from a few SSUs for a simple network to
hundreds of units for complex networks. For operators of distribution networks
such as electrical utilities and telecommunications operators, the Company
offers the LYNX system--a flexible suite of complementary software modules that
are distinctively combined to satisfy the requirements of the users. With the
advent of digital broadband transmission technologies, reliable synchronization
has become the Quality of Service for telecommunications operators world-wide.
For the space and defense sectors the Company combines its core products in
a wide range of diverse applications that provide systems for space and ground
based communications, space exploration, satellite tracking stations,
satellite-based navigation and position location, secure communication,
submarine and ship navigation, calibration, and electronic counter-measures
applications. These time and frequency control systems can provide up to
quadruple redundancy to assure operational longevity and dependability.
The Company's new subsidiary, FEI-Zyfer, manufactures products incorporating
GPS technology by utilizing GPS signals to derive time and frequency
information. These systems and subsystems are used in Enhanced wireless 911
(E911), secure government and commercial communications and other applications.
BACKLOG
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As of April 30, 2003, the Company's consolidated backlog amounted to
approximately $31 million (see Item 7). Approximately 60% of this backlog is
expected to be filled during the Company's fiscal year ending April 30, 2004.
The backlog, which reflects only firm purchase orders and contracts, is subject
to change by reason of several factors including possible cancellation of
orders, change orders, terms of the contracts and other factors beyond the
Company's control. Accordingly, the backlog is not necessarily indicative of the
revenues or profits (losses) which may be realized when the results of such
contracts are reported.
CUSTOMERS AND SUPPLIERS
-----------------------
The Company markets its products both directly and through 27 independent
sales representative organizations located principally in the United States and
Europe. Sales to non-U.S. customers, including all of the sales of Gillam-FEI,
totaled approximately 38%, 42% and 29% of net sales in fiscal years 2003, 2002
and 2001, respectively.
The Company's products are sold to a variety of customers, both commercial
and governmental. For the years ended April 30, 2003, 2002 and 2001,
approximately 28%, 11% and 7%, 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, 2003,
2002 and 2001 included sales to Motorola Corp. ("Motorola") of approximately
$10.0 million, $15.5 million and $17.7 million, respectively. These amounts
represent 32%, 38% and 36%, respectively, of consolidated sales for each of
those years. Northrop Grumman Corporation ("Northrop") accounted for $3.5
million of revenues in fiscal 2003 or 11% of consolidated sales. For the year
ended April 30, 2001, sales to Space Systems Loral ("SSL") were $5.2 million or
11% of the Company's consolidated sales. During the three years ended April 30,
2003, sales to Motorola and SSL were made by the Company's Commercial
Communications segment, accounting for 66% in fiscal 2003, 65% in fiscal 2002
and 63% in fiscal 2001 of that segment's total sales. During fiscal 2003 and
2002, France Telecom and Belgacom were major customers of the Gillam-FEI
segment. France Telecom accounted for 13% and 18%, respectively, and
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Belgacom accounted for 10% and 12%, respectively, of the segment's revenues in
those fiscal years. In fiscal 2001, Itissalat al Maghrib and France Telecom
accounted for 29% and 11%, respectively, of Gillam-FEI's revenues. Fiscal 2003
revenues in the U.S. Government segment included sales to three customers,
Northrop, Raytheon Missile Systems, Inc. ("Raytheon") and BAE Systems Aerospace,
Inc. ("BAE"), accounting for 40%, 22% and 14%, respectively of total segment
sales. In fiscal 2002, Boeing Satellite Systems, Inc. ("Boeing"), Raytheon and
BAE accounted for 32%, 26% and 19%, respectively, of total segment revenues. In
fiscal 2001, two customers, Raytheon and Boeing, accounted for 68% of U.S.
Government revenues. The loss by the Company of any one of these customers would
have a material adverse effect on the Company's business. The Company believes
its relationship with these companies to be mutually satisfactory 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 to
support future growth in revenues and earnings. The Company has focused its
internal research and development efforts on improving the core physics and
electronic packages in its time and frequency products; conducting research to
develop new time and frequency technologies; improving product manufacturability
by seeking to reduce its production costs through product redesign and process
improvements and other measures to take advantage of lower cost components.
The Company continues to focus a significant portion of its own resources
and efforts on developing hardware for satellite and terrestrial commercial
communications systems, including wireless, wireline and fiber optic systems.
During fiscal years 2003, 2002 and 2001, the Company expended $4.6 million, $6.6
million and $4.8 million of its own funds, respectively, on such research and
development activity. (See also Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.) For fiscal year 2004, the
Company is targeting to spend from $3.5 million to $5.0 million on research and
development in similar areas but will spend more or less as market conditions
and opportunities warrant.
PATENTS AND LICENSES
--------------------
The Company believes that for the most part, its business is not dependent
on patent or license protection. Rather, it is primarily dependent upon the
Company's technical competence, the quality of its products and its prompt and
responsible contract performance. However, the rights to inventions of employees
working for the Company are assigned to the Company and the Company presently
holds such patents and licenses. In certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses the government has funded. During fiscal 2003, the Company
received a broad and significant patent for new, proprietary quartz oscillator
technology which the Company will exploit in both legacy and new applications.
COMPETITION
-----------
The Company experiences competition in all areas of its business. The
Company competes primarily on the basis of the accuracy, performance and
reliability of its products; the ability of its products to function under
severe conditions, such as in space or other extreme hostile environments;
prompt and responsive contract performance; technical competence and price. The
Company has a unique and broad product line which includes all three frequency
standards - quartz, rubidium, and cesium. Because of the very high precision of
certain of its components, the Company has few competitors. For lower precision
components there is significant competition from a number of suppliers.
10
In recent years, the Company has successfully outsourced certain component
manufacturing processes to third parties and more recently to its wholly-owned
subsidiary, FEI-Asia in Tianjin, China and to Russian-based Morion, Inc., in
which the Company is a minority shareholder. The Company expects this
outsourcing to enhance its competitive position on cost while maintaining its
high quality standards. The Company believes its ability to obtain raw
materials, manufacture finished products, integrate them into systems and
sub-systems, and interface these systems with end-user applications provides a
strong competitive advantage.
Certain of the Company's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs.
With respect to its instruments and systems, the Company competes with
Hewlett-Packard Company, Symmetricom, Inc, E. G. and G., Inc. and others.
Systems for the wireline industry produced by the Gillam-FEI segment compete
with Symmetricom, Inc. which recently merged with another competitor. The
Company's principal competition for space products is the in-house capability of
its major customers.
EMPLOYEES
---------
The Company employs approximately 340 persons worldwide. None of the U.S.
employees are represented by labor unions while in Europe, approximately 20
employees in one facility are represented by a French labor union.
OTHER ASPECTS
-------------
The Company's business is not seasonal although it expects to experience
some fluctuation in revenues during the second fiscal quarter as a result of
extended holiday periods in August. No unusual working capital requirements
exist.
Item 2. Properties
-------------------
The Company operates out of several facilities located around the world.
Each facility is used for manufacturing its products and for administrative
activities. The following table presents the location, size and terms of
ownership/occupation:
Location Size (sq. ft.) Own or Lease
-------- -------------- ------------
Long Island, NY 93,000 Lease
Liege, Belgium 34,000 Own
Chalon Sur Saone, France 37,000 Own
Tianjin, China 6,000 Lease
The Company's facility located in Mitchel Field, Long Island, New York, is
part of the building that the Company constructed in 1981 and expanded in 1988
on land leased from Nassau County. In January 1998, the Company sold this
building and the related land lease to Reckson Associates Realty Corp.
("Reckson"), leasing back the space that it presently occupies.
The Company leases its manufacturing and office space from Reckson under an
11-year lease at an annual rental of $400,000 per year with the Company paying
its pro rata share of real estate taxes along with the costs of utilities and
insurance. The lease provides for two 5-year renewal periods, exercisable at the
option of the Company, with annual rentals of $600,000 during the first renewal
period and $800,000 during the second renewal period. Under the terms of the
lease, new office and engineering facilities for the Company were constructed at
the cost of Reckson. The leased space is adequate to meet the Company's domestic
operational needs.
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
11
were valued at closing at $12 million. Each REIT unit is convertible into one
share of the common stock of the REIT. In addition, approximately 27,000 REIT
units have been placed in escrow which may be released to the Company based upon
the price per share of the REIT on the date of conversion of REIT units. Under
the accounting provisions for sale and leaseback transactions, the sale of this
building is considered a financing and the REIT units received are reflected as
a noncurrent liability while the related building continues to be reflected as
an asset. Upon liquidation of the REIT units, a portion of the resulting gain on
this sale will be deferred and recognized into income over the term of the
leaseback with the balance recognized in income on the date of liquidation. (See
Note 6 to the accompanying financial statements.)
The properties located in Belgium and France were acquired upon completion
of the Gillam S.A. acquisition. These facilities are adequate to meet the
present and future operational requirements of Gillam-FEI. During the year ended
April 30, 2003, the Company sold a portion of the building owned by its
subsidiary in France, receiving proceeds of $275,000 and realizing a gain of
$152,000 which amount is included in other income and expense.
The Tianjin, China facility is the location of the Company's newly
established subsidiary, FEI-Asia. Space has been leased within a manufacturing
facility located in the Trade-Free Zone. The lease is renewable annually with
rent of $9,850 payable quarterly. The amount of space is adequate for the
near-term manufacturing expectations for the Company.
Item 3. Legal Proceedings
--------------------------
A judgment in favor of the Company, dated September 3, 2002, was entered by
the United States District Court for the Eastern District of New York in
connection with its dismissal of a qui tam action which was brought in March
1994 by Ralph Muller, a former FEI employee. A qui tam action is an action
wherein an individual may, under certain circumstances, bring a legal action
against one or more third persons on behalf of the Government for damages and
other relief by reason of one or more alleged wrongs perpetrated against the
Government by such third persons. The judgment is based on the Court's decision
on the merits in favor of Frequency Electronics, Inc. and its CEO, Martin B.
Bloch, dated August 23, 2002. The judgment preserves all of FEI's rights to
recover costs and its causes of action against the plaintiff and third party
defendants. (For a more complete description of the litigation brought against
the Company and the related settlement actions, see Item 3. Legal Proceedings in
the Company's Annual Report on Form 10-K for the year ended April 30, 2001, a
copy of which is on file with the Securities and Exchange Commission.)
Directors' and Officers' Insurance Coverage
-------------------------------------------
On April 30, 2002, FEI settled the arbitration proceeding it had commenced
in June 2001 before the American Arbitration Association against The Home
Insurance Company ("Home") under a $2.0 million excess directors and officers
liability insurance policy. FEI had asserted claims for its loss relating to,
among other matters, sums it paid in connection with the Settlement Agreement
and Global Disposition with the Government on June 19, 1998. (For a description
of these litigations, the Settlement Agreement and Global Disposition, refer to
Item 3 of the Registrant's Annual Report on Form 10-K for the year ended April
30, 1998, a copy of which is on file with the Securities and Exchange
Commission.) Under the terms of the settlement agreement, Home paid FEI $1.5
million, FEI released its claims and the arbitration was discontinued.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were required to be submitted by Registrant to a vote of
security holders during the fourth quarter of fiscal 2003.
12
PART II
-------
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters
-----------------------------------------------------------------
The Common Stock of the Company is listed on the American Stock Exchange
under the symbol "FEI". The following table shows the high and low sale price
for the Company's Common Stock for the quarters indicated, as reported by the
American Stock Exchange.
FISCAL QUARTER HIGH SALE LOW SALE
-------------- --------- --------
2003 -
FIRST QUARTER $13.04 $ 5.62
SECOND QUARTER 8.00 5.00
THIRD QUARTER 11.50 7.34
FOURTH QUARTER 10.25 8.16
2002 -
FIRST QUARTER $19.20 $12.90
SECOND QUARTER 17.90 9.00
THIRD QUARTER 15.40 11.10
FOURTH QUARTER 14.00 11.10
As of July 22, 2003, the approximate number of holders of record of common
stock was 600. The closing share price of the Company's stock on July 22, 2003
was $9.85.
