SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended April 30, 19992001
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 on which registered
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Common Stock(parStock (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[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 ][X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 21, 199923, 2001 - $55,239,000$123,200,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 21, 199923, 2001 - 7,664,284.8,300,450
DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by
reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held on or about October 20, 1999.3, 2001.
(Cover page 1 of 6158 pages)
Exhibit Index at Page 5451
PART I
Item 1. Business
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GENERAL DISCUSSION
Frequency Electronics, Inc. (sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the areatechnology of time and frequency control. Unless the
context indicates otherwise, references to the Registrant or the Company are to
Frequency Electronics, Inc. and its subsidiaries. References to "FEI" are to the
parent company alone and do not refer to any of the subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became the
successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500 and its website is
www.frequencyelectronics.com.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 7,662,4098,291,270 shares were
outstanding at April 30, 1999,2001, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.
At its inception, theThe Company was involved principallyis a world leader in military defense
contracting by way of the design, development and manufacture of
high-technology frequency, timing and marketing of
precision timesynchronization products for satellite and
frequency control products. Its products are used in guidanceterrestrial voice, video and navigation, communications, surveillance and electronic counter measure and
timing systems. Such products are used on many of the United States' most
sophisticated military aircraft, satellites, and missiles.data telecommunications. The Company's business was highly dependent upontechnologies
provide unique solutions that are essential building blocks for the defensenext
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 voice, video and data transmissions in communications
networks and in certain military and space spending policies of
the U.S. Government. In recent years, changing defense priorities and severe
federal government budget pressures have significantly changed the market
environment for defense related products.
In an effort to better serve customers on a more competitive basis, the
Company has transformed itself from a defense contract manufacturer into a
high-tech provider of precision time and frequency products used to synchronize
voice, data and video transmissions in commercial satellites and terrestrial
wireless communications.applications.
The Company has segmented its operations into twothree principal industries:
commercial(1) products for wirelesscommercial 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 newly acquired Belgian
subsidiary. (See discussion below under Fiscal 2001 Significant Events.)
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 has focusedalso continues to support the United States government
with products for defense and space applications principally with COTS
(commercial off-the-shelf) products. Products delivered by its internal researchnewly acquired
subsidiary, Gillam-FEI, are providing essential network monitoring and development on
re-engineering its core technologies for the commercial markets. During fiscal
1999, 1998 and 1997 approximately 77%, 82% and 70%, respectively, of the
Company's sales were for commercial products used for terrestrial or space-based
wireless communications and foreign governments. For the years ended April 30,
1999, 1998 and 1997, approximately 23%, 18% and 30%, respectively, of the
Company's sales were for U.S. Government end-use. The Company believes a
substantial commercial market exists for its legacy technologies and has
developed several new commercial product lines as discussed later in this Item
1.
MATERIAL DEVELOPMENTS
During fiscal year 1999, the Company focused a significant portion of its
resources on the development of newwireline
synchronization products for a linevariety of industries and telecommunications
providers in Europe, Africa, Latin America, the Middle East and Asia.
FISCAL 2001 SIGNIFICANT EVENTS
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. The acquired company
has been renamed Gillam-FEI. 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 transponder
componentsand (iv) "Power Supplies"
--produced through a subsidiary, for telecom service providers.
The Gillam acquisition was consummated pursuant to the terms of a Share
Purchase Agreement dated as wellof 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 augmenting and improving its existing linefollows:
(in thousands)
Cash paid for Gillam shares $ 8,400
Fair value of terrestrial
wireless communication products.restricted shares issued 3,465
Direct transaction costs 496
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Total purchase price $12,361
=======
The Company incurred research and development
costsGillam acquisition was treated as a purchase. The purchase price was
allocated to net assets acquired of approximately $5.8 million as compared$7,282,000 and to goodwill, of
approximately $1.4 million$5,079,000. Goodwill in eachfiscal 2001 was amortized on the
straightline method using a 15-year life. As of May 1, 2001, under the
provisions of Statement 142 of the two precedingFinancial Accounting Standards Board,
"Goodwill and Other Intangible Assets", goodwill will not be amortized but will
be tested periodically for impairment.
Insurance Reimbursement
-----------------------
On April 18, 2001, the Company settled an action which FEI had initiated in
the prior year against National Union Fire Insurance Company ("National Union").
In May 2001, under terms of the settlement, National Union paid the Company $3.0
million, FEI released its claims and the legal action was discontinued. In
fiscal years. The Company is beginning to market its
current generation of generic satellite and new terrestrial wireless products.
See additional discussion under Research and Development efforts.
On November 17, 1998,1999, the Company received $4.5 million in settlement of
its claim againstfrom Associated International
Insurance Company under applicable
directorsCompany. In June 2001, FEI initiated an arbitration proceeding to seek
reimbursement from a third insurance carrier. (See Item 3. Legal Proceedings and
officers insurance coverage. This payment related to legal fees
incurred by FEI in previous years in defense of certain litigation brought
against it by agencies of the U.S. Government.
On June 19, 1998, FEI and the United States Government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and Related Documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters with the Government. Under the terms of the Settlement
Agreement, FEI paid an aggregate of $8 millionNote 9 to the Government. These
settlement payments are reflected in the Company's consolidated results of
operations for the prior fiscal year ended April 30, 1998.
By letter dated October 21, 1998, the U.S. Department of the Air Force
concluded the proceedings with respect to FEI's Government contract suspension
and debarment, as of December 12, 1998, without condition. As a consequence, FEI
may engage in projects related to U.S. Government military and space related
efforts if it chooses to do so.
For a more complete description of the Litigations and their disposition
pursuant to the Settlement Agreement and the Government contract suspension and
debarment proceedings, reference is made to Item 3 of the Registrant's Annual
Report on Form 10-K for the year ended April 30, 1998, a copy of which is on
file with the Securities and Exchange Commission.
See Item 3 - Legal Proceedings, for additional information on these
matters.accompanying financial statements.)
REPORTABLE SEGMENTS
The Company designs, develops, manufactures and markets precision time and
frequency control products for twothree principal markets: (1) commercial wireless
communications applications, either space- or ground-based, (2) wireline
synchronization and (2)network monitoring systems produced by Gillam-FEI, and (3)
the traditional heritage governmentU.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 Company's products for the other two reportable segments are similar in function and
are currently manufactured byin the same personnelCompany's production facility located in a single production
facility.New
York. The Company has chosen these twothe U.S Government business as a reportable segmentssegment
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 2001, 2000 and 1999 approximately 74%, 85% and 77%,
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 19% of
fiscal 2001 revenues. For the years ended April 30, 2001, 2000 and 1999,
approximately 7%, 15% and 23%, respectively, of the Company's sales were for
U.S. Government end-use. Sales summaries for the Commercial WirelessCommunications,
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 has transformed itself from a defense contract manufacturer
into aprovides high-tech provider ofprecision time and frequency products used to synchronize
voice, datathat
are found in both ground-based communication stations and video transmissions inon-board commercial
satellites and digital
wireless communications.satellites. The Company has focused its internalmade a substantial investment in research and
development on re-engineeringto apply its core technologies forto the commercial markets. As a
result, the Company has experienced accelerating growth in commercial
communications revenues and anticipates continued substantial sales growth in
these areas.
Terrestrial- Wireless
The telecommunications industry is rapidly expanding with new or improved
technologies being developed to provide ever more services to the public.
Growing digital cellular systems and PCS networks require more base stations to
provide the connectivity and quality of service that cell phone users demand.
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) and 3G (3rd Generation) 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
accomplished through quartz or rubidium oscillators to achieve a higher degree
of services.
With increased demand for cellular services but limited bandwidth, the
requirement for precise timing becomes paramount. The Company manufactures a
Rubidium Atomic Standard, a small, low cost, 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
Timing and signal synchronization is not limited to wireless
communications. 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 has provided prototypes for
such systems and began initial production 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 is unknown.
Space-based
The commercial use of satellites launched for communications, navigation,
weather forecasting, video and data transmissions has led to the increased need
and ability to transmit information to earth based receivers. This requires
precise timing and frequency control at the satellite. For example, the Company
manufactures the master clocks (quartz, rubidium and cesium) and other
significant timing products for many satellite communication systems. The
Company's space hybrid assemblies are used onboard spacecraft for command,
control and power distribution. Efficient and reliable DC-DC power converters
are also manufactured for the Company's own instruments and as stand alonestand-alone
products for space and satellite applications. The Company's subminiature oven-controlled
quartz crystal oscillator is a low cost, small size, precision crystal
oscillator suited for high-end performance required in satellite transmissions,
airborne telephony and geophysical survey positioning systems. The Company's space-qualified products have been utilized by commercialCommercial
satellite programs such as Globalstar, Eutelsat, Inmarsat and Worldstar. New
products based onWorldstar have
utilized the Company's heritage military designs are being introducedspace-qualified products.
Gillam-FEI segment:
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The acquisition of Gillam-FEI extends the Company's core competencies into
wireline telecommunications synchronization, network monitoring and power supply
products. The LYNX network monitoring product provides the Company with entree
to take advantage of this emerging market. These new products include local
frequency generators, upnot only telecommunications companies but also to companies that monitor
electrical grids and down converters, low noise amplifiers and complete
satellite transponders.
Terrestrial
The telecommunications industry is rapidly expanding as a result of the
conversion from analog to digital systems and the expansion of cellular and PCS
networks. Wireless communication services have become an integral part of the
telecommunications market.
Wireless communication networks consist of numerous installations located
throughout a service area, each with its own base station connected by wire or
microwave radio through a network switch. Network operators are in the process
of converting older networks from analog to digital technology in order to
expand network coverage, increase capacity and improve transmission quality.
This upgrade requires very accurate frequency control at the base stations
accomplished through quartz or rubidium oscillators to achieve a higher degree
of precision.
Currently three leading digital technologies are utilized: Time Division
Multiple Access, Code Division Multiple Access and Global System for Mobile
Communications. These transmission protocols are segmented and transmitted over
a wider spectrum of bandwidths than available under analog systems. Wide-band
digital systems have a need for more accurate synchronization which is
accomplished through use of precise timing devices located throughout the
system. The Company manufactures a Commercial Rubidium Atomic Standard, an
extremely small, low cost, low phase noise, stable atomic standard and
temperature stable quartz crystal oscillators ideally suited for use in advanced
cellular communications and wireless telecommunications.other utilities applications.
U.S. Government segment:
During the fiscal years ended April 30, 1999, 1998 and 1997, approximately
23%, 18% and 30%, respectively, of the------------------------
The Company's sales werein the U.S. Government segment are made under fixed
price contracts either directly with U.S. Government agencies or indirectly
with government agencies through subcontracts intended for government end-use. All of these contracts were on a
fixed price basis. Under a fixed price contract theThe price paid to the
Company is not subject to adjustment by reason of the costs incurred by the
Company in the performance of the contract, except for costs incurred due to
contract changes ordered by the customer. These contracts are on a negotiated
basis under which the Company bears the risk of cost overruns and derives the
benefit from cost savings.
Negotiations on U.S. Government contracts are sometimes based in part on
Certificates of Current Costs. An inaccuracy in such certificates may entitle
the government to an appropriate recovery. From time to time, the Defense
Contracts Audit Agency ("DCAA") of the Department of Defense audits the
Company's accounts with respect to these contracts. The Company is not aware of
any basis for recovery with respect to past certificates.
All government end-use contracts are subject to termination by the
purchaser for the convenience of the U.S. Government and are subject to various
other provisions for the protection of the U.S. Government. In the event of such
termination, the Company is entitled to receive compensation as provided under
such contracts and in the applicable U.S. Government regulations.
The Company's proprietary products have been used in guidance, navigation,
communications, radar, sonar surveillance and electronic countermeasure and
timing systems. Products are built in accordance with Department of Defense
standards and are in use on many of the United States' most sophisticated
military aircraft, satellites and missiles. The Global Positioning Satellite
System, as well as the MILSTAR Satellite System, are two examples of the
programs in which the Company participates. The Company has manufactured the
master clock for the Trident missile, the basic timing system for the Voyager I
and Voyager II deep space exploratory missions and the quartz timing system for
the Space Shuttle. The Company's cesium beam atomic clock is presently employed
in low frequency secure communications, surveillance and positioning systems for
the United States Air Force, Navy and Army.
Sales summaries for the Commercial Wireless Communications and U.S.
Government markets during each of the last five years are set forth in Item 6
(Selected Financial Data). Segment information regarding revenues, operating
profits, depreciation and assets is more fully disclosed in Note 13 to the
accompanying financial statements.
PRODUCTS
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The Company's products are manufactured from raw material which, when
combined with conventional electronic components available from multiple
sources, become finished products, subsystems and systems used for commercial
wireless and wireline communications, satellite applications, space exploration, wireless communications,
position location, radar, sonar and electronic counter-measures. These products,
subsystems and systems are employed in ground-based earth stations, domestic and international
satellites, fixed,
transportable, portable and mobile communications installations, 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 and
delivery schedule as determined by project detail.
Componentsschedule.
COMPONENTS - The Company's key technologies includeutilize quartz, rubidium and
cesium from which it manufacturesto manufacture precision time and frequency standards and higher level
assemblies which allow the users to generate, synchronize, transmit, and receive
signals in order to locate their position, secure a communications system, or
guide a missile. The components class of the Company's products is rounded out
with crystal filters and discriminators, surface acoustic wave resonators, and
space and high-reliability custom thick and thin film hybrid assemblies.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:including ultrastable units for critical satellite and
strategic systems, and
fast warm-up, low power consumption units for mobile applications, including
commercial aircraftwideband-CDMA voice and telephony.data communications.
The ovenized quartz oscillator is the most accurate type, wherein the
oscillator crystal is enclosed in a temperature controlled environment called a
proportional oven. The Company manufactures several varieties of temperature
controlling devices and ovens.
The voltage-controlled quartz oscillator is an electronically controlled
device wherein the frequency may be stabilized or modulated, depending upon the
application.
The temperature compensated quartz oscillator is an electronically
controlled device using a temperature sensitive device to directly compensate
for the effect of temperature on the oscillator's frequency.
The key components for the atomic instrument products (cesium and
rubidium) are manufactured totally from raw materials. The rubidium lamp, filter and resonance cell provide the optical
subassembly used in the manufacture of the Company's optically pumped atomic
rubidium frequency standards. The cesium tube resonator is also manufactured totally from raw materials and is used in the
manufacture of the Company's cesium primary standard atomic clocks.
High reliability, MIL-M-38510 Class S and B, custom hybrid assemblies are
manufactured in thick and thin film technologies for applications from DC to 44
GHz. These are used in manufacturing the Company's products and also supplied
directly to customers, for space and other high reliability systems.
Efficient and reliable DC-DC power converters are manufactured for the
Company's own instruments and as stand alone products, for space and satellite
applications.
The Company manufactures filters and discriminators using its crystal
resonators for its own radio-frequency and microwave receiver, signal
conditioner and signal processor products.
InstrumentsINSTRUMENTS - 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 standards and VSAT transceivers.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 wirelesscommercial communications systems. Rubidium oscillators combine
sophisticated glassware, light detection devices and electronics packages to
generate a highly stable frequency output. Rubidium, when energized by a
specific radio frequency, will absorb less light. The oscillator's electronics
package generates this specific frequency and the light detection device
ensures, through monitoring the decreased absorption of light by the rubidium
and the use of feedback control loops, that this specific frequency is
maintained. This highly stable frequency is then captured by the electronics
package and generated as an output signal. Rubidium oscillators provide atomic
oscillator stability, at lower costs and in smaller packages.
The cesium beam atomic standard utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency several orders of
magnitude more accurate than other types of quartz frequency generators. The
atomic standard is a compact, militarized solid-state device which generates
these precision frequencies for use with advanced communications and navigation
equipment. A digital time-of-day clock is incorporated which provides visual
universal time display and digital timing for systems use. The atomic standard
manufactured by the Company is a primary standard, capable of producing time
accuracies of better than one second in seven hundred thousand years.
The VSAT transceivers consisting of C and KU Bands are intended for use in
satellite communications primarily for private data and voice earth stations.
As communications systems become more precise, the requirement for precise
frequency signals to drive a multitude of electronic equipment is greatly
expanded. To meet this requirement, the Company manufactures a distribution
amplifier which is an electronically controlled solid-state device that receives
frequency from a frequency standard and provides multiple signal outputs of the
input frequency. A distribution amplifier enables many items of electronic
equipment in a single facility, aircraft or ship to receive a standardized
frequency and/or time signal from a quartz, rubidium or cesium atomic standard.
SystemsSYSTEMS - Essentially, the Company'sThe systems portion of itsthe Company's business is
manufactured byincludes
manufacturing and integrating selections of its products into subsystems and
systems that meet customer-defined needs. This is done by utilizing its unique
knowledge of interfacing these technologies and experience in applying them to a
wide range of systems. The Company's systems generate electronic frequencies of
predetermined value and then divide, multiply, mix, convert, modulate,
demodulate, filter, distribute, combine, separate, switch, measure, analyze,
and/or compare these signals depending on the system application.
The Systems portion of the business includes a complete line of time and
frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. The time and
frequency control systems combine the Company's cesium, rubidium and/or crystal
instruments with its other products, to provide systems for space and ground
based communications, space exploration, satellite tracking stations,
satellite-based navigation and position location, secure communication,
submarine and ship navigation, calibration, and electronic counter-measures
applications. A number of these time and frequency control systems provide up to
quadruple redundancy to assure operational longevity.
BACKLOG
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As of April 30, 1999,2001, the Company's consolidated backlog amounted to
approximately $21$39 million (see Item 7) and includes. Of this backlog, approximately 76%
represents orders for the commercial wireless communications segment, of approximately $19 million.18% for the
Gillam-FEI segment and 6% for the U.S. Government segment. Approximately 55%90% of
this backlog is expected to be filled during the Company's fiscal year ending
April 30, 2000. Although the current backlog is comparable to the backlog at
April 30, 1998, the character of the backlog is changing. In previous years, the
backlog of custom-built products could represent 12 to 18 months of production.
As the Company evolves into a more product-oriented manufacturer and seller of
generic wireless communication products, its cycle-time will be significantly
reduced. Consequently, the backlog will be less predictive of future results.2002. The backlog, which includes firm purchase orders and contracts,
is subject to change by reason of several factors including possible
cancellation of orders, change orders, terms of the contracts and other factors
beyond the Company's control. Accordingly, the backlog is not necessarily
indicative of the revenues or profits (losses) which may be realized when the
results of such contracts are reported.
CUSTOMERS AND SUPPLIERS
-----------------------
The Company markets its products both directly and through 27 independent
sales representative organizations located principally in the United States.States and
Europe. Sales to non-U.S. customers, including all of the sales of Gillam-FEI in
fiscal 2001, totaled approximately 20%29%, 18%12% and 21%20% of net sales in fiscal years
1999, 19982001, 2000 and 1997,1999, respectively.
The Company's products are sold to a variety of customers, both commercial
and governmental. For the years ended April 30, 2001, 2000 and 1999,
1998approximately 8%, 15% and 1997,
approximately 23%, 18% and 30%, respectively, of the Company's sales were made
under contracts to the U.S. Government or subcontracts for U.S. Government
end-use.
SalesThe Company's consolidated sales for each of the years ended April 30,
2001, 2000 and 1999 included sales to Motorola Corp. ("Motorola") exceeded 10% of
the Company'sapproximately $17.7 million, $14.0 million and $6.5 million, respectively. These
amounts represent 36%, 53% and 34%, respectively, of consolidated sales for each
of those years. For the year ended April 30, 1999. Sales2001, sales to Space Systems Loral
("SSL") and Motorola each exceeded 10%were $5.2 million or 11% of the Company's consolidated sales
for the year ended April 30, 1998, and for the year ended April 30, 1997, sales
to Hughes Space and Communications ("HSC") and SSL each exceeded 10% of consolidated sales. During the
three years ended April 30, 1999,2001, sales to SSLMotorola and MotorolaSSL were made by the
Company's commercial wireless communications segment. Sales to HSC during this period were substantiallysegment, accounting for 63% in fiscal 2001,
67% in fiscal 2000 and 54% in fiscal 1999 of that segment's total sales. During
fiscal 2001, two customers accounted for 29% and 11%, respectively, of the
revenues of the Gillam-FEI segment and two customers accounted for 37% and 31%,
respectively, of the U.S. Government end-use.segment's revenues. In fiscal 2000, sales
to three customers accounted for 61% of the U.S. Government segment's revenues
and, in fiscal 1999, two customers accounted for 53% of that segment's sales.
