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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended April 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to _____
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- ----------------------- --------------------------
Common Stock (par value American Stock Exchange, Inc.
$1.00 per share)
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 12,1996 - $24,488,500.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 12,1996 - 4,848,395.
DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by
reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held on August 27,1996.
(Cover Page 1 of 63 pages)
Exhibit Index at Page 52
PART I
Item 1. Business
GENERAL DISCUSSION
Frequency Electronics, Inc.(sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the area of time and frequency control. Unless the context
indicates otherwise, references to the Registrant are to Frequency Electronics,
Inc. and its subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became
the successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 4,846,395 shares were
outstanding at April 30, 1996, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.
Since its inception, Registrant has been involved principally in
military defense contracting by way of the design, development, manufacture, and
marketing of precision time and frequency control products. Its products are
used in guidance and navigation, communications, surveillance and electronic
counter measure and timing systems. Such products are used on many of the United
States' most sophisticated military aircraft, satellites, and missiles. In
recent years, changing defense priorities and severe federal government budget
pressures have significantly changed the market environment for defense related
products. Total U.S. Government defense and space acquisitions have declined
steeply and further cuts cannot be discounted over the coming years. As a
consequence, many major U.S. Government contracts have been subjected to program
stretch-outs. The Registrant's business was highly dependent upon the defense
and space spending policies of the U.S. Government when fiscal 1996 began.
Although this dependence will be less significant in the future, as discussed
below, any substantial reduction in government spending or change in emphasis in
the government's defense and space programs would still have a material adverse
effect upon the Registrant's business. For additional factors which may have had
an adverse effect on Registrant's business with the U.S. Government, the
materiality, if any, or extent of which effect is not readily ascertainable by
Registrant at this time, reference is made to the subtopic "Material
Developments" of this Item 1 and to Item 3 (Legal Proceedings).
In an effort to better serve customers on a more competitive basis,
Registrant has segmented its operations into two principal industries: Defense
and space for United States Government end use, and commercial communications
and non-U.S. defense and space. The Registrant's commercial communications and
commercial space programs have been transferred to and are now produced by its
wholly owned subsidiary FEI Communications, Inc. ("FEIC"). FEIC was incorporated
in Delaware in December 1991, and was created as a separate subsidiary company
to provide ownership and management of assets and other services appropriate for
commercial clients, both domestic and foreign. Registrant believes that as a
separate entity operational flexibility and efficiency isenhanced.
For the years ended April 30, 1996, 1995 and 1994, approximately 55%,
75% and 69%, respectively of the Registrant's sales were for U.S. Government end
use. During fiscal 1996, approximately 45% of the Registrant's sales were for
commercial products, used for commercial communications, commercial space
applications and foreign government end use. Registrant believes a substantial
commercial market exists and has developed several new product lines as
discussed later in this Item 1.
MATERIAL DEVELOPMENTS
On November 17, 1993, Registrant was indicted on criminal charges
alleging conspiracy and fraud in connection with six contracts for which
Registrant was a subcontractor. In addition, two derivative actions have been
filed against the Board of Directors essentially seeking recovery on behalf of
the Company for any losses it incurs as a result of the indictment. On December
14, 1993, Registrant was notified by the U.S. Department of the Air Force that
it had been suspended from contracting with any agency of the government.
Current contracted programs are not affected by this suspension. Certain
exceptions will apply if a compelling reason exists. The suspension is temporary
subject to the outcome of the legal proceedings in connection with the
indictment. The Company and the individual defendants have pleaded not guilty to
all criminal charges, have denied all civil allegations, and will vigorously
contest all charges and allegations. See Item 3 - Legal Proceedings.
PRODUCTS
Since its inception, Registrant has been involved in the design,
development, manufacture and marketing of precision time and frequency control
products. Using the technology the Registrant has developed in time and
frequency products for limited applications, the Registrant has modified a
number of products for wider application in the much broader navigation,
communications and electronic warfare markets and non-military commercial
markets.
The Registrant's products are used in guidance and navigation,
communications, surveillance and electronic countermeasure and timing systems.
These products are built in accordance with Department of Defense or customer
standards and are used on many of the United States' most sophisticated military
aircraft, satellites and missiles.
Registrant designs and manufactures the master clocks (quartz, rubidium
and cesium) for many satellite communication systems for both satellite and
ground applications. The Global Positioning Satellite System, as well as the
MILSTAR Satellite System, are but two examples of the programs in which the
Registrant participates. Registrant also supplies significant timing products
utilized with many satellite communications systems.
Registrant manufactures the master clock for the Trident missile, the
basic timing system for the Voyager I and Voyager II deep space exploratory
missions and the quartz timing system for the Space Shuttle. The Registrant's
cesium beam atomic clock is presently employed in low frequency secure
communications, surveillance and positioning systems for the United States Air
Force, Navy and Army.
The Registrant's products are marketed as components, microwave
products, instruments, or complete systems and are used in navigation,
communications, radar, sonar, guidance, surveillance and electronic
countermeasure equipment and systems. Prices are determined based upon the
complexity, design requirement and delivery schedule as determined by the
project details.
Sales summaries for each class of Registrant's products during each of
the last five years is set forth in Item 6 (Selected Financial Data).
Most of Registrant's products are manufactured from raw materials
which, when combined with conventional electronic component parts available from
multiple sources, become finished products, subsystems and systems used for
space exploration, satellite applications, communication, navigation, position
location, radar, and electronic counter-measures. These products, subsystems and
systems are employed in domestic and international satellites, earth stations,
aircraft, missiles, ships and submarines, and ground-based fixed, transportable,
portable and mobile installations.
COMPONENTS - The Registrant's key technologies include quartz, rubidium
and cesium from which it manufactures accurate time and frequency standards and
higher level assemblies which allow the users to locate their position, secure a
communications system, or guide a missile with precision. The components class
of Registrant's products is rounded out with crystal filters and discriminators,
surface acoustic wave resonators, and space and high-reliability custom thick
and thin film hybrid integrated circuits.
Quartz is the key element in making quartz resonators used for
oscillators and filters utilized in most of its products.
Precision quartz oscillators use quartz resonators in conjunction with
electronic circuitry to produce signals with accurate and stable frequency. The
Registrant's products include several types of quartz oscillators, suited to a
wide range of applications, including: ultrastable units for critical satellite
and strategic systems, and fast warm-up, low power consumption units for mobile
and tactical applications.
The ovenized quartz oscillator is the most accurate type, wherein the
oscillator crystal is enclosed in a temperature controlled environment called a
proportional oven. The Registrant manufactures several varieties of temperature
controlling devices and ovens.
The voltage-controlled quartz oscillator is an electronically
controlled device wherein the frequency may be stabilized or modulated,
depending upon the application.
The temperature compensated quartz oscillator is an electronically
controlled device using a temperature sensitive device to directly compensate
for the effect of temperature on the oscillator's frequency.
The key components for the atomic instrument products are manufactured
totally from raw materials. The rubidium lamp, filter and resonance cell provide
the optical subassembly used in the manufacture of the Registrant's optically
pumped atomic rubidium frequency standards. The cesium tube resonator is also
manufactured totally from raw materials and is used in the manufacture of the
Registrant's cesium primary standard atomic clocks.
Efficient and reliable DC-DC power converters are manufactured for the
Registrant's own instruments, and as stand alone products, for space and
satellite applications.
The Registrant manufactures filters and discriminators using its
crystal resonators, for use in its own radio-frequency and microwave receiver,
signal conditioner and signal processor products.
High reliability, MIL-M-38510 Class S and B, custom hybrids are
manufactured in thick and thin film technologies for applications from DC to 44
GHz. These are used in manufacturing the Registrant's products, and also
supplied directly to customers, for space and other high reliability systems.
MICROWAVE PRODUCTS - The Registrant, under an agreement with TRW's
Electronics and Technology Division, markets their extensive line of
millimeter/microwave monolithic integrated circuits ("MIMICs") developed by TRW
for the Department of Defense, and microwave monolithic integrated circuits
("MMICs") developed at TRW's own cost. These devices are incorporated into
"supercomponents" and integrated subassemblies.