DIVIDEND POLICY
---------------
On March 24, 1997, the Company announced a policy of distributing a cash
dividend to shareholders of record on April 30 and October 31, payable on June 1
and December 1, respectively. The Board of Directors will determine dividend
amounts prior to each declaration based on the Company's financial condition and
financial performance.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
Number of Securities
Remaining available for
Number of Securities to Weighted-Average Future Issuance under
be Issued upon exercise Exercise Price of Equity Compensation Plans
of Outstanding Options Outstanding Options (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a))
--------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity Compensation Plans
Approved by Security Holders 343,750 $ 7.76 297,750
Equity Compensation Plans Not
Approved by Security Holders 824,162 $12.52 298,000
13
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, 2003.
The information has been derived from the audited financial statements of the
Company for the respective periods.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
------------------------------------------
Years Ended April 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Commercial Communications $ 15,051 $ 26,663 $ 36,290 $ 22,554 $ 14,547
U.S. Government 8,906 4,513 3,727 3,981 4,411
Gillam-FEI 8,137 11,223 9,276 - -
less intersegment sales (567) (1,220) (83) - -
-------- ------- -------- -------- -------
Total Net Sales $ 31,527 $ 41,179 $ 49,210 $26,535 $ 18,958
======== ======= ======== ======== =======
Operating Profit (Loss) ($12,490)(1) $ 89(2) $ 5,939(4) $ 1,008 $ (701)(6)
======== ======= ======== ======== =======
Net (Loss) Income ($ 8,860) $ 1,378(3) $ 5,644(5) $ 3,144 $ 1,173
======== ======= ======== ======== =======
Average Common Shares Outstanding
Basic 8,331,785 8,350,735 8,198,569 7,673,497 7,502,260
Diluted 8,331,785 8,529,175 8,431,823 8,043,727 7,820,742
Earnings per Common Share
Basic ($ 1.06) $ 0.17 $ 0.69 $ 0.41 $ 0.16
======= ======= ======== ======= =======
Diluted ($ 1.06) $ 0.16 $ 0.67 $ 0.39 $ 0.15
======= ======= ======== ======= =======
CONSOLIDATED BALANCE SHEET DATA
Total Assets $ 85,729 $ 96,011 $ 102,039 $ 80,847 $ 78,355
======= ======= ======== ======= =======
Long-Term Obligations
and Deferred Items $17,903 $ 17,796 $ 18,074 $ 16,849 $ 16,959
======= ======= ======== ======= =======
Cash dividend declared
per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======== ======= =======
(1) Includes writedown of Goodwill of $6.2 million and adjustments to inventory of $3.6 million.
(2) Includes insurance reimbursement of $1.5 million for expenses related to certain litigation with the U.S.
Government less inventory reserves and writeoffs aggregating $1.0 million.
(3) In addition to items in (2) above, includes $300,000 investment loss for an other than temporary decline of
value in a marketable security.
(4) Includes insurance reimbursement of $2.8 million (net of professional fees) for expenses related to certain
litigation with the U.S. Government, inventory reserves of $2.0 million related to certain product lines and
$300,000 of acquisition-related nonrecurring costs.
(5) In addition to items in (4) above, includes $287,000 investment loss for an other than temporary decline of
value in a marketable security.
(6) Includes insurance reimbursement of $4.5 million for legal fees related to certain litigation with the U.S.
Government.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
------------------------------------------------------------------
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 1 to the
consolidated financial statements. The Company believes its most critical
accounting policies to be the recognition of revenue and costs on production
contracts and the valuation of inventory. Each of these areas requires the
Company to make use of reasoned estimates including estimating the cost to
complete a contract, the realizable value of its inventory or the market value
of its products. Changes in estimates can have a material impact on the
Company's financial position and results of operations.
Revenue Recognition
-------------------
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred. Each month management reviews
estimated contract costs. The effect of any change in the estimated gross margin
percentage for a contract is reflected in revenues in the period in which the
change is known. Provisions for anticipated losses on contracts are made in the
period in which they become determinable.
On production-type contracts, revenue is recorded as units are delivered
with the related cost of sales recognized on each shipment based upon a
percentage of estimated final contract costs. Changes in job performance may
result in revisions to costs and income and are recognized in the period in
which revisions are determined to be required. Provisions for anticipated losses
on contracts are made in the period in which they become determinable.
For contracts in the Company's Gillam-FEI segment, and smaller contracts or
orders in the other business segments, sales of products and services to
customers are reported in operating results based upon shipment of the product
or performance of the services pursuant to contractual terms. When payment is
contingent upon customer acceptance of the installed system, revenue is deferred
until such acceptance is received.
Costs and Expenses
------------------
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
Inventory
---------
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year. Inventory reserves are established
for slow-moving and obsolete items and are based upon management's experience
and expectations for future business. Any changes in reserves arising from
revised expectations are reflected in cost of sales in the period the revision
is made.
Equity-based Compensation
-------------------------
The Company applies the disclosure-only provisions of FAS No. 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 FAS 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.
15
The following table illustrates the effect on the Company's consolidated
statements of operations had compensation cost for stock option awards under the
plans been determined based on the fair value at the grant dates consistent with
the provisions of FAS No. 123:
(in thousands, except per share data)
2003 2002 2001
---- ---- ----
Net (Loss) Income, as reported ($8,860) $1,378 $5,644
======= ====== ======
Net (Loss) Income - pro forma ($9,574) $474 $5,233
======= ==== ======
(Loss) Earnings per share, as reported:
Basic ($ 1.06) $0.17 $ 0.69
======= ===== ======
Diluted ($ 1.06) $0.16 $ 0.67
======= ===== ======
(Loss) Earnings per share- pro forma
Basic ($ 1.15) $0.06 $ 0.64
======= ===== ======
Diluted ($ 1.15) $0.06 $ 0.62
======= ===== ======
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 2003, 2002 and 2001,
respectively, dividend yield of 1.83%, 1.83% and 3.0%; expected volatility of
63%, 65%, and 70%; risk free interest rate (ranging from 5.5% to 8.0%); and
expected lives ranging from seven to ten years.
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:
2003 2002 2001
---- ---- ----
Net Sales
Commercial Communications 46.9% 63.4% 73.6%
U.S. Government 28.3 11.0 7.6
Gillam-FEI 24.8 25.6 18.8
------ ------ ------
100.0 100.0 100.0
Cost of Sales 81.5 65.8 65.4
------ ------ ------
Gross Margin 18.5 34.2 34.6
Selling and Administrative expenses 24.0 21.7 17.9
Goodwill writedown 19.5 - -
Insurance Reimbursement, net - (3.6) (5.2)
Research and Development expenses 14.6 15.9 9.8
------ ------ -------
Operating (Loss) Profit (39.6) 0.2 12.1
Other Income (Expense) 5.8 3.9 4.7
(Benefit) Provision for Income Taxes (5.6) 0.8 5.3
------- ------- -------
Net (Loss) Income (28.2%) 3.3% 11.5%
====== ======= ======
Significant Events
------------------
As more thoroughly described elsewhere in this Form 10-K and in the notes to
the financial statements, the Company's fiscal 2003, 2002 and 2001 results of
operations were materially impacted by several specific events. In fiscal 2003,
the Company determined that the goodwill associated with its investment in
Gillam-FEI had become impaired and wrote off the full amount of goodwill in the
amount of $6.2 million. In fiscal 2002 and 2001, the Company recovered $1.5
million and $2.8 million (net of $200,000 in expenses in 2001), respectively,
from two insurance companies related to expenses incurred
16
in defense and settlement of the Company's litigation with the U.S. Government.
(See Item 3. Legal Proceedings and Note 9 to the financial statements.) In
October 2000, the Company also settled a derivative suit stemming from its U.S.
Government litigation and paid approximately $224,000 in attorneys' fees and
expenses.
Without these significant events, the Company's operating (loss) profit,
pre-tax earnings and net earnings would be materially different from that
reported in the financial statements. The table below illustrates the impact of
the special income and expense items on the results of operations for each of
the three years ended April 30:
2003 2002 2001
---- ---- ----
Operating (loss) profit - as reported ($12,490) $ 89 $ 5,939
Add back:
Goodwill impairment charge/amortization 6,158 - 193
Less:
Insurance reimbursement, net - (1,500) (2,576)
------------- --------- --------
Operating (loss) profit, excluding special items $ (6,332) $ (1,411) $ 3,556
======== ======== =======
Operating (Loss) Profit
-----------------------
The operating (loss) profit for the year ended April 30, 2003, decreased by
$12.5 million from the operating profit reported in the prior fiscal year. In
addition to the special items listed above, the Company wrote-off or reserved
against certain work-in-process and component inventory in the amount of $3.6
million in fiscal 2003 and $1.0 million in fiscal 2002. Excluding the special
items identified above and the inventory adjustments in both fiscal years, the
operating loss in fiscal 2003 increased by $2.3 million compared to the
operating loss for fiscal 2002. Revenues declined by 23% while gross margins,
exclusive of inventory adjustments, decreased to 30% of revenue from 37% a year
ago. These results reflect the continuing low level of telecommunication-related
business. Although the Company has reduced costs in all categories, it has
maintained its core operational capabilities while continuing to invest in new
products, efficient manufacturing processes and development of non-US
manufacturing capacity.
During fiscal 2002, the operating profit decreased by $5.8 million from the
operating profit recorded for the year ended April 30, 2001. In each year, the
Company wrote-off or reserved against certain work-in-process and component
inventory in the amount of $1.0 million in fiscal 2002 and $2.0 million in
fiscal 2001. Excluding the inventory adjustments and special items as described
in the table above, the operating loss was $6.3 million lower than the operating
profit recorded in fiscal 2001. Revenues declined by 16% and gross margins,
exclusive of inventory adjustments, were lower, reflective of the more
challenging market faced by the Company beginning in fiscal 2002. Despite the
near-term slowdown in the telecommunications industry, the Company believed it
was critical to its future success to continue making strategic investments.
Funds were provided to the manufacturing facility in China to qualify it for
expected new business opportunities in Asia, the costs of which are included in
selling and administrative expenses. In addition, the Company developed new
products, including Gillam-FEI's wireline synchronization product for the US
market, and improved product designs and manufacturing processes, many of which
were not completed until fiscal 2003.
Net Sales
---------
Net sales for fiscal 2003 decreased by $9.7 million (23%) from fiscal 2002
sales. The principal cause for the decline is attributable to the world-wide
slowdown in capital spending in the telecommunications industry which the
Company serves. Revenues for the Commercial Communications segment decreased by
$11.6 million (44%) and Gillam-FEI revenues decreased by $3.1 million (28%).
Offsetting these declines, revenues for the US Government segment almost doubled
from the fiscal 2002 levels, to $8.9 million, as the Company responded to the US
Government's need for more sophisticated secure communications and weaponry.
Fiscal 2002 revenues decreased by $8.0 million (16%) over fiscal 2001 sales.
The decline in telecommunication spending began during fiscal 2002. Revenues for
the Commercial Communications
17
segment declined by $9.6 million (27%), while revenues increased by 21% for both
the U.S. Government ($786,000) and Gillam-FEI ($1.9 million) over fiscal 2001.
(Gillam-FEI's fiscal 2001 revenues are from the date of acquisition by the
Company.)
Given the uncertainties in telecommunications markets, the Company is unable
to make any assessment for near-term future sales in the Commercial
Communications or Gillam-FEI segments of its business. The Company anticipates
revenues for its U.S. Government segment will continue to increase as more
funding is provided by the government for such projects as secure radios, new
communication satellites, unmanned aerial vehicles and weapons guidance systems.