The loss by the Company of any one of these customers would have a material
adverse effect on the Company's business. The Company believes its relationship
with these companies to be mutually satisfactory and is not aware of any
prospect for the cancellation or significant reduction of any of its commercial
or existing U.S. Government contracts.
The Company purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Company is not dependent upon any one supplier or source of supply
for any of its component part purchases and maintains alternative sources of
supply for all of its purchased components. The Company has found its suppliers
generally to be reliable and price-competitive.
RESEARCH AND DEVELOPMENT
------------------------
The Company's technological expertise has beencontinues to be an important factor
in its recent growth. Until a few years ago, virtually all of its research and
development activities had taken place in connection with customer-sponsored
development-oriented products conducted under fixed price contracts and
subcontracts in support of U.S. Government programs. The Company has beenwas successful
in applying its resources to develop prototypes and preproduction hardware for
use in navigation, communication, guidance and electronic countermeasure
programs and space application. The output of these customer-sponsored projects,
in all cases, iswas of a proprietary nature.
TheIn the last three years, the Company has focused its internal research and
development efforts on improving the core physics and electronic packages in its
time and frequency products. The Company continuesproducts; conducting research to conduct research in developingdevelop new time and
frequency technologies andtechnologies; improving product manufacturability by seeking to reduce
its production costs through product redesign and other measures to take
advantage of lower cost components.
The Company continues to focus a significant portion of its own resources
and efforts on developing hardware for commercial satellite and terrestrial wirelesscommercial
communications systems, whichincluding wireless, wireline and fiber optic systems. By
so doing, the Company anticipates it anticipates will result inachieve future growth and increased
profits. During fiscal 1999, 19982001, 2000 and 1997,1999, the Company expended $5.8$4.8 million,
$1.4$5.4 million and $1.5$5.8 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 2000,2002, the
Company expectsis targeting to spend from $3 million
to $4 millionapproximately 10% of revenues on research and
development whichbut will include completion ofspend more if market conditions and opportunities warrant.
Such funds will be used to introduce Gillam-FEI's wireline synchronization
products to the US market, to further develop third generation (3G) cellular
telephony products, complete development of the family of generic transponder componentshigh-precision crystal oscillators
for the growing
commercial telecommunications satellite market as well asmarketplace and other products for other emerging wireless,
optical and wireline communications technologies.
PATENTS AND LICENSES
--------------------
The Company believes that its business is not dependent on patent or
license protection. Rather, it is primarily dependent upon the Company's
technical competence, the quality of its products and its prompt and responsible
contract performance. However, the rights to inventions of employees working for
the Company are assigned to the Company and the Company presently holds such
patents and licenses. Also, in certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses it has funded. The Company does not believe that patents and
licenses are material to its business.
COMPETITION
-----------
The Company experiences intense competition with respect to all areas of its
business. The Company competes primarily on the basis of the accuracy,
performance and reliability of its products, the ability of its products to
function in severe environments, such as encountered in space or other remote
locations, prompt and responsive contract performance, and the Company's
technical competence and price. The Company has a unique and broad product line
which includes all three frequency standards - quartz, rubidium, and cesium. In
recent years, the Company has successfully outsourced certain component
manufacturing processes to third parties as well as to joint venture partners
and more recently to its wholly-owned subsidiary in Tianjin, China. The Company
expects this outsourcing to enhance its competitive position on cost while
maintaining its high quality standards. The Company believes its ability to
take suchobtain raw materials, manufacture finished products, integrate them into systems
and sub-systems, and to interface these systems with end-user applications
all under one roof, provides the Company with an advantage over
many of its competitors.
Manya 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 the cesium beam atomic clock, quartz crystal standardits instruments and rubidium frequency standard,systems, the Company competes with
Hewlett-Packard Company, Datum, Inc., and E. G. and G., Inc. and others. The
Company's principal competition for space products is the in-house capability of
its major customers.
EMPLOYEES
---------
The Company employs 225approximately 400 persons noneworldwide. None of whomthe U.S.
employees are represented by labor unions.unions while in Europe, approximately 25
employees in one facility are represented by a French labor union.
OTHER ASPECTS
-------------
The Company's business is not seasonal and noalthough the Company expects to
experience some fluctuation in revenues during the second fiscal quarter as a
result of the extended European holiday period in August. No unusual working
capital requirements exist.
Item 2. Properties
- ------- ----------
The Company occupiesoperates 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 square feet of a manufacturing and officeLease
Liege, Belgium 34,000 Own
Chalon Sur Saone, France 70,900 Own
Tianjin, China 6,000 Lease
The Company's facility located in Mitchel Field, Long Island, New York. This facilityYork, is
part of the building whichthat the Company constructed in 1981 and expanded in 1988
on land leased from Nassau County. In January 1998, the Company sold this
building and the related land lease with the County of Nassau, to Reckson
Associates Realty Corp. ("Reckson"), and leased back the space whichthat it presently
occupies.
The Company leases its manufacturing and office space from Reckson under an
11-year lease at an annual rental of $400,000 per year with the Company paying
its pro rata share of real estate taxes along with the costs of utilities and
insurance. The lease provides for two 5-year renewal periods, exercisable at the
option of the Company, with annual rentals of $600,000 during the first renewal
period and $800,000 during the second renewal period. Under the terms of the
lease, new office and engineering facilities for the Company were constructed at
the cost of Reckson. The leased space is adequate to meet the Company's present and futuredomestic
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, ("REIT"), was effected
through a tax-deferred exchange of the building for approximately 486,000
participation units of Reckson Operating Partnership, L.P. ("REIT units") which
were valued at closing at $12 million. Each REIT unit is convertible into one
share of the common stock of the REIT. In addition, approximately 27,000 REIT
units have been placed in escrow which may be released to the Company based upon
the price per share of the REIT on the date of conversion of REIT units. Under
the accounting provisions for sale and leaseback transactions, the sale of this
building is considered a financing and the REIT units received are reflected as
a noncurrent liability while the related building continues to be reflected as
an asset. Upon liquidation of the REIT units, a portion of the resulting gain on
this sale will be deferred and recognized into income over the term of the
leaseback with the balance recognized in income on the date of liquidation. (See
Note 6 to the accompanying financial statements.)
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.
The Tianjin, China facility is the location of the Company's newly
established subsidiary, Frequency Electronics, Inc. Asia. Space has been leased
within a manufacturing facility located in the Trade-Free Zone. The lease is for
a one-year term 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
- ------- -----------------
On June 19, 1998 FEl and the United States government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and related documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters, as follows:
1. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CR No. 93/1261 ("Indictment").
2. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CR No. 93/0176 ("Superseding Indictment"). (The
Indictment and Superseding Indictment are collectively
referred to as the "Criminal Cases").
3. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CV No. 93/5200 ("Fox Civil Case").
4. United States of America, ex rel, Howard B. Geldart,
Plaintiff-Relator vs. Frequency Electronics, Inc., Markus
Hechler, Harry Newman, Marvin Norworth and Steven Calceglia,
Defendants, United States District Court, Eastern District of
New York, CV No. 93/4750 ("Geldart qui tam Action").
5. AMRAAM/cesium Grand Jury investigation, United States District
Court, Eastern District of New York ("AMRAAM Investigation").
The foregoing matters are collectively referred to as the "Litigations". By
letter dated October 21, 1998, the Air Force concluded the proceedings with
respect to FEI's Government contract suspension and debarment as of December 12,
1998, without condition. For a more complete description of the Litigations and
their disposition pursuant to the Settlement Agreement and the Government
contract suspension and debarment proceedings, reference is made to Item 3 of
the Registrant's Annual Report on Form 10-K for the year ended April 30, 1998, a
copy of which is on file with the Securities and Exchange Commission.
A qui tam action was commenced in the United States District Court for the
Eastern District of New York entitled, "The United States of America ex rel.
Ralph Muller, Plaintiff, against Frequency Electronics, Inc., Raytheon Company,
Raytheon Company Subsidiaries #1-10, fictitious names for subsidiaries of
Raytheon Company, Hughes Aircraft Company, Hughes Aircraft Company subsidiaries
#1-20, fictitious names for subsidiaries of Hughes Aircraft Company, and Martin
Bloch, Defendants", index number CV-92 5716 ("Muller Qui Tam Action"). The
Muller Qui Tam Action was brought pursuant to the provisions of the False Claims
Act and is an action by which an individual may, under certain circumstances,
sue one or more third persons on behalf of the Government for damages and other
relief.
The complaint was filed on or about December 3, 1992, in camera and under
seal pursuant to the provisions of the False Claims Act. The Court unsealed the
complaint by order dated December 3, 1993, after FEI complained to the United
States Attorney for the Eastern District of New York regarding newspaper
articles that charged FEI with manufacturing defective products based upon
claims in an unspecified and undisclosed qui tam action. It is believed that the
Government made applications to the Court on one or more occasions after
December 3, 1992, to continue to have the file in the Muller Qui Tam Action
remain under seal. The complaint was served on FEI and Martin B. Bloch on March
28, 1994 and March 30, 1994, respectively. Under the provisions of the False
Claims Act, the Government is permitted to take over the prosecution of the
action. The Government has declined to prosecute the Muller Qui Tam Action and
the plaintiff, Ralph Muller ("Muller"), is proceeding with the action on behalf
of the Government as is permitted under the False Claims Act. Moreover, while
the action named as parties defendant, Hughes Aircraft Company ("Hughes") and
Raytheon Company ("Raytheon"), along with several of their subsidiaries, the
Muller Qui Tam Action was dismissed voluntarily by Muller on April 6, 1994, as
to Hughes, Raytheon and their respective subsidiaries. FEI and Martin Bloch
moved to dismiss the complaint on various grounds and at the oral argument of
the motion to dismiss, the Court granted the motion to the extent that the
complaint failed to plead fraud with sufficient particularity as is required
under the Federal Rules of Civil Procedure and the plaintiff was directed to
serve an amended complaint. On February 6, 1996, plaintiff served an amended
complaint ("Amended Complaint").
The Amended Complaint, insofar as it pertains to FEI and Martin Bloch,
contains a series of allegations to the effect that Hughes and Raytheon
contracted with the Government to supply it with Advanced Medium Range Air to
Air Missiles ("AMRAAMS"); Hughes and Raytheon (collectively, the "Contractors")
entered into a subcontract with FEI pursuant to which FEI was to design,
manufacture, test, sell and deliver to the Contractors certain oscillators which
constituted components of the AMRAAMS; that FEI improperly designed,
manufactured and tested the oscillators; that numerous faulty and defective
oscillators were delivered to the Contractors; that the oscillators did not meet
contract specifications; that FEI was aware of the defective and faulty nature
of the oscillators; that FEI and Martin Bloch knowingly directed non-disclosure
of the design flaws; that the concealed design defects in developmental
oscillators permitted FEI to manufacture additional defective oscillators which
were used in operational missiles; that as a direct result of FEI's fraudulent
concealment of the defects, FEI was contracted to design and manufacture
additional oscillators; that when missiles were returned to FEI for repair, FEI
charged the Government for repair even though FEI knew the units had been
defective at the time of delivery; that FEI falsified test results and FEI and
Martin Bloch directed the falsification of test results; and that FEI sold and
delivered the oscillators to the Contractors; as a result of the faulty and
defective oscillators, many of the AMRAAMS failed to function properly; and that
the Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act,
and that the plaintiff Muller be awarded a bounty. Under the False Claims Act, a
recovery can be made in favor of the Government for a civil penalty of not less
than $5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses.
FEI has determined to vigorously defend the Muller Qui Tam Action. It has
answered the Amended Complaint, denied the material allegations, asserted
seventeen affirmative defenses, and counterclaims for: libel and product libel -
demanding damages of $3,000,000; republication of the libel and product libel -
demanding damages of $3,000,000; slander - demanding damages of $3,000,000;
tortious interference with prospects for additional business relations -
demanding damages of $1,865,010; prima facie tort - demanding damages of
$1,865,010; conversion - demanding damages of $11 plus an amount to be
determined at trial; breach of employment contract - demanding damages of
$1,865,010; breach of fiduciary duty - demanding damages of $1,865,010; plus
punitive damages in the amount of $30,000,000 on each of the tort causes of
action, and legal fees and expenses. The substance of the counterclaims alleged
against Muller are predicated upon a letter dated November 23, 1992 ("November
23 Letter") written by Muller's attorneys Schneider, Harris, Harris and Furman
("SHHF") to the Government which allegedly contained false and libelous
statements concerning FEI's design, manufacture and production of components for
Hughes and Raytheon in connection with the AMRAAMS.
In addition, FEI has instituted a third party action against SHHF, Robert
Harris, Esq. and Rod Kovel, Esq., attorneys for Muller, in connection with their
alleged authoring and publishing of the November 23 Letter provided to the
Government. The third-party complaint asserts the same claims against the
attorneys as are asserted in the counterclaims against Muller, for libel and
product libel, republication of the libel and product libel, slander, tortious
interference with contractual relations, prima facie tort and conversion. The
counterclaims and third-party complaint have been served. Muller has replied to
the counterclaims asserted in FEI's answer to the Amended Complaint, denied the
substantive allegations and asserted various affirmative defenses. The
third-party defendants have replied to the third-party complaint and have denied
the allegations and asserted various affirmative defenses.
Discovery has not
commenced.
Muller moved to dismiss the counterclaims in the answer and the third party
defendants moved to dismiss the third-party complaint. FEI and Martin Bloch
moved to dismiss the complaint in the Muller Qui Tam Action. The motions were
argued on January 5, 1996 and at the time the Court directed the plaintiff to
serve the Amended Complaint. At the oral argument, the Court deferred a portion
of its decision and, in addition, it indicated a formal decision and order would
be provided as to certain of the relief requested. By order dated August 29,
1996, the Court stated that on January 5, 1996, the Government had agreed to
unseal the case file and that the balance of the relief requested was denied or
otherwise dealt with as reflected on the record at the oral argument on January
5, 1996. On April 11, 1997, in open Court and on the record, the Court ordered
that the Muller Qui Tam Action was stayed pending resolution of
the Criminal Cases. Since the disposition of the Criminal Cases,stayed. Thereafter, in September 1998
litigation haswas resumed. To date, the parties have engaged in limited discovery
since the Government has determined that all classified and unclassified
documents relating to this action are deemed classified documents subject to
Department of Defense security regulations. As a result, extraordinary
procedures have only
recently been put in place for purposes of conducting discovery. On
January 20, 2000, the Court stayed further proceedings pending a decision of the
Supreme Court of the United States in a case where certain legal issues were
raised that could have been dispositive of certain legal issues in the Muller
Qui Tam Action. That case was decided and on July 20, 2000, the Court determined
that this litigation will resume.
In August 1999, the attorneys representing Muller withdrew as his counsel.
Since that time Muller has been representing himself on a pro se basis.
No opinion can be offered as to the outcome of the Muller Qui Tam Action,
the FEI counterclaims, third-party action or the pending motions.
On December 1, 1993, FEI was served with a complaint in an action
entitled, "In the Court of Chancery of the State of Delaware In and For New
Castle County, Diane Solash Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, Abraham Lazar, John C. Ho, E. John Rosenwald,
Jr., individuals, Defendants and Frequency Electronics, Inc., a Delaware
Corporation, Nominal Defendant", Civil Action No. 13266 ("Solash Action"). At
the time this action was instituted, all of the individual defendants named in
the complaint were directors of FEI, Martin B. Bloch was president and chairman
of the board of directors and Abraham Lazar was a vice-president. Joseph P.
Franklin is presently chairman of the board of directors, Lazar has retired and
is no longer a vice president. On January 24, 1994, plaintiff served an amended
complaint adding as named defendants Harry Newman, FEI's then
secretary/treasurer and Marvin Norworth, then FEI's contracts manager. This is a
derivative action which is permitted by law to be instituted by a shareholder
for the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. FEI is named as a
nominal defendant. In the Solash Action, the complaint alleges that the members
of FEI's board of directors may not reasonably be expected to authorize an
action against themselves.
The substance of the amended complaint contains allegations, in general,
as follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The amended complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the amended complaint, together with interest, costs, legal and other
experts' fees.
FEI and all of the individual defendants moved to dismiss the complaint in
the Solash Action ("Motion(s)"). To date, the Motions have not been heard by the
Court. FEI has determined to vigorously defend the Solash Action. Discovery has
not commenced. No opinion can be offered as to the outcome of the Motions or
with respect to the Solash Action.
On February 4, 1994, FEI was served with a complaint in an action entitled
"Supreme Court of the State of New York, County of New York, Moise Katz,
Plaintiff, against Martin B. Bloch, Joseph P. Franklin, Joel Girsky, John C. Ho,
Abraham Lazar, E. John Rosenwald, Jr., Defendants, and Frequency Electronics,
Inc., Nominal Defendant", Index Number 93-129450 ("Katz Action"). This was a
derivative action which is permitted by law to be instituted by a shareholder
for the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. FEI is named as a
nominal defendant. In the Katz Action, the complaint alleges that the members of
FEI's board of directors may not reasonably be expected to authorize an action
against themselves. At the time this action was instituted, all of the
individual defendants named in the complaint were directors of FEI, Martin B.
Bloch was president and chairman of the board of directors and Abraham Lazar was
a vice president. Joseph P. Franklin is presently chairman of the board of
directors. Lazar has retired and is no longer a vice president.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a
consequence, the matters alleged in the Indictment occurred; that the individual
defendants were grossly negligent and as a consequence the matters alleged in
the Indictment occurred; that the individual defendants voluntarily participated
in such wrongdoing and attempted to conceal it; and that the individual
defendants intentionally and negligently breached their fiduciary duty to FEI
and its shareholders. The complaint seeks judgment against these defendants in
favor of FEI in the amount of all losses and damages suffered by FEI on account
of the facts alleged in the complaint, together with interest, costs, legal and
other experts' fees.
FEI and all of the defendants moved to dismiss the complaint in the Katz
Action ("Motion(s)"). At the time of the Motions, the plaintiff moved to amend
the complaint by setting forth certain additional allegations of wrongdoing
including, among others, amplifying allegations with respect to the Indictment,
setting forth allegations relating to the Muller Qui Tam Action, and allegations
attempting to clarify the relationship of the parties to the New York forum, the
latter allegations having been attacked on the Motions. In connection with the
Motions, the defendants stipulated that they would not object to any application
by the plaintiff Katz to intervene in the Solashthird-party action. By order dated
September 21, 1994, the Court granted the defendants' Motions, dismissed the
complaint and denied the plaintiff's cross-motions.
On or about November 17, 1994, FEI was served with a complaint in an
action entitled, "In the Court of Chancery of the State of Delaware In and For
New Castle County, Moise Katz Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, John C. Ho, Abraham Lazar, E. John Rosenwald,
Jr., Harry Newman, Marvin Norworth, individuals, Defendants and Frequency
Electronics, Inc., a Delaware corporation, Nominal Defendant", Civil Action No.
13841 ("Katz Delaware Action"). All of the individual defendants named in the
complaint, with the exception of Harry Newman ("Newman") and Marvin Norworth
("Norworth"), were all directors of FEI, Martin B. Bloch was president and
chairman of the board of directors, Abraham Lazar was a vice-president, and
Joseph P. Franklin is presently chairman of the board of directors. Lazar has
retired and is no longer a vice president. Newman was FEI's secretary/treasurer
and is FEI's secretary and Norworth was FEI's contracts manager and is retired.
This is a derivative action which is permitted by law to be instituted by a
shareholder for the benefit of a corporation to enforce an alleged right or
claim of the corporation where it is alleged that such corporation has either
failed or refused to do so or may not reasonably be expected to do so. FEI is
named as a nominal defendant. In the Katz Delaware Action, the complaint alleged
that the members of FEI's board of directors may not reasonably be expected to
authorize an action against themselves.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage, and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the complaint, together with interest, costs, legal, and other experts' fees.