INSTRUMENTS - The Registrant's instrument line consists of three basic
time and frequency generating instruments and a number of instruments which test
and distribute the time and frequency. The Registrant's time and frequency
generating instruments are the quartz frequency standard, rubidium atomic
standard, and the cesium beam atomic clock.
The quartz frequency standard is an electronically controlled
solid-state device which utilizes a quartz crystal oscillator to produce a
highly stable output signal at a standardized frequency. The Registrant's
frequency standard is used in communications, guidance and navigation and time
synchronization. The Registrant's products also include a precision frequency
standard with battery back-up and memory capability enabling it to remain in
operation if a loss of power has occurred. The optically pumped atomic rubidium
frequency standard is a rugged, compact, militarized solid-state instrument
which provides both timing and low phase noise references used in communications
systems.
The cesium beam atomic clock utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency, several orders of
magnitude more accurate than other types of quartz frequency generators. The
atomic clock is a compact, militarized solid-state device which generates these
precision frequencies for use with advanced communications and navigation
equipment. A digital time-of-day clock is incorporated which provides visual
universal time display and provides digital timing with ten-billionths of a
second accuracy for systems use. The atomic clock manufactured by Registrant is
a primary standard, capable of producing time accuracies of better than one
second in seven hundred thousand years.
As communications systems become more precise, the requirement for
precise frequency signals to drive a multitude of electronic equipment is
greatly expanded. To meet this requirement, the Registrant manufactures a
distribution amplifier which is an electronically controlled solid-state device
that receives frequency from a frequency standard and provides multiple signal
outputs of the input frequency. A distribution amplifier enables many items of
electronic equipment in a single facility, aircraft or ship to receive a
standardized frequency and/or time signal from a quartz, rubidium or cesium
atomic standard.
SYSTEMS - Essentially, the Registrant's systems portion of its business
is manufactured by integrating selections of its products into subsystems that
meet customer-defined needs. This is done by utilizing its unique knowledge of
interfacing these technologies, and experience in applying them to a wide range
of systems. In general, though not limited to, the Registrant's systems generate
electronic frequencies of predetermined value, and then divide, multiply, mix,
convert, modulate, demodulate, filter, distribute, combine, separate, switch,
measure, analyze, and/or compare, depending on the system application.
The Systems portion of the business includes a complete line of time
and frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. The time and
frequency control systems combine Registrant's cesium, rubidium and/or crystal
instruments, with its other products, to provide systems for space exploration,
satellite tracking stations, satellite-based navigation and position location,
secure communication, submarine and ship navigation calibration, and electronic
counter-measures applications. A number of these time and frequency control
systems provide up to quadruple redundancy to assure operational longevity.
For example, the Registrant manufactured the Common Time and Frequency
System (CTFS) for the first and second Time Data Relay Satellite System (TDRSS)
Ground System. It includes redundant cesium standards and redundant Disciplined
Standards, redundant switches, time code generators, buffer amplifiers, and
displays; and integrates WWVB, LORAN and GPS receivers and antennas, and various
instrumentation and non-interruptible power supplies.
As a second example, the Registrant manufactured a triple-redundant
quartz crystal oscillator and frequency distribution sub-system for MILSTAR
Satellite Flight #1 and quadruple-redundant rubidium standards and
dual-redundant frequency distribution and DC-DC power converter sub-systems for
MILSTAR Flights #2 through #5.
The Registrant also manufactures satellite communications subsystems
such as the up and down converters for the TDRSS satellites and the 30 channel,
triple conversion element separator for the TDRSS earth stations, and the LNA's
up/down converters and receiver subsystems for the DSP.
See Item 6 - Selected Financial Data - for sales data for each of these
product lines.
BACKLOG
As of April 30, 1996, the Registrant's backlog amounted to
approximately $15 million of which approximately $13.7 million is funded as
compared to approximately $15 million of funded backlog at April 30, 1995 (see
Item 7). The backlog includes purchase orders and contracts from commercial and
foreign customers of approximately $8.6 million. A substantial portion of this
backlog is expected to be filled during Registrant's fiscal year ending April
30, 1997. While the backlog includes firm purchase orders and contracts and may
be a guideline in determining the value of orders which may be deliverable in
the period indicated, it is subject to change by reason of several factors
including possible cancellation of orders, change orders, terms of the contracts
and other factors beyond the Registrant's control. Accordingly, the backlog is
not necessarily indicative of the revenues or profits (losses) which may be
realized when the results of such contracts are reported.
CUSTOMERS AND SUPPLIERS
The Registrant markets its products both directly and through 35
independent sales representative organizations located principally in the United
States. Sales to non-U.S. customers totaled approximately 17% of net sales in
1996 and 16% in fiscal years 1995 and 1994.
The Registrant's products are sold to a variety of customers, both
governmental and private. For the years ended April 30, 1996, 1995 and 1994,
approximately 55%, 75% and 69%, respectively, of the Registrant's sales were
made under contracts to the U.S. Government or subcontracts for U.S. Government
end-use. The Registrant's business is highly dependent upon the defense and
space spending policies of the U.S. Government. Any substantial reduction in
government spending or change in emphasis in the government's defense and space
programs would have a material adverse effect upon the Registrant's business
(see Item 3).
Sales to Hughes Aircraft Company (HAC) and Space Systems Loral each
exceeded 10% of the Company's consolidated sales for the year ended April 30,
1996. Collectively these two companies accounted for approximately 39% of the
Company's consolidated sales for the same period. For the year ended April 30,
1995, sales to HAC, TRW and Raytheon Corp. exceeded 10% individually and 56%
collectively of consolidated sales. For the year ended April 30, 1994, sales to
HAC and Raytheon Corp. exceeded 10% individually and 40% collectively of
consolidated sales. For the fiscal year ended April 30, 1996, the sales to HAC
were substantially all for U.S. Government end use while the sales to Space
Systems Loral were for commercial communication and foreign defense and space
applications. Sales to the above named customers in the fiscal years ended April
30, 1995 and 1994 were substantially all for U.S. government end use. The loss
by the Company of any one of these customers or, for those customers contracting
with the U.S. Government, the loss of any contracts which are partially
subcontracted to the Company, would have a material adverse effect on the
Company's business. The Company believes its relationship with these companies
to be mutually satisfactory and, except for the pending legal proceedings
discussed in Item 3, is not aware of any prospect for the cancellation of or
significant reduction of any of their U.S. Government contracts in which the
Company is involved.
The Registrant purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Registrant is not dependent upon any one supplier or source of
supply for any of its component part purchases and maintains alternative sources
of supply for all of its purchased components. The Registrant has found its
suppliers generally to be reliable and price-competitive.
GOVERNMENT CONTRACTS
During the fiscal years ended April 30, 1996, 1995 and 1994,
approximately 55%, 75% and 69%, respectively, of the Registrant's sales were
made either directly with U.S. Government agencies or indirectly with government
agencies through subcontracts intended for government end-use. All but a few of
these contracts are on a fixed price basis. Under a fixed price contract the
price paid to the Registrant is not subject to adjustment by reason of the costs
incurred by the Registrant in the performance of the contract, except for costs
incurred due to contract changes ordered by the customer. These contracts are on
a negotiated basis under which the Registrant bears the risk of cost overruns
and derives the benefit from cost savings.
Negotiations on U.S. Government contracts are sometimes based in part
on Certificates of Current Costs. An inaccuracy in such certificates may entitle
the government to an appropriate recovery. From time to time, the Defense
Contracts Audit Agency ("DCAA") of the Department of Defense audits the
Registrant's accounts with respect to these contracts. The Registrant is not
aware of any basis for recovery with respect to past certificates.
All government end-use contracts are subject to termination by the
purchaser for the convenience of the U.S. Government and are subject to various
other provisions for the protection of the U.S. Government. In the event of such
termination, the Registrant is entitled to receive compensation as provided
under such contracts and in the applicable U.S.Government regulations.
COMMERCIAL MARKETS
During the fiscal year ended April 30, 1996, the Registrant continued
to focus a significant portion of its resources and efforts on developing
hardware for commercial satellite programs and commercial ground communication
systems which management believes will result in future growth and increases in
profits. In fiscal 1994, Registrant transferred all commercial communications
and space programs to its wholly owned subsidiary, FEIC. The foregoing
developments have been implemented with a view towards enabling Registrant to
achieve long-term substantial increases in sales from other than Defense
Department programs.