Over the long-term, the Company continues to believe that the telecommunications
markets, including cellular network infrastructure and wireline synchronization
world-wide, will be important growth areas of its business.
Gross Margins
-------------
The gross margin rate for fiscal year 2003 decreased to 19% of net sales
compared to 34% in fiscal 2002 and 35% in fiscal 2001. Excluding the inventory
adjustments described above, gross margin rates as a percentage of sales in each
fiscal year would have been 30%, 37% and 39%, respectively. Decreasing sales
account for much of the decline as a lower level of sales absorbed a greater
percentage of fixed overhead costs. In addition, in fiscal 2003 gross margin
rates were reduced by approximately 3% as the Company experienced a high level
of warranty expenses.
In addition to lower sales in fiscal 2002, a greater percentage of
consolidated sales (27%) were made from the Gillam-FEI segment than in fiscal
2001 (19%). Costs in this segment are generally higher than in the U.S.
segments. In both fiscal 2003 and 2002, Gillam-FEI gross margin rates were 30%
compared to 15% in fiscal 2001.
The Company's target is to achieve an overall gross margin rate of 40% or
better through greater sales volume, continued process improvements and
utilization of lower cost manufacturers in Russia and China.
Selling and Administrative expenses
-----------------------------------
Selling and administrative costs in fiscal 2003 decreased by $1.4 million
(15%) from fiscal 2002 as the Company responded to the lower level of business
volume. During the year, Gillam-FEI lowered its administrative support costs by
18% in euros but the savings were reduced to $175,000 (7%) when translated to US
dollars due to the 13% increase in the value of the Euro to the US dollar during
fiscal 2003. Costs associated with the establishment of the Company's FEI-Asia
facility were halved (approximately $250,000 lower) as less time was required by
US-based personnel to support that operation and more costs were borne in the
China facility where operating expenses are much lower than in the US.
Offsetting those cost reductions was an increase in the costs to support the new
European sales office. In the US subsidiaries, cost savings in fiscal 2003 of
$1.1 million were related to personnel reductions, lower charges to deferred
compensation expense, reduced sales commissions and reduction in legal and other
professional fees.
Selling and administrative costs for the year ended April 30, 2002,
increased by $112,000 or 1% over fiscal 2001. As a percentage of sales, these
costs increased from 18% in fiscal 2001 to 22% in fiscal 2002. (The Company
targets selling and administrative expenses to be less than 20% of sales.) The
2002 amounts include approximately $500,000 attributable to start-up operating
costs of the Company's new China manufacturing facility. Excluding this expense,
selling and administrative costs would have been 20% of sales. For fiscal 2002,
significant increases in selling and administrative expenses aggregating $1.4
million over the prior year, resulted from a full year of expenses for
Gillam-FEI compared to the partial year in fiscal 2001 and an increase in the
accrual for certain long-term compensation programs as a result of benefit
adjustments authorized during fiscal 2002. These increases were offset by
substantial cost reductions aggregating $1.7 million related to lower incentive
compensation accruals due to reduced profitability in fiscal 2002, lower
employee recruitment expenses, reduced travel-related costs, elimination of
amortization of goodwill and a decrease in amortization expense related to
independent contractor stock options awarded in prior years.
18
Research and Development expenses
---------------------------------
Research and development expenses in fiscal 2003 were $2.0 million lower
(30%) than fiscal 2002 spending and were approximately 15% of revenues. During
fiscal 2003, the Company completed development of certain manufacturing process
improvements and new product designs. Related personnel and other resources were
refocused on production activities as development projects were concluded. Other
research and development activities are on-going and involve further product and
process improvements, development of a common platform for time and frequency
generators which will enable the interchange of a crystal or rubidium
oscillator, and to maintain the Company's competitive position in the markets it
serves.
Research and development expenditures for the year ended April 30, 2002,
increased by $1.7 million or 36% over the amounts incurred in fiscal 2001 and
were approximately 16% of sales. Of this amount, approximately $1.0 million was
incurred to develop wireline synchronization products for the U.S. market. Other
development efforts were focused on manufacturing process improvements,
completion of a high precision quartz oscillator as well as next-generation
products for cellular network infrastructure markets.
The Company will continue to focus its research and development activities
on those products which it expects will provide the best return on investment
and greatest prospects for the future growth of the Company. For fiscal year
2004, the Company will complete its initial development of the enhanced
Gillam-FEI wireline synchronization product and will make further investment in
new designs and manufacturing process improvements. 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, net
-----------------
Other income, net, increased by $216,000 (13%) in fiscal 2003 compared to
fiscal 2002 and decreased by $718,000 (31%) in fiscal 2002 compared to fiscal
2001.
Investment income during the year ended April 30, 2003 decreased by $34,000
compared to fiscal 2002 and fiscal 2002 was lower by $791,000 (30%) compared to
fiscal 2001. In all three years, the Company recorded realized gains and losses
on marketable securities. In fiscal 2003, realized losses on marketable
securities of $130,000 were partially offset by realized gains of $90,000.
Similarly, during fiscal 2002 the Company recorded a $300,000 writedown to
market value of a certain marketable security whose decline in value was deemed
to be other than temporary which loss was offset by realized gains on sales of
marketable securities of $172,000. This is compared to fiscal 2001 when the
Company had realized gains of $469,000 on the sale of marketable securities less
a $287,000 writedown to market value of a marketable security whose decline in
value was deemed to be other than temporary. Excluding these net gains and
losses, investment income in fiscal 2003 was $122,000 (6%) lower than fiscal
2002 and fiscal 2002 was lower by $480,000 (19%) than fiscal 2001. This decline
is attributable to a combination of lower interest rates and a decreased level
of invested assets as a result of the Gillam acquisition in the first half of
fiscal 2001. In addition to interest income, the Company also realizes quarterly
dividend income on its REIT units. The Company anticipates that investment
income in 2004 will decrease as a result of cash used to acquire and support
FEI-Zyfer (see Note 17 to the financial statements), and a lower interest rate
environment.
Interest expense for the year ended April 30, 2003 decreased by $19,000 (6%)
compared to fiscal 2002 which decreased by $31,000 (9%) from fiscal 2001. As the
Company retires its short and long-term financing obligations, interest expense
will continue to decline. The Company incurs interest expense on Gillam-FEI's
credit obligations, the financing arrangement for the leaseback of the U.S.
manufacturing facility and for certain deferred compensation payments. The
Company anticipates that interest expense in fiscal 2004 will be approximately
the same as the expense for fiscal 2003.
During the year ended April 30, 2003, other income, net, increased by
$231,000 over the prior fiscal year. The largest component of this increase was
the realized gain of approximately $150,000 on the sale of a portion of real
property owned by the Company's French subsidiary. In fiscal 2002, other income,
net, increased by $42,000 over fiscal 2001. Gillam-FEI contributed $127,000 and
$76,000 of this
19
growth in fiscal years 2002 and 2001, respectively. The Company anticipates that
in future years other income, net, will not be a significant contributor to
pretax earnings.
Income Taxes
------------
The Company is subject to taxation in several countries. The statutory
federal rates vary from 34% in the United States to 35% in Europe. The effective
rate for the Company for the year ended April 30, 2003 was 17% (benefit)
compared to 19% in fiscal 2002 and 31% in fiscal 2001. In fiscal 2003, the tax
benefit rate is impacted by the non-deductibility of the goodwill writedown. In
the two prior years, the effective rate is lower than the statutory rate
primarily due to the availability of Research and Development Tax Credits in the
United States. (See Note 13 to the Consolidated Financial Statements.)
The Company's European subsidiaries have available net operating loss
carryforwards of approximately $2.0 million to offset future taxable income.
These loss carryforwards have no expiration date.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $62.0 million at April 30, 2003. Included in working
capital at April 30, 2003 is $33.8 million consisting of cash, cash equivalents
and short-term investments, including approximately $9.7 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, 2003 is 11.5 to 1.
Net cash provided by operating activities for the year ended April 30, 2003,
was $2.4 million compared to $4.9 million provided in fiscal 2002. The Company
recorded an $8.9 million net loss for fiscal 2003, which included substantial
non-cash charges, such as the writedown of goodwill for $6.2 million and certain
adjustments to inventory. Additionally, cash was provided by collections on
accounts receivable and reductions of inventory offset by payments against
accounts payable and other liabilities. Fiscal 2002 cash from operations was
partially derived from $4.5 million received during the year for reimbursement
of expenses under directors' and officers' liability insurance coverage. (See
Item 3. Legal Proceedings and Note 9 to the financial statements.) This inflow
was offset by payment of income taxes of $3.3 million, of which approximately
45% was attributable to the insurance reimbursements.
Net cash provided by investing activities for the year ended April 30, 2003,
was $506,000. Approximately $1.2 million was generated by the sale and maturity
of certain marketable securities, net of purchases. Approximately $834,000 was
used to acquire additional property, plant and equipment while approximately
$275,000 was received from the sale of a portion of real property owned by the
Company's French subsidiary. An additional $120,000 was recorded as capitalized
investment costs related to the Company's May 2003 acquisition of FEI-Zyfer.
(See Note 16 to the accompanying financial statements.) Investing activities in
fiscal 2002 resulted in cash inflow of $607,000 consisting of net transactions
in marketable securities of $2.5 million offset by capital expenditures of $1.5
million and an investment in a Russian crystal manufacturer of $300,000. In
fiscal 2001, net cash used in investing activities was $5.0 million. The major
transaction during fiscal 2001 was the acquisition of Gillam-FEI for which the
Company utilized cash of $8.9 million, including transaction costs. This
purchase was partially funded by the redemption of certain marketable securities
of approximately $6.2 million and was also offset by the acquired cash of
Gillam-FEI of $758,000. The Company acquired and sold other marketable
securities that resulted in a net outflow of cash in the amount of $1.1 million.
The Company may continue to invest cash equivalents in longer-term securities or
to convert short-term investments to cash equivalents as dictated by its
investment and acquisition strategies. The Company will continue to acquire more
efficient equipment to automate its production process. It intends to spend less
than $2 million on capital equipment during fiscal 2004. Internally generated
cash will be adequate to acquire this capital equipment.
Net cash used by financing activities for the year ended April 30, 2003, was
$2.7 million. Of this amount, $1.7 million was used to pay the Company's
semi-annual cash dividends to shareholders and $741,000 was used to make
regularly scheduled long-term liability payments. During the year, the
20
Company also acquired 80,000 shares of its common stock for treasury at a cost
of $501,000. These outflows were partially offset by proceeds of $111,000 from
new borrowings and payments of $67,000 received from the sale of shares of
common stock from treasury to satisfy the exercise of stock options granted to
certain officers and employees in prior years. The Company will continue to use
treasury shares to satisfy the future exercise of stock options granted to
officers and employees. The Company may repurchase shares of its common stock
for treasury whenever appropriate opportunities arise but it has neither a
formal repurchase plan nor commitments to purchase additional shares in the
future.
The Company will continue to expend resources to develop and improve
products for wireless and wireline communication systems which management
believes will result in future growth and continued profitability. During fiscal
2004, the Company intends to make a substantial investment of capital and
technical resources to develop new products to meet the needs of the commercial
communications marketplace and to invest in more efficient product designs and
manufacturing procedures. Where possible, the Company will secure partial
customer funding for such development efforts but is targeting to spend its own
funds at a rate of approximately 10% of revenues to achieve its development
goals. Internally generated cash will be adequate to fund these development
efforts.
As of April 30, 2003
Total Less than More than
Contractual Obligations (in thousands) 1 Year 1 to 3 Years 3 to 5 Years 5 Years
------------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $ 78 $ 20 $ 58 $ 0 $ 0
Operating Lease Obligations 2,267 400 1,200 667
Other Long -Term Liabilities Reflected in
the Registrant's Balance Sheet under GAAP
17,845**
-------- ----- ------ ----
Total $20,190 $ 420 $1,258 $ 667
======= ===== ====== =====
** Consists of Deferred Compensation liability (See Note 12 in the
accompanying financial statements) and liabilities, deferred income and deferred
taxes related to the REIT units received on sale of the Company's building to
Reckson Associates in 1998. (See Item 2. Properties and Note 6. Property, Plant
and Equipment in the accompanying financial statements.) These liabilities have
no defined maturity.