Pursuant to the order of the Court, the Solash Action and the Katz
Delaware Action have been consolidated under consolidated Civil Action No.
13266, with the caption "In Re Frequency Electronics Derivative Litigation"
("Derivative Litigation").
In the Derivative Litigation, FEI and all of the individual defendants
have moved to dismiss the consolidated complaint and to stay the Derivative
Litigation pending a disposition of the Indictment and the Superseding
Indictment ("Motion(s)"). To date, the Motions have not been heard by the Court.
However, as a result of the Motions, pursuant to a Stipulation and Order of the
Court dated May 17, 1995, and a Stipulation and Order of the Court dated June
14, 1995, the Derivative Litigation has been dismissed as to Newman and Norworth
and was otherwise stayed pending a disposition of the Indictment, Superseding
Indictment and related investigations until the further order of the Court. The
Indictment, Superseding Indictment and the related investigations have been
disposed of by reason of the Global Disposition. Since the disposition of the
Criminal Cases, the plaintiff in the Derivative Litigation has made an
application to resume the litigation and is presently seeking to serve an
amended complaint. FEI has determined to vigorously defend the Derivative
Litigation. Discovery has not commenced. No opinion can be offered as to the
outcome of the Motion(s) or with respect to the Derivative Litigation.
FEI has filed claims with its insurance carriers pertainingas follows: (1) Associated
International Insurance Company ("Associated") (2) National Union Fire Insurance
Company of Pittsburgh, PA ("National") and (3) the Home Insurance Company
("Home"). The claims filed pertain to potential coverages for directors and
officers relating to the first Grand Jury
Investigation, the IndictmentMuller Qui Tam Action and the Superseding Indictment,Solash Action, the Fox Civil
Case,Katz
Action, the Katz Delaware Action, the Derivative Litigation, the AMRAAM
Investigation and the Geldart Qui Tam Action. (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).
On November 17, 1998, FEI settled its claim with Associated and FEI
received payment from the carrier in the amount of $4.5 million. On March 14,
2000, FEI commenced an action in the Supreme court of the State of New York,
Nassau County, entitled "Frequency Electronics, Inc. Plaintiff, against National
Union Fire Insurance of Pittsburgh, PA, Defendants," index number 004075/00
("National Action"). The National Action set forth causes of action for a
declaratory judgment and breach of contract relating to certain directors and
officers liability insurance policies in connection with the Muller Qui Tam
Action, the AMRAAM Investigation, the Geldart Qui Tam Action, the Solash Action,
the Katz Action, the Katz Delaware Action, and the Katz Action. On November 17, 1998,Derivative Litigation.
Pursuant to a Settlement Agreement dated April 18, 2001, the action against
National was settled, FEI settled
its claim with Associated International Insurance Company and FEI received
payment from Associated inwas paid $3.0 million representing the full amount of
$4.5 million.
Certain disclaimersthe available coverage under the applicable National policy, FEI released its
claims and the action was discontinued.
The Home policy provides $2.0 million of excess coverage have been madeover the
applicable National policy. Homes' liability under its policy was triggered by
National's payment under its policy. Home is disputing FEI's claims. In June
2001, FEI demanded arbitration of the remaining carriersdispute with respect to certainHome before the American
Arbitration Association for resolution of these matters.a portion of the FEI claims. No
opinion can be offered as to coverage or the extent of coverage under anyoutcome of the foregoing policies. At the
appropriate time, FEI intends to vigorously pursue its rights with respect to
these insurance policies.
Included in selling and administrative expenses are legal fees incurred in
connection with the above matters of approximately $221,000, $741,000 and
$890,000 for fiscal years 1999, 1998 and 1997, respectively.
Government Contract Suspension and Debarment
By letter dated July 13, 1998, FEI was notified by the U.S. Department of
the Air Force that it terminated the suspension proceedings initiated against
FEI's president and director, Martin B. Bloch, its former vice president and
director, Abraham Lazar, its secretary/treasurer, Harry Newman and its former
contracts manager, Marvin Norworth, who has since retired. By letter dated July
9, 1998, FEI was notified by the U.S. Department of the Air Force of FEI's
debarment from Government contracting and from directly or indirectly receiving
the benefits of federal assistance programs. The debarment was based upon FEI's
guilty plea entered in connection with the Global Disposition and the Settlement
Agreement. The debarment was effective July 9, 1998. By letter dated October 21,
1998, the U.S. Department of the Air Force concluded the proceedings with
respect to the debarment and determined that the debarment of FEI would be
terminated on December 12, 1998, without condition. Such debarment, in fact,
terminated on December 12, 1998 and, as a consequence, FEI may engage in
projects related to U.S. Government military and space related efforts if it
chooses to do so.arbitration proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------- ---------------------------------------------------
No matters were required to be submitted by Registrant to a vote of
security holders during the fourth quarter of fiscal 1999.2001.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
-
------- ----------------------------------------------------------------------
The Common Stock of the Company is listed on the American Stock Exchange
under the symbol "FEI". The following table shows the high and low sale price
for the Company's Common Stock for the quarters indicated, as reported by the
American Stock Exchange and as adjusted for the 3-for-2 stock split in the form
of a 50% stock dividend, effective October 31, 1997.Exchange.
FISCAL QUARTER HIGH SALE LOW SALE
1999-------------- --------- --------
2001-
FIRST QUARTER $29.50 $15.00
SECOND QUARTER 38.25 15.61
THIRD QUARTER 22.50 11.51
FOURTH QUARTER 22.00 10.61
2000 -
FIRST QUARTER $19 3/8 $10$10.88 $7.50
SECOND QUARTER 11 5 9/1613.00 8.62
THIRD QUARTER 11 3/4 6 7/811.94 8.12
FOURTH QUARTER 9 1/8 6 3/16
1998 -
FIRST QUARTER $11 3/8 $ 6 3/8
SECOND QUARTER 19 1/2 10 13/16
THIRD QUARTER 20 13 1/8
FOURTH QUARTER 17 3/8 13 1/430.25 10.62
As of July 21, 1999,23, 2001, the approximate number of holders of record of common
stock was 833.771.
DIVIDEND POLICY
On March 24, 1997, the Company announced a policy of distributing a cash
dividend to shareholders of record on April 30 and October 31, payable on June 1
and December 1, respectively. The Board of Directors will determine dividend
amounts prior to each declaration based on the Company's financial condition and
financial performance.
Item 6. Selected Financial Data
- ------- -----------------------
The following table sets forth selected financial data including net sales
and operating profit (loss) for the five-year period ended April 30, 1999.2001. The
information has been derived from the audited financial statements of the
Company for the respective periods.
Years Ended April 30,
2001 2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
WirelessCommercial Communications ............ $ 14,547 $ 26,364 $ 19,612 $ 11,220 $ 6,103$36,206 $22,554 $14,547 $26,364 $19,612
U.S. Government ....................3,728 3,981 4,411 5,633 8,317
13,872 17,978Gillam-FEI 9,276 - - - -
------- ------- ------- -------- -------- -------- -------- ---------------
Total Net Sales .....................$49,210 $26,535 $18,958 $31,997 $27,929
======= ======= ======= ======= =======
Operating Profit (Loss) $ 18,9585,939(1) $ 31,9971,008 $ 27,929 $ 25,092 $ 24,081
======== ======== ======== ======== ========
Operating (Loss) Profit ............. $ (701)(1)($(3) ($ 9,105)(2)(4) $ 2,675
$ 1,047 ($ 6,025)======= ======= ======= ======== =======
======== ======== ========
Net Earnings (Loss) .................$ 5,644(2) $ 3,144 $ 1,173 $ 64 (5) $ 4,863
$ 2,822 ($ 3,843)
======== ======= ======== ======== =============== ======= ======= =======
Average Common Shares Outstanding (4)(6)
Basic .............8,198,569 7,673,497 7,502,260 7,368,472 6,967,109
6,939,872 7,253,051
Diluted ...........8,431,823 8,043,727 7,820,742 7,787,140 7,319,250
6,995,133 7,253,051
Earnings (Loss) per Common Share (4)(6)
Basic .............$ 0.69 $ 0.41 $ 0.16 $ 0.01 $ 0.70
====== ====== ====== ====== ======
Diluted $ 0.41 ($ 0.53)
======= ======= ======= ======= =======
Diluted ...........0.67 $ 0.39 $ 0.15 $ 0.01 $ 0.66
$ 0.40 ($ 0.53)====== ====== ====== ====== ======
Total Assets $102,039 $80,847 $78,355 $88,780 $74,866
======== ======= ======= ======= ======= =======
Total Assets ........................ $ 78,355 $ 88,780 $ 74,866 $ 68,770 $ 65,032
======== ======== ======== ======== ========
Long-Term Obligations
and Deferred Items ............ $ 16,959 $ 18,841$18,074 $16,849 $16,959 $18,841 $ 5,460
$ 14,877 $ 14,959
======== ======== ======== ======== =============== ======= ======= ======= =======
Cash dividend declared
per common share (4) ............(6) $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.10
-- --
======= ======= ======= ======= =======
====== ====== ====== ====== ======
(1) 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.
(2) In addition to items in (1) above, includes $287,000 investment loss for an
other than temporary decline of value in a marketable security.
(3) Includes insurance reimbursement of $4.5 million for legal fees related to
certain litigation with the U.S. Government.
(2) Includes litigation settlement of $8 million and U.S. Government-related
inventory writedowns and reserves of $4.8 million.
(3) In addition to items in (2) above, includes net gain on sale of buildings
of $4.9 million and the reversal of the valuation allowance on deferred
tax assets of $2.6 million.
(4) Includes litigation settlement of $8 million and U.S. Government-related
inventory writedowns and reserves of $4.8 million.
(5) In addition to items in (4) above, includes net gain on sale of buildings
of $4.9 million and the reversal of the valuation allowance on deferred tax
assets of $2.6 million.
(6) All share and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31,
1997.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------- ---------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
The table below sets forth for the fiscal years ended April 30 the
percentage of consolidated net sales represented by certain items in the
Company's consolidated statements of operations:
1999 1998 1997
---- ---- ----
Net Sales
Wireless Communications ........ 76.7% 82.4% 70.2%
U.S. Government ................ 23.3 17.6 29.8
----- ----- -----
100.0 100.0 100.0
Cost of Sales ...................... 68.5 80.9 64.7
Selling and administrative expenses 28.4 18.1 20.5
Insurance reimbursement ............ (23.7) -- --
Litigation settlement .............. -- 25.0 --
Research and development expenses .. 30.5 4.5 5.2
----- ----- -----
Operating (loss) profit ........ (3.7) (28.5) 9.6
Other income (expense) ............. 12.0 24.3 8.6
Provision (benefit) for income taxes 2.1 (4.4) 0.7
----- ----- -----
Net Earnings ...................2001 2000 1999
---- ---- ----
Net Sales
Commercial Communications 73.6% 85.0% 76.7%
U.S. Government 7.6 15.0 23.3
Gillam-FEI 18.8 - -
----- ----- -----
100.0 100.0 100.0
Cost of Sales 65.4 56.1 68.5
Selling and Administrative expenses 17.9 19.9 28.4
Insurance Reimbursement, net (5.2) - (23.7)
Research and Development expenses 9.8 20.2 30.5
----- ----- -----
Operating Profit (Loss) 12.1 3.8 (3.7)
Other Income (Expense) 4.7 12.9 12.0
Provision for Income Taxes 5.3 4.8 2.1
----- ----- -----
Net Income 11.5% 11.9% 6.2% 0.2% 17.4%
===== ===== =====
Fiscal 2001 - Gillam Acquisition
--------------------------------
The fiscal year 2001 results of operations reflect the global expansion of
Frequency Electronics. In September 2000, the Company completed the acquisition
of Gillam, S.A., a Belgium based corporation. (see Item 1 and Note 11 to the
financial statements) The consolidated results of operations include the
operating results of renamed Gillam-FEI from the date of acquisition through
March 31, 2001, the historical fiscal year-end of Gillam, S.A. Included in these
results are certain non-recurring charges to expense the "step-up" value of
acquired inventory ($300,000) as well as amortization of goodwill in the amount
of $193,000. (The Financial Accounting Standards Board has issued Statement 142
on "Goodwill and Other Intangible Assets" which became effective June 30, 2001.
Under the provisions of this statement, effective May 1, 2001, goodwill related
to the Gillam-FEI acquisition will not be amortized but will be tested
periodically for impairment.)
Significant Fiscal 2001 & 1999 & 1998 Events
-------------------------------------
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal 19992001 and 19981999 results of
operations were materially impacted by several specific events as well as a
strategic management decision.including the
fiscal 2001 Gillam-FEI acquisition. In both fiscal 2001 and 1999, the Company
recovered $2.8 million (net of $200,000 in expenses) and $4.5 million,
respectively, from antwo insurance companycompanies related to legal expenses incurred in
defense and settlement of the Company's litigation with the U.S. Government.
(Item(See Item 3. Legal Proceedings and Note 9 to the financial statements)statements.) In
addition,October 2000, the Company recognized an
opportunity to provide generic satellite transponder components for the
anticipated growth in the space-based wireless telecommunications industry.
Accordingly, during fiscal 1999, the Company committed significant resources to
developingalso settled a line of generic satellite transponder products to meet the expected
demand while it also continued development of generic terrestrial wireless
communications products. The Company spent an aggregate of $5.8 million on
research and development efforts during the fiscal year as compared to
approximately $1.4 million in each of the preceding two years.
Fiscal 1998 results were impacted by: (1) the settlement of litigation with
thederivative suit stemming from its U.S.
Government (Item 3. Legal Proceedingslitigation and Note 9 to the financial
statements); (2) the sale of its real estate holdings (Item 2. Propertiespaid approximately $224,000 in attorneys' fees and
Note 6 to the financial statements) and (3) the writedown or reserve for
inventories related to phasing out U.S. Government business. (Note 4 to the
financial statements)
In June 1998, the Company settled all outstanding criminal and civil cases
brought by the U.S. Government and made total payments of $8 million (Item 3.
Legal Proceedings). Accordingly, including related accrued litigation expenses,
the Company recorded a charge of $8.15 million against fiscal 1998 earnings.
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust, and leased back
a portion of the building which it occupies. (Item 2. Properties and Note 6 to
the financial statements.) In one sale transaction, the Company sold the
building which it had leased to Laboratory Corporation of America, receiving
cash of approximately $15.6 million and realizing a gain of approximately $5.4
million after selling expenses. A portion of the proceeds were used to repay the
$9 million loan obtained to finance the original construction of this building.
In the other sale, the Company effected a tax-deferred exchange of the building
which it occupies for approximately 486,000 participation units of Reckson
Operating Partnership, L.P. ("REIT units") which were valued at closing at $12
million. The Company leased back approximately 43% of this building from Reckson
and incurred approximately $500,000 of relocation expenses related to this
leaseback during fiscal 1998. Under the accounting provisions for sale and
leaseback transactions, most of the ultimate gain on this sale will be deferred
and recognized into income over the term of the lease with the balance
recognized in income upon sale or conversion of the REIT units into shares of
Reckson Associates Realty Corp., a publicly-traded company. Preceeding the sale
of its building, the Company prepaid the balance of its Nassau County Industrial
Development Bonds in the amount of $820,000, including accrued interest. During fiscal 1998,2001, the Company determined that a writeoff or reserve
of $4.8$2.0 million of certain work-in-progress and component parts inventory related
to U.S. Government programs was
appropriate. These inventory adjustments result
fromitems relate to certain product lines that the
Company's transformationCompany is no longer marketing and to a commercial wireless telecommunications
equipment manufacturer as well as its expectation for reduced procurement
volumes byquantities of certain component parts in
excess of near-term requirements. During the U.S. Government due to both smaller Defense Department budgets
and the Government's migration to alternate technologies.
As of the endfourth quarter of fiscal 1999,2001, the
Company has utilized mostdetermined that the decline in market value of its tax net
operating loss carryforward. In addition, with the settlement of the U.S.
Government litigation, the uncertainty regarding realizability of the Company's
net deferred income tax assetinvestment in a
certain marketable security was removed, thus eliminating the need for a
valuation allowance on such amount.not temporary. Accordingly, during fiscal 1998, the Company wrote
down the investment to its then reported market value and recorded a deferred tax benefitcharge
against investment income of $2.6 million (net).
Without these significant events, the Company's fiscal 1999 and 1998
operating profit, pre-tax earnings and net earnings would be materially
different from that reported in the financial statements as illustrated below:
1999 1998 1997
---- ---- ----
Operating (loss) profit- as reported ......... $ (701) $(9,105) $ 2,675
Less:
Insurance reimbursement .............. (4,500) -- --
Add back:
Litigation settlement and expenses ... -- 8,150 --
Inventory writedowns and reserves .... -- 4,764 --
------ ------- -------
Adjusted operating (loss) profit ............. (5,201) 3,809 2,675
------ ------- -------
Other income (expense) - as reported ......... 2,274 7,769 2,388
Less:
Gain on building sale, net of expenses -- (4,927) --
------ ------- -------
Adjusted Other income (expense) .............. 2,274 2,842 2,388
------ ------- -------
Adjusted pretax (loss) earnings .............. ($2,927) $ 6,651 $ 5,063
====== ======= =======
approximately $287,000.
Operating Profit (Loss)
Profit
The operating loss for the year ended April 30, 1999, decreased by $8.4
million from fiscal 1998. Excluding the one-time items discussed above and as
shown in the preceding table, the Company would have incurred a loss of $5.2
million or a decrease of $9.0 million from fiscal 1998's adjusted operating
profit. This decline is due to the sizable increase ($4.3 million) in research
and development spending during fiscal 1999 versus fiscal 1998, coupled with a
$13 million decrease in sales volume in 1999 compared to fiscal 1998.-----------------------
Operating profit for the year ended April 30, 1998 decreased2001, increased by $11.8$4.9
million over the profit for fiscal 2000. Excluding the nonrecurring items as
discussed above (see Items 6 and 7), the increase in operating profit would have
been $4.8 million. Approximately $400,000 of this increase is attributable to
the results of Gillam-FEI. The major portion of the improved profitability is
due to the 51% increase in revenues, exclusive of Gillam-FEI, while maintaining
gross profit margins. Selling and administrative costs increased in proportion
to the increased revenues while self-funded research and development spending
declined from the fiscal 1997. Without2000 levels.
The operating profit for the litigation settlement and the inventory
adjustments described above,year ended April 30, 2000, increased by $1.7
million over the operating loss would have been a profit of $3.8
million or an increase of $1.1 million (42%) overthe preceding fiscal 1997's results. This
results fromyear. Excluding the
15%insurance reimbursement, as noted above, the increase in netoperating profits for
fiscal 2000 was $6.2 million. The increase is the result of a 40% increase in
sales a relatively constantand significantly improved gross margin
rate (34% vs. 35%) and a small decline in selling and administrative expenses.margins.
Net Sales
---------
Net sales for fiscal 1999 decreased2001 increased by $13$22.7 million (41%(85%) over fiscal 19982000
sales. The largest decline ($11.8Excluding Gillam-FEI sales, revenues would have increased by $13.5
million or 45%(51%) wasover comparable fiscal 2000 sales. Sales in the commercial
wireless
communications segment principallyimproved by $13.7 million (61%) over fiscal 2000 while
revenues from the U.S. Government segment declined by $250,000 (6%). Continued
strong demand for the Company's rubidium atomic standard, which is the key
synchronization element of many cellular network base stations, led the increase
but the Company also experienced significant growth in salesother areas. Revenues
from space programs increased from the depressed levels of fiscal 2000 and the
Company developed a new source of revenues from fiber optic networks. These two
areas accounted for approximately 44% of the growth in revenues in the
commercial communication segment and 27% of consolidated revenue growth. The
Company anticipates the demand for its rubidium atomic standard to remain high
as OEMs continue the world-wide buildout of the cellular network infrastructure.
The Company expects revenues from space industry. Significant
launch failures by the major satellite manufacturersprograms and fiber optic networks to
trend higher but at a lower rate than experienced in the past 18-month period
coupled withyear. It is
expected that evenue from Gillam-FEI will grow but the economic slowdownrate of growth is
predicated on the introduction and acceptance of new products into the U.S.
wireline market and wireless products into European markets.