Some of the product lines which the Registrant has developed for the
commercial market are as follows:
Commercial Rubidium Atomic Standard:
An extremely small,low cost, low phase noise,stable atomic standard
ideally suited for use in advanced cellular communications, wireless
telecommunications and navigation applications.
Subminiature Oven Controlled Commercial Quartz Crystal Oscillator:
A low cost, small size, precision crystal oscillator suited for high
end performance required in satellite transmissions, airborne
telephony, and geophysical survey positioning systems.
VSAT Transceivers:
Used in satellite communications for private data and voice earth
stations and are currently under test and evaluation. The objective is
to manufacture VSAT products for both the domestic and export markets
through joint venture arrangements. Registrant is presently marketing
its other products through a representative Chinese Company engaged in
the electronics business. A family of two product lines is planned to
meet customer needs. The Registrant has received its first contract
for VSAT's in China.
RESEARCH AND DEVELOPMENT
The Registrant's technological expertise has been an important factor
in its growth. Until recently, virtually all of its research and development
activities have taken place in connection with customer-sponsored research and
development oriented projects conducted under fixed price contracts and
subcontracts in support of U.S. Government programs. These projects constituted
non-recurring engineering and were a substantial portion of the Registrant's
business. The Registrant has been successful in applying its resources to
providing prototypes and preproduction hardware for use in military navigation,
communication, guidance and electronic countermeasure programs and space
applications. The output of these customer-sponsored projects, in all cases, are
proprietary to the Registrant.
The Registrant continues to focus a significant portion of its own
resources and efforts on developing hardware for commercial satellite programs,
commercial ground communication systems and wireless communications systems
which it anticipates will result in future growth and increases in profits.
Through its wholly owned subsidiary, FEIC, the Registrant is aggressively
pursuing markets for its commercial rubidium product line and its C and KU-Band
VSAT transceivers. The foregoing developments have been implemented with a view
towards enabling Registrant to achieve long-term increases in sales from other
than Defense Department programs. During fiscal 1996, 1995 and 1994, the
Registrant expended $1.1 million, $1.9 million, and $1.4 million of its own
funds, respectively, on such research and development activity.
PATENTS AND LICENSES
The Registrant believes that its business is not dependent on patent or
license protection. Rather, it is primarily dependent upon the Registrant's
technical competence, the quality of its products and its prompt and responsible
contract performance. However, the rights to inventions of employees working for
the Registrant are assigned to the Registrant and the Registrant presently holds
such patents and licenses. Registrant does not believe that patents and licenses
are material to its business.
COMPETITION
The Registrant experiences intense competition with respect to all
areas of its business. The Registrant competes primarily on the basis of the
accuracy, performance and reliability of its products, the ability of its
products to perform in severe environments encountered in military and aerospace
applications, prompt and responsive contract performance, and the Registrant's
technical competence and price. The Registrant has a unique and broad product
line which includes all three frequency standards - quartz, rubidium, and
cesium. The Registrant believes its ability to take such raw materials,
manufacture finished products, integrate them into systems and sub-systems, and
to interface these systems with end-user applications by determining the most
appropriate type, all under one roof, provides the Registrant with an advantage
over many of its competitors. The Registrant believes that it is a significant
supplier of time and frequency products for the military and aerospace markets.
Many of the Registrant's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs than the
Registrant. With respect to the cesium beam atomic clock, quartz crystal
standard and rubidium frequency standard, the Registrant competes with
Hewlett-Packard Company, Datum, Inc., Austron, Inc., and E. G. and G., Inc.
EMPLOYEES
The Registrant employs 208 persons.
OTHER ASPECTS
The Registrant's business is not seasonal and no unusual working
capital requirements exist.
Item 2. Properties
Registrant established its headquarters in December, 1981 in a 131,000
square foot manufacturing and office facility located in Mitchel Field, Long
Island, New York (the "Mitchel Field Complex"). The Mitchel Field Complex was
built and equipped, in part, with the proceeds of a $5,000,000 Industrial
Development Bond financing arrangement concluded through the Nassau County
Industrial Development Agency and various lending institutions ("Financing
Arrangement"). The Mitchel Field Complex is erected on land leased from the
County of Nassau ("Nassau County Lease") dated as of February 24, 1981 for an
aggregate period of 99 years (including renewal options exercisable at
Registrant's sole discretion). Registrant paid total base rentals under this
lease of approximately $167,000 during fiscal year ended April 30, 1996. The
Nassau County Lease provides for increases generally at 10 year intervals.
Registrant has granted to the lending banks a security interest in all personal
property purchased with the proceeds of this financing and a mortgage on the
Nassau County Lease.
In June 1988, Registrant completed construction of an additional 90,000
square feet of manufacturing and office facility contiguous to the Mitchel Field
Complex. These additional facilities were financed with the proceeds of a
$3,500,000 Industrial Development Bond Financing arrangement with the Nassau
County Industrial Development Agency and a lending institution, as part of its
plan to finance the new plant and equipment ("Financing Arrangement II").
Under the terms of the Financing Arrangement and Financing Arrangement
II, interest is payable at 65% and 79% respectively of the lending banks' prime
commercial lending rates. This advantageous interest rate is made available
under an exemption from the taxation of interest payments received by the
lenders as provided by the Internal Revenue Code ("Code"). In fiscal 1995 the
Financing Arrangement was fully repaid. Registrant has no reason to believe that
the exemption with respect to Financing Arrangement II will be challenged by the
Internal Revenue Service.
Such interest rate formula will remain in effect during the 15-year
period required to amortize Financing Arrangement II. Registrant has the right
to prepay the loan at any time. Financing Arrangement II contains certain
restrictions with respect to the maintenance of net worth and encumbering the
building.
In December 1990, a subsidiary of the Registrant signed a 15 year lease
with Lab Corporation of America ("LCA", formerly National Health Laboratories
Incorporated). The terms require that the subsidiary of the Registrant have a
building constructed for use by LCA for which construction was completed in
November 1992. The Registrant provided $9,000,000 of financing for the cost of
the building for which a six-year term loan has been negotiated. This loan has
been guaranteed and collateralized by LCA assets. Annual rental income of
$1,650,000 commenced in November 1992 upon completion of the building. Minimum
rentals are subject to adjustment based on the difference between the actual
rate of interest incurred on the borrowing used to construct the facility and
the targeted range of 9.75% to 10.25%. Under the terms of the lease agreement
annual rent escalations of 5% will commence in the fourth year of the lease.
This lease is accounted for as a direct finance lease and income is recognized
by a method which produces a constant periodic rate of return on the outstanding
investment in the lease.
Item 3. Legal Proceedings
U.S. Government Indictment
On November 17, 1993, a Federal Grand Jury in the United States
District Court for the Eastern District of New York returned an indictment in a
criminal proceeding entitled, "United States District Court, Eastern District of
New York, United States of America, Plaintiff, against Frequency Electronics,
Inc., Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants", index number CR 93-1261 ("Indictment"). As the caption in the
proceeding indicates, the Indictment named as defendants Frequency Electronics,
Inc ("FEI"), Martin Bloch - its then board chairman, president and chief
executive officer, Abraham Lazar - one of its directors, Harry Newman- its
secretary/treasurer, and Marvin Norworth its then contracts manager. The
eighteen count Indictment charges violations of Title 18, United States Code
("U.S.C.") Sections 286 and 3551 et seq., 1031(a), 2 and 3551 et seq., 1001, 2
and 3551 et seq.
The Indictment makes allegations, generally, as follows: TRW, Inc.
("TRW") was a prime contractor on a contract with the United States Government
("Government") to build satellites; FEI was a subcontractor of TRW under six
contracts to manufacture electronic devices for space satellites pursuant to
TRW's contracts with the Government; in February 1988, three of the subcontracts
were terminated by TRW and three of the subcontracts were partially terminated
by TRW and restructured; in connection with such terminations, FEI submitted
detailed statements of information setting out its costs incurred in connection
with the subcontracts, for the unpaid portion of which it was eligible for
compensation, directly or indirectly, by the Government; among the costs for
which it was eligible for compensation were labor costs, overhead and general
and administrative costs (collectively "costs"); settlement proposals were
submitted by FEI with respect to the three terminated subcontracts; the
proposals contained, among other things, the cost information described above
and FEI was compensated, directly or indirectly, by the Government; contract
pricing proposals were submitted by FEI with respect to the three partially
terminated and restructured subcontracts and such proposals contained, among
other things, the cost information described above. FEI and TRW entered into an
agreement restructuring such subcontracts and FEI was paid settlement expenses
in connection with such restructured subcontracts.