As of April 30, 2003, the Company's consolidated backlog amounted to
approximately $31 million (see Item 1). Approximately 60% of this backlog is
expected to be filled during the Company's fiscal year ending April 30, 2004.
*******
The Company's liquidity is adequate to meet its foreseeable operating and
investment needs, including the acquisition and support of its new FEI-Zyfer
subsidiary. In addition, with its available cash and marketable securities, the
Company is able to continue paying semi-annual dividends, subject to the review
and approval of its Board of Directors.
Recent Accounting Pronouncements
--------------------------------
In July 2002, the FASB issued Statement No. 146 ("FAS 146), "Accounting for
Costs Associated with Exit or Disposal Activities." FAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." FAS 146 revises the accounting for certain lease termination
costs and employee termination benefits, which are generally recognized in
connection with restructuring activities. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not anticipate that the adoption of FAS 146 will have a
material impact on its consolidated financial statements.
21
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), effective prospectively for
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for periods ending after December 15, 2002.
Under FIN 45, a guarantor is required to recognize, at the inception of certain
guarantees, a fair value liability for the obligations it has undertaken in
issuing the guarantee, including its ongoing obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. All guarantees subject to the disclosure
provisions of FIN 45, such as product warranties, have been disclosed in the
accompanying notes to the consolidated financial statements. At April 30, 2003,
the Company does not have any outstanding guarantees required to be disclosed or
recorded as obligations upon adoption of FIN 45.
In December 2002, the FASB issued Statement No. 148 ("FAS 148"), "Accounting
for Stock-Based Compensation - Transition and Disclosure." FAS 148 amends FAS
123, "Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS 148 amends the disclosure
requirements of FAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure provisions of this Standard are effective for fiscal years beginning
after December 15, 2002 and have been incorporated into these financial
statements and accompanying footnotes.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). This Interpretation changes the method of
determining whether certain entities should be included in the Company's
consolidated financial statements. An entity is subject to FIN 46 and is called
a variable interest entity ("VIE") if it has (1) equity that is insufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties, or (2) equity investors that cannot make
significant decisions about the entity's operations, or that do not absorb the
expected losses or receive the expected returns of the entity. All other
entities are evaluated for consolidation under FAS No. 94, Consolidation of All
Majority-Owned Subsidiaries. The provisions of FIN 46 are to be applied
immediately to VIEs created after January 31, 2003, and to VIEs in which an
enterprise obtains an interest after that date. For VIEs in which an enterprise
holds a variable interest that it acquired before February 1, 2003, FIN 46
applies in the first fiscal period beginning after June 15, 2003. The Company
does not expect the adoption of FIN 46 to have a material effect on its
financial position, results of operations or cash flows.
In April 2003, the FASB issued Statement No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149 amends
FAS 133 for certain decisions made by the FASB as part of the Derivatives
Implementation Group process. FAS 149 also amends FAS 133 to incorporate
clarifications of the definition of a derivative. FAS 149 is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and requires prospective application. The Company does not expect the effect of
adopting FAS 149 to be material to its results of operations or financial
condition.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("FAS 150"). This statement establishes standards for
how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. FAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the provisions of
this statement to have a significant impact on the Company's results of
operations or financial position.
22
Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Interest Rate Risk
The Company is exposed to market risk related to changes in interest rates
and market values of securities, including participation units in the Reckson
Operating Partnership, L.P. (REIT units, see Item 2. Properties and Note 6 to
the financial statements). The Company's investments in fixed income and equity
securities were $17.8 million and $10.0 million, respectively, at April 30,
2003. 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, 2003, a
10% change in market interest rates would not have a material effect on the fair
value of the Company's fixed income securities or results of operations
(investment income).
Foreign Currency Risk
With its investment in Gillam-FEI, the Company is subject to foreign
currency translation risk. For each of these investments, the Company does not
have any near-term intentions to repatriate its invested cash. For this reason,
the Company does not intend to initiate any exchange rate hedging strategies
which could be used to mitigate the effects of foreign currency fluctuations.
The effects of foreign currency rate fluctuations will be recorded in the equity
section of the balance sheet as a component of other comprehensive income. As of
April 30, 2003, the amount related to foreign currency exchange rates is a
$2,565,000 unrealized gain.
The results of operations of foreign subsidiaries, when translated into US
dollars, will reflect the average rates of exchange for the periods presented.
As a result, similar results in local currency can vary significantly upon
translation into US dollars if exchange rates fluctuate significantly from one
period to the next.
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 2003, 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.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995:
The statements in this Annual Report on Form 10K regarding future earnings
and operations and other statements relating to the future constitute
"forward-looking" statements pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. Factors that would cause
or contribute to such differences include, but are not limited to, continued
acceptance of the Company's products in the marketplace, competitive factors,
new products and technological changes, product prices and raw material costs,
dependence upon third-party vendors, competitive developments, changes in
manufacturing and transportation costs, the availability of capital, and the
outcome of certain litigation and arbitration proceedings. By making these
forward-looking statements, the Company undertakes no obligation to update these
statements for revisions or changes after the date of this report.
23
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
REPORT OF INDEPENDENT AUDITORS
_____________
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 16(a)(1) on page 49 present fairly, in all material
respects, the financial position of Frequency Electronics, Inc. and its
subsidiaries as of April 30, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
2003 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 16(a)(2) on page 49 presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion.
As discussed in Notes 1 and 11 to the consolidated financial statements,
on May 1, 2001, the Company adopted the provisions of Statement of Accounting
Standards No. 142, "Goodwill and Other
Intangible Assets."
PRICEWATERHOUSECOOPERS LLP
Melville, New York
July 11, 2003
24
April 30, 2003 and 2002
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2003 and 2002
-----------
ASSETS: 2003 2002
---- ----
(In thousands)
Current assets:
Cash and cash equivalents $ 5,952 $ 5,383
Marketable securities 27,829 30,848
Accounts receivable, net of allowance for
doubtful accounts of $124 9,565 11,725
Inventories 17,734 19,601
Deferred income taxes 4,435 3,645
Income taxes receivable 1,223 1,328
Prepaid expenses and other 1,198 1,350
--------- ----------
Total current assets 67,936 73,880
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,105 11,361
Deferred income taxes 436 280
Goodwill - 4,938
Cash surrender value of life insurance 4,869 4,373
Other assets 1,383 1,179
--------- ----------
Total assets $ 85,729 $ 96,011
========= ==========
25
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2003 and 2002
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 2003 2002
---- ----
(In thousands)
Current liabilities:
Current portion of debt $ 179 $ 384
Accounts payable - trade 1,294 2,359
Accrued liabilities 3,615 4,073
Dividend payable 834 833
--------- ----------
Total current liabilities 5,922 7,649
Deferred compensation 6,752 6,496
REIT liability and other liabilities 11,151 11,300
--------- ----------
Total liabilities 23,825 25,445
--------- ----------
Minority interest in subsidiary 195 224
--------- ----------
Commitments and contingencies (Notes 6 and 9)
Stockholders' equity:
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued - -
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued - 9,163,940 shares 9,164 9,164
Additional paid-in capital 43,806 43,077
Retained earnings 10,415 20,939
--------- ----------
63,385 73,180
Common stock reacquired and held in treasury -
at cost (824,739 shares in 2003 and
830,074 shares in 2002) (3,062) (2,806)
Other stockholders' equity (116) (116)
Accumulated other comprehensive income 1,502 84
--------- ----------
Total stockholders' equity 61,709 70,342
--------- ----------
Total liabilities and stockholders' equity $ 85,729 $ 96,011
========= ==========
The accompanying notes are an integral part of these
financial statements.
26
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 2003, 2002 and 2001
-----------
2003 2002 2001
---- ---- ----
(In thousands, except share data)
Net sales $31,527 $41,179 $49,210
Cost of sales 25,681 27,090 32,180
-------- ------- --------
Gross margin 5,846 14,089 17,030
Selling and administrative expenses 7,573 8,932 8,820
Research and development expenses 4,605 6,568 4,847
Insurance reimbursement, net - (1,500) (2,576)
Goodwill writedown 6,158 - -
-------- ------- --------
Operating (loss) profit (12,490) 89 5,939
Other income (expense):
Investment income 1,830 1,864 2,655
Interest expense (283) (302) (333)
Other, net 277 46 4
-------- ------- --------
(Loss) income before minority interest and
(benefit) provision for income taxes (10,666) 1,697 8,265
Minority interest in (loss) income of
consolidated subsidiary (33) (1) 29
-------- ------- --------
(Loss) income before (benefit) provision
for income taxes (10,633) 1,698 8,236
(Benefit) provision for income taxes (1,773) 320 2,592
-------- ------- -------
Net (loss) income ($ 8,860) $ 1,378 $ 5,644
======== ========= ========
Net (loss) income per common share:
Basic ($ 1.06) $ 0.17 $ 0.69
====== ====== ======
Diluted ($ 1.06) $ 0.16 $ 0.67
====== ====== ======
Average shares outstanding:
Basic 8,331,785 8,350,735 8,198,569
========= ========= =========
Diluted 8,331,785 8,529,175 8,431,823
========= ========= =========
The accompanying notes are an integral part of these
financial statements.
27
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 2003, 2002 and 2001
(In thousands, except share data)
Common Stock Additional
------------ paid in Retained
Shares Amount capital earnings
------ ------ ------- --------
Balance at May 1, 2000 9,009,259 $9,009 $37,929 $17,239
----------------------
Exercise of stock options 510
Tax benefit from stock option exercise 809
Amortization of independent
contractor stock options 310
Contribution of stock to 401(k) plan (8)
Issuance of stock for Gillam acquisition 154,681 155 3,310
Amortization of unearned compensation
Cash dividend (1,657)
Increase in market value of
marketable securities
Foreign currency translation adjustment
Net income 5,644
Comprehensive income- 2001 -------- ----- ------- -------
Balance at April 30, 2001 9,163,940 9,164 42,860 21,226
-------------------------
Exercise of stock options 52
Amortization of independent
contractor stock options 45
Contribution of stock to 401(k) plan 120
Amortization of unearned compensation
Cash dividend (1,665)
Increase in market value of
marketable securities
Foreign currency translation adjustment
Net income 1,378
Comprehensive income- 2002 -------- ----- ------- -------
Balance at April 30, 2002 9,163,940 9,164 43,077 20,939
-------------------------
Exercise of stock options 29
Issuance of stock for Gillam acquisition 447
Contribution of stock to 401(k) plan 253
Repurchase of stock for treasury
Cash dividend (1,664)
Decrease in market value of
marketable securities
Foreign currency translation adjustment
Net loss (8,860)
Comprehensive loss- 2003 -------- ----- ------- -------
Balance at April 30, 2003 9,163,940 $9,164 $43,806 $10,415
------------------------- ========= ====== ======= =======
(TABLE CONTINUED)
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 2003, 2002 and 2001
(In thousands, except share data)
Treasury stock Accumulated
(at cost) Other other
---------------- Stockholders' comprehensive
Shares Amount equity income (loss) Total
------ ------ ------ ------------- -----
Balance at May 1, 2000 1,016,552 ($3,644) ($135) ($1,408) $58,990
----------------------
Exercise of stock options (129,288) 206 716
Tax benefit from stock option exercise 809
Amortization of independent
contractor stock options 310
Contribution of stock to 401(k) plan (14,595) 311 303
Issuance of stock for Gillam acquisition 3,465
Amortization of unearned compensation 13 13
Cash dividend (1,657)
Increase in market value of
marketable securities 1,367 1,367
Foreign currency translation adjustment 245 245
Net income 5,644
---------
Comprehensive income- 2001 ------- ------ ------ ------ 7,256
---------
Balance at April 30, 2001 872,669 (3,127) (122) 204 70,205
-------------------------
Exercise of stock options (14,375) 43 95
Amortization of independent
contractor stock options 45
Contribution of stock to 401(k) plan (28,220) 278 398
Amortization of unearned compensation 6 6
Cash dividend (1,665)
Increase in market value of
marketable securities 17 17
Foreign currency translation adjustment (137) (137)
Net income 1,378
---------
Comprehensive income- 2002 ------- ------ ------ ------ 1,258
---------
Balance at April 30, 2002 830,074 (2,806) (116) 84 70,342
-------------------------
Exercise of stock options (11,000) 38 67
Issuance of stock for Gillam acquisition (35,000) 88 535
Contribution of stock to 401(k) plan (39,335) 119 372
Repurchase of stock for treasury 80,000 (501) (501)
Cash dividend (1,664)
Decrease in market value of
marketable securities (1,039) (1,039)
Foreign currency translation adjustment 2,457 2,457
Net loss (8,860)
--------
Comprehensive loss- 2003 ------- ------- ------ ------ (7,442)
--------
Balance at April 30, 2003 824,739 ($3,062) ($116) $1,502 $61,709
------------------------- ======= ======== ======== ======= ========
The accompanying notes are an integral part of these
financial statements.