Net sales for fiscal 2000 increased by $7.6 million (40%) over fiscal 1999
sales. Sales in Asia, has resultedthe commercial communications segment improved by $8.0 million
(55%) over fiscal 1999 while revenues from the U.S. Government segment declined
by $430,000 (10%). Revenues in major delays in new
satellite programs. This alsothe commercial communications segment were led to lower levels of outsourcing for component
parts for existing satellite programs. Although detrimental to the current
year's financial results, the Company believes these program delays provide a
window of opportunity to complete development of its line of generic transponder
components before major satellite orders are released.
Sales of the Company's products to the terrestrial wireless communications
market were also negatively impacted by
the Company's decision to renegotiate an
exclusive contract with a customergrowing demand for the Company's VSAT product line. This
action resulted in a fiscal 1999 fourth quarter reduction of sales and cost of
sales of approximately $1.7 million and $1.0 million, respectively. During
fiscal 1999, the Company was developing this product for the customer under a
fixed-unit contract and recorded revenues through the third quarter of the year.
As a result of the renegotiations, the Company expects to remove the exclusivity
feature of the contract, thus broadening its customer base and increasing sales
of this product in the future.
Sales to the U.S. Government were down by $1.2 million (22%) from fiscal
1998 levels. The decrease in U.S. Government revenue was anticipated by the
Company as it de-emphasizes this aspect of its business.
Net sales in fiscal 1998 increased by $4.1 million (15%) over fiscal 1997
with sales to commercial wireless communications customers increasing by $6.8
million (34%). The increasing proportion of commercial wireless communications
sales illustrates the Company's successful transformation into a non-U.S.
Government provider of specialty timing devices for space and terrestrial
commercial wireless applications. Both fiscal 1998 and 1997 wirelessrubidium atomic standard. Commercial
communications revenues reflect increasing sales of the Company's commercial
rubidium product line for application primarily in the cellular telephone
industry. Shipments of this product line have approximately doubled in each of
the last three years and are expectedrelated to continue to growspace programs remained at a rapid pacelow levels as the
Company further advancesindustry continued to experience low demand for its products into the marketplace.products.
The Company believes that its 37-year38-year legacy in building high-reliability,
precision timing and frequency generation devices for U.S. Government programs
(principally DOD and NASA), uniquely positions it to
successfully exploit the much greater emerging commercial markets in wirelesscommercial
communications both in space and on the ground. The Company therefore intends to
focus its energies on these markets and is de-emphasizinghas de-emphasized its business with the
U.S. Government. However, the Company will continue to fulfill its current
contractual obligations to U.S. Government programs and will make its
proprietary technology available for these programs.and future programs where applicable.
Consequently, in fiscal 2000 and beyond, the proportion of sales to be generated from U.S. Government programs is
expected to continue to decline.decline in future years. This will be significantlymore than offset
by increasing demands for the Company's wirelesscommercial communications products used
in commercial space hardware and terrestrial base stations.applications as well as the wireline and network
synchronization products offered by Gillam-FEI.
Gross Margins
-------------
Gross margins for fiscal year 2001 were 35% compared to 44% in the fiscal
year ended April 30, 2000. During fiscal 2001, the Company had been engaged in
two significant development efforts which are customer-funded. The cost of these
efforts, which approximate the revenue recognized on the contracts, are a
component of cost of sales. Excluding these contracts as well as the inventory
adjustments mentioned above, gross margins would have been 41%. The principal
cause for the decline in the rate from the prior year is due to the mix of
products sold. In particular, costs at Gillam-FEI are typically higher than in
the U.S. due to labor cost structure. Excluding the effects of Gillam-FEI, the
inventory adjustments and the development contracts, gross margins would have
exceeded 47%. The Company's target is to achieve an overall gross margin of 40%
or better. To that end, the Company's goal for fiscal 2002 is to improve the
margins at Gillam-FEI.
Gross margins for the fiscal year ended April 30, 1999,2000 were 32%44% versus 19% overall32%
in fiscal 1998. Excluding1999. The improved margins are a result of the inventory writedownssuccessful migration to
producing components and reservessystems in fiscal 1998's results,higher volumes versus the gross margin rate realized in fiscal 1999 was 2%Company's legacy
of contract manufacturing which generally included the costs of unique product
designs and smaller, less than fiscal 1998's 34% rate. The overall gross margin realized onefficient, production quantities. This larger-quantity
production mode is also applicable to U.S. Government sales improved from 16% in fiscal 1998 to 18% in fiscal 1999 as the Company completed certain low margin projects. Aggregate margins on the
Company's commercial wireless communications revenues declined from 38% to 35%.sells
more of its Commercial Off-the-Shelf (COTS) products under contracts for U.S.
Government programs. Margins were negativelyalso favorably impacted by the lowerhigher volume
of business that requiredwhich permitted fixed costs to be absorbed over a smaller numberbroader range of
projects to absorb fixed costs.
Gross marginsorders.
Selling and Administrative expenses
-----------------------------------
Selling and administrative costs for the fiscal year ended April 30, 1998 were negatively
impacted2001,
increased by $3.5 million (67%). Of this increase, $1.4 million is attributable
to expenses incurred by Gillam-FEI. Of the inventory writedowns and reserves described above. Without such
charges, gross margins would have been 34%. During fiscal 1998, the
profitability of wireless communications programs versus U.S. Government
programs became more distinct. Aggregate gross margins on wireless
communications programs were 38%. U.S. Government programs showed margins of 16%
before inventory adjustments and recorded negative margins of 69% after such
adjustments.
Included in the Company's manufacturing overhead pool, a component of cost
of sales,remaining $2.1 million, $875,000 is
a chargeattributable to increased personnel costs, including accruals for amortization of the Company's ESOP program (see Notes
11 and 12 to the financial statements). The Company recognizes an annual expense
based upon the average market value of the underlying shares of Company stock
which are allocated to the ESOP each year. Asbonuses as a
result of improved profit margins and $825,000 relates to increased selling
costs and travel expenses, as the significant
increase inCompany seeks to continue the valueexpansion of its
world-wide commercial markets. In addition, the Company's stock during fiscal 1998,Company incurred legal fees
related to the charge to
ESOP amortization also increased significantly. The amount chargedinsurance recovery and litigation settlement, and administrative
expenses related to the Company's overhead pool was approximately $900,000establishment of a manufacturing facility in
fiscal 1999 and $1.2
million in fiscal 1998 compared to $552,000 in fiscal 1997. These amounts
include a substantial non-cash charge, as the actual cash obligation of the
Company is $500,000 annually through fiscal 2000. Without this excess
amortization charge, aggregate gross margins on the Company's wireless
communications sales during fiscal 1999 and 1998 would have improved by
approximately 1.5% and 2.5%, respectively. The impact of this charge in fiscal
1997 was negligible. If the Company's stock value remains at current or higher
levels during fiscal 2000, gross margins will continue to be dampened by the
additional noncash ESOP amortization expense. Despite this potential reduction
in margins, with the continuing growth in sales of its commercial wireless
communications products, the Company anticipates that future gross margins will
be significantly higher than that experienced during fiscal 1999.
Selling and administrative expensesChina.
Selling and administrative costs in fiscal 19992000 decreased by $407,000 (7%$109,000 (2%)
from those incurred in fiscal 1998. During fiscal 1999,1999. The lower costs are the Company made
adjustments toresult of several
factors including an $800,000 reduction in amortization expense of deferred
compensation benefits which resultedcosts (a return to normal levels) and a reduction of $200,000 in
a charge to
earnings which was approximately $800,000 greater than the normally expected
amortization expense (see Note 11 to the financial statements). Without that
adjustment and excluding the litigation settlementcomputer software and related costs incurred in
fiscal 1998, the decline in selling and administrative costs would have been
$1.1 million (19%). This significant decrease in expenses isservices as a result of greater
efficiencies gained from the move toimplementation of new
operating space (lower property taxes,
utility charges,enterprise software and consolidation of computer hardware. These savings were
offset by accruals for bonuses as a result of improved profit margins, increased
selling expenses, increased amortization of certain stock-based compensation and
higher depreciation expense), lower legal fees due to the settlementinstallation of the litigation with the U.S. Government, reduction in non-cash
charges tied to the value of the Company's stocknew computer hardware and
reduced accruals for
bonuses due to lower operating profits in fiscal 1999.
Selling and administrative costs, excluding the litigation settlement and
related costs, declined by $77,000 or 1% for the year ended April 30, 1998, over
fiscal 1997. This decline resulted from reduced litigation-related spending
during much of the fiscal year, reduced accrual for bonuses and lower deferred
compensation expense to certain officers. These reductions were offset by
increased spending for computer system expenses and stock-based compensation
amortization expenses, including $236,000 of ESOP amortization expense (see
discussion above under Gross Margins). The fiscal 1998 ESOP amortization is
$115,000 (95%) greater than the amount recorded in fiscal 1997 and exceeds the
actual cash outflow by $150,000.software.
As sales increase, the ratio of selling and administrative expenses to net
sales is expected to decrease. As a result of its June 1998 settlement of all
outstanding criminal and civil cases brought by the U.S. Government (see Item 3.
Legal Proceedings), theThe Company expects the future level of legal costs to be
significantly less than that experienced in the preceding two years. Because
fewer Company personnel are included in thetargets selling and administrative
category
than are engaged in the production process, the proportional impact of
increasing ESOP amortization willexpenses to be less than that incurred20% of sales.
Research and Development expenses
---------------------------------
Research and development expenditures for the year ended April 30, 2001,
declined by 10% ($521,000) from fiscal 2000 levels. Development spending by
Gillam-FEI was less than 5% of the consolidated total and not significant in
fiscal 2001. The apparent slowing of research and development spending is not
indicative of a decrease in the Company's development effort. During fiscal
2001, the Company was successful in obtaining funding from customers on two
separate projects. This reduced the level of self-funded research and
development spending but increased the cost of sales.
Research and development expenses
The Company expended $5.79spending in fiscal 2000 was $5.37 million on research and development efforts
during fiscal 1999 compared
to $1.44$5.79 million in fiscal 1998, an increase1999, a 7% decrease. These costs were incurred to
develop a high-precision quartz oscillator, improvement of $4.4
million or 302%. Such efforts also included developingrubidium atomic
standards for wireless communications infrastructure, finalization of certain
generic space transponder components and to continue the next generationdevelopment of
commercial rubidium and VSAT products and other new products for the terrestrial
wireless communication markets and successfully designing more
efficient manufacturing procedures to keep its products competitive.
The level of effort in Company-funded research and development projects
during fiscal 1998 was comparable to that of fiscal 1997 with costs decreasing
by $20,000 (1%) from fiscal 1997 levels. Such costs reflect the successful
development of the early-generation rubidium and VSAT commercial product lines
(see Item 1. Business) but do not reflect satellite hardware development costs
which were partially funded by customer projects. While the Company retains
production rights to any technology which results from customer-funded,
non-recurring engineering efforts, the costs of such development are recorded in
cost of sales.procedures.
The Company will continue to focus its research and development activities
on those commercial projectsproducts which it expects will provide the best return on
investment and provide the bestgreatest prospects for the future growth of the Company. For
fiscal 2000,2002, the Company will continue to make adevote substantial investment of
capitalfinancial and
technical resources to complete development of the genericnew products for the satellite transponder market,burgeoning cellular
infrastructure buildout as well as continue to invest in more efficient product
designs and manufacturing proceduresprocedures. The Company's target is to spend
approximately 10% of revenues on research and developdevelopment activities, although
the actual level of spending is dependent on new opportunites and the rate at
which it succeeds in bringing new products to meet
the needs of the wireless communications marketplace. Where possible, the
Companymarket. Internally generated cash
and cash reserves will attemptbe adequate to secure partial customer funding for suchfund these development efforts but is expecting to spend between $3 and $4 million of its own funds in
order to bring such products to market during fiscal 2000.efforts.
Other Income (Expense)
----------------------
Other income (expense) declined by $5.5 million (71%) in fiscal 1999
compared to fiscal 1998 and increased by $5.4 million (225%) in fiscal 1998
compared to fiscal 1997. Excluding the $4.9 million net gain on the sale of the
Company's real estate holdings in fiscal 1998, other income (expense) decreased by $568,000 (20%$1.1 million (32%) in fiscal 1999 over2001
compared to fiscal 1998 and2000 but increased by $455,000
(19%$1.1 million (50%) overin fiscal 1997
During2000
compared to fiscal 1999, the Company realized increased investment1999.
Investment income ($640,000 or 30%) overin fiscal 1998. This increase is attributable to the fiscal
19992001 includes $469,000 of realized gains on the
sale of marketable securities of $678,000. Such gains
includeless a realized gain of $508,000 on the sale of 41,000 shares of stock which
the Company received as the result$287,000 writedown to market value of a
"spinoff" company from Reckson
Associates. Withoutcertain marketable security whose decline in value was deemed to be other than
temporary. This is compared to $1.6 million of realized gains in fiscal 2000 and
to $678,000 in fiscal 1999. Excluding these net gains, fiscal 1999 investment income would have
decreased by $38,000 (2%in
fiscal 2001 was $198,000 (9%) overhigher than fiscal 1998. This decline is attributable to the
Company's decision to invest a substantial portion of its marketable securities
in certain tax-free instruments which carry a lower interest rate. Fiscal 19982000 and fiscal 2000 investment
income increased by $592,000 (38%was $178,000 (8%) overhigher than fiscal 1997. This result is
due principally to an increase in income-earning assets over fiscal 1997 levels.
Such assets grew significantly in the last quarter of fiscal 1998 as a result of
the net proceeds from the real estate sales.1999. In addition to interest
income, the Company also realizes quarterly dividend income on its REIT units.
The Company anticipates that investment income in future years will decline modestly due to
the lower level of interest rates on its tax-free investments andremain
fairly constant assuming a relatively stable interest rate environment.environment and if
the level of investments remains the same.
Interest expense in fiscal 1999 decreased2001 increased by $342,000 or 51%$27,000 (9%) from fiscal 19982000
and fiscal 19982000 interest expense decreased by $207,000 (24%)$26,000 or 7% from fiscal 1997. During1999.
Included in the third quarterfiscal 2001 amount is $56,000 of fiscal 1998,interest expense paid by
Gillam-FEI. Excluding Gillam-FEI, interest expense would have continued its
decline as the Company repaidretires its real
estate-related loans thus realizing significant reductions in itslong-term financing obligations. It 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. As a result, of the loan paydowns, declining debt balances and a stable
interest rate environment, the Company anticipates that interest
expense in fiscal 2002 will be lower inapproximately the same as the expense for fiscal
2000 when compared to earlier2001.
During fiscal years.
Other2001, other income, net, in additionincreased by $211,000 to the net gain on the sale$4,000.
Gillam-FEI contributed $76,000 of the
Company's real estate holdings also included rental income through December 1997
under the long-term direct finance lease with Laboratory Corporation of America.
Without the one-time gain, this category declined by $1.6 million duringgrowth. In fiscal 1999 compared to fiscal 1998 and by $345,000 during fiscal 1998 from fiscal
1997. This decrease is principally attributable to the cessation of finance
lease income as a result of the sale of the leased property during January 1998.
In addition,2000, the Company
incurred costs during fiscal 1998 and early fiscal 1999approximately $170,000 of expenses related to move its operations to new and more efficient space within the leased back
property.an attempted acquisition
of another company. The Company anticipates that in future years other income,
net, will not be an insignificanta significant contributor to pretax earnings.
Income Taxes
------------
As a result of the acquisition of Gillam S.A. during fiscal 2001, the
Company is now subject to taxation in several countries. The statutory federal
rates vary from 34% in the United States to 40% in Europe. The effective rate
for the Company for the year ended April 30, 2001 was 31.4% compared to 28.9% in
fiscal 2000 and to 25.4% in fiscal 1999. In all three 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.
The Company's European subsidiaries have available net operating loss
carryforwards of approximately $2.2 million to offset future taxable income. Of
the loss carryforward, approximately $238,000 expires in fiscal 2003 while the
balance may be utilized for an indefinite period of time.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $59.8$66.6 million at April 30, 1999.2001. Included in working
capital at April 30, 19992001 is $39.3$35.5 million of cash, cash equivalents and
short-term investments, including approximately $12 million representing the
fair market value of REIT units which are convertible to Reckson Associates
Realty Corp. common stock. (see(See Note 6 to the financial statements.) The
Company's current ratio at April 30, 19992001 is 13.25.9 to 1 compared to a 5.7 to 11. This ratio at April 30, 1998. Theis lower ratio at April
30, 1998 isthan
prior years due to the accrual of $8 million related toCompany's long-term investments in new subsidiaries as
well as the U.S. Government
litigation settlement which was paidgrowth in June 1998. Excluding such accrual from
both cashaccruals for income taxes and accrued liabilities resulted in a current ratio of 12.4 to 1 at
April 30, 1998.compensation programs.
Net cash used inprovided by operating activities for the year ended April 30,
1999,2001, was approximately $1.8$4.0 million compared to $3.2$3.5 million provided by operationsin fiscal
2000. While fiscal 2001 earnings were greater than the prior year, a significant
component of earnings, the reimbursement for directors' and officers' liability
insurance coverage of $3.0 million, was not received until after the end of the
fiscal 1998. This decrease inyear. Another significant reason for the reduced cash inflow is due to
increased levelsthe $6.6 million increase in inventory, before reserve adjustments, as the
Company attempted to build a stock of research and development spending and the June 1998 $8 million litigation
settlementfinished goods by year-end. These two
items were offset by receipta $3.6 million increase in income taxes payable, largely
related to the insurance reimbursement and refunds of $4.5prior year tax payments.
Unbilled receivables increased by $1.2 million from directors and officers
liability insurance coverage. Reversing a trend of the previous two years,
unbilled receivables decreased by $6.96 million (51%(48%) as the Company shippedwon new
long-term contracts in both the space portion of the commercial communications
segment and billed more product on maturing projects. Inventories have grown by $3.2 million
(50%) over fiscal 1998 levels asin the Company builds more product to have
available for customers on a quick turn-around basis.US Government segment. Accounts payable and accrued expenses
exclusive of the 1998 litigation accrual, decreasedincreased by 20%$5.4 million (129%) from the balances at April 30, 1998. This decline2000. Of this
increase, $4.5 million is relatedattributable to the timingliabilities of Gillam-FEI. The balance
of the purchases of capitalizable assets relatedincrease is principally due to the early fiscal 1999
relocation of the Company's office space within its leased back portion of the
building as well as smaller accruals for bonuses based on lower operating
profits in fiscal 1999.
management compensation
programs for improved profitability offset by payments for inventory purchases.
Net cash used in investing activities for the year ended April 30, 1999,2001,
was $3.7$5.0 million. The major transaction during the year was the acquisition of
Gillam-FEI for which the Company used $2paid an aggregate of $8.9 million, (net) to acquire certain U.S.
government and agency securities and an additional $339,000 to acquireincluding
transaction costs. This purchase was partially funded by the common stockredemption of
certain unrelated companies for investment purposes.marketable securities of approximately $6.2 million and was also offset
by the acquired cash of Gillam-FEI of approximately $758,000. The Company also
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 strategies. The Company also
invested approximately $700,000$1.8 million in production and test equipment which will
improve the efficiency of its manufacturing operations;
used an additional $500,000 to obtain new computer hardware and enterprise-wide
software to improve its financial and operational information systems and
acquired approximately $200,000 of furniture and fixtures for its newly
renovated office space.operations. The Company will
continue to acquire more efficient equipment to automate its production process
and to build up the capacity of its new China manufacturing facility. It intends
to spend approximately $1$2 million on capital equipment during fiscal 2000.2002.
Internally generated cash will be adequate to acquire this capital equipment.