The general substance of the criminal charges against FEI and the
individual defendants named in the Indictment is that FEI and the individual
defendants conspired to defraud and did defraud the Government and that some or
all of them committed, among others, the following criminal acts: they agreed to
defraud the Government; they submitted statements and invoices with respect to
FEI's costs incurred in connection with the terminated and/or partially
terminated and restructured subcontracts for the purpose of FEI obtaining
compensation thereunder, which statements and invoices were intentionally false;
the statements and invoices included claims for labor costs and other costs
which were intentionally false; FEI and the individual defendants destroyed or
caused to be destroyed important records relating to labor costs; FEI and the
individual defendants altered or caused to be altered FEI's records and vendor
invoices with respect to FEI's cost of labor, materials and services; FEI and
the individual defendants intentionally made false statements to Government
officials; and FEI and the individual defendants intentionally submitted false
documents to Government officials. The Indictment does not specify the dollar
amount as to which it is claimed the Government was defrauded.
Subsequent to the return of the Indictment, FEI and the individual
defendants moved to dismiss the Indictment on various grounds ("Motion(s)"). The
Motions were heard on May 13, 1994 and the Court rendered its decision and
denied the Motions. Discovery has not been completed. FEI has determined to
vigorously defend the Indictment.
On April 6, 1994, a Federal Grand Jury in the United States District
Court for the Eastern District of New York returned a superseding indictment in
a criminal proceeding entitled, "United States District Court, Eastern District
of New York, United States of America, Plaintiff, against Frequency Electronics,
Inc., Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants", index number CR 93-0176 ("Superseding Indictment"). As the caption
in the proceeding indicates, the Superseding Indictment named as defendants all
of the same parties as in the Indictment. The nineteen count Superseding
Indictment charges violations of Title 18, U.S.C. Sections 371 and 3551 et seq.,
1001, 2 and 3551 et seq. It is believed that the Superseding Indictment
primarily represents an attempt by the Government to meet and cure certain of
the asserted deficiencies in the Indictment which were specified in the Motions.
The Superseding Indictment enlarged Count One of the Indictment from an 18
U.S.C. Section 286 conspiracy to a conspiracy charged under Title 18, U.S.C.
Section 371. In addition, the Superseding Indictment contained an additional
count charging a violation of Section 1001 of Title 18, i.e., making a false
statement to a Government agency. Other than the foregoing, there are no other
substantial differences between the Indictment and the Superseding Indictment.
The Superseding Indictment does not specify the dollar amount as to which it is
claimed the Government was defrauded. The Government takes the position that it
may proceed to trial on either the Indictment or the Superseding Indictment. The
Government has not advised as to whether it intends to proceed under the
Indictment or the Superseding Indictment and the Court has not ruled on this
subject. FEI and the other defendants moved to dismiss the Superseding
Indictment and those motions were also heard on May 13, 1994. The Court denied
the motions addressed to the Superseding Indictment. Discovery has not been
completed. FEI has determined to vigorously defend the Superseding Indictment.
In connection with the defense of the Indictment and the Superseding
Indictment, FEI and the other defendants have sought the production of United
States Government classified information and documents pursuant to the
provisions of the Classified Information Procedures Act ("CIPA"). A formal
hearing under CIPA commenced on April 29, 1996. The CIPA process is continuing
and no assessment can be made as to when it will be concluded or the outcome.
Upon a conviction of FEI, the Government may be awarded fines,
penalties, restitution, forfeitures, treble damages or other conditional relief.
On November 17, 1993, the Government commenced a civil action for
damages in the United States District Court for the Eastern District of New York
entitled, "United States District Court, Eastern District of New York, United
States of America, Plaintiff, against Frequency Electronics, Inc., Martin Bloch,
Abraham Lazar, Harry Newman and Marvin Norworth, Defendants", index number CV
93-5200 ("Government Civil Action"). The Government Civil Action sets forth four
causes of action against each of the named defendants alleging, in substance,
fraud under 31 U.S.C. Section 3729, et seq, (the "False Claims Act"), fraud,
unjust enrichment and breach of contract. In the complaint, demand is made for
treble damages in an unspecified sum based upon the alleged violations under the
False Claims Act, plus costs and attorneys fees in an unspecified amount, plus
$10,000 for each false claim and for each false record and statement. Pursuant
to an order of the Court dated January 12, 1994, all proceedings in the
Government Civil Action including, without limitation, discovery are stayed
pending a jury verdict of the Indictment. Under the False Claims Act, a recovery
can be made in favor of the Government for a civil penalty of not less than
$5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses. No opinion can be
offered as to the outcome of the Government Civil Action. FEI has determined to
vigorously defend the Government Civil Action.
A qui tam action was commenced in the United States District Court for
the Eastern District of New York entitled, "The United States of America ex rel.
Ralph Muller, Plaintiff, against Frequency Electronics, Inc., Raytheon Company,
Raytheon Company Subsidiaries #1-10, fictitious names for subsidiaries of
Raytheon Company, Hughes Aircraft Company, Hughes Aircraft Company subsidiaries
#1-20, fictitious names for subsidiaries of Hughes Aircraft Company, and Martin
Bloch, Defendants", index number CV-92 5716 ("Muller Qui Tam Action"). The
Muller Qui Tam Action was brought pursuant to the provisions of the False Claims
Act and is an action by which an individual may, under certain circumstances,
sue one or more third persons on behalf of the Government for damages and other
relief.
The complaint was filed on or about December 3, 1992, in camera and
under seal pursuant to the provisions of the False Claims Act. The Court
unsealed the complaint by order dated December 3, 1993, after FEI complained to
the United States Attorney for the Eastern District of New York regarding
newspaper articles that charged FEI with manufacturing defective products based
upon claims in an unspecified and undisclosed qui tam action. It is believed
that the Government made applications to the Court on one or more occasions
after December 3, 1993 to continue to have the file in the Muller Qui Tam Action
remain under seal. The complaint was served on FEI and Martin Bloch on March 28,
1994 and March 30, 1994, respectively. Under the provisions of the False Claims
Act, the Government is permitted to take over the prosecution of the action. The
Government has declined to prosecute the Muller Qui Tam Action and the
plaintiff, Ralph Muller ("Muller"), is proceeding with the action on behalf of
the Government as is permitted under the False Claims Act. Moreover, while the
action names as parties defendant, Hughes Aircraft Company ("Hughes") and
Raytheon Company ("Raytheon"), along with several of their subsidiaries, it
appears that the Muller Qui Tam Action was dismissed voluntarily by Muller on
April 6, 1994, as to Hughes, Raytheon and their respective subsidiaries. FEI and
Martin Bloch moved to dismiss the complaint on various grounds and, at the oral
argument of the motion to dismiss, the Court granted the motion to the extent
that the complaint failed to plead fraud with sufficient particularity as is
required under the Federal Rules of Civil Procedure and the plaintiff was
directed to serve an amended complaint. On February 6, 1996, plaintiff served an
amended complaint ("Amended Complaint").