28
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2003, 2002 and 2001
-----------
2003 2002 2001
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net (loss) income ($8,860) $ 1,378 $5,644
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Goodwill writedown 6,158
Deferred tax expense (benefit) (247) 358 (1,408)
Depreciation and amortization 1,600 1,460 1,446
Provision for losses on accounts
receivable and inventories 3,634 1,009 2,001
Loss (gain) on marketable securities and
other assets- net (67) 128 (181)
Tax benefit from stock option exercise - - 809
Minority interest in (loss) earnings of subsidiary (34) (1) 29
Changes in assets and liabilities, exclusive of assets
and liabilities acquired:
Accounts receivable 4,515 3,360 (1,195)
Inventories (1,115) (11) (4,612)
Prepaid and other 370 308 (262)
Other assets (548) (341) (373)
Accounts payable trade (2,209) (21) 44
Insurance reimbursement receivable - 3,000 (3,000)
Accrued liabilities (823) (2,524) 1,150
Liability for employee benefit plans 973 1,429 1,271
Income taxes receivable 105 (3,698) 2,781
Other liabilities (1,004) (939) (193)
------- --------- --------
Net cash provided by operating activities 2,448 4,895 3,951
------- -------- -------
Cash flows from investing activities:
Payment for acquisition, net of cash
acquired of $758 in 2001 - - (8,138)
Purchase of minority interest in manufacturing partner - (313) -
Purchase of marketable securities (7,378) (21,154) (4,318)
Proceeds from sale or redemption of marketable
securities 8,598 23,615 9,384
Capital expenditures (834) (1,541) (1,929)
Other- net 120 - -
-------- ----------- --------
Net cash provided by (used in) investing activities 506 607 (5,001)
-------- --------- -------
Continued
29
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2003, 2002 and 2001
(Continued)
-----------
2003 2002 2001
---- ---- ----
(In thousands)
Cash flows from financing activities:
Principal payments of long-term debt and
other long-term obligations (741) (750) (929)
Proceeds from short-term debt 111 88 -
Payment of cash dividend (1,664) (1,661) (1,627)
Repurchase of stock for treasury (501) - -
Exercise of stock options 67 95 716
------- ------- -------
Net cash used in financing activities (2,728) (2,228) (1,840)
------- ------- -------
Net increase (decrease) in cash and cash equivalents
before effect of exchange rate changes 226 3,274 (2,890)
Effect of exchange rate changes on cash and
cash equivalents 343 (12) 17
------- ------- -------
Net increase (decrease) in cash and cash equivalents 569 3,262 (2,873)
Cash and cash equivalents at beginning of year 5,383 2,121 4,994
------- ------- -------
Cash and cash equivalents at end of year $5,952 $ 5,383 $ 2,121
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 264 $ 283 $297
======= ======= =======
Income taxes $ 0 $ 3,352 $971
======= ======= =======
Other activities which affect assets or liabilities
but did not result in cash flow during the fiscal years:
Declaration of cash dividend $ 834 $ 833 $829
====== ====== ====
The accompanying notes are an integral part of these
financial statements.
30
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
14 for information regarding the Company's Commercial Communications, Gillam-FEI
and U.S. Government business segments. Intercompany accounts and significant
intercompany transactions are eliminated in consolidation. To accommodate the
different fiscal periods of Gillam-FEI, the company recognizes its share of net
income or loss on a one month lag.
These financial statements have been prepared in conformity with generally
accepted accounting principles and require management to make estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from these estimates.
Reclassifications:
Certain prior year amounts have been reclassified to conform to current year
presentation. These reclassifications had no effect on reported consolidated
earnings.
Inventories:
Inventories, which consist of finished goods, work-in-process, raw materials
and components, are accounted for at the lower of cost (specific and average) or
market.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost and include interest on
funds borrowed to finance construction. Expenditures for renewals and
betterments are capitalized; maintenance and repairs are charged to income when
incurred. When fixed assets are sold or retired, the cost and related
accumulated depreciation and amortization are eliminated from the respective
accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
Depreciation and Amortization:
Depreciation of fixed assets is computed on the straight-line method based
upon the estimated useful lives of the assets (40 years for buildings and 3 to
10 years for other depreciable assets). Leasehold improvements are amortized on
the straight-line method over the shorter of the term of the lease or the useful
life of the related improvement.
Goodwill:
The Company records goodwill as the excess of purchase price over the fair
value of identifiable net assets acquired. Through April 30, 2001, goodwill was
amortized on a straight-line basis over the estimated useful life of 15 years.
As a result of the adoption of Statement of Financial Accounting Standards
("FAS") No. 142 "Goodwill and Other Intangible Assets," goodwill is no longer
amortized but is tested for impairment on at least an annual basis. When it is
determined that the carrying value of investments may not be recoverable, the
Company measures impairment based on revenue projections, recent transactions
involving similar businesses and price/revenue multiples at which they were
bought and sold, price/revenue multiples of competitors, and the present market
value of publicly-traded companies in the Company's industry.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Revenue and Cost Recognition:
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred.
On production-type contracts, revenue is recorded as units are delivered
with the related cost of sales recognized on each shipment based upon a
percentage of estimated final contract costs. Changes in job performance may
result in revisions to costs and revenue and are recognized in the period in
which revisions are determined to be required. Provisions for anticipated losses
are made in the period in which they become determinable.
For contracts in the Company's Gillam-FEI segment, and smaller contracts or
orders in the other business segments, sales of products and services to
customers are reported in operating results upon shipment of the product or
performance of the services pursuant to contractual terms.
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year.
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.
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, 2003 and 2002 were
held in the custody of two financial institutions. Investments in debt and
equity securities are categorized as available for sale and are carried at fair
value, with unrealized gains and losses excluded from income and recorded
directly to stockholders' equity. The Company recognizes gains or losses when
securities are sold using the specific identification method.
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.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Research and Development expenses:
The Company engages in research and development activities to identify new
applications for its core technologies, to improve existing products and to
improve manufacturing processes to achieve cost reductions and manufacturing
efficiencies. Research and development costs include direct labor, manufacturing
overhead, direct materials and contracted services. Such costs are expensed as
incurred.
Equity-based Compensation:
The Company applies the disclosure-only provisions of FAS 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 FAS 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.
The following table illustrates the effect on the Company's consolidated
statements of operations had compensation cost for stock option awards under the
plans been determined based on the fair value at the grant dates consistent with
the provisions of FAS No. 123:
(in thousands, except per share data)
2003 2002 2001
---- ---- ----
Net (Loss) Income, as reported ($8,860) $1,378 $5,644
======= ====== ======
Net (Loss) Income - pro forma ($9,574) $474 $5,233
======= ==== ======
(Loss) Earnings per share, as reported:
Basic ($ 1.06) $0.17 $ 0.69
======= ===== ======
Diluted ($ 1.06) $0.16 $ 0.67
======= ===== ======
(Loss) Earnings per share- pro forma
Basic ($ 1.15) $0.06 $ 0.64
======= ===== ======
Diluted ($ 1.15) $0.06 $ 0.62
======= ===== ======
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 2003, 2002 and 2001,
respectively, dividend yield of 1.83%, 1.83% and 3.0%; expected volatility of
63%, 65%, and 70%; risk free interest rate (ranging from 5.5% to 8.0%); and
expected lives ranging from seven to ten years.
Fair Values of Financial Instruments:
Cash and cash equivalents and loans payable are reflected in the
accompanying consolidated balance sheets at amounts considered by management to
reasonably approximate fair value based upon the nature of the instrument and
current market conditions. Management is not aware of any factors that would
significantly affect the value of these amounts.
New Accounting Pronouncements:
In July 2002, the FASB issued Statement No. 146 ("FAS 146), "Accounting for
Costs Associated with Exit or Disposal Activities." FAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." FAS 146 revises the accounting for certain lease termination
costs and employee termination benefits, which are generally recognized in
connection with restructuring activities. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not anticipate that the adoption of FAS 146 will have a
material impact on its consolidated financial statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), effective prospectively for
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for periods ending after December 15, 2002.
Under FIN 45, a guarantor is required to recognize, at the inception of certain
guarantees, a fair value liability for the obligations it has undertaken in
issuing the guarantee, including its ongoing obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. All guarantees subject to the disclosure
provisions of FIN 45, such as product warranties, have been disclosed in the
accompanying notes to the consolidated financial statements. At April 30, 2003,
the Company does not have any outstanding guarantees required to be disclosed or
recorded as obligations upon adoption of FIN 45.
In December 2002, the FASB issued Statement No. 148 ("FAS 148"), "Accounting
for Stock-Based Compensation - Transition and Disclosure." FAS 148 amends FAS
123, "Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS 148 amends the disclosure
requirements of FAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure provisions of this Standard are effective for fiscal years beginning
after December 15, 2002 and have been incorporated into these financial
statements and accompanying footnotes.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). This Interpretation changes the method of
determining whether certain entities should be included in the Company's
consolidated financial statements. An entity is subject to FIN 46 and is called
a variable interest entity ("VIE") if it has (1) equity that is insufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties, or (2) equity investors that cannot make
significant decisions about the entity's operations, or that do not absorb the
expected losses or receive the expected returns of the entity. All other
entities are evaluated for consolidation under FAS No. 94, Consolidation of All
Majority-Owned Subsidiaries. The provisions of FIN 46 are to be applied
immediately to VIEs created after January 31, 2003, and to VIEs in which an
enterprise obtains an interest after that date. For VIEs in which an enterprise
holds a variable interest that it acquired before February 1, 2003, FIN 46
applies in the first fiscal period beginning after June 15, 2003. The Company
does not expect the adoption of FIN 46 to have a material effect on its
financial position, results of operations or cash flows.