Net cash used by financing activities for the year ended April 30, 1999,2001,
was $2.6$1.8 million. Of this amount, $1.54$1.6 million was used to pay the Company's
semi-annual cash dividends to shareholders $665,000and $916,000 was used to make
regularly scheduled long-term liability payments and $487,000 was used to acquire 70,000
shares of the Company's stock for treasury.payments. The debt repayment includes
$694,000 paid by Gillam-FEI. These outflows were partially offset by payments of
$73,000$716,000 received from the sale of shares of common stock from treasury to
satisfy the exercise of stock options granted to certain employees.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 in previous years.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 its resources and efforts to develop
products for wireless, wireline and fiber optic commercial communication
systems, for commercial satellite programs
and terrestrial-based operations, which management believes will result in future growth and continued
profitability. During fiscal 2000,2002, the Company will
continueintends to make a substantial
investment of capital and technical resources to complete developmentcontinue to develop new
products to meet the needs of the generic products for the satellite transponder
market, continuecommercial communications marketplace and to
invest in more efficient product designs and manufacturing procedures and develop new products to meet the needs of the wireless
communications marketplace.procedures. Where
possible, the Company will attempt to secure partial customer funding for such development
efforts but is expectingtargeting to spend
up to $4 million of its own funds in orderat a rate of approximately 10%
of revenues to bring such products to market
during fiscal 2000.achieve its development goals. Internally generated cash will be
adequate to fund these development efforts.
As of April 30, 1999,2001, the Company's consolidated backlog amounted to
approximately $21$39 million (see Item 7) and includes1). Of this backlog, approximately 76%
represents orders for the commercial wireless communications segment, of approximately $19 million.18% for the
wireline and network synchronization segment and 6% for the U.S. Government
segment. Approximately 55%90% of this backlog is expected to be filled during the
Company's fiscal year ending April 30, 2000. Although the current backlog is comparable to the backlog at
April 30, 1998, the character of the backlog is changing. In previous years, the
backlog of custom-built products could represent 12 to 18 months of production.
As the Company evolves into a more product-oriented manufacturer and seller of
generic wireless communication products, its cycle-time will be significantly
reduced. Consequently, the backlog will be less predictive of future results.
The Company also has available for income tax purposes, approximately $1.7
million of net operating loss carryforwards which may be applied against future
taxable income.
Quantitative and Qualitative Disclosures about Market2002.
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;units, see Item 2. Properties and Note 6 to
the financial statements). The Company's investments in fixed income and equity
securities were $25.5$19.6 million and $13.2$13.8 million, respectively, at April 30,
1999.2001. The investments are carried at fair value with changes in unrealized gains
and losses recorded as adjustments to stockholders' equity. The fair value of
investments in marketable securities is generally based on quoted market prices.
Typically, the fair market value of investments in fixed interest rate debt
securities will increase as interest rates fall and decrease as interest rates
rise. Based on the Company's overall interest rate exposure at April 30, 1999,2001, a
10 percent change in market interest rates would not have a material effect on
the fair value of the Company's fixed income securities or results of operations
(investment income).
Year 2000 Issue
The Year 2000 Issue is the resultForeign Currency Risk
---------------------
With its acquisition of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
or hardware that have date-sensitive software or embedded computer chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could resultGillam-FEI in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
During the first quarter of fiscalSeptember 2000, the Company intendshas
become subject to complete
installation of newly acquired, integrated financial and manufacturing software,
the cost of which is not expected to exceed $500,000. The purchase of the
financial software will satisfactorily address the issue of compliance with the
year 2000 problem for financial transactions and reporting purposes. The Company
has sufficient resources to acquire, install and implement such software.
Beginning in the latter portion offoreign currency translation risk. In fiscal 1998 and concluding during the
second quarter of fiscal 1999,2002, the Company
acquired new desktop computerswill be subject to additional risks related to its establishment of sufficient size and speed to operate the new financial software. The costa
manufacturing facility in China. For each of these computers, included in capital equipment, was approximately $220,000. The
Company identified the additional operational, nonfinancial software which must
be obtained to resolve the year 2000 issue in certain production and support
areas. Such software will be installed by the end of the first quarter of fiscal
2000 at a cost of less than $50,000.
The Company's products do not contain imbedded microchips or other
components which are date sensitive. The same is generally true of the products
which are acquired from third-party vendors. Consequently, the Company's
products are already compliant with the year 2000. In addition, the Company has
received assurances from its "critical" vendors that their systems are or will
be Y2K compliant prior to the year 2000. Consequently,investments, the Company does
not anticipatehave any interruption in services or supplies from vendors.
In the eventnear-term intentions to repatriate its financial and manufacturing software is not timely
installed and the Company is unable to prepare appropriately dated invoices,
payments or other documentation, the Company will employ alternative strategies.
This will consist principally of hiring additional clerical personnel to assure
that the Company's records and documentation are properly and accurately
maintained until such time that the software implementation can be completed. In
the event one or more of its vendors suffers a "Y2K" failure, the Company will
obtain its component parts from other sources. Since the majority of the
important components used in the Company's products can be obtained from
multiple sources,invested cash. For this
reason, the Company does not anticipate a problemintend 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 purchasing needed
partsthe equity section of the balance sheet as a component of other comprehensive
income. As of April 30, 2001, the amount related to foreign currency exchange
rates is a $245,000 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, of Y2K issues. For those component parts, whichsimilar results in local currency can be
obtainedvary significantly upon
translation into US dollars if exchange rates fluctuate significantly from only a limited number of sources, the Company will evaluate the
need to increase its on-hand inventory priorone
period to the endnext.
European Union Conversion to Euro
---------------------------------
Effective January 1, 2002, the eleven participating countries of calendar 1999.
the
European Union are expected to convert the "legacy" currency of each country
into the Euro. Thereafter, all cash transactions are to be conducted solely in
the Euro with legacy currencies canceled. The Company's European-based
subsidiaries operate in two of the participating countries and are therefore
obligated to comply with the new currency requirements. To the knowledge of
Company management, this conversion will have little, if any, impact on
contractual agreements, banking arrangements, employment agreements or similar
matters. The subsidiaries' accounting systems and records must be modified to
accommodate the new currency but management expects the cost of doing so to be
nominal.
OTHER MATTERS
See discussion of recently issued pronouncements included in Note 1 to the
consolidated financial statements.
The financial information reported herein is not necessarily indicative of
future operating results or of the future financial condition of the Company.
Except as noted, management is unaware of any impending transactions or events
that are likely to have a material adverse effect on results from operations.
INFLATION
During fiscal 1999,2001, 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.
Item 8. Financial Statements and Supplementary Data
-
------- -------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Frequency Electronics, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 5350 present fairly, in all material
respects, the financial position of Frequency Electronics, Inc. and its
Subsidiaries as of April 30, 19992001 and 1998,2000, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
19992001 in conformity with accounting principles generally accepted accounting principles.in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 5350 presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted auditing
standardsin 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 the opinion expressed above.our opinion.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
July 13, 1999June 27, 2001
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 19992001 and 19982000
-----------
ASSETS: 1999 19982001 2000
---- ----
(In thousands)
Current assets:
Cash and cash equivalents ............... .......................$ 5672,121 $ 8,7254,994
Marketable securities (Note 5) .......... 38,720 36,661........................... 33,407 36,013
Accounts receivable, net of allowance
for doubtful accounts of $190 (Note 3) ... 12,190 18,640................ 15,160 9,590
Inventories (Note 4) .................... 9,696 6,475..................................... 20,471 13,307
Deferred income taxes (Note 12) ......... 2,336 5,000........................... 4,313 1,940
Prepaid expenses and other .............. 1,182 986
-------...................... 4,662 1,329
-------- -------
Total current assets ............. 64,691 76,487........................ 80,134 67,173
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization (Note 6) ................. 9,489 9,159.................................... 11,997 9,040
Deferred income taxes (Note 12) ............. 500 --............................. 69 600
Intangible assets ................................. 4,987 -
Other assets ................................ 3,675 3,134
-------...................................... 4,852 4,034
-------- -------
Total assets ..................... $78,355 $88,780
=======................................$102,039 $80,847
======== =======
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 19992001 and 19982000
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 1999 19982001 2000
---- ----
(In thousands)
Current liabilities:
Current maturities of long-term debt (Note 7) ...... Short-term credit obligations .......................$ 489699 $ 479-
Accounts payable - trade ........................... 837 1,283............................ 2,408 1,019
Accrued liabilities (Note 8) ....................... 2,342 10,854................................. 7,228 3,190
Dividend payable ................................... 766 771.................................... 829 799
Income taxes payable ............................... 455 145
-------................................ 2,370 -
-------- -------
Total current liabilities .............. 4,889 13,532
Long-term debt, net of current maturities (Note 7).... -- 500..................... 13,534 5,008
Deferred compensation (Note 11) ...................... 5,165 3,905
Deferred income taxes (Note 12) ...................... -- 2,400................................. 5,726 5,276
Other liabilities (Note 6) ........................... 11,794 12,036..................................... 12,348 11,573
-------- -------
-------
21,848 32,373
-------Total liabilities ............................. 31,608 21,857
-------- -------
Commitments and contingencies (Notes 6 and 9)
Minority interest in subsidiary ....................... 226 -
Stockholders' equity (Note 11):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 - 9,163,939 shares
in 2001 and 9,009,259 shares 9,009in 2000 9,164 9,009
Additional paid-in capital ......................... 36,940 36,30642,860 37,929
Retained earnings .................................. 15,653 15,983................................... 21,226 17,239
-------- -------
-------
61,602 61,29873,250 64,177
Common stock reacquired and held in treasury -
at cost (1,346,850(872,669 shares in 19992001
and 1,296,9131,016,552 shares in 1998)2000) .................... (4,058) (3,632)
Unamortized ESOP debt (Notes 7 and 11) ............ (500) (1,000)
Notes receivable-common stock (Note 10) ........... (287) (287)
Unearned compensation ............................. (47) (89)(3,127) (3,644)
Other stockholders' equity .......................... (122) (135)
Accumulated other comprehensive income (loss) income ..... (203) 117
-------....... 204 (1,408)
-------- -------
Total stockholders' equity ................... 56,507 56,407
-------.................... 70,205 58,990
-------- -------
Total liabilities and stockholders' equity ....... $78,355 $88,780
=======........$102,039 $80,847
======== =======
The accompanying notes are an integral part of these
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 1999, 19982001, 2000 and 19971999
-----------
2001 2000 1999 1998 1997
---- ---- ----
(In thousands, except share data)
Net sales (Note 13) ............................. ............................$ 49,210 $ 26,535 $ 18,958
$ 31,997 $ 27,929Cost of sales ............................ 32,180 14,884 12,985
-------- -------- --------
Cost of sales ................................ 12,985 25,870 18,075Gross margin ........................ 17,030 11,651 5,973
Selling and administrative expenses (Note 9) ....... 8,820 5,275 5,384 5,791 5,718
Insurance reimbursement, (Note 9)net ............. (2,576) - (4,500) -- --
Litigation settlement (Note 9) ............... -- 8,000 --
Research and development expenses .................... 4,847 5,368 5,790 1,441 1,461
-------- -------- --------
Total operating expenses ............... 19,659 41,102 25,254
-------- -------- --------
Operating profit (loss) profit ............5,939 1,008 (701) (9,105) 2,675
Other income (expense):
Investment income ...................... 2,655 3,929 2,775 2,135 1,543
Interest expense ....................... (333) (306) (330) (672) (879)
Other, net (Note 6) ................................................. 4 (207) (171) 6,306 1,724
-------- -------- --------
Earnings (Loss)Income before minority interest and
provision (benefit)for income taxes ............ 8,265 4,424 1,573
Minority interest in income of
consolidated subsidiary ............... 29 - -
-------- -------- --------
Income before provision for
income taxes .......................... 8,236 4,424 1,573
(1,336) 5,063
Provision (Benefit) for income taxes (Note 12)............... 2,592 1,280 400 (1,400) 200
-------- -------- --------
Net Earnings .................................Income .................$ 5,644 $ 3,144 $ 1,173 $ 64 $ 4,863
======== ======== ========
Net EarningsIncome per common share:
Basic ................................................................ $ 0.69 $ 0.41 $ 0.16
====== ====== ======
Diluted ............................ $ 0.010.67 $ 0.70
======== ======== ========
Diluted ................................0.39 $ 0.15
$ 0.01 $ 0.66
======== ======== ============== ====== ======
Average shares outstanding (Note 2):outstanding:
Basic ...............................................................8,198,569 7,673,497 7,502,260 7,368,472 6,967,109
========= ========= =========
Diluted ...........................................................8,431,823 8,043,727 7,820,742 7,787,140 7,319,250
========= ========= =========
The accompanying notes are an integral part of these
financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in
Stockholders' Equity Years
ended April 30, 1999, 1998,2001, 2000
and 19971999
(In thousands, except share data)
NoteOther Accumulated
Add'l Treasury stock receivableStock- other
Common Stock paid in Retained (at cost) Unamortized common Unearnedholders' comprehensive
Shares Amount capital earnings Shares Amount ESOP debt stock compensationequity income (loss) Total
--------- ------ ------- -------- ------- ------- --------- ------ ------------ ------------------- ------ ------------- -------
Balance at May 1, 1996 6,006,300 $6,006 $35,024 $16,265 1,159,905 ($5,075) ($2,000) ($740) ($113) $56 $49,423
Exercise of stock options (6) (127,093) 463 457
Amortization of ESOP debt
as a result of shares
allocated 172 500 672
Payment received for common
stock subscribed 305 305
Amortization of unearned
compensation 36 36
Increase in market value of
marketable securities 24 24
Cash dividend (714) (714)
Net Earnings 4,863 4,863
--------- ----- ------ ------ --------- ------ ------ ----- ------ ---- -------
Balance April 30, 1997 6,006,300 6,006 35,190 20,414 1,032,812 (4,612) (1,500) (435) (77) 80 55,066
Exercise of stock options (83) (162,495) 938 855
Amortization of ESOP debt
as a result of shares
allocated 976 500 1,476
Shares issued under
restricted stock plan 15 (7,500) 42 (52) 5
Independent Contractor
stock options granted 208 208
Payment received for common
stock subscribed 148 148
Amortization of unearned
compensation 40 40
Increase in market value of
marketable securities 37 37
Stock dividend, 3-for-2 3,002,959 3,003 (3,007) 434,096 (4)
Cash dividend (1,488) (1,488)
Net Earnings 64 64
--------- ----- ------ ------ --------- ------ ------ ----- ------ ---- -------
Balance April 30, 1998 9,009,259 9,009 36,306 15,983$9,009 $36,306 $15,983 1,296,913 (3,632) (1,000) (287) ( 89) 117 56,407($3,632) ($1,000) ($ 376) $117 $56,407
Exercise of stock options 12 (20,063) 61 73
Purchase of treasury stock 70,000 (487) (487)
Amortization of Independent
Contractor stock options 58 58
Amortization of ESOP debt as a result of shares
allocated 564 500 1,064
Amortization of unearned
compensation 42 42
Cash dividend (1,503) (1,503)
Decrease in market value of
marketable securities (320) (320)
Cash dividend (1,503) (1,503)
Net EarningsIncome 1,173 1,173
-------
Comprehensive income- 1999 853
--------- ------ ------- ------- --------- ------- ------- ----- ----- ---------- ------ ------ -------
Balance at April 30, 1999 9,009,259 $9,009 $36,940 $15,6539,009 36,940 15,653 1,346,850 (4,058) (500) ( 334) (203) 56,507
Exercise of stock options 341 (330,298) 414 755
Amortization of Independent
Contractor stock options 170 170
Amortization of ESOP debt 478 500 978
Payment received for common
stock subscribed 172 172
Amortization of unearned
compensation 27 27
Cash dividend (1,558) (1,558)
Decrease in market value of
marketable securities (1,205) (1,205)
Net Income 3,144 3,144
--------
Comprehensive income- 2000 1,939
--------- ------ ------- ------- --------- ------- ------ ------ ------ --------
Balance at April 30, 2000 9,009,259 9,009 37,929 17,239 1,016,552 (3,644) 0 (135) (1,408) 58,990
Exercise of stock options 510 (129,288) 206 716
Tax benefit from stock option
exercise 809 809
Amortization of Independent
Contractor stock options 310 310
Contribution of stock to
401(k) plan (8) (14,595) 311 303
Issuance of stock for Gillam
acquisition 154,681 155 3,310 3,465
Amortization of unearned
compensation 13 13
Cash dividend (1,657) (1,657)
Increase in market value of
marketable securities 1,367 1,367
Foreign currency translation
adjustment 245 245
Net Income 5,644 5,644
-------
Comprehensive income- 2001 7,256
--------- ------ ------- ------- --------- ------- ------ ------ ------ -------
Balance at April 30, 2001 9,163,940 $9,164 $42,860 $21,226 872,669 ($4,058)3,127) $0 ($500) ($287) ($ 47) ($203) $56,507122) $ 204 $70,205
========= ====== ======= ======= ========= ======= ====== ===== ===== ========== ====== =======
The accompanying notes are an integral part of
these financial statementsstatements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1999, 19982001, 2000 and 19971999
-----------
2001 2000 1999 1998 1997
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net earnings ..................................income .....................................$ 5,644 $ 3,144 $ 1,173 $ 64 $ 4,863
Adjustments to reconcile net earnings
to net cash provided by (used in) provided by
operating activities:
Deferred tax benefit .......................expense (benefit) ............... (1,408) 840 (100) (2,600) --
Depreciation and amortization Property ................................. 1,211 943 921
Other .................................... 13 20 18................ 1,446 1,117 1,224
Provision for losses on accounts
receivable and inventories ............... (200) 4,537 42................. 2,001 151 186
Gains on marketable securities and
notes receivable .........................receivable- net ...................... (181) (1,654) (678) (42) (70)
Gain on sale or disposal of
property, plant and equipment ............ -- (5,869) --
Amortization resulting from
allocation of ESOP shares .................................. - 978 1,064 1,476 672
Employee benefit plan provisions ........................ 1,271 766 1,461
444 407
NoncashMinority interest on finance lease .......... -- (15) (95)in earnings of subsidiary .. 29 - -
Changes in assets and liabilities:liabilities, exclusive
of assets and liabilities acquired:
Accounts receivable .......................... 6,450 (3,843) (1,424)(1,195) 2,583 6,414
Inventories .................................. (3,196) 48 (779)(4,612) (3,745) (3,546)
Prepaid and other ............................ (462) (174) 312 247 (207)
Other assets ................................. (373) (359) (554) (579) (418)
Accounts payable trade ....................... 44 182 (446)
Insurance reimbursement receivable ........... (3,000) - trade ..................... (446) 401 (497)-
Litigation settlement accrual ................ - - (8,150) 8,150 --
Accrued liabilities .......................... 1,350 773 (362) (217) 659
Income taxes payable ......................... 3,590 (676) 310 72 (6)
Other liabilities ............................ (193) (383) (137) (81) (37)
------- ------- -------
Net cash provided by (used in)
provided by
operating activities .................... 3,951 3,543 (1,829) 3,156 4,049
------- ------- -------
Cash flows from investing activities:
Payment for acquisition, net of cash
acquired of $758 ............................. (8,138) - -
Purchase of marketable securities .............. (4,318) (24,611) (22,920) (13,030) (25,927)
Proceeds from sale or redemption of marketable
securities .................................. 9,384 27,468 20,575 9,560 10,541
Capital expenditures ........................... (1,929) (668) (1,366) (1,043) (1,141)
Proceeds from sale of property, plant
and equipment -- 6,587 --
------- ------- -------
Net cash (used in) provided by
investing activities ........................................ (5,001) 2,189 (3,711) 2,074 (16,527)
------- ------- -------
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1999, 19982001, 2000 and 19971999
(Continued)
-----------
2001 2000 1999 1998 1997
---- ---- ----
(In thousands)
Cash flows from financing activities:
Principal payments of long-term debt
and other long-term obligations .......................... (929) (700) (665) (1,374) (751)
Purchase of treasury stock ...................................... - - (487) -- --
Payment of cash dividend ..........................................(1,627) (1,532) (1,539) (1,520) --
Payment on notes
receivable from employees ............. -- 148 305
Proceeds from loan receivable ............. -- 1,879 --................... - 172 -
Exercise of stock options ........................................ 716 755 73 914 457
------- ------- -------
Net cash (used in) provided byused in
financing activities ..................................... (1,840) (1,305) (2,618) 47 11
------- ------- -------
Net (decrease) increase in cash and
cash equivalents .............................before effect of
exchange rate changes .......................... (2,890) 4,427 (8,158)
5,277 (12,467)Effect of exchange rate changes on cash
and cash equivalents ........................... 17 - -
------- ------- -------
Net (decrease) increase in cash
and cash equivalents .......................... (2,873) 4,427 (8,158)
Cash and cash equivalents at beginning of year ... 4,994 567 8,725 3,448 15,915
------- ------- -------
Cash and cash equivalents at end of year ............... $ 5672,121 $ 8,7254,994 $ 3,448567
======= ======= =======
Supplemental disclosures of cash flow
information (Note 15)16):
Cash paid during the year for:
Interest ...........................$ 297 $ 312 $ 331
$ 766 $ 979
======= ======= ============= ====== ======
Income taxes ........................$ 971 $1,159 $ 190
$ 1,128 $ 206
======= ======= ============= ====== ======
The accompanying notes are an integral part of these
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
------------------------------
Principles of Consolidation:
The consolidated financial statements include the accounts of Frequency
Electronics, Inc. and its wholly-owned subsidiaries (the "Company" or
"Registrant". References to "FEI" are to the parent company alone and do not
refer to any of its subsidiaries). The Company is principally engaged in the
design, development and manufacture of precision time and frequency control
products and components for microwave integrated circuit applications. See Note
1314 for information regarding the Company's commercial wireless communications, Gillam-FEI
and U.S. government business segments. Intercompany accounts and significant
intercompany transactions are eliminated in consolidation.