The Amended Complaint, insofar as it pertains to FEI and Martin Bloch,
contains a series of allegations to the effect that Hughes and Raytheon
contracted with the Government to supply it with Advance Medium Range Air to Air
Missiles ("AMRAAMS"); Hughes and Raytheon (collectively, the "Contractors")
entered into a subcontract with FEI pursuant to which FEI was to design,
manufacture, test, sell and deliver to the Contractors certain oscillators which
constituted components of the AMRAAMS; that FEI improperly designed,
manufactured and tested the oscillators; that numerous faulty and defective
oscillators were delivered to the Contractors; that the oscillators did not meet
contract specifications; that FEI was aware of the defective and faulty nature
of the oscillators; that FEI and Martin Bloch knowingly directed non-disclosure
of the design flaws; that the concealed design defects in developmental
oscillators permitteed FEI to manufacture additional defective oxcillators which
were used in operational missiles; that as a direct result of FEI's fraudulent
concealment of the defects, FEI was contracted to design and manufacture
additional oscillators; that when missiles were returned to FEI for repair, FEI
charged the Government for repair even though FEI knew the units had been
defective at the time of delivery; that FEI falsified test results and FEI and
Martin Bloch directed the falsification of test results; and that FEI sold and
delivered the oscillators to the Contractors; as a result of the faulty and
defective oscillators, many of the AMRAAMS failed to function properly; and that
the Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act,
and that the plaintiff Muller be awarded a bounty. Under the False Claims Act, a
recovery can be made in favor of the Government for a civil penalty of not less
than $5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses.
FEI has determined to vigorously defend the Muller Qui Tam Action. It
has answered the Amended Complaint, denied the material allegations, asserted
seventeen affirmative defenses, and counterclaims for: libel and product libel
demanding damages of $3,000,000; republication of the libel and product libel -
demanding damages of $3,000,000; slander demanding damages of $3,000,000;
tortious interference with prospects for additional business- demanding damages
of $1,865,010; prima facie tort - demanding damages of $1,865,010; conversion -
demanding damages of $11 plus an amount to be determined at trial; breach of
employment contract - demanding damages of $1,865,010; breach of fiduciary duty
- - demanding damages of $1,865,010; plus punitive damages in the amount of
$30,000,000 on each of the tort causes of action, and legal fees and expenses.
The substance of the counterclaims alleged against Muller are predicated upon a
letter dated November 23, 1992 ("November 23 Letter") written by Muller's
attorneys Schneider, Harris, Harris and Furman ("SHHF") to the Government which
allegedly contained false and libelous statements concerning FEI's design,
manufacture and production of components for Hughes and Raytheon in connection
with the AMRAAMS.
In addition, FEI has instituted a third party action against SHHF,
Robert Harris, Esq. and Rod Kovel, Esq., attorneys for Muller, in connection
with their alleged authoring and publishing of the November 23 Letter provided
to the Government. The third-party complaint asserts the claims against the
attorneys for libel and product libel, republication of the libel and product
libel, slander, tortious interference with contractual relations, prima facie
tort and conversion.
The counterclaims and third-party complaint have been served. Muller has
replied to the counterclaims asserted in FEI's answer to the Amended Complaint,
denied the substantive allegations and asserted various affirmative defenses.
The third-party defendants have replied to the third-party complaint and have
denied the substantive allegations and asserted various affirmative defenses.
Discovery has not commenced.
Muller moved to dismiss the counterclaims in the answer and the
third-party defendants moved to dismiss the third-party complaint. FEI and
Martin Bloch moved to dismiss the complaint in the Muller Qui Tam Action. The
motions were argued on January 5, 1996 and, at the time, the Court directed the
plaintiff to serve the Amended Complaint. At the oral argument, the Court
deferred a portion of its decision and, in addition, it indicated a formal
decision and order would be provided as to certain of the relief requested. To
date, the Court has not rendered its formal decision and order.
No opinion can be offered as to the outcome of the Muller Qui Tam
Action, the FEI counterclaims, third-party action or the pending motions.
On December 1, 1993, FEI was served with a complaint in an action
entitled, "In the Court of Chancery of the State of Delaware In and For New
Castle County, Diane Solash Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, Abraham Lazar, John C. Ho, E. John Rosenwald,
Jr., individuals, Defendants and Frequency Electronics, Inc., a Delaware
Corporation, Nominal Defendant", Civil Action No. 13266 ("Solash Action"). All
of the individual defendants named in the complaint are or were directors of
FEI, Martin B. Bloch was president and chairman of the board of directors,
Abraham Lazar was a vice-president, and Joseph P. Franklin is presently chairman
of the board of directors. On January 24, 1994, plaintiff served an amended
complaint adding as named defendants Harry Newman, FEI's secretary/treasurer and
Marvin Norworth, FEI's contracts manager, who has since retired. This is a
derivative action which is permitted by law to be instituted by a shareholder
for the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. FEI is named as a
nominal defendant. In the Solash Action, the complaint alleges that the members
of FEI's board of directors may not reasonably be expected to authorize an
action against themselves.
The substance of the amended complaint contains allegations, in
general, as follows: the Indictment was issued (reciting certain of the
allegations contained in the Indictment); the misconduct of FEI's personnel as
alleged in the Indictment is such that FEI is exposed to material and
substantial monetary judgments and penalties as well as the loss of significant
Government business; such misconduct is likely to continue; the individual
defendants were under a fiduciary obligation to FEI and its shareholders to
supervise, manage and control with due care and diligence the business
operations of FEI and the business conduct of its personnel; that they failed to
do so and as a direct consequence, the matters alleged in the Indictment
occurred; and that the individual defendants breached their fiduciary duty. The
amended complaint seeks judgment against the individual defendants in the amount
of all losses and damages suffered by FEI and indemnification, on account of the
matters alleged in the amended complaint, together with interest, costs, legal
and other experts' fees. See additional comment with respect to the Solash
Action below.
On February 4, 1994, FEI was served with a complaint in an action
entitled "Supreme Court of the State of New York, County of New York, Moise
Katz, Plaintiff, against Martin B. Bloch, Joseph P. Franklin, Joel Girsky, John
C. Ho, Abraham Lazar, E. John Rosenwald, Jr., Defendants, and Frequency
Electronics, Inc., Nominal Defendant", Index Number 93-129450 ("Katz Action").
This is a derivative action which is permitted by law to be instituted by a
shareholder for the benefit of a corporation to enforce an alleged right or
claim of the corporation where it is alleged that such corporation has either
failed and refused to do so or may not reasonably be expected to do so. FEI is
named as a nominal defendant. In the Katz Action, the complaint alleges that the
members of FEI's board of directors may not reasonably be expected to authorize
an action against themselves. All of the individual defendants named in the
complaint are directors of FEI, Martin B.Bloch was president and chairman of the
board of directors, Abraham Lazar was a vice president, and Joseph P. Franklin
is presently chairman of the board of directors.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued (reciting certain of the allegations
contained in the Indictment); the misconduct of FEI's personnel as alleged in
the Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a
consequence, the matters alleged in the Indictment occurred; that the individual
defendants were grossly negligent and as a consequence the matters alleged in
the Indictment occurred; that the individual defendants voluntarily participated
in such wrongdoing and attempted to conceal it; and that the individual
defendants intentionally and negligently breached their fiduciary duty to FEI
and its shareholders. The complaint seeks judgment against these defendants in
favor of FEI in the amount of all losses and damages suffered by FEI on account
of the facts alleged in the complaint, together with interest, costs, legal and
other experts' fees.
FEI and all of the defendants have moved to dismiss the complaint in
the Katz Action ("Motion(s)"). At the time of the Motions, the plaintiff moved
to amend the complaint by setting forth certain additional allegations of
wrongdoing including, among others, amplifying allegations with respect to the
Indictment, setting forth allegations relating to the Muller Qui Tam Action, and
allegations attempting to clarify the relationship of the parties to the New
York forum, the latter allegations having been attacked on the Motions. In
connection with the Motions, the defendants stipulated that they would not
object to any application by the plaintiff Katz to intervene in the Solash
action. By order dated September 21, 1994, the Court granted the defendants'
Motions, dismissed the complaint and denied the plaintiff's cross-motions.
On or about November 17, 1994, FEI was served with a complaint in an
action entitled, "In the Court of Chancery of the State of Delaware In and For
New Castle County, Moise Katz Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, John C. Ho, Abraham Lazar, E. John Rosenwald,
Jr., Harry Newman, Marvin Norworth, individuals, Defendants and Frequency
Electronics, Inc., a Delaware corporation, Nominal Defendant", Civil Action No.