In April 2003, the FASB issued Statement No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149 amends
FAS 133 for certain decisions made by the FASB as part of the Derivatives
Implementation Group process. FAS 149 also amends FAS 133 to incorporate
clarifications of the definition of a derivative. FAS 149 is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and requires prospective application. The Company does not expect the effect of
adopting FAS 149 to be material to its results of operations or financial
condition.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("FAS 150"). This statement establishes standards for
how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. FAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the provisions of
this statement to have a significant impact on the Company's results of
operations or financial position.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. Earnings Per Share
------------------
Reconciliations of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Years ended April 30,
--------------------------------
2003 2002 2001
---- ---- ----
Basic EPS Shares outstanding
(weighted average) 8,331,785 8,350,735 8,198,569
Effect of Dilutive Securities *** 178,440 233,254
--------- ---------- ----------
Diluted EPS Shares outstanding 8,331,785 8,529,175 8,431,823
========= ========= =========
*** Dilutive securities are excluded for the year ended April 30, 2003 since
the inclusion of such shares would be antidilutive due to the net loss for the
year then ended
Options to purchase 483,250 and 419,750 shares of common stock were
outstanding during the years ended April 30, 2002 and 2001, 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 $3,023,000 at April 30, 2003 and $2,027,000 at April 30,
2002. 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. Marketable Securities
---------------------
Marketable securities at April 30, 2003 and 2002 are summarized as follows
(in thousands):
April 30, 2003
-------------------------------------------------
Unrealized
Market Holding
Cost Value Gain (Loss)
---- ----- -----------
REIT units $ 12,000 $ 9,675 ($2,325)
Fixed income securities 17,298 17,841 543
Equity securities 306 313 7
---------- ----------- -----------
$ 29,604 $ 27,829 ($ 1,775)
======== ======== =======
April 30, 2002
-------------------------------------------------
Unrealized
Market Holding
Cost Value Gain (Loss)
---- ----- ------------
REIT units $ 12,000 $ 12,000 $ -
Fixed income securities 16,714 16,691 (23)
Equity securities 2,174 2,157 (17)
---------- ---------- -------
$ 30,888 $ 30,848 ($ 40)
======== ======== =====
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Maturities of fixed income securities classified as available-for-sale at
April 30, 2003 are as follows (in thousands):
Current $ 1,524
Due after one year through five years 7,017
Due after five years through ten years 8,757
--------
$17,298
========
During fiscal years 2002 and 2001, the decline in market value of certain
fixed income securities was deemed to be other than temporary. Accordingly, the
Company charged $300,000 in fiscal 2002 and $287,000 in fiscal 2001 against
investment income to record the impairment in value of these securities.
5. Inventories
-----------
Inventories, which are reported net of reserves of $3,598,000 and $2,941,000
at April 30, 2003 and 2002, respectively, consisted of the following (in
thousands):
2003 2002
---- ----
Raw Materials and Component Parts $ 7,349 $ 8,946
Work in Progress and Finished Goods 10,385 10,655
--------- ---------
$ 17,734 $ 19,601
======== ========
6. Property, Plant and Equipment
-----------------------------
Property, plant and equipment consists of the following (in thousands):
2003 2002
---- ----
Buildings and building improvements $ 12,250 $ 11,615
Machinery, equipment and furniture 27,647 25,933
--------- ---------
39,897 37,548
Less, accumulated depreciation and amortization 28,792 26,187
--------- ---------
$ 11,105 $ 11,361
======== ========
Depreciation and amortization expense for the years ended April 30, 2003,
2002 and 2001 was $1,600,000, $1,460,000 and $1,253,000, respectively.
Maintenance and repairs charged to operations for the years ended April 30,
2003, 2002 and 2001 was approximately $242,000, $440,000 and $485,000,
respectively.
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 of $10,820,000
and $11,088,000 at April 30, 2003 and 2002, respectively. The related building
continues to be reflected as an asset. Upon liquidation of the REIT units, a
portion of the resulting gain on this sale will be deferred and recognized into
income over the term of the leaseback with the balance recognized in
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, 2003, 2002
and 2001, the Company charged $132,000, $149,000 and $165,000, respectively, to
interest expense under the financing agreement.
The Reckson lease contains two five-year renewal periods at the option of
the Company. Annual rental payments are $400,000 for the initial 11-year term
which ends in January 2009. Under the terms of the lease the Company is required
to pay its proportional share of real estate taxes, insurance and other charges.
The lease for the FEI-Asia facility is for a one-year term with rent of $9,850
payable quarterly. .
Future minimum lease payments required by the leases are as follows (in
thousands):
Years ending
April 30,
---------
2004 400
2005 400
2006 400
2007 400
2008 400
2009 267
-------
$2,267
=======
7. Debt Obligations
----------------
The Company's European subsidiaries have available approximately $7.6
million in bank credit lines to meet short-term cash flow requirements. As of
April 30, 2003 and 2002, $144,000 and $213,000, respectively, was outstanding
under such lines of credit. One of the credit lines is collateralized by the
accounts receivable of the Company's French subsidiary. All other credit lines
are unsecured. Interest on these credit lines varies from 0.5% to 1.5% over the
EURO Interbank Offered rate (EURIBOR). At April 30, 2003, the rate was 3.574%
based on the 1 month EURIBOR.
The Company also has one long-term debt obligation of approximately $78,000
which is secured primarily by the Company's European buildings. The loan matures
in 2004 through 2007, and is payable in monthly installments of $1,973,
including interest at 5.34%. Other long-term debt obligations of the Company
were paid during fiscal 2003.
Debt scheduled to mature in each of the subsequent years ending April 30,
are as follows: (in thousands)
2004 $ 179
2005 21
2006 22
2007 15
-------
$ 237
=======
8. Accrued Liabilities
-------------------
Accrued liabilities at April 30, 2003 and 2002 consist of the following (in
thousands):
2003 2002
---- ----
Due customers $ 766 $ 751
Other compensation including payroll taxes 1,456 1,490
Vacation accrual 456 491
Other 937 1,341
------- -------
$ 3,615 $ 4,073
======= =======
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
9. Commitments and Contingencies
-----------------------------
Qui Tam Action:
A judgment in favor of the Company, dated September 3, 2002, was entered by
the United States District Court for the Eastern District of New York in
connection with its dismissal of a qui tam action. The qui tam action was served
upon FEI and Martin Bloch, its President, in March 1994 by Ralph Muller, a
former FEI employee. A qui tam action is an action wherein an individual may,
under certain circumstances, bring a legal action against one or more third
persons on behalf of the Government for damages and other relief by reason of
one or more alleged wrongs perpetrated against the Government by such third
persons. The judgment is based on the Court's decision on the merits in favor of
Frequency Electronics, Inc. and its President, dated August 23, 2002. The
judgment preserves all of FEI's rights to recover costs and its causes of action
against the plaintiff and third party defendants.
Directors' and Officers' Insurance Coverage:
On April 30, 2002, FEI settled the arbitration proceeding it had commenced
in June 2001 before the American Arbitration Association against The Home
Insurance Company of Illinois ("Home") under an excess directors and officers
liability insurance policy. FEI had asserted claims for its loss relating to,
among other matters, sums it paid in connection with certain litigation with the
US government which was settled in 1998. Under the terms of the settlement
agreement, Home paid FEI $1.5 million, FEI released its claims and the
arbitration was discontinued.
On March 14, 2000, FEI commenced an action in the state court against
National Union Fire Insurance of Pittsburgh, PA ("National"). The complaint set
forth causes of action for declaratory judgment and breach of contract relating
to certain directors and officers' liability insurance policies in connection
with the Muller qui tam action and certain other litigations which the Company
had previously settled. Pursuant to a Settlement Agreement dated April 18, 2001,
the action against National was settled, FEI was paid $3.0 million (excluding
related legal costs) representing the full amount of the available coverage
under the applicable National policy, FEI released its claims and the action was
discontinued.
Legal Fees:
Included in selling and administrative expenses are legal fees incurred in
connection with the above matters of approximately $64,000, $150,000 and
$614,000 for fiscal years 2003, 2002 and 2001, respectively.
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 (6.0% at
April 30, 2003) 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, who owed an aggregate of $115,500 at April 30, 2003 and 2002,
requested and received an extension of the due date of the notes to October
2004. No payments were received during fiscal 2003 or 2002.
11. Acquisition of Gillam S.A.
--------------------------
On September 13, 2000, the Company completed its acquisition of
substantially all of the outstanding shares of Gillam S.A. ("Gillam"), a
privately-held company organized under the laws of Belgium. Gillam's business is
based in the telecommunications market and targeted to four main areas:
(i) "Wireline Network Synchronization"--managing timing and
interconnectivity for communication networks; (ii) "Remote Control"--consisting
of network monitoring systems; (iii) "Rural Telephony"--equipment designed to
connect isolated subscribers to a telephone network via satellite and (iv)
"Power Supplies" --produced through a subsidiary, for telecom service providers.
The acquired company has been renamed Gillam-FEI.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Gillam acquisition was consummated pursuant to the terms of a Share
Purchase Agreement dated as of August 29, 2000. Under terms of the agreement,
the Company paid $8,400,264 in cash and issued 154,681 shares of common stock
("FEI stock") to acquire the outstanding stock of Gillam. Based upon the market
value of FEI's stock on July 25, 2002, the Share Purchase Agreement may require
the Company to issue to the Gillam shareholders up to 35,000 additional shares
of FEI stock. In addition, the Company paid approximately $496,000 in direct
transaction costs. Thus, the total purchase price is approximately as follows:
(in thousands)
Cash paid for Gillam shares $ 8,400
Fair value of restricted shares issued 3,465
Direct transaction costs 496
-------
Total purchase price $12,361
=======
The Gillam acquisition is treated as a purchase. The purchase price is
allocated to net assets acquired of approximately $7,282,000 and to goodwill of
approximately $5,079,000. Goodwill amortization in fiscal 2001 was $193,000 and
was computed on the straightline method using a 15-year life. As of May 1, 2001,
under the provisions of Statement 142 of the Financial Accounting Standards
Board, "Goodwill and Other Intangible Assets", goodwill is no longer amortized
but is tested periodically for impairment.
Goodwill Impairment
-------------------
In the fourth quarter of 2003, the Company performed an impairment test of
the Gillam-FEI reporting unit. The fair value of this reporting unit was
determined based upon valuations utilized in recent industry acquisition
transactions and current market values of publicly-traded competitors and
customers in the same industry as Gillam-FEI. Based on this test, the Company
further analyzed its investment in Gillam-FEI and concluded that the goodwill
associated with this acquisition was impaired. Consequently, the Company
recorded a non-cash charge of $6.2 million against operating income for fiscal
2003 to reflect the write down of the full value of goodwill related to the
Gillam-FEI acquisition.
12. Employee Benefit Plans
----------------------
Profit Sharing Plan:
The Company adopted a profit sharing plan and trust under section 401(k) of
the Internal Revenue Code. This plan allows all eligible employees to defer a
portion of their income through voluntary contributions to the plan. In
accordance with the provisions of the plan, the Company can make discretionary
matching contributions in the form of cash or common stock. For the years ended
April 30, 2003, 2002 and 2001, the Company contributed 39,335, 28,220 and 14,592
shares of common stock, respectively. The approximate value of these shares at
the date of issuance was $370,000 in fiscal 2003, $400,000 in fiscal 2002 and
$300,000 in fiscal 2001.
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. For fiscal 2003 and 2002, no amount for bonuses was
recorded in selling and administrative expenses due to the lack of earnings,
exclusive of the insurance reimbursement in fiscal 2002. The Company charged
$1,073,000 to operations under these plans for the fiscal year ended April 30,
2001.
Independent Contractor Stock Option Plan:
The Company has an Independent Contractor Stock Option Plan under which up
to 350,000 shares may be granted. An Independent Contractor Stock Option
Committee determines to whom options may be granted from among eligible
participants, the timing and duration of option grants, the option price, and
the number of shares of common stock subject to each option. Each of the option
grants in fiscal 2001, 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
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
over the next two to three years. For the years ended April 30, 2002 and 2001,
the Company recognized compensation expense of $45,000 and $310,000,
respectively, as a result of these stock option grants. No compensation expense
was recognized during the year ended April 30, 2003 as no new grants were made
in fiscal 2003 or 2002 and previous grants have been fully expensed.