These financial statements have been prepared in conformity with generally
accepted accounting principles and require management to make estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from these estimates.
Inventories:
Inventories, which consist of 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 is recorded at cost and includes interest on
funds borrowed to finance construction. Expenditures for renewals and
betterments are capitalized; maintenance and repairs are charged to income when
incurred. When fixed assets are sold or retired, the cost and related
accumulated depreciation and amortization are eliminated from the respective
accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
Depreciation and Amortization:
Depreciation of fixed assets is computed on the straight-line method based
upon the estimated useful lives of the assets (40 years for buildings and 3 to
10 years for other depreciable assets). Leasehold improvements are amortized on
the straight-line method over the shorter of the term of the lease or the useful
life of the related improvement.
Revenue and Cost Recognition:
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred. On production-type contracts,
revenue is recorded as units are delivered with the related cost of sales
recognized on each shipment based upon a percentage of estimated final contract
costs. Changes in job performance may result in revisions to costs and income
and are recognized in the period in which revisions are determined to be
required. Provisions for anticipated losses are made in the period in which they
become determinable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For contracts in the Company's Gillam-FEI segment, and smaller contracts andor
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.
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year.
Income Taxes:
The Company recognizes deferred tax liabilities and assets based on the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Earnings Per Share:
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," became effective for the year ended April 30, 1998. In accordance
with SFAS 128, basicBasic earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share are computed by dividing net earnings by the sum of the if-converted effect of unexercised stock options and the weighted
average number of shares of common stock.
All periods prior to April 30, 1998 have been restated to conform withstock and the requirementsif-converted effect of
SFAS 128.
All shares and per share amounts have been adjusted to reflect a 3-for-2unexercised stock split in the form of a 50% stock dividend, effective October 31, 1997.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, 19992001 and 19982000 were
held in the custody of onetwo financial institution.institutions. Investments in certain debt
and equity securities are categorized as available for sale and are carried at
fair value, with unrealized gains and losses excluded from income and recorded
directly to stockholders' equity. The Company recognizes gains or losses when
securities are sold using the specific identification method.
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company places its temporary cash investments with high credit
quality financial institutions. Such investments may be in excess of the FDIC
insurance limit. No losses have been experienced on such investments.
Fair Values of Financial Instruments:
Cash and cash equivalents and loans payable are reflected in the
accompanying consolidated balance sheets at amounts considered by management to
reasonably approximate fair value based upon the nature of the instrument and
current market conditions. Management is not aware of any factors that would
significantly affect the value of these amounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock-based Plans:
The Company applies the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and continues to measure compensation
cost in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Historically, this has not resulted in
compensation cost upon the grant of options under a qualified stock option plan.
However, in accordance with SFAS No. 123, the Company provides pro forma
disclosures of net earnings (loss) and earnings (loss) per share as if the fair
value method had been applied beginning in fiscal 1996.
Newly Issued Accounting Standards
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 replaces the "industry segment"
approach with the "management" approach which is defined as the internal
organization used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position but did affect the disclosure of segment information. (See
Note 13 - Segment Information)
In fiscal 1999, the Company also adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting
and presentation of comprehensive income and its components in a full set of
financial statements. As shown in the Consolidated Statement of Changes in
Stockholders' Equity, comprehensive income includes all changes in equity during
a period, except those resulting from investments by and distribution to the
Company's stockholders. As this standard only requires additional information in
the financial statements, it does not affect the Company's results of operation
or financial position.
2. Earnings Per Share
------------------
Reconciliations of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Years ended April 30,
1999 1998 1997
--------- --------- ---------
Basic EPS Shares outstanding
(weighted average) ......... 7,502,260 7,368,472 6,967,109
Effect of Dilutive Securities ...... 318,482 418,668 352,141
--------- --------- ---------
Diluted EPS Shares outstanding .....Years ended April 30,
-----------------------------------------
2001 2000 1999
---- ---- ----
Basic EPS Shares outstanding
(weighted average) 8,198,569 7,673,497 7,502,260
Effect of Dilutive Securities 233,254 370,230 318,482
--------- --------- ---------
Diluted EPS Shares outstanding 8,431,823 8,043,727 7,820,742 7,787,140 7,319,250
========= ========= =========
Options to purchase 178,500419,750 and 6,000178,500 shares of common stock were
outstanding during the years ended April 30, 19992001 and 1998,1999, respectively, but
were not included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of the
Company's common shares during the respective periods. Since the inclusion of
such options would have been antidilutive they are excluded from the
computation. No options were excluded from the computation duringFor the year ended April 30, 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued2000, all exercisable options were
included in the computation of diluted earnings per share.
3. Accounts Receivable
-------------------
Accounts receivable include costs and estimated earnings in excess of
billings on uncompleted contracts accounted for on the percentage of completion
basis of approximately $6,657,000$3,814,000 at April 30, 19992001 and $13,618,000$2,584,000 at April 30,
1998.2000. Such amounts represent revenue recognized on long-term contracts that has
not been billed, pursuant to contract terms, and was not billable at the balance
sheet date.
4. Inventories
-----------
Inventories, which are reported net of reserves of $1,054,000$4,001,000 and
$1,400,000$1,188,000 at April 30, 19992001 and 1998,2000, respectively, consisted of the following
(in thousands):
1999 19982001 2000
---- ----
Raw Materials and Component Parts .........$ 3,0289,227 $ 2,8576,188
Work in Progress 6,668 3,618
------- -------and Finished Goods ....... 11,244 7,119
-------- --------
$ 9,69620,471 $ 6,475
======= =======13,307
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. Marketable Securities
---------------------
Marketable securities at April 30, 19992001 and 19982000 are summarized as follows
(in thousands):
April 30, 19992001
-------------------------------------------
Unrealized
Market Holding
Cost Value Gain (Loss)
---- ----- -----------
REIT units ..................$ 12,000 $ 11,548 ($ 452)12,000 $ -
Fixed income securities 25,376 25,484 108..... 19,344 19,582 238
Equity Securities 1,683 1,688 5
--------- --------- -----securities ........... 2,132 1,825 (307)
-------- -------- ------
$ 39,05933,476 $ 38,72033,407 ($ 339)69)
======== ======== ===========
During fiscal 2001, the decline in market value of a certain fixed income
security was deemed to be other than temporary. Accordingly, the Company
charged $287,000 against investment income to record the impairment in value
of this security.
April 30, 19982000
-------------------------------------------
Unrealized
Market Holding
Cost Value GainLoss
---- ----- --------------
REIT units $12,000 $12,000 -..................$ 12,000 $ 10,297 ($1,703)
Fixed income securities 23,200 23,253..... 24,867 24,269 (598)
Equity securities ........... 1,494 1,447 (47)
--------- -------- -------
$ 53
Equity Securities 1,344 1,408 64
--------- --------- -----38,361 $ 36,544 $ 36,661 $ 11736,013 ($2,348)
======== ======== ============
Maturities of fixed income securities classified as available-for-sale at
April 30, 19992001 are as follows (in thousands):
Current .................................. $11,576......................................$10,604
Due after one year through five years .... 6,100
Due after five years through ten years.... 7,700........ 8,740
-------
$25,376
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued$19,344
=======
6. Property, Plant and Equipment
-----------------------------
Property, plant and equipment consists of the following (in thousands):
1999 1998
------- -------2001 2000
---- ----
Buildings and building improvements.. improvements ................$ 8,75112,252 $ 8,751
Machinery, equipment and furniture... 18,915 17,374furniture ................. 25,010 19,523
------- -------
27,666 26,12537,262 28,274
Less, accumulated depreciation and amortization .................. 18,177 16,966.... 25,265 19,234
------- -------
$11,997 $ 9,489 $ 9,1599,040
======= =======
Depreciation and amortization expense for the years ended April 30, 2001,
2000 and 1999 1998was $1,253,000, $1,117,000 and 1997 was $1,211,000, $943,000 and $921,000, respectively.
Maintenance and repairs charged to operations for the years ended April 30,
1999, 19982001, 2000 and 19971999 was approximately $353,000,$485,000, $369,000 and $347,000,$353,000,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust ("REIT") whose
shares are traded on the New York Stock Exchange ("REIT").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 iswas
included in "Other income, net."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 after January 6, 1999.REIT. In addition, approximately 27,000 REIT units have been placed in
escrow which may be released to the Company based upon the price per share of
the REIT on the date of conversion of REIT units.
The Company leased back approximately 43% of the latter building from the
purchaser (the "Reckson lease"). Under the accounting provisions for sale and
leaseback transactions, the sale of this building is considered a financing and
the REIT units received are reflected as a noncurrent liability while the
related building continues to be reflected as an asset. Upon liquidation of the
REIT units, a portion of the resulting gain on this sale will be deferred and
recognized into income over the term of the leaseback with the balance
recognized in income on the date of liquidation. The Company's annual rental
payment of $400,000 is characterized as repayment of the financing with a
portion allocated to interest expense at an assumed interest rate of 6.5% and
the balance is considered repayment of principal. During the yearyears ended April
30, 2001, 2000 and 1999, the Company charged $165,000, $180,000 and $194,000,
respectively, to interest expense under the financing agreement. Lease rental expense charged to operations under the Company's former
land lease with Nassau County and for certain equipment was approximately
$308,000 and $223,000, respectively, for the years ended April 30, 1998 and
1997.
The Reckson lease contains two five-year renewal periods at the option of
the Company. Annual rental payments are $400,000 for the initial 11-year term
which ends in January 2010.2009. Under the terms of the lease the Company is required
to pay its proportional share of real estate taxes, insurance and other charges.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Future minimum lease payments required by the lease are as follows:follows (in
thousands):
Years ending
April 30,
2000 2002 ..........................$ 400
2001 400
2002 400
2003 .......................... 400
2004 .......................... 400
2005 .......................... 400
2006 .......................... 400
2007 and thereafter 1,867........... 1,067
------
$3,867$3,067
======
7. Long-Term Debt
Long-term debt consists of a note payable, originally in the amount of
$5,000,000, which was used to fund the purchase of 1,071,652 shares of the
Company's common stock for the Employee Stock Ownership Plan (ESOP). The note is
payable in forty equal quarterly installments of $125,000 through April 1, 2000
with interest at adjusted LIBOR plus 1.00% (6.439% at April 30, 1999). Dividends
received on ESOP shares ($11,000 and $21,000 at April 30, 1999 and 1998,
respectively) which have not been allocated to participant accounts are used to
pay a portion of the principal of this note. (see Note 11.) The note is
collateralized by a portion of the Company's common stock held in treasury.
1999 1998
---- ----
Outstanding balance ........ $489 $979
Less, current maturities.... 489 479
---- ----
Long-term debt ............. $ -- $500
==== ====
8. Accrued Liabilities
Accrued liabilities at April 30, 1999 and 1998 consist of the following (in
thousands):
1999 1998
------ ------
Litigation settlement (Note 9)... $ -- $ 8,150
Sales commissions ............... 797 800
Compensation .................... 512 753
Vacation accrual ................ 395 368
Other ........................... 638 783
------- -------
$ 2,342 $10,854
======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, 2001, $537,000 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, 2001, the rate was 4.802% based on the 3 month EURIBOR.
The Company also has several long-term debt obligations aggregating
approximately $376,000 which are secured primarily by the Company's European
buildings. Three of the loans are payable in monthly installments, including
interest at 5.25% to 5.61%, in the aggregate amount of $6,750. The fourth loan
is payable in annual installments of $87,000, plus interest at 5.52%.
Aggregate amounts of long-term debt scheduled to mature in each of the
subsequent years ending April 30, are as follows: (in thousands)
2002 ..............$ 162
2003 .............. 157
2004 .............. 57
-----
$ 376
=====
8. Accrued Liabilities
-------------------
Accrued liabilities at April 30, 2001 and 2000 consist of the following (in
thousands):
2001 2000
---- ----
Due customers ....................$ 2,915 $ 1,470
Accrued bonus .................... 1,181 535
Other compensation ............... 1,089 201
Vacation accrual ................. 512 390
Other ............................ 1,531 594
------- -------
$ 7,228 $ 3,190
======= =======
9. Commitments and Contingencies
Litigation Settlement:
On June 19, 1998, FEI and the United States Government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and Related Documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters with the Government. Under the terms of the Settlement
Agreement, FEI paid an aggregate of $8 million to the Government. These
settlement payments are reflected in Registrant's consolidated results of
operations for the fiscal year ended April 30, 1998. Included in selling and
administrative expenses for that year are accruals for additional legal fees
related to this settlement in the amount of $150,000.
Private Civil Derivative Actions:
On December 1, 1993, and February 4, 1994, two separate derivative
shareholder actions (pursuant to a court order, are now consolidated under one
civil action) were served in state court naming FEI, as a nominal defendant, and
its directors at the time and certain of its officers and employees as
defendants and, generally alleges, based upon a November 1993 federal grand jury
indictment, that they defrauded the government, submitted false statements and
invoices on government projects, destroyed and altered records, and made false
statements and submitted false documents to government officials (The indictment
has been dismissed with prejudice. FEI pled guilty to a single charge under a
superseding indictment, of submitting a false statement which failed to disclose
the full explanation of costs on a highly classified government project, and the
superseding indictment was otherwise dismissed with prejudice as to all
defendants. The indictment and superseding indictment generally contained
similar allegations.); and that, as a result FEI is exposed to material and
substantial monetary judgments and penalties and the loss of significant
business and the directors were under a fiduciary obligation to manage and
control the business operations of FEI and the conduct of its personnel. A
derivative action is one permitted by law to be instituted by a shareholder for
the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. The complaint seeks
judgment against the directors in the amount of all losses and damages suffered
by FEI on account of the facts alleged in the complaint, together with interest
costs, legal and other professional fees. FEI and the other defendants have
denied the allegations of and intend vigorously to contest the derivative
actions. These actions were stayed pending disposition of the criminal cases
covered by the Settlement Agreement. The plaintiff is presently seeking to serve
an amended complaint and vacate the stay.-----------------------------
Qui Tam Action:
In March 1994, a qui tam action brought by Ralph Muller, a former FEI
employee, was served upon FEI and Martin Bloch, its president. A qui tam action
is an action wherein an individual may, under certain circumstances, bring a
legal action against one or more third persons on behalf of the Government for
damages and other relief by reason of one or more alleged wrongs perpetrated
against the Government by such third persons. The complaint alleges that FEI, in
connection with its subcontract to design and manufacture certain oscillators
which are components of the Government's Advance Medium Range Air to Air
Missiles ("AMRAAMS"), improperly designed, manufactured and tested the
oscillators and as a result the Government sustained damages. The complaint
demands an unspecified amount of damages allegedly suffered by the Government,
and asks that the Court determine the damages and assess civil penalties as
provided under the False Claims Act. Under the False Claims Act, a recovery can
be made in favor of the Government for a civil penalty of not less than $5,000
and not more than
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
$10,000 as to each false claim and for each false record and
statement, plus three times the amount of damages it is determined the
Government sustained, plus legal fees and expenses. Under the provisions of the
False Claims Act, the Government is permitted to take over the prosecution of
the action. The Government has declined to prosecute the action and Muller is
proceeding with the action on behalf of the Government.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The action was stayed by the court between approximately April 1997 through
June 1998 and January 2000 through July 2000. Limited discovery has taken place.
The Government has determined that all documents related to this action are
classified necessitating the implementation of extraordinary procedures for
purposes of conducting discovery. In August 1999, the attorneys representing
Muller withdrew as his counsel. Since that time Muller has been representing
himself on a pro se basis.
Company Position and Legal Fees:
The Company and Mr. Bloch consider the allegations of the complaint to be
unjustified; have denied the allegations of and intend to vigorously defend the qui
tam action. On April 11, 1997, the Court ordered the
qui tam action stayed pending resolution of the criminal cases. Since the
disposition of the criminal cases, litigation has resumed. Limited discovery has
taken place due to the government's determination that all documents related to
this action are classified which has necessitated extraordinary procedures,
recently put in place, for purposes of conducting discovery.
Company Position and Legal Fees:
FEI and the individual defendants in each of the legal matters described
above consider the allegations and the charges asserted to be unjustified. They
further consider the actions of FEI and the individual defendants with respect
to the subject matter of these charges to have been taken in good faith and
without wrongful intent, criminal or otherwise. Because of the uncertainty associated with the foregoing matters,qui tam action, FEI
isand its legal counsel are unable to estimate the potential liability or loss
that may result, if any, and, accordingly,any. Accordingly, no provision has been made in the
accompanying consolidated financial statements. However, an unfavorable outcome
of these mattersthis qui tam action could have a material impact on the Company's financial
position, results of operations and cash flows.
Included in selling and administrative expenses are legal fees incurred in
connection with the litigation settlement and the above matters of approximately $686,000, $274,000 and
$221,000 $741,000 and $890,000 for the fiscal years ended April 30,2001, 2000 and 1999, 1998respectively.
Directors' and 1997,
respectively.Officers' Insurance Coverage
On November 17, 1998, the Company received $4.5 million in settlement of
its claim against Associated International Insurance Company under applicable
directors and officers insurance coverage. This payment related to legal fees
incurred by FEI in previous years in defense of the litigation brought against it by
agencies of the U.S. Government.
Government Contract SuspensionOn 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 Debarment:
By letter dated July 13, 1998, FEI was notified by the U.S. Departmentbreach of the Air Force that it terminated the suspension proceedings initiated against
FEI's presidentcontract relating
to certain directors and director, Martin B. Bloch, its former vice president and
director, Abraham Lazar, its secretary/treasurer, Harry Newman and its former
contracts manager, Marvin Norworth, who has since retired. By letter dated July
9, 1998, FEI was notified by the U.S. Department of the Air Force of FEI's
debarment from Government contracting and from directly or indirectly receiving
the benefits of federal assistance programs. The debarment was based upon FEI's
guilty plea enteredofficers' liability insurance policies in connection
with the Global DispositionMuller 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 Settlement
Agreement.action was
discontinued.
The debarmentHome Insurance Company ("Home") provided a $2.0 million policy of
excess coverage to the referenced national policy. Home's liability under its
policy was effective July 9, 1998. By letter dated October 21,
1998,triggered by National's payment under its policy. Home is disputing
FEI's claims. In June 2001, FEI demanded arbitration before the U.S. DepartmentAmerican
Arbitration Association for resolution of a portion of the Air Force concluded the proceedings with
respectFEI claim. No opinion
can be offered as to the debarment and determined that the debarmentoutcome of FEI would be
terminated on December 12, 1998, without condition. Such debarment, in fact,
terminated on December 12, 1998 and, as a consequence, FEI may engage in
projects related to U.S. Government military and space related efforts if it
chooses to do so.