13841 ("Katz Delaware Action"). All of the individual defendants named in the
complaint, with the exception of Harry Newman ("Newman") and Marvin Norworth
("Norworth"), were all directors of FEI, Martin B. Bloch was president and
chairman of the board of directors, Abraham Lazar was a vice-president, and
Joseph P. Franklin is presently chairman of the board of directors. Newman is
FEI's secretary/treasurer and Norworth was FEI's contracts manager and has since
retired. This is a derivative action which is permitted by law to be instituted
by a shareholder for the benefit of a corporation to enforce an alleged right or
claim of the corporation where it is alleged that such corporation has either
failed or refused to do so or may not reasonably be expected to do so. FEI is
named as a nominal defendant. In the Katz Delaware Action, the complaint alleges
that the members of FEI's board of directors may not reasonably be expected to
authorize an action against themselves.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued (reciting certain of the allegations
contained in the Indictment); the misconduct of FEI's personnel as alleged in
the Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage, and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the complaint, together with interest, costs, legal, and other experts' fees.
Pursuant to the order of the Court, the Solash Action and the Katz
Delaware Action have been consolidated under consolidated Civil Action No.
13266, with the caption "In Re Frequency Electronics Derivative Litigation"
("Derivative Litigation").
In the Derivative Litigation, FEI and all of the individual defendants
have moved to dismiss the consolidated complaint and to stay the Derivative
Litigation pending a disposition of the Indictment and the Superseding
Indictment ("Motion(s)"). To date, the Motions have not been heard by the Court.
However, as a result of the Motions, pursuant to a Stipulation and Order of the
Court dated May 17,1995 and a Stipulation and Order of the Court dated June 14,
1995, the Derivative Litigation has been dismissed as to Newman and Norworth and
is otherwise stayed pending a disposition of the Indictment, Superseding
Indictment and related investigations until the further order of the Court. FEI
has determined to vigorously defend the Derivative Litigation. Discovery has not
been commenced. No opinion can be offered as to the outcome of the Motion(s) or
with respect to the Derivative Litigation.
A qui tam action was commenced in the United States District Court for
the Eastern District of New York entitled, "United States of America, ex rel.
Howard B. Geldart, Plaintiff - Relator v. Frequency Electronics, Inc., Markus
Hechler, Harry Newman, Marvin Norworth, and Steven Calceglia, Defendants"
(Geldart Qui Tam Action"). The Geldard Qui Tam Action was brought pursuant to
the False Claims Act, which is described above.
The complaint was originally filed on or about October 19, 1993 in
camera and under seal pursuant to the provisions of the False Claims Act. An
amended complaint was filed on or about April 4, 1995. The Court unsealed the
amended complaint on or about June 2, 1995. The amended complaint was served on
FEI on or about July 27, 1995. The Government has exercised its right under the
False Claims Act to take over the prosecution of this action.
The amended complaint alleges that FEI created and used materially
false cost data to justify cost estimates in bid packages and otherwise,
affecting prices and fees charged and paid for defense procurement contracts
relating to the AMRAAM missile, and to a program for the replacement of cesium
standard parts, and to continue to justify the award of and payments under such
contracts; that the false claims caused the United States unknowingly to pay
more than the actual cost (plus a reasonable profit) of the products and
services; that FEI knowingly made transfers to costs from contract to contract
that were unjustified and materially false and otherwise overstated the costs of
its contracts; that this materially false cost data was used to support false
cost estimates by FEI to the United States or its contractors, to fradulently
accelerate costs incurred so as to obtain progress payments, to justify cost
estimates in bids for contracts of a nature similar to ones already awarded FEI,
and to misrepresent cost information to the United States and its contractors.
FEI has determined to vigorously defend the Geldart Qui Tam Action. The
time of the defendants to answer or move with respect to the amended complaint
has been extended up to and including August 16, 1996. To date, none of the
defendants have answered the amended complaint.
On December 22, 1993, February 10, 1994, February 24, 1994, May 10,
1994 and June 7, 1994, Grand Jury Subpoenas Duces Tecum were served on FEI
("Subpoenas"), the Subpoenas were each returnable before a Grand Jury sitting in
the United States District Court for the Eastern District of New York. The
Subpoenas called for the production of a variety of finance, accounting and
other documents, computer records and computer tapes relating to the AMRAAMS. A
number of FEI employees have been subpoenaed to appear before the Grand Jury.
The prosecutor has not advised as to the theory of this investigation. Based
upon the FEI documents subpoenaed, it appears that the inquiry relates to
finance and/or pricing matters. FEI is advised the notices provided with the
Subpoenas to FEI employees indicate their testimony is required in connection
with an investigation related to false statements (18 U.S.C. Section 1001),
false claims (18 U.S.C. Section 287), and conspiracy to present fraudulent
claims (18 U.S.C. Section 286). FEI regards charges or claims of violations of
Government laws and regulations as extremely serious and recognizes that such
charges or claims could have a material adverse affect on it. FEI's business is
primarily dependent upon contracts with the Government and contracts and
subcontracts with other companies as to which the Government or its agencies are
the end-user. Under the law, a Grand Jury indictment of FEI or any of its
officers, directors or employees, can result in suspension or debarment of FEI
from receiving Government contracts for a specified period of time. Registrant
is currently subject to such a suspension by reason of its indictment on
November 17, 1993. Upon conviction of FEI or in a civil proceeding, the
Government may seek fines, penalties, restitution, forfeitures, treble damages
or other conditional relief. To date, no charges have been filed, nor claims
asserted against FEI as a result of the Grand Jury investigation related to
AMRAAM.
Robert H. Harris, Esq. ("Harris"), a counsel to one of FEI's former
employees who was subpoenaed to testify before the Grand Jury, threatened to
file a claim against FEI, in the name of such counsel, in the form of a qui tam
action pursuant to the False Claims Act. To date, FEI has not been served with
any legal process relating to the False Claims Act other than the Government
Civil Action, the Muller Qui Tam Action and the Geldart Qui Tam Action.
FEI has filed claims with its insurance carriers pertaining to
potential coverages for directors and officers relating to the first Grand Jury
Investigation, the Indictment and the Superseding Indictment, the Government
Civil Action, the Muller Qui Tam Action, the Geldart Qui Tam Action, the Solash
Action and the Katz Action.
Certain disclaimers of coverage have been made by the carriers with
respect to certain of these matters. No opinion can be offered as to coverage or
the extent of coverage under any of the foregoing policies. At the appropriate
time, FEI intends to vigorously pursue its rights with respect to these
insurance policies.
Included in selling and administrative expenses are legal fees incurred
in connection with the above matters of approximately $919,000, $2,300,000 and
$1,819,000 for fiscal years 1996, 1995 and 1994, respectively.
Government Contract Suspension
On December 14, 1993, Registrant was notified by the U.S. Department of
the Air Force that, effective December 13, 1993, it had been suspended from
contracting with, or acting as subcontractor under any contract with any agency
of the U.S. Government and that such suspension is effective throughout the
executive branch of the Government. The suspension is also applicable to
Registrant's former chairman and chief executive officer, one of Registrant's
directors and former vice presidents, Registrant's secretary and treasurer, who
went on leave of absence from such position, and Registrant's contract manager,
who went on leave of absence from such position and has since retired. The
suspension is temporary, subject to the outcome of legal proceedings against
Registrant and certain individuals named above presently pending in the United
States District Court as discussed above.
The suspension does not preclude the completion by Registrant of its
performance of Government contracts or subcontracts awarded to it and pending on
the date of suspension. The Government may also conduct business with Registrant
during the period of suspension when a Government department or agency
determines that a compelling reason exists for it to do so. Examples of
compelling reasons are: (1) only Registrant can provide the supplies or services
required; (2) urgency requires contracting with Registrant; and (3) the national
defense requires continued dealings with Registrant. However, except for all of
the foregoing, during the period of suspension:
(1) Offers will not be solicited from, contracts will not be
awarded to, existing contracts will not be renewed or
otherwise extended for, and subcontracts requiring Government
approval will not be approved for Registrant by any agency in
the executive branch of the Government, unless the head of the
agency taking the contracting action, or a designee, states in
writing the compelling reason for continued business between
Registrant and the agency.
(2) Registrant may not conduct business with the Government as an
agent or representative of other contractors and it may not
act as an individual surety for other contractors.
(3) No government contractor may award Registrant a subcontract
equal to or in excess of $25,000 unless there is a compelling
reason to do so and the contractor first notifies the
contracting officer and further complies with certain
Government registrations.