Transactions under this plan, including the weighted average exercise prices
of the options, are as follows:
2003 2002 2001
-------------------- ------------------- -------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 114,350 $15.31 114,350 $15.31 122,300 $15.21
Granted - - - - 6,000 $15.80
Exercised - - - - (13,950) $13.54
------- ------- -------
Outstanding at end of year 114,350 $15.31 114,350 $15.31 114,350 $15.31
======= ======= =======
Exercisable at end of year 111,350 $15.29 109,350 $15.32 104,050 $15.54
======= ======= =======
Available for grant at end of year 219,500 219,500 219,500
======= ======= =======
Weighted average fair value
of options granted during the year $ - $ - $ 8.81
======== ======== ======
Employee Stock Option Plans:
The Company has various stock option plans for key management employees,
including officers and directors who are employees. The plans are both
Nonqualified Stock Option ("NQSO") plans and Incentive Stock Option ("ISO")
plans. Under both types of plans options are granted at the discretion of the
Stock Option committee at an exercise price not less than the fair market value
of the Company's common stock on the date of grant. Under one NQSO plan the
options are exercisable one year after the date of grant. Under the remaining
plans the options are exercisable over a four-year period beginning one year
after the date of grant. The options expire ten years after the date of grant
and are subject to certain restrictions on transferability of the shares
obtained on exercise. As of April 30, 2003, eligible employees had been granted
options to purchase 955,500 shares of Company stock under ISO plans of which
206,750 options are outstanding and 38,125 are exercisable. Through April 30,
2003, eligible employees have been granted options to acquire 1,090,000 shares
of Company stock under NQSO plans. Of the NQSO options, approximately 824,000
are outstanding and approximately 627,000 are exercisable (see tables below).
The excess of the consideration received over the par value of the common
stock or cost of treasury stock issued under both types of option plans has been
recognized as an increase in additional paid-in capital. No charges are made to
income with respect to the ISO or NQSO plans.
Transactions under these plans, including the weighted average exercise
prices of the options, are as follows:
2003 2002 2001
------------------ ------------------- ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 969,062 $13.14 861,437 $13.30 611,800 $7.65
Granted 83,500 $6.62 122,000 $11.25 330,000 $22.03
Exercised (3,500) $7.27 (14,375) $6.76 (80,363) $6.18
Expired or canceled (18,000) $12.91 - -
--------- ------- -------
Outstanding at end of year 1,031,062 $12.63 969,062 $13.14 861,437 $13.30
========= ======= =======
Exercisable at end of year 665,562 $11.64 514,000 $10.23 351,048 $7.74
======= ======= =======
Available for grant at end of year 278,000 342,000 65,500
======= ======= ======
Weighted average fair value
of options granted during the year $6.62 $7.00 $12.24
===== ===== ======
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table summarizes information about stock options outstanding
at April 30, 2003:
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Actual Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 4/30/03 Life Price at 4/30/03 Price
--------------- ---------- ---- ----- ---------- -----
$3.333 - 7.813 472,375 5.9 $ 6.75 354,125 $ 6.72
10.167 - 16.625 476,687 7.2 12.60 274,370 12.50
23.75 82,000 7.3 23.75 41,000 23.75
Restricted Stock Plan:
During fiscal 1990, the Company adopted a Restricted Stock Plan which
provides that key management employees may be granted rights to purchase an
aggregate of 375,000 shares of the Company's common stock. The grants,
transferability restrictions and purchase price are determined at the discretion
of a special committee of the board of directors. The purchase price may not be
less than the par value of the common stock.
2003 2002 2001
------------------ ------------------- ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 30,000 $4.00 30,000 $4.00 69,000 $3.94
Granted - - - - - -
Expired - - - - - -
Exercised (7,500) $4.00 - - (39,000) $4.00
------ ------ -------
Outstanding at end of year 22,500 $4.00 30,000 $4.00 30,000 $4.00
====== ====== ======
Exercisable at end of year 22,500 $4.00 30,000 $4.00 30,000 $4.00
====== ====== ======
Balance of shares available for
grant at end of year 98,250 98,250 98,250
====== ====== ======
Transferability of shares is restricted for a four-year period, except in
the event of a change in control as defined. Amounts shown as unearned
compensation in stockholders' equity represent the excess of the fair market
value of the shares over the purchase price at the date of grant which is being
amortized as compensation expense over the period in which the restrictions
lapse.
Employee Stock Ownership Plan/Stock Bonus Plan:
During 1990 the Company amended its Stock Bonus Plan to become an Employee Stock
Ownership Plan ("ESOP"). By means of a bank note, subsequently repaid, the
Company reacquired 561,652 shares of its common stock during fiscal 1990. These
shares plus approximately 510,000 additional shares issued by the Company from
its authorized, unissued shares were sold to the ESOP in May 1990. Shares were
released for allocation to participants based on a formula as specified in the
ESOP document. By the end of fiscal 2000, all shares (1,071,652) had been
allocated to participant accounts of which 661,004 shares remain in the ESOP.
Deferred Compensation Plan:
The Company has a program for key employees providing for the payment of
benefits upon retirement or death. Under the plan, each key employee receives
specified retirement payments for the
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, 2003, 2002 and 2001 was approximately $602,000, $982,000 and $620,000,
respectively. During fiscal 2002, the Company made modifications to the benefits
of certain employees and added two new participants. Accordingly, deferred
compensation expense in fiscal 2002 included approximately $400,000 to account
for the benefit modifications.
13. Income Taxes
------------
The (loss) income before (benefit) provision for income taxes consisted of (in thousands):
Year Ended April 30,
--------------------
2003 2002 2001
---- ---- ----
U.S ($ 3,680) $ 1,568 $ 8,464
Foreign (6,986) 130 (228)
-------- ------- -------
($10,666) $ 1,698 $ 8,236
======== ======= =======
The (benefit) provision for income taxes consists of the following (in thousands):
2003 2002 2001
---- ---- ----
Current:
Federal ($ 1,650) $ - $ 3,520
Foreign - 32 -
State - (70) 480
-------- ------- -------
Current (benefit) provision (1,650) (38) 4,000
Deferred
Federal (352) 228 (1,214)
Foreign (171) 90 9
State (200) 40 (203)
Valuation allowance- foreign 600 - -
-------- ------- -------
Deferred (benefit) provision (123) 358 (1,408)
-------- ------- -------
Total (benefit) provision ($ 1,773) $ 320 $ 2,592
======== ======= =======
The following table reconciles the reported income tax expense with the amount computed using the federal
statutory income tax rate (in thousands)
2003 2002 2001
---- ---- ----
Computed "expected" tax (benefit) expense ($ 3,626) $ 577 $ 2,810
State and local tax, net of federal benefit (139) (46) 317
Valuation allowance on foreign deferred taxes 600 - -
Foreign taxes - 118 9
Nondeductible goodwill writedown 2,094 - -
Nondeductible expenses 164 60 111
Nontaxable life insurance cash value increase (51) (86) (116)
Tax credits (768) (210) (310)
Other items, net, none of which individually
exceeds 5% of federal taxes at statutory rates (47) (93) (229)
-------- ------- -------
($ 1,773) $ 320 $ 2,592
======== ======= =======
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The components of deferred taxes are as follows (in thousands):
2003 2002
---- ----
Deferred tax assets:
Employee benefits $ 3,289 $ 3,279
Inventory 1,505 995
Accounts receivable 50 50
Marketable securities 710 16
Credit and loss carryforwards 400 -
Foreign research & development 510 603
Other liabilities 214 372
Foreign net operating loss carryforwards 970 539
Miscellaneous (116) (116)
--------- ------- -------
Total deferred tax asset 7,532 5,737
------- -------
Deferred tax liabilities:
Property, plant and equipment 2,061 1,812
------- -------
Net deferred tax asset 5,471 3,925
Valuation allowance (600) -
------- -------
$ 4,871 $ 3,925
======= =======
At April 30, 2003, the Company has available approximately $2.2 million in
net operating loss carryforwards at its European subsidiaries. In fiscal 2003,
the Company recorded a $600,000 valuation allowance against a deferred tax asset
of a foreign subsidiary.
14. Segment Information
-------------------
The Company operates under three reportable segments:
(1) Commercial communications - consists principally of time and frequency
control products used in two principal markets- commercial
communication satellites and terrestrial cellular telephone or other
ground-based telecommunication stations.
(2) U.S. Government - consists of time and frequency control products used
for national defense or space-related programs.
(3) Gillam-FEI - the Company's Belgian subsidiary primarily sells wireline
synchronization and network monitoring systems.
The accounting policies of the three segments are the same as those
described in the "Summary of Significant Accounting Policies." The Company
evaluates the performance of its segments and allocates resources to them based
on operating profit which is defined as income before investment income,
interest expense and taxes. The Company's Commercial Communications and U.S.
Government segments operate principally out of a U.S.-based manufacturing
facility with both segments sharing the same managers, manufacturing personnel,
and machinery and equipment. Consequently, data for these two segments includes
allocations of depreciation and corporate-wide general and administrative
charges. The assets of these two segments consist principally of inventory and
accounts receivable. All other U.S.-based assets are assigned to the corporation
for the benefit of all three segments.
The Company's European-based director manages the assets of the Gillam-FEI
segment. All acquired assets, including intangible assets, are included in the
assets of this segment.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The table below presents information about reported segments for each of the
years ended April 30 with reconciliation of segment amounts to consolidated
amounts as reported in the statement of operations or the balance sheet for each
of the years:
(in thousands)
2003 2002 2001
---- ---- ----
Net sales:
Commercial Communications $15,051 $26,663 $36,290
U.S. Government 8,906 4,513 3,727
Gillam-FEI 8,137 11,223 9,276
less intersegment sales (567) (1,220) (83)
------- ------- -------
Consolidated Sales $31,528 $41,179 $49,210
======= ======= =======
Operating (loss) profit:
Commercial Communications ($7,123) ($1,394) $ 4,316
U.S. Government 1,887 733 462
Gillam-FEI (6,972) 516 (238)
Corporate (282) 234 1,401
------- -------- -------
Consolidated Operating (Loss) Profit ($12,490) $ 89 $ 5,939
======= ======== =======
Identifiable assets:
Commercial Communications $14,733 $21,101 $ 25,025
U.S. Government 6,147 3,176 1,580
Gillam-FEI 12,305 17,956 19,237
less intersegment balances (964) (1,575) (234)
Corporate 53,508 55,353 56,431
------- -------- ----------
Consolidated Identifiable Assets $85,729 $96,011 $102,039
======= ======= ========
Depreciation (allocated):
Commercial Communications $ 930 $ 995 $ 956
U.S. Government 327 166 112
Gillam-FEI 324 280 166
Corporate 19 19 19
------ ------ ------
Consolidated Depreciation Expense $1,600 $1,460 $1,253
====== ====== ======
Major Customers
---------------
During fiscal year 2003, sales to one customer accounted for approximately
$10.0 million of the Commercial Communications segment's total sales. This
amount represents 66% of Commercial Communications' total revenues and 32% of
consolidated sales. In the U.S. Government segment, sales to three customers
accounted for $6.7 million of sales or 76% of the segment's revenue and 21% of
consolidated revenue. One of the U.S. Government segment's customers accounted
$3.5 million or 11% of consolidated revenue. Sales to two customers, aggregating
$1.9 million, accounted for 24% of the revenues of the Gillam-FEI segment. None
of the customers in the Gillam-FEI segment accounted for more than 10% of
consolidated revenues.
During fiscal year 2002, sales to one customer of the Commercial
Communications segment were $15.5 million or 58% of that segment's sales and 38%
of consolidated revenue. In the U.S. Government segment, sales to three
customers aggregated $3.5 million or 78% of that segment's revenues. Sales to
two customers, aggregating $3.3 million, accounted for 30% of the revenues of
the Gillam-FEI segment. None of the customers in the U.S. Government segment or
the Gillam-FEI segment accounted for more than 10% of consolidated revenues.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In fiscal year 2001, sales to three customers of the Commercial
Communications segment aggregated $26.7 million or 73% of that segment's total
sales. Two of these customers accounted for 36% and 11%, respectively, of the
Company's consolidated sales for the year. In the U.S. Government segment, sales
to two customers aggregated $2.5 million or 68% of that segment's revenues in
fiscal 2002. In the Gillam-FEI segment, sales to three customers aggregated $4.6
million or 49% of that segment's revenues for the period that the Company owned
the segment. None of the customers in the U.S. Government segment or the
Gillam-FEI segment accounted for more than 10% of consolidated revenues.