Other:
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position of the Company.this arbitration proceeding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
10. Notes Receivable - Common Stock
-------------------------------
In October 1994, certain officers and employees acquired an aggregate of
375,000 shares of the Company's common stock in the open market. The purchase
price of these shares of approximately $822,000 was financed by advances from
the Company to such officers and employees. The notes, collateralized by the
shares of common stock purchased, accrue interest at 1/2% above prime (9.0%(8.5% at
April 30, 1999)2001) which is payable and adjusted annually. The principal iswas due in
its entirety at the earlier of termination of employment or October 1999.
No
payments were made during fiscal 1999.(Certain officers requested and received an extension of the due date of the
notes to October 2001.) During the yearsyear ended April 30, 1998 and
1997,2000, certain officers
and employees made payments on their notes in the aggregate amount of $148,000$172,000.
No payments were received during fiscal 2001 or 1999.
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 $305,000, respectively.
11.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.
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 intangible
assets, principally 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 will not be amortized but will be tested periodically for impairment.
The accompanying consolidated statements of operations for the year ended
April 30, 2001 includes the results of operations of Gillam from September 13,
2000 through March 31, 2001. (Gillam will retain its April 1 to March 31 fiscal
year for financial reporting purposes.) The pro forma financial information set
forth below is based upon the Company's historical consolidated statements of
operations for the years ended April 30, 2001 and 2000, adjusted to give effect
to the acquisition of Gillam as of the beginning of each of the periods
presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The pro forma financial information is presented for informational purposes
only and may not be indicative of what actual results of operations would have
been had the acquisition occurred on May 1, 1999, nor does it purport to
represent the results of operations for future periods.
Pro forma
(unaudited)
Years ended April 30,
2001 2000
---- ----
(In thousands except per share data)
Net Sales .............................. $53,569 $42,312
------- -------
Operating Profit ....................... $5,495 $ 1,832
------ -------
Income from continuing operations ...... $5,440 $ 3,222
====== =======
Earnings per share- basic .............. $ 0.66 $ 0.41
====== ======
Earnings per share- diluted ............ $ 0.64 $ 0.39
====== ======
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 year ended
April 30, 2001, the Company contributed 14,592 shares of common stock with an
approximate value at the date of issuance of $300,000. There were no such
contributions in fiscal 1999, 19982000 or 1997.1999.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees which
are based on operating profits of the Company. The Company also adopted a plan
for the President and Chief Executive Officer of the Company, which formula is
based on pre-tax profits. The Company charged $1,073,000 and $175,000 to
operations under these plans for the fiscal years ended April 30, 2001 and 2000,
respectively. The Company incurred no expenses for such bonuses for the year
ended April 30, 1999 due to lower operating profits.
TheIndependent Contractor Stock Option Plan
During fiscal 1998, the Company charged $490,000established 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 $500,000duration of option grants, the
option price, and the number of shares of common stock subject to operations under these plans foreach option.
Each of the option grants in fiscal 2001 and 2000, as indicated in the table
below, were granted to certain independent contractors at a price equal to the
then fair market value of the Company's common stock. Each option grant
permitted immediate exercise of a portion of the options (24% to 34% of the
total grant) with the balance exercisable proportionately over the next two to
three years. For the years ended April 30, 19982001, 2000 and 1997, respectively.1999, the Company
recognized compensation expense of $310,000, $170,000 and $58,000, respectively,
as a result of these stock option grants.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Transactions under this plan, including the weighted average exercise
prices of the options, are as follows:
2001 2000 1999
------------------- ------------------- -------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year ......122,300 $15.21 112,500 $15.75 112,500 $15.75
Granted ............................... 6,000 $15.80 12,000 $8.98 - -
Exercised .............................(13,950) $13.54 (2,200) $8.88 - -
------- ------- ------
Outstanding at end of year ............114,350 $15.31 122,300 $15.21 112,500 $15.75
======= ======= ======
Exercisable at end of year ............104,050 $15.54 89,200 $15.63 57,500 $15.75
======= ====== ======
Available for grant at end of year ....219,500 75,500 87,500
======= ====== ======
Weighted average fair value
of options granted during the year .... $ 8.81 $ 4.35 $ -
====== ====== ======
Employee Stock Options:Option Plans:
The Company has various Incentive Stock Option Plans ("ISOP's")stock option plans for key management employees,
(includingincluding officers and directors who are employees).employees. The ISOP's provide that eligible employees may beplans are both
Nonqualified Stock Option ("NQSO") plans and Incentive Stock Option ("ISO")
plans. Under both types of plans options are granted options to purchaseat the discretion of the
Stock Option committee at an aggregate of 1,350,000 sharesexercise price not less than the fair market value
of the Company's common stock.stock on the date of grant. Under one PlanNQSO 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. TheAs of April 30, 2001, eligible employees had been granted
options to purchase 750,000 shares of Company stock under ISO plans of which
4,250 options are granted at the discretion of the Stock
Option committee at an exercise price not less than the fair market value of the
Company's common stock on the date of grant.
During fiscal 1998, the Company established an Independent Contractor Stock
Option Plan under which up to 200,000 shares may be granted. An Independent
Contractor Stock Option Committee determines to whom options may be granted from
among eligible participants, the timingoutstanding and duration of option grants, the
option price, and the number of shares of common stock subject to each option.
During the year endedexercisable. Through April 30, 1998, the Company2001, eligible
employees have been granted options to acquire 112,5001,090,000 shares at a price of $15.75, the then fair market value of the Company's
common stock.Company stock
under NQSO plans. Of the shares granted, 22,750NQSO options, approximately 857,000 are outstanding and
approximately 347,000 are exercisable immediately, 29,750
are exercisable one year from grant date, 30,000 are exercisable two years from
grant date, and 30,000 are exercisable three years from grant date. For the
years ended April 30, 1999 and 1998, the Company recognized compensation expense
of $58,000 and $208,000, respectively, as a result of these stock option grants.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued(see tables below).
The excess of the consideration received over the par value of the common
stock or cost of treasury stock issued under theseboth 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 ISOP's.ISO or NQSO plans.
Transactions under these plans, including the weighted average exercise
prices of the options, are as follows:
2001 2000 1999
1998 1997
---------------- ---------------- --------------------------------- ------------------ ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ ------ ------ -----------
Outstanding at beginning of year ...... 618,188 $ 6.84 625,489 $ 3.38 874,373 $3.43......611,800 $7.65 792,625 $6.14 505,688 $6.14
Granted .................................................330,000 $22.03 156,500 $7.50 325,000 $ 8.25 219,000 $13.08 32,250 $4.38$8.25
Exercised .............................................(80,363) $6.18 (316,825) $3.82 (20,063) $ 3.72 (216,551) $ 3.48 (257,884) $3.45$3.72
Expired or canceled ......................... - (20,500) $7.26 (18,000) $10.84
(9,750) $ 5.64 (23,250) $3.48
------- --------------- -------
Outstanding at end of year 905,125 $ 7.34 618,188 $ 6.84 625,489 $3.38
=======............861,437 $13.30 611,800 $7.65 792,625 $6.14
======= =======
Exercisable at end of year 476,846 $ 5.51 396,736 $ 4.29 534,026 $3.44............351,048 $7.74 304,593 $6.83 419,346 $4.11
======= ======= =======
Available for grant at end of year ................ 65,500 205,000 64,000
377,000 388,500====== ======= ======= =============
Weighted average fair value
of options granted during the year .....................$12.24 $3.68 $4.26
$4.39 $1.80
=========== ===== =====
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
The weighted average remaining contractual life of options outstanding at
April 30, 2001, 2000 and 1999 is 8.3, 8.1 and 1998 is 6.5 and 5.76.2 years, respectively. At April
30, 1999,
19982001, 2000 and 1997,1999, option prices per share were from $3.25 to $18.875.$23.9375.
The Company applies the disclosure-only provision for SFAS No. 123 in
accounting for the stock option plans. Had compensation cost for stock option
awards under the plans been determined based on the fair value at the grant
dates consistent with the provisions of SFAS No. 123, the pro forma effect on
the Company's financial statements would have been as follows:
(in thousands, except per share data)
2001 2000 1999
---- ---- ----
Net Income, as reported ..............$5,644 $3,144 $1,173
====== ====== ======
Net Income - pro forma ...............$4,775 $2,468 $ 843
====== ====== ======
Earnings per share, as reported:
Basic ............................ $ 0.69 $ 0.41 $ 0.16
====== ====== ======
Diluted .......................... $ 0.67 $ 0.39 $ 0.15
====== ====== ======
Earnings per share- pro forma
Basic ............................ $ 0.58 $ 0.32 $ 0.11
====== ====== ======
Diluted .......................... $ 0.57 $ 0.31 $ 0.11
====== ====== ======
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 2001, 2000 and 1999,
respectively: dividend yield of 3.0%, 3.0% and 1.5%; expected volatility of 70%,
47%, and 37%; risk free interest rate (ranging from 6.5% to 8.0%); and expected
lives ranging from seven to ten years.
Restricted Stock Plan:
During fiscal 1990, the Company adopted a Restricted Stock Plan which
provides that key management employees may be granted rights to purchase an
aggregate of 375,000 shares of the Company's common stock. The grants,
transferability restrictions and purchase price are determined at the discretion
of a special committee of the board of directors. The purchase price may not be
less than the par value of the common stock.
2001 2000 1999
1998 1997
---------------- ---------------- --------------------------------- ----------------- ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ ------ ------ -----------
ExercisableOutstanding at beginning of year.....................year ... 69,000 $3.94 99,000 $3.93 105,000 $3.98
135,000 $4.00 135,000 $4.00
Granted ................................................ - - - - 1,500 $1.00
7,500 $0.67 -- --
Expired ................................................ - - - - (7,500) $4.00
-- -- -- --
Exercised .................. -- (37,500) $3.40 -- --..........................(39,000) $4.00 (30,000) $4.00 - -
------- ------- -------
Outstanding at end of year .......... 30,000 $4.00 69,000 $3.94 99,000 $3.93
105,000 $3.98 135,000 $4.00
======= ===== ======= ===== ======= =========== ====== ======
Exercisable at end of year ......... 30,000 $4.00 69,000 $3.94 98,000 $3.96
105,000 $3.98 135,000 $4.00
======= ===== ======= ===== ======= =========== ====== ======
Balance of shares available for
grant at end of year ......... 98,250 92,250 99,750
=======98,250 98,250
====== ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Transferability of shares is restricted for a four-year period, except in
the event of a change in control as defined. Amounts shown as unearned
compensation in stockholders' equity represent the excess of the fair market
value of the shares over the purchase price at the date of grant which is being
amortized as compensation expense over the period in which the restrictions
lapse.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company applies the disclosure-only provision for SFAS No. 123 in
accounting for the plans. Accordingly, no compensation expense has been
recognized other than for restricted stock awards. Had compensation cost for
stock option awards under the plans been determined based on the fair value at
the grant dates consistent with the provisions of SFAS No. 123, the pro forma
effect on the Company's financial statements would have been as follows:
1999 1998 1997
---- ---- ----
Net Earnings, as reported .......... $ 1,173 $ 64 $ 4,863
======= ====== =======
Net Earnings (Loss)- pro forma ..... $ 843 ($ 69) $ 4,818
======= ====== =======
Earnings per share, as reported:
Basic ........................... $ 0.16 $ 0.01 $ 0.70
====== ====== ======
Diluted ......................... $ 0.15 $ 0.01 $ 0.66
====== ====== ======
Earnings (Loss) per share- pro forma
Basic ........................... $ 0.11 ($ 0.01) $ 0.69
====== ====== ======
Diluted ......................... $ 0.11 ($ 0.01) $ 0.66
====== ====== ======
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively: dividend yield of 1.5% and 3.0%; expected volatility of 47%, 37%
and 40%; risk free interest rate (ranging from 6.5% to 8.0%); and expected lives
ranging from seven to ten years.
Employee Stock Ownership Plan/Stock Bonus Plan:
During 1990 the Company amended its Stock Bonus Plan to become an Employee
Stock Ownership Plan (ESOP)("ESOP"). This amendment became effective January 1, 1990. A
loan in the amountBy means of $5,000,000 was negotiated with a bank on May 22, 1990 to
fundnote, subsequently repaid, the Trust. The loan is for a ten year period with forty equal quarterly
installments of $125,000, plus interest at various rates at the Company's
option. The
Company reacquired 561,652 shares of its common stock during fiscal 1990. These
shares plus approximately 510,000 additional shares issued by the Company from
its authorized, unissued shares were sold to the ESOP in May 1990. Shares arewere
released for allocation to participants based on a formula as specified in the
ratioESOP document. By the end of the current year's debt service to the sum of the current year's debt service
plus the principal to be paid forfiscal 2000, all future years. Through April 30, 1999,
653,851 shares have(1,071,652) had been
allocated to participant accounts.
Effective May 1, 1994,accounts of which 670,886 shares remain in the Company changed its method of accounting for
its ESOP inESOP.
In accordance with Statement of Position ("SOP") 93-6. In accordance
with SOP 93-6, the annual expense
related to the leveraged ESOP, was determined as interest incurred on the note
plus compensation cost based on the fair value of the shares released. Since all
shares were released to the ESOP prior to May 1, 2000, no expense was recorded
in fiscal 2001. The ESOP expense was approximately $1,064,000, $1,569,000$978,000 and $797,000$1,064,000, for
the years ended April 30, 1999, 19982000 and 1997,1999, respectively.
The SOP also requires that ESOP shares that are committed to be released be
considered outstanding for purposes of calculating earnings per share. The fair
value of unallocated shares approximatesapproximated $830,000 and $3.5 million at April 30, 1999 and 1998, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued1999.
Deferred Compensation Plan:
The Company has a program for key employees providing for the payment of
benefits upon retirement or death. Under the plan, each key employee receives
specified retirement payments for the remainder of the employee's life with a
minimum payment of ten years' benefits to either the employee or his
beneficiaries. The plan also provides for reduced benefits upon early retirement
or termination of employment. The Company pays the benefits out of its working
capital but has also purchased whole life insurance policies on the lives of
certain of the participants to cover the optional lump sum obligations of the
plan upon the death of the participant.
Deferred compensation expense charged to operations during the years ended
April 30, 2001, 2000 and 1999 was approximately $620,000, $494,000 and
$1,360,000, respectively. During fiscal 1999, the Company made modifications to
the benefits of certain employees and added two new participants. Accordingly,
for the year
ended April 30, 1999, the Company charged approximately $1.36 million to
deferred compensation expense includingin fiscal 1999 included approximately $800,000 to
account for the benefit modifications.
Deferred compensation expense charged to operations
during the years ended April 30, 1998 and 1997 was approximately $227,000 and
$371,000, respectively.
12.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
13. Income Taxes
------------
The provision (benefit) for income taxes consists of the following (in thousands):
1999 1998 1997
---- ---- ----
Current Federal .................. $ 300 $ 225 $ 40
Current State and Local .......... 200 975 1602001 2000 1999
---- ---- ----
Current:
Federal ............................$3,520 $ 200 $ 300
Foreign ............................ - - -
State .............................. 480 240 200
------ ------ ------
Current provision ................. 4,000 440 500
Deferred
Federal ............................(1,214) 715 (85)
Foreign ............................ 9 - -
State .............................. (203) 125 (15)
------ ------ ------
Current provision ....... 500 1,200 200
Deferred tax (benefit) provision . (100) 8 2,124
Reduction in valuation allowance . -- (2,608) (2,124)
------ ------ ------
Total provision (benefit) provision ......(1,408) 840 (100)
------ ------ ------
Total provision ...................$2,592 $1,280 $ 400 ($1,400) $ 200
====== ====== ======
The following table reconciles the reported income tax expense (benefit) with the
amount computed using the federal statutory income tax rate (in thousands).
2001 2000 1999 1998 1997
---- ---- ----
(In thousands)
Computed "expected" tax expense (benefit) ....................$2,810 $1,504 $ 535 ($ 454) $1,721
State and local tax, net of federal benefit ...... 317 161 640 106161
Excess ESOP amortization ............................................ - 163 192 332 --
Nondeductible expenses ................................................ 111 26 35 361 --
Nontaxable investment income .................................... (43) (99) (145) (62) (32)
Research & Development Tax Credit ...............development tax credit ........... (310) (330) -- --
Loss carryforward for which no tax
benefit was recorded - ........................ -- -- 530
Adjustment to deferred tax balances
due to tax rates .............................. -- 374 --
Reduction in valuation allowance ................ -- (2,608) (2,124)(330)
Other items, net, none of which
individually exceeds 5% of federal
taxes at statutory rates ................... (293) (145) (48)
17 (1)
----------- ------ -----
$2,592 $1,280 $ 400
($1,400) $ 200
=========== ====== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The components of deferred taxes are as follows (in thousands):
1999 19982001 2000
---- ----
Deferred tax assets:
Deferred tax assets:
Employee benefits ................ $2,594 $2,138
Litigation settlement ............ -- 3,040.....................$3,312 $2,722
Inventory ........................ 518 803............................. 1,591 606
Accounts receivable ................................. 76 --76
Marketable securities ............ 136 --................. 28 940
Research & Development Credit .... 640 --development ................ 449 -
Acquisition contingency reserve ....... 210 -
Net operating loss carryforwards.. 688 614carryforwards ...... 829 -
Miscellaneous .................... 11 8......................... 32 52
------ ------
Total deferred tax asset ...... 4,663 6,603........... 6,527 4,396
------ ------
Deferred tax liabilities:
Accounts receivable .............. -- 2,302
Property, plant and equipment .... 1,827 1,701
------ ------
Total deferred tax liabilities ... 1,827 4,003......... 2,145 1,856
------ ------
Net deferred tax asset ................. $2,836 $2,600.....................$4,382 $2,540
====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
At April 30, 1999,2001, the Company has available approximately $2.2 million in
net operating loss carryforwards ofat its European subsidiaries. Of this loss
carryforward, approximately $1.7 million which$238,000 expires in fiscal 2003 while the balance
may be applied against future taxable income
and which expire in fiscal years 2008 through 2012.
13.utilized for an indefinite period of time.
14. Segment Information
In fiscal 1999, the-------------------
The Company adopted SFAS 131. The prior year's segment
information has been restated to present the Company's twooperates under three reportable segments
for each of the three years ended April 30, 1999.
The Company's reportable segments are:segments:
(1) Commercial wireless communications - consists principally of time and frequency
control products used in two principal markets- commercial communication
satellites and terrestrial cellular telephone or other ground-based
telecommunication stations.
(2) U.S. Government - consists of time and frequency control products used for
national defense or space-related programs.
(3) Gillam-FEI - the Company's Belgian subsidiary primarily sells wireline
synchronization and network monitoring systems.
The accounting policies of the twothree 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 operatesCompany's Commercial Communications and U.S.
Government segments operate principally out of a singleU.S.-based manufacturing
facility andwith both segments sharesharing the same managers, manufacturing personnel,
and machinery and equipment. Consequently, segment data for these two segments includes
allocations of depreciation and corporate-wide general and administrative
charges. SegmentThe 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 bothall three segments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedThe 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.
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):
2001 2000 1999 1998 1997
---- ---- ----
Net sales:
Net sales:
WirelessCommercial Communications ............... .................$ 14,547 $ 26,364 $ 19,61236,290 $22,554 $14,547
U.S. Government .................................................. 3,727 3,981 4,411
5,633 8,317
-------- -------- --------Gillam-FEI ................................ 9,276 - -
less intercompany sales ................... (83) - -
------- ------- -------
Consolidated Sales ................. $ 18,958 $ 31,997 $ 27,929
======== ======== ========.................... $49,210 $26,535 $18,958
======= ======= =======
Operating profit (loss) profit:
Wireless:
Commercial Communications .................................$4,316 ($ 91) ($4,682) $ 6,130 $ 3,242
U.S. Government ................................................... 462 1,711 (137)
(4,522) 2,011Gillam-FEI ................................. (238) - -
Corporate ............................................................... 1,401 (612) 4,118
(10,713) (2,578)
-------- -------- --------------- ------- -------
Consolidated Operating Profit (Loss) Profit...$ 5,939 $ 1,008 ($ 701)
($ 9,105) $ 2,675
======== ======== =============== ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(in thousands):
2001 2000 1999
---- ---- ----
Identifiable assets:
Wireless
Commercial Communications ............... ................$ 16,968 $ 18,701 $ 11,98125,025 $18,447 $16,968
U.S. Government ................................................. 1,580 4,450 4,918
6,415 13,876Gillam-FEI ............................... 19,237 - -
less intercompany balances ............... (234) - -
Corporate ............................................................. 56,431 57,950 56,469 63,664 49,009
-------- -------- --------
Consolidated Identifiable Assets ... ......$ 78,355 $ 88,780 $ 74,866102,039 $80,847 $78,355
======== ======== =============== =======
Depreciation (allocated):
WirelessCommercial Communications .................................$ 955 $ 971 $ 910
$ 698 $ 649
U.S. Government ................................................... 112 127 282
226 253Gillam-FEI ................................. 166 - -
Corporate ............................................................... 19 19 19
-------- -------- -------------- ------ ------
Consolidated depreciation expense .. Depreciation Expense .......$ 1,211 $ 943 $ 921
======== ======== ========1,252 $1,117 $1,211
====== ====== ======
Major Customers
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 2001. 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.