(4) Registrant's affiliation with or relation with any
organization doing business with the Government will be
carefully examined to determine the impact of these ties on
the responsibility of that organization to be a government
contractor or subcontractor.
The suspension regulations allow Registrant the opportunity to contest
the suspension by submitting to the suspending agency information and argument
in opposition to the suspension. Since Registrant and all of the individual
defendants have pleaded not guilty to the Indictment and the Superseding
Indictment and denied the charges alleged in the Government's related civil
action, denied the allegations in the Muller Qui Tam Action and, it is
anticipated, will deny the allegations in the Geldart Qui Tam Action, the
Registrant believes that the suspension is unwarranted and, accordingly,
Registrant has undertaken to vigorously contest the suspension. However, to
date, the suspension has not been withdrawn and no opinion can be provided as to
removing the suspension pending a favorable disposition of the above-described
If the Indictment results in conviction, the period of suspension could
be extended by way of the debarment of Registrant from any future Government
contracts or subcontracts. Debarment is imposed for a period commensurate with
the seriousness of the causes. Generally, debarment does not exceed three years.
The duration of Registrant's suspension will be considered in determining the
debarment period. The debarring official may also extend the debarment for an
additional period if that official determines that an extension is necessary to
protect the Government's interest. A debarment may not be extended solely on the
basis of the facts and circumstances upon which the initial debarment action was
based. The debarring official may likewise reduce the period or extent of
debarment, upon Registrant's request, supported by documentation for reasons
such as: 1) newly discovered material evidence; 2) reversal of the conviction or
civil judgment upon which the debarment was based; (3) bona fide change in
ownership or management; 4) elimination of other causes for which the debarment
was imposed; or 5) other reasons the debarring official deems appropriate.
Approximately 55% of Registrant's business is comprised of prime and
subcontracts in which the Government is the end-user. The other category of
Registrant's business, which it has been expanding in recent years, is in
commercial and export markets unrelated to the Government. In view of the extent
to which Registrant is currently reliant on Government contracts and
subcontracts and the effect which the suspension, unless withdrawn, will have on
Registrant's ability to continue to obtain such business, Registrant believes
that the suspension and possible debarment is an extremely serious matter which
is likely to have a material adverse effect on Registrant's business prospects,
financial condition, results of its operations and cash flows. However,
Registrant is unable to ascertain at this time whether or not this has been the
case.
Environmental Matters
The State of California Regional Water Quality Control Board has issued
certain abatement orders relative to ground water contaminations originating
from the site of premises obtained by the Company in connection with an
acquisition. In June, 1988, the U.S. Environmental Protection Agency proposed
that such premises be added to the National Priorities List, which would subject
the premises to the Super-fund requirements of federal law. No estimate as to
the cost to clean up the premises has been made or provided to Registrant.
Pursuant to the terms of the Purchase Agreement, the seller, a financially
capable party, has indemnified Registrant from any damages arising from this
environmental matter. Since Registrant has only secondary responsibility, it is
of the opinion that the outcome will not have a significant impact on financial
condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were required to be submitted by Registrant to a vote of
security holders during the fourth quarter of
fiscal 1996.
Item 4(a) Executive Officers of the Registrant
The executive officers hold office until the annual meeting of the
Board of Directors following the annual meeting of stockholders, subject to
earlier removal by the Board of Directors. Since fiscal 1994 certain officers
have taken voluntary leaves of absence as discussed in Registrant's Form 8-K
dated November 17, 1993.
The names of all executive officers of Registrant and all positions and
offices with the Registrant which they presently hold are as follows:
Joseph P. Franklin - Chairman of the Board of Directors, Chief Executive
Officer, Chief Financial Officer.
Martin B. Bloch - President(1), Chief Scientist
John C. Ho - Vice President of Research and Development and Director
Marvin Meirs - Vice President, Engineering
Alfred Vulcan - Vice President, Systems Engineering
Markus Hechler - Vice President, Manufacturing and Acting Secretary
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Space Systems and Business Development
Harry Newman - Secretary and Treasurer(2)
None of the officers and directors are related.
(1) In connection with the indictment as discussed under item 3 - Legal
Proceedings, Martin B. Bloch has taken a leave of absence as
president, and no one has been elected as acting president.
(2) In connection with the indictment as discussed under item 3 - Legal
Proceedings, Harry Newman has taken a leave of absence as secretary
and treasurer and Markus Hechler, a vice president of Registrant, has
been elected acting secretary.
Joseph P. Franklin, age 62, has served as a Director of the Company
since March 1990. In December 1993 he was elected Chairman of the Board of
Directors, Chief Executive Officer and, since September 15, 1995, has served as
Chief Financial Officer. He has been the Chief Executive Officer of Franklin
S.A., since August 1987, a Spanish business consulting company located in
Madrid, Spain, specializing in joint ventures, and was a director of several
prominent Spanish companies. General Franklin was a Major General in the United
States Army until he retired in July 1987.
Martin B. Bloch, age 60, has been a Director of the Company and of its
predecessor since 1961. He recently resigned as Chairman of the Board of
Directors and Chief Executive Officer and is currently its President and Chief
Scientist. Previously, he served as chief electronics engineer of the
Electronics Division of Bulova Watch Company.
John C. Ho, age 63, has been employed by the Company and its
predecessor since 1961 and has served as a Vice President since 1963 and as a
Director since 1968.
Marvin Meirs, age 58, was employed by the Company in an engineering
capacity from 1966 to 1972 and rejoined the Company in such capacity in 1973,
serving as Vice President, Engineering since 1978.
Alfred Vulcan, age 59, joined the Company as an engineer in 1973 and
has served as its Vice President, Systems Engineering since 1978.
Markus Hechler, age 50, joined the Company in 1967, and has served as
its Vice President, Manufacturing since 1982, and as Assistant Secretary since
1978. He was elected Acting Secretary in December 1993 when Harry Newman took a
leave of absence.
Charles S. Stone, age 65, joined the Company in 1984, and has served as
its Vice President since that time. Prior to joining the Company, Mr. Stone
served as Senior Vice President of Austron Inc., from 1966 to 1979, and Senior
Scientist of Tracor Inc., from 1962 to 1966.
Leonard Martire, age 59, joined the Company in August 1987 and served
as Executive Vice President of FEI Microwave, Inc., the Company's wholly owned
subsidiary until May 1993 when he was elected Vice President, Space Systems.
Harry Newman, age 49, has been employed by the Company as Secretary and
Treasurer since 1979, prior to which he served as Divisional Controller of
Jonathan Logan, Inc., apparel manufacturers, from 1976 to 1979, and as
supervising Senior Accountant with Clarence Rainess and Co., Certified Public
Accountants, from 1971 to 1975.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Registrant is listed on the American Stock
Exchange under the symbol "FEI". The following table shows the high and low sale
price for the Registrant's Common Stock for the quarters indicated, as reported
by the American Stock Exchange.
FISCAL QUARTER HIGH SALE LOW SALE
-------------- --------- --------
1996 -
FIRST QUARTER $5 $3 1/8
SECOND QUARTER 5 1/8 3 5/8
THIRD QUARTER 6 1/2 3 5/16
FOURTH QUARTER 8 1/2 4 7/8
1995 -
FIRST QUARTER $4 1/4 $3 5/8
SECOND QUARTER 4 3 1/8
THIRD QUARTER 5 1/2 2 7/8
FOURTH QUARTER 5 1/8 3 13/16
As of July 12, 1996, the approximate number of holders of record of common
stock was 969.
DIVIDEND POLICY
The Registrant has paid no cash dividends on its Common Stock and
currently intends to follow a policy of retaining earnings for use in its
business.
Item 6. Selected Financial Data
The following table sets forth selected financial data including net
sales and operating income for the five year period ended April 30, 1996.