The loss by the Company of any one of these customers would have a material
adverse effect on the Company's business. The Company believes its relationship
with these companies to be mutually satisfactory.
Foreign Sales
-------------
Revenues in the Commercial Communications and Gillam-FEI segments include
sales to foreign governments or to companies located in foreign countries.
Revenues, based on the location of the procurement entity, were derived from the
following countries:
(in thousands)
2003 2002 2001
---- ---- ----
Belgium $ 3,514 $ 5,113 $ 2,401
France 2,483 5,645 2,480
China 1,814 1,129 -
Brazil - 1,074 2,825
United Kingdom 910 261 1,020
Morocco - - 2,636
Other 3,414 3,881 3,000
------- ------- -------
$12,135 $17,103 $14,362
======= ======= =======
15. Product Warranties
------------------
The Company generally provides its customers with a one-year warranty
regarding the manufactured quality and functionality of its products. For some
limited products, the warranty period has been extended. The Company establishes
warranty reserves based on its product history, current information on repair
costs and annual sales levels. At April 30, 2003 and 2002, the warranty reserve
was $300,000. During fiscal 2003, the Company incurred approximately $900,000 in
warranty expenses. The higher than expected warranty expense level was primarily
related to a unique manufacturing defect in one of the Company's products which
occurred over a limited period of time. The defect was identified and corrected
and, as of April 30, 2003, the Company had substantially completed the warranty
rework related to this product.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
16. Interim Results (Unaudited)
---------------------------
Quarterly results for fiscal years 2003 and 2002 are as follows:
(in thousands, except per share data)
2003 Quarter
-------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales $6,828 $8,300 $9,390 $7,009
Gross margin 2,055 2,621 3,073 (1,903)
Net income (loss) (489) 251 239 (8,861)
*Earnings (loss) per share
Basic ($0.06) $0.03 $0.03 ($1.06)
Diluted ($0.06) $0.03 $0.03 ($1.06)
During the fourth quarter of fiscal 2003, the Company wrotedown the goodwill
associated with the acquisition of Gillam-FEI in the amount of $6.2 million. In
addition, the Company wrote off or reserved $3.6 million of certain excess
component inventory and work-in-progress inventory due to contract cancellations
and revaluation related to market conditions and from manufacturing process
improvements.
*Quarterly earnings per share data do not equal the annual amount due to
changes in the average common equivalent shares outstanding.
(in thousands, except per share data)
2002 Quarter
-------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales $11,070 $11,465 $9,565 $9,079
Gross margin 4,070 4,441 3,626 1,952
Net income (loss) 820 812 326 (580)
*Earnings (loss) per share
Basic $0.10 $0.10 $0.04 ($0.07)
Diluted $0.10 $0.10 $0.04 ($0.07)
During the fourth quarter of fiscal 2002, the Company received $1.5 million
for reimbursement of certain expenses under applicable directors' and officers'
liability insurance. In addition, the Company wrote off or reserved $1.0 million
of certain work-in-progress and excess component inventory.
*Quarterly earnings per share data do not equal the annual amount due to
changes in the average common equivalent shares outstanding.
17. Subsequent Event
----------------
On May 9, 2003, the Company acquired the business and net assets of Zyfer,
Inc., a wholly-owned subsidiary of Odetics, Inc., in a cash transaction. The
Company paid $2.3 million at closing, plus acquisition costs estimated at
approximately $400,000. According to the terms of the purchase agreement, the
Company will pay up to a maximum of $1 million in each of fiscal years 2004 and
2005 if the new subsidiary, FEI-Zyfer, Inc., achieves certain revenue levels in
those years. The contingent payments are based on a percentage of revenues in
excess of $6 million in fiscal 2004 and as a percentage of revenues in excess of
$8 million in fiscal 2005. The acquired business recorded revenue of $6.5
million for the year ended March 31, 2003 and $4.5 million in the prior fiscal
year.
46
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Description Balance Charged Charged
at to costs to other Balance at
beginning and accounts- Deductions end of
of period expenses describe -describe period
--------- -------- -------- --------- ------
Year ended April 30, 2003
-------------------------
Allowance for doubtful
accounts $124 - - $124
Inventory reserves $2,941 $3,634 $35(c) $3,012(b) $3,598
Year ended April 30, 2002
-------------------------
Allowance for doubtful
accounts $190 $9 $75(a) $124
Inventory reserves $2,537 $1,000 $(1)(c) $595(b) $2,941
Year ended April 30, 2001
-------------------------
Allowance for doubtful
accounts $190 $190
Inventory reserves $1,188 $2,001 $1(c) $653(b) $2,537
(a) Accounts written off
(b) Inventory disposed or written off
(c) Foreign currency translation adjustments
47
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
-----------------------------------------------
Directors of the Company
------------------------
Information regarding Directors of the Company 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 16, 2003.
Executive Officers of the Company
---------------------------------
The executive officers hold office until the annual meeting of the Board of
Directors following the annual meeting of stockholders, subject to earlier
removal by the Board of Directors.
The names of all executive officers of the Company and all positions and
offices with the Company which they presently hold are as follows:
Joseph P. Franklin - Chairman of the Board of Directors
Martin B. Bloch - President, Chief Executive Officer and
Director
Markus Hechler - Executive Vice President, President of FEI
Government Systems, Inc. and Assistant
Secretary
Michel Gillard - President, Gillam-FEI
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Marketing and Sales
Oleandro Mancini - Vice President, Business Development
Thomas McClelland - Vice President, Commercial Products
Alan Miller - Treasurer and Chief Financial Officer
Harry Newman - Secretary and Assistant to the Executive Vice
President
None of the officers and directors are related.
Joseph P. Franklin, age 69, has served as a Director of the Company since
March 1990. In December 1993 he was elected Chairman of the Board of Directors.
He also served as Chief Executive Officer from December 1993 through October
1998 and as Chief Financial Officer from September 1996 through October 1998.
From August 1987 to November 1993, he was the Chief Executive Officer of
Franklin S.A., a Spanish business consulting company located in Madrid, Spain,
specializing in joint ventures, and was a director of several prominent Spanish
companies. General Franklin was a Major General in the United States Army until
he retired in July 1987.
Martin B. Bloch, age 67, 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 57, joined the Company in 1967. He was elected to the
position of Executive Vice President in February 1999, prior to which he served
as Vice President, Manufacturing since 1982. In October 2001, he was named
President of the recently formed subsidiary, FEI Government Systems, Inc. He has
served as Assistant Secretary since 1978.
48
Michel Gillard, age 62, became an officer and director of the Company when
Gillam S.A. was acquired in September 2000. Gillam S.A., a company engaged in
the design, manufacture and marketing of wireline and network synchronization
systems, was founded by Mr. Gillard in 1974.
Charles S. Stone, age 72, 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 66, joined the Company in August 1987 and served as
Executive Vice President of FEI Microwave, Inc., the Company's wholly-owned
subsidiary until May 1993 when he was elected Vice President, Marketing and
Sales.
Oleandro Mancini, age 54, joined the Company in August 2000 as Vice
President, Business Development. Prior to joining the Company, Mr. Mancini
served from 1998 as Vice President, Sales and Marketing at Satellite
Transmission Systems, Inc. and from 1995 to 1998 as Vice President, Business
Development at Cardion, Inc., a Siemens A.G. company. From 1987 to 1995, he held
the position of Vice President, Engineering at Cardion, Inc.
Thomas McClelland, age 48, joined the Company as an engineer in 1984 and
was elected Vice President, Commercial Products in March 1999.
Alan Miller, age 54, 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 56, 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 16, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
----------------------------------------------------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 16, 2003.
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 16, 2003.
Item 14. Controls and Procedures
-----------------------
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its Chief
Executive Officer, Martin B. Bloch and Chief Financial Officer, Alan L. Miller,
of the effectiveness of disclosure controls and procedures pursuant to Exchange
Act Rules 13a-14 and 15d-14. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic SEC reports. There have been
no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
Item 15. Principal Accountant Fees and Services
--------------------------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 16, 2003.
49
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) Index to Financial Statements, Financial Statement Schedule and Exhibits
------------------------------------------------------------------------
The financial statements, financial statement schedule and exhibits are
listed below and are filed as part of this report.
(1) FINANCIAL STATEMENTS
Included in Part II of this report:
Page(s)
-------
Report of Independent Auditors 24
Consolidated Balance Sheets
April 30, 2003 and 2002 25-26
Consolidated Statements of Operations
-years ended April 30, 2003, 2002 and 2001 27
Consolidated Statements of Changes in Stockholders' Equity
- years ended April 30, 2003, 2002 and 2001 28
Consolidated Statements of Cash Flows
- years ended April 30, 2003, 2002 and 2001 29-30
Notes to Consolidated Financial Statements 31-46
(2) Financial Statement Schedule
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 46
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 Auditors 57
Exhibit 31 - Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 58-59
Exhibit 32 - Certifications Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 60-61
The exhibits listed on the accompanying Index to Exhibits beginning
on page 57 are filed as part of this annual report.
(b) REPORTS ON FORM 8-K
Registrant's Form 8-K, dated March 6, 2003, containing disclosure under
Item 5 thereof (dividend declaration), was filed with the Securities and
Exchange Commission during the quarter ended April 30, 2003.
Registrant's Form 8-K, dated May 9, 2003, containing disclosure under
Item 2 thereof (acquisition of business and net assets of Zyfer, Inc.),
was filed with the Securities and Exchange Commission on May 19, 2003.
50
INDEX TO EXHIBITS
ITEM 14(a)(3)
Certain of the following exhibits were filed with the Securities and Exchange
Commission as exhibits, numbered as indicated below, to the Registration
Statement or report specified below, which exhibits are incorporated herein by
reference:
Exhibit No.
as filed with
Registration
Exhibit No. Identification Statement or
in this per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
--------- ---------- ----------------- ---------------
1 (3) Copy of Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware (1) 3.1
2 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on March 27,
1981 (2) 3.2
3 (3) Copy of By-Laws of the
Registrant, as amended
to date (3) 3.3
4 (4) Specimen of Common Stock
certificate (1) 4.1
5 (10) 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
9 (10) Employment agreement
between Registrant and
Marvin Meirs (4) 10.6
51
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
--------- ---------- ----------------- ---------------
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
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
52
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
--------- ---------- ----------------- ---------------
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
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
53
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
--------- ---------- ----------------- ---------------
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 2002 audit report
in Registrant's Form S-8
Registration Statement. 23.1
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 (99) Certifications Pursuant
to Section
906 of the Sarbanes-Oxley
Act of 2002. 99.1
54
NOTES:
(1) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-29609, which
exhibit is incorporated herein by reference.
(2) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-71727, which
exhibit is incorporated herein by reference.
(3) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061 for the year
ended April 30, 1981, which exhibit is incorporated herein by reference.
(4) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-69527, which
exhibit is incorporated herein by reference.
(5) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1982, which exhibit is incorporated herein by reference.
(6) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1985, which exhibit is incorporated herein by reference.
(7) Filed with the SEC as exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1986, which exhibit is incorporated herein by reference.
(8) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1987, which exhibit is incorporated herein by reference.
(9) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1989, which exhibit is incorporated herein by reference.
(10) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1990, which exhibit is incorporated herein by reference.
(11) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-8, File No. 333-42233,
which exhibit is incorporated herein by reference.
(12) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1998, which exhibit is incorporated herein by reference.
------------------------
55
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934,as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FREQUENCY ELECTRONICS, INC.
/s/ Alan L. Miller
------------------------------
Name: Alan L. Miller
Title: Chief Financial Officer
and Controller
Dated: August 18, 2003
56