During fiscal year 2000, sales to one customer accounted for approximately
$14.0 million of the Commercial Communications segment's total sales. This
amount represents 62% of the Commercial Communications' total revenues and 53%
of consolidated sales. In the U.S. Government segment, sales to three customers
accounted for $2.4 million of sales or 61% of the segment's revenue and 9% of
consolidated revenue. No U.S. Government customer accounted for more than 10% of
consolidated revenue.
Sales to one customer in the wireless communicationsCommercial Communications segment were
approximately $6.5 million or 45% of that segment's revenues and 34% of
consolidated sales for fiscal 1999. In the U.S. Government segment, sales to two
customers accounted for $2.3 million of sales or 53% of the segment's revenue
and 12% of consolidated revenue. Neither U.S. Government customer accounted for
more than 10% of consolidated revenue.
During fiscal year 1998, sales to two customers accounted for
approximately $8.9 million and $6.9 million, respectively, of the wireless
communications segment's total sales. These amounts represent 60% of the
wireless communications total revenues and 49% of consolidated sales.
During fiscal year 1997, wireless communications segment sales included
revenues of $11.1 million from one customer (57% of segment sales and 40% of
consolidated sales); and U.S. Government segment sales included $2.9 million
from one customer (35% of segment sales and 10% of consolidated sales).
The loss by the Company of any one of these customers would have a material
adverse effect on the Company's business. The Company believes its relationship
with these companies to be mutually satisfactory.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Foreign Sales
Revenues in the wireless communications segmentCommercial 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):
1999 1998 1997
---- ---- ----
France .......... $ 987 $ 855 $ 690
Korea ........... 638 1,881 2,418
United Kingdom... 811 1,003 519
Italy ........... 277 1,427 876
Other ........... 1,028 518 1,405
------ ------ ------
$3,741 $5,684 $5,908
======2001 2000 1999
---- ---- ----
Brazil ..................$2,825 $ 242 $ -
Morocco ................. 2,636 - -
France .................. 2,480 616 987
Belgium ................. 2,401 3 -
United Kingdom .......... 1,020 1,068 811
Other ................... 3,000 1,320 1,943
------- ------ ------
$14,362 $3,249 $3,741
======= ====== ======
14.15. Interim Results (Unaudited)
--------------------------
Quarterly results for fiscal years 19992001 and 19982000 are as followsfollows:
(in thousands, except per share data):
1999 Quarter
------------
2001 Quarter
---------------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales ................... $ 7,015 $ 6,180 $ 3,060 $ 2,703
Gross profit ................ 2,389 2,025 888 671
Net earnings (loss) ......... 518 3,209 (1,357) (1,197)
*Earnings (loss) per share
Basic ....... $ 0.07 $ 0.43 ($ 0.18) ($ 0.16)
Diluted ..... $ 0.07 $ 0.41 ($ 0.18) ($ 0.16)
The Company decided to renegotiate an exclusive fixed unit contract with
a customer for one of the Company's wireless communications products. This
action resulted in a fiscal 1999 fourth quarter reduction of sales and cost of
sales of approximately $1.7 million and $1.0 million, respectively. During the
fourth quarter, the Company also recorded an additional $800,000 accrual to
deferred compensation expense as a result of benefit modifications. (see Note
11)
1998 Quarter
------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales ................... $ 7,301 $ 8,016 $ 8,033 $ 8,647
Gross profit ................ 2,481 2,934 371 341
Net earnings (loss) ......... 1,398 1,633 2,380 (5,347)
*Earnings (loss) per share
Basic ....... $ 0.19 $ 0.22 $ 0.32 ($ 0.71)
Diluted ..... $ 0.18 $ 0.21 $ 0.31 ($ 0.71)
..............$8,893 $10,819 $15,193 $14,305
Gross margin ........... 3,912 4,691 5,832 2,595
Net income ............. 807 1,471 1,633 1,734
*Earnings per share
Basic .............$0.10 $0.18 $0.20 $0.21
Diluted ...........$0.10 $0.17 $0.19 $0.20
During the fourth quarter of fiscal 1998,2001, the Company recorded an
accruala receivable
for $3.0 million before related legal expenses for reimbursement of $8 million forcertain
expenses under applicable directors' and officers' liability insurance. In
addition, the litigation settlement (Note 9- Commitments and
Contingencies) andCompany wrote off or reserved against$2.0 million of certain
work-in-progress and component inventory related to certain
government programsdiscontinued product lines
and to quantities in the amountexcess of $2.5 million.near-term requirements.
2000 Quarter
---------------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales ..............$5,464 $6,036 $7,117 $7,918
Gross margin ........... 2,392 2,681 3,144 3,434
Net income ............. 444 478 1,203 1,019
*Earnings per share
Basic .............$0.06 $0.06 $0.16 $0.13
Diluted ...........$0.06 $0.06 $0.15 $0.12
*Quarterly earnings per share data does not equal the annual amount
due to changes in the average common equivalent shares outstanding.
All per
share amounts have been adjusted to reflect a 3-for-2 stock split in the
form of a 50% dividend, effective October 31, 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15.16. Other Information
-----------------
The following provides information about investing and financing activities
of the Company that affect assets or liabilities but did not result in cash flow
for the three years ended April 30, 1999, 19982001, 2000 and 19971999 and, therefore, are
excluded from the Consolidated Statements of Cash FlowsFlows.
(in thousands):
1999 1998 1997
---- ---- ----
Declaration of cash dividend ........... $ 766 $ 771 $ 746
3-for-2 stock split in the form of a 50%
stock dividend ..................... -- 3,003 --
Proceeds from sale of LCA building
used to pay down construction loan . -- 9,000 --
REIT units received in connection
with building sale ................. -- 12,000 --
Transfer of work-in-process inventory
to equipment .......................
2001 2000 1999
---- ---- ----
Declaration of cash dividend .............$829 $799 $766
Transfer of work-in-process inventory
to equipment ......................... - - 175 -- --
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Description Balance Charged Charged
at to costs to other Balance at
beginning and accounts- Deductions end of
of period expenses describe -describe period
--------- -------- -------- --------- ------
Year ended April 30, 2001
Allowance for doubtful
accounts ..............................$190 119(c) $311
2(d)
Inventory reserves ..................$1,188 $2,001 1,437(c) $653(b) $4,001
28(d)
Year ended April 30, 2000
Allowance for doubtful
accounts ..............................$190 $17 $17(a) $190
Inventory reserves ..................$1,054 $134 - $1,188
Year ended April 30, 1999
Allowance for doubtful
accounts $190..............................$190 $36 $36(a) $190
Inventory reserves $1,400..................$1,400 $150 $496(b) $1,054
Year ended April 30, 1998
Allowance for doubtful
accounts $190 $49 $49(a) $190
Inventory reserves $350 $4,488 $3,438(b) $1,400
Year ended April 30, 1997
Allowance for doubtful
accounts $483 $42 $335(a) $190
Inventory reserves $940 $590(b) $350
(a) Accounts written off
(b) Inventory disposed or written off
(c) Acquired in connection with Gillam SA acquisition
(d) Foreign currency translation adjustments
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------ --------------------------- ---------------------------------------------------------------
NONE
PART III
Item 10. Directors and Executive Officers of the Company
- -------- -----------------------------------------------
Item 10(a) Directors of the Company
- -----------------------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 20, 1999.3, 2001.
Item 10(b) Executive Officers of the Company
- --------------------------------------------
The executive officers hold office until the annual meeting of the Board of
Directors following the annual meeting of stockholders, subject to earlier
removal by the Board of Directors. During fiscal 1994 certain officers had taken
voluntary leaves of absence as discussed in the Company's Form 8-K dated
November 17, 1993. With the settlement of all criminal and civil litigation
brought by the U.S. Government, such officers have resumed their positions with
the Company.
The names of all executive officers of the Company and all positions and
offices with the Company which they presently hold are as follows:
Joseph P. Franklin - Chairman of the Board of Directors
Martin B. Bloch - President, Chief Executive Officer and Director
Markus Hechler - Executive Vice President and Assistant Secretary
Alfred VulcanMichel Gillard - Vice President, Systems EngineeringGillam-FEI
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Space SystemsMarketing and Sales
Oleandro Mancini - Vice President, Business Development
Thomas McClelland - Vice President, Commercial Products
Alan Miller - Treasurer and Chief Financial Officer
Harry Newman - Secretary and Assistant to the Executive Vice President
None of the officers and directors is related.
Joseph P. Franklin, age 65,67, has served as a Director of the Company since
March 1990. In December 1993 he was elected Chairman of the Board of Directors
and Chief Executive Officer. He also served as Chief Financial Officer from
September 15, 1996 through October 5, 1998. He has been the Chief Executive
Officer of Franklin S.A., since August 1987, a Spanish business consulting
company located in Madrid, Spain, specializing in joint ventures, and was a
director of several prominent Spanish companies. General Franklin was a Major
General in the United States Army until he retired in July 1987.
Martin B. Bloch, age 63,65, has been a Director of the Company and of its
predecessor since 1961. Mr. Bloch is the Company's President and Chief Executive
Officer. Previously, he served as chief electronics engineer of the Electronics
Division of Bulova Watch Company.
Markus Hechler, age 53,55, joined the Company in 1967. He was elected to the
position of Executive Vice President in February 1999, prior to which he served
as Vice President, Manufacturing since 1982. He has served as Assistant
Secretary since 1978.
Alfred Vulcan,Michel Gillard, age 62, joined60, became an officer and director of the Company as an engineerwhen
Gillam S.A. was acquired in 1973September 2000. Gillam S.A., a company engaged in
the design, manufacture and has
served as its Vice President, Systems Engineering since 1978.marketing of wireline and network synchronization
systems, was founded by Mr. Gillard in 1974.
Charles S. Stone, age 68,70, joined the Company in 1984, and has served as its
Vice President since that time. Prior to joining the Company, Mr. Stone served
as Senior Vice President of Austron Inc., from 1966 to 1979, and Senior
Scientist of Tracor Inc., from 1962 to 1966.
Leonard Martire, age 62,64, 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, SpaceMarketing and
Sales.
Oleandro Mancini, age 52, 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.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 44,46, joined the Company as an engineer in 1984 and
was elected Vice President, Commercial Products in March 1999.
Alan Miller, age 50,52, joined the Company in November 1995 as its corporate
controller and was elected to the position of Treasurer and Chief Financial
Officer in October 1998. Prior to joining the Company, Mr. Miller served as an
operations manager and a consultant to small businesses from 1992 through 1995
and as a Senior Audit Manager with Ernst & Young, L.L.P. from 1980 to 1991.
Harry Newman, age 52,54, Secretary and Assistant to the Executive Vice
President, has been employed by the Company since 1979, prior to which he served
as Divisional Controller of Jonathan Logan, Inc., apparel manufacturers, from
1976 to 1979, and as supervising Senior Accountant with Clarence Rainess and
Co., Certified Public Accountants, from 1971 to 1975.
Item 11. Executive Compensation
- -------- ----------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 20, 1999.3, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
-
-------- --------------------------------------------------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 20, 1999.3, 2001.
Item 13. Certain Relationships and Related Transactions
-
-------- ----------------------------------------------
This item is incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held on or about
October 20, 1999.3, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
-------- ----------------------------------------------------------------
(a) Index to Financial Statements, Financial Statement Schedules and Exhibits
-------------------------------------------------------------------------
The financial statements, financial statement schedule and exhibits
are listed below and are filed as part of this report.
(1) FINANCIAL STATEMENTS
Included in Part II of this report:
Page(s)
Report of Independent Accountants 2723
Consolidated Balance Sheets
April 30, 19992001 and 1998 28-292000 24-25
Consolidated Statements of Operations
-years ended April 30, 2001, 2000 and 1999 1998 and 1997 3026
Consolidated Statements of Changes in
Stockholders' Equity
- years ended April 30, 2001, 2000 and 1999 1998 and 1997 3127
Consolidated Statements of Cash Flows
- years ended April 30, 2001, 2000 and 1999 1998 and 1997 32-3328-29
Notes to Consolidated Financial Statements 34-4930-46
(2) FINANCIAL STATEMENT SCHEDULESFinancial Statement Schedules
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 5047
Other financial statement schedules are omitted because they are not
required, or the information is presented in the consolidated
financial statements or notes thereto.
(3) EXHIBITS
Exhibit 23.1 - Consent of Independent Accountants. 6057
The exhibits listed on the accompanying Index to Exhibits
beginning on page 5451 are filed as part of this annual report.
(b) REPORTS ON FORM 8-K
Registrant's Form 8-K, dated March 12, 1999,23, 2001, containing disclosure under
Item 5 thereof (dividend declaration), was filed with the Securities and
Exchange Commission during the quarter ended April 30, 1999.2001.
INDEX TO EXHIBITS
ITEM 14(a)(3)
Certain of the following exhibits were filed with the Securities and Exchange
Commission as exhibits, numbered as indicated below, to the Registration
Statement or report specified below, which exhibits are incorporated herein by
reference:
Exhibit No.
as filed with
Registration
Exhibit No. Identifica-Identification Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
-
--------- ---------- -------------------------- ----------------
1 (3) Copy of Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware (1) 3.1
2 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on March 27, 3.2
1981 (2)
3 (3) Copy of By-Laws of the
Registrant, as amended
to date (3) 3.3
4 (4) Specimen of Common Stock
certificate (1) 4.1
5 (10) Stock Bonus Plan of Registrant
and Trust Agreement
thereunder (4) 10.2
6 (10) Employment agreement
between Registrant and
Martin B. Bloch (4) 10.3
7 (10) Employment agreement
between Registrant and
Abraham Lazar (4) 10.4
8 (10) Employment agreement
between Registrant and
John C. Ho (4) 10.5
Exhibit No.
as filed with
Registration
Exhibit No. Identifica-Identification Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
-
--------- ---------- -------------------------- ----------------
9 (10) Employment agreement
between Registrant and
Marvin Meirs (4) 10.6
10 (10) Employment agreement
between Registrant and
Alfred Vulcan (4) 10.7
11 (10) Employment agreement
between Registrant and
Harry Newman (4) 10.8
12 (10) Employment agreement
between Registrant and
Marcus Hechler (4) 10.9
13 (10) Form of stock escrow
agreement between Vincenti &
Schickler as escrow agent
and certain officers of
Registrant (4) 10.10
14 (10) Form of Agreement concerning
Executive Compensation (2) 10.11
15 (10) Registrant's 1982 Incentive
Stock Option Plan (5) 15
16 (10) Amendment dated April 19,
1981 to Stock Bonus Plan
of Registrant and Trust
Agreement (3) 20.1
17 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
Secretary of State of
Delaware on October 26,
1984 (6) 17
18 (10) Registrant's 1984 Incentive
Stock Option Plan (6) 18
Exhibit No.
as filed with
Registration
Exhibit No. Identifica-Identification Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
-
--------- ---------- -------------------------- ----------------
19 (10) Registrant's Cash or Deferral
Profit Sharing Plan and
Trust under Internal Revenue
Code Section 401,
dated April 1, 1985 (7) 19
20 (10) Computation of Earnings Included in the
per Share of Common Financial
Stock Statements
21 (10) Amendment Restated Effective
as of May 1, 1984 of the
Stock Bonus Plan and Trust
Agreement of Registrant (7) 21
22 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with the
Secretary of State of Delaware
on October 22, 1986 (8) 22
23 (10) Amendment Restated Effective
as of May 1, 1984 of the Stock
Bonus Plan and Trust Agreement
of Registrant (8) 23
24 (3) Amended and Restated
Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on
October 26, 1987 (10) 24
25 (22) List of Subsidiaries
of Registrant (10) 25
26 (10) Employment agreement
between Registrant and
Charles Stone (9) 26
27 (10) Employment agreement
between Registrant and
Jerry Bloch (9) 27
Exhibit No.
as filed with
Registration
Exhibit No. Identifica-Identification Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
-
--------- ---------- -------------------------- ----------------
28 (10) Registrant's 1987
Incentive Stock Option
Plan (9) 28
29 (10) Registrant's Senior
Executive Stock Option
Plan (9) 29
30 (10) Amendment dated Jan. 1, 1988
to Registrant's Cash or
Deferred Profit Sharing Plan
and Trust under Section 401
of Internal Revenue Code (9) 30
31 (10) Executive Incentive
Compensation Plan between
Registrant and various
employees (9) 31
32 (10) Amended Certificate of In-
corporation of the Company
filed with the Secretary of
State of Delaware on
November 2, 1989 (10) 32
33 (10) Registrant's Employee Stock
Option Plan (10) 33
34 (10) Loan agreement between
Registrant and Nat West
Dated May 22, 1990 (10) 34
35 (10) Loan Agreement between
Registrant's Employee
Stock Ownership Plan and
Registrant dated
May 22, 1990 (10) 35
36 (23) Consent of Independent
Accountants to incorporation
by reference of 19992001 audit reportrepo
in Registrant's Form S-8
Registration Statement. 23.1
Exhibit No.
as filed with
Registration
Exhibit No. Identifica-Identification- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
-
--------- ---------- -------------------------- ----------------
37 (10) Registrant's 1997 Independent
Contractor Stock Option Plan (11) 4.14
38 (10) Contribution Agreement between
Registrant and Reckson Operating
Partnership L.P. dated
January 6, 1998 (12) 10.12
39 (10) Lease agreement between
Registrant and Reckson
Operating Partnership, L.P.
dated January 6, 1998 (12) 10.13
40 (10) Plea Agreement, Civil Settlement
and Related Documents dated
June 19, 1998 (12) 10.14
NOTES:
(1) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-29609, which
exhibit is incorporated herein by reference.
(2) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-71727, which
exhibit is incorporated herein by reference.
(3) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061 for the year
ended April 30, 1981, which exhibit is incorporated herein by reference.
(4) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-69527, which
exhibit is incorporated herein by reference.
(5) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1982, which exhibit is incorporated herein by reference.
(6) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1985, which exhibit is incorporated herein by reference.
(7) Filed with the SEC as exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 1986, which exhibit is incorporated herein by reference.
(8) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1987, which exhibit is incorporated herein by reference.
(9) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1989, which exhibit is incorporated herein by reference.
(10) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1990, which exhibit is incorporated herein by reference.
(11) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-8, File No. 333-42233, which
exhibit is incorporated herein by reference.
(12) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1998,1999, which exhibit is incorporated herein by reference.
------------------------
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-42233) of Frequency Electronics, Inc. of our
report dated July 13, 1999June 27, 2001 relating to the consolidated financial statements and
financial statement schedule, which appears in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
July 13, 199930, 2001
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
Registrant
By: /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chairman of the Board
By: /s/ Alan L. Miller
------------------
Alan L. Miller
Chief Financial Officer
and Controller
Dated: July 28, 199930, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Martin B. Bloch President & Director 7/28/99
--------------------30/01
-----------------------
Martin B. Bloch
/s/ Joel Girsky Director 7/28/99
--------------------30/01
-----------------------
Joel Girsky
/s/ John Ho Director 7/28/99
--------------------30/01
-----------------------
John Ho
/s/ Marvin Meirs Director 7/28/99
--------------------30/01
-----------------------
Marvin Meirs