Years Ended April 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Components $ 9,349 $ 5,602 $ 1,965 $ 5,216 $ 6,998
Microwave
Products 1,216 93 2,687 17,335 25,432
Instruments 9,524 14,065 15,921 17,495 17,398
Systems 3,801 4,321 6,891 3,185 3,375
Purchase Services 1,202 -- -- -- --
------ -------- -------- -------- --------
Total Net Sales $ 25,092 $ 24,081 $ 27,464 $ 43,231 $ 53,203
======== ======== ======== ======== ========
Operating Profit
(Loss) $ 1,047 ($ 6,025) ($ 6,174) ($12,279) $ 2,952
======== ======== ======== ======== ========
Net Earnings
(Loss) $ 2,822 ($ 3,843) ($ 4,622) ($ 7,966) $ 462
======== ======== ======== ======== ========
Average Common
Shares and
Common Equiv-
alent Shares
Outstanding 4,626,581 4,835,367 5,410,762 5,596,788 5,751,408
Earnings (Loss)
per Common and
Common Equiv-
alent Shares $ .61 ($ .80) ($ .85) ($1.42) $.08
===== ===== ===== ===== =====
Total Assets $68,770 $65,032 $72,655 $97,065 $99,592
======= ======= ======= ======= =======
Long-Term
Obligations $14,877 $14,959 $15,327 $24,945 $25,124
======= ======= ======= ======== =======
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The table below sets forth for the fiscal years ended April 30 the
percentage of consolidated net sales represented by certain items in the
Company's consolidated statements of operations:
1996 1995 1994
---- ---- ----
Net Sales
US Government 55.3% 74.7% 68.7%
Commercial 44.7 25.3 31.3
----- ----- -----
100.0 100.0 100.0
Cost of Sales 66.5 85.5 91.3
Selling and administrative expenses 25.1 31.4 26.2
Research and development expenses 4.2 8.1 5.0
----- ----- -----
Operating income (loss) 4.2 (25.0) (22.5)
Other income (expense)- net 7.8 8.5 5.5
(Provision) benefit for income taxes (0.8) (0.3) 0.2
----- ----- -----
Income (loss) before cumulative effect
of change in accounting principle 11.2 (16.8) (16.8)
Net income (loss) 11.2% (16.0%) (16.8%)
===== ===== =====
Operating Income
Operating income for the year ended April 30, 1996, improved by $7.1
million over the year ended April 30, 1995 and by $7.2 million over fiscal year
1994. This result was achieved through increased sales to non-U.S. Government
contract customers coupled with significant improvement in gross margins due to
cost cutting efforts and the conclusion of certain unprofitable contracts
initiated by the Company's former west coast operations. Reduced selling and
administrative expenses and more focused research and development costs, as
discussed below, further enhanced the operating results for the current fiscal
year.
Net Sales
Net sales in fiscal 1996 increased by over $1 million over fiscal 1995
but were lower than fiscal 1994 by $2.4 million. As illustrated in the table
above, commercial sales have become a much more significant portion of the
Company's business. Sales to such customers for the fiscal year ended April 30,
1996 increased by $5.1 million over fiscal 1995 and by $2.6 million over fiscal
1994. Sales to non-U.S. Government contract customers are expected to become the
dominant source of revenues in subsequent fiscal years. The Company will
continue to engage in contracts for which the end user is the U.S. Government
but such sales are not expected to increase significantly in absolute sales
dollars due mainly to the overall decline in U.S. Government (principally DOD
and NASA) spending.
Sales in fiscal 1994 were higher than in both 1996 and 1995 as a result
of the completion of two significant programs that year which were effectively
not replaced in subsequent periods. On one of these projects, the customer
decided not to exercise certain contract options. Also, as noted above,
reductions in DOD and NASA programs have had a negative impact on revenues.
Included in fiscal 1996 commercial sales is approximately $1.2 million
of revenues related to parts procurement and screening services on behalf of the
Globalstar Satellite program. The Company expects to recognize an additional $1
million in incentive revenues in fiscal 1997 and intends to actively promote its
procurement services on other satellite programs. Fiscal 1996 commercial
revenues also benefited from a combined $1.8 million increase in sales of the
Company's commercial rubidium product line and the TRW MIMIC/MMIC product lines;
sales of which were not significant in fiscal 1994. Sales of these product lines
are expected to continue to grow, particularly for commercial rubidium, as the
Company further advances its products into the marketplace.
Gross margins
Gross margins for the fiscal year ended April 30, 1996, showed
continued improvement over fiscal years 1995 and 1994, increasing to 33.5% from
14.5% and 8.7%, respectively. These results have been obtained through
meaningful cost reductions primarily in the areas of personnel and compensation
coupled with operational efficiencies and product mix. Fiscal 1994 gross margins
were negatively impacted by higher than anticipated technical development costs
incurred during the engineering, design, and production stages of certain
projects. The impact of these items was greatly reduced in fiscal 1995 and 1996.
In addition, fiscal years 1995 and 1994 incurred costs associated with the
restructuring and consolidation of the Company's former west coast facility. The
assets and activities of that entity were relocated to the Company's
headquarters location during fiscal 1995.
Gross margin in fiscal 1996 was negatively impacted by the
establishment of reserves for certain slow moving or obsolete inventory items
and accruals for employee bonuses. Without these charges to earnings, the 1996
gross margin would have been approximately 35.7%. While the Company cannot
reasonably predict the need for future inventory reserves or the possibility of
cost overruns on existing or future contracts, the Company anticipates that
future gross margins will be comparable to that experienced during fiscal 1996.
Selling and administrative expenses
Selling and administrative costs declined by $1.3 million or 17% for
the year ended April 30, 1996, over fiscal 1995 and by $0.9 million or 12% over
fiscal 1994. The principal cause of these decreases was a reduced level of
activity in 1996 related to the Company's defense of the ongoing litigation with
the government and related actions. Related legal fees were $1.4 million less in
1996 than in 1995 and $0.9 million less than in 1994. Offsetting such reduced
legal expenses in fiscal 1996, was the increased provision for certain
uncollectible accounts receivable and accrued officers and employee bonuses. Bad
debt expense for fiscal 1996 was approximately $580,000 compared to nominal bad
debt expense in fiscal years 1995 and 1994. Without regard to bad debt expenses,
bonuses and the legal fees related to the government litigation, selling and
administrative costs in fiscal 1996 were $632,000 lower (12%) than in 1995 and
$737,000 lower (14%) than in 1994. This result was achieved through a reduction
in the number of personnel, reduced insurance costs and improved operating
efficiencies. As sales increase, the ratio of selling and administrative
expenses, excluding legal costs, to net sales is expected to decrease. The
Company is unable to predict the future level of legal costs for any specific
period as this is dependent on factors outside of its immediate control.
Research and development expenses
Company-funded research and development costs in the year ended April
30, 1996, decreased by $890,000 (46%) and $317,000 (23%) from the levels of
spending in fiscal 1995 and 1994, respectively. The decreases in Company-funded
costs are the result of an effort to focus research and development activities
on a narrower band of commercial projects which will provide the best return on
investment. Research and development spending in fiscal 1995 was higher than in
1994 principally due to an intense effort to develop the two VSAT product lines.
In fiscal 1996, spending on these product lines continued but at a lower level
as development of one line was completed and development on the other line is
nearing the preproduction stage. For fiscal 1997, the Company expects to
continue to invest in research and development at approximately the same rate as
it did for fiscal 1996.
Other Income and Expense
For the year ended April 30, 1996, other income (expense)-net decreased
by $74,000 (4%) from fiscal 1995 and increased by $473,000 (31%) over fiscal
1994. During fiscal year 1995, the Company realized a gain of approximately $1.2
million on the sale of certain marketable securities. Excluding that one-time
gain, 1996 other income (expense)-net were significantly improved over both the
fiscal 1995 and 1994 results.
In particular, interest income increased by $535,000 and $424,000 over
fiscal 1995 and 1994, respectively, as the result of both higher interest rates
and a notable increase in interest-earning assets in fiscal 1996. Interest
income in fiscal 1994 included interest earned on federal income tax refunds
which did not recur to the same extent in fiscal 1996 or 1995. Excluding such
interest, interest income in fiscal 1996 and 1995 increased by 92% and 13%,
respectively, over the comparable 1994 levels. On the other hand, interest
expense in fiscal 1996 decreased by $67,000 and $6,000, respectively, from
fiscal 1995 and 1994 levels. This was the result of declining long-term debt
balances as the Company makes scheduled principal payments, offset by increased
interest rates during 1996. Although the Company is unable to predict the future
levels of interest rates, at current rates the Company anticipates that interest
income will continue to increase and interest expense will continue to decrease
when compared to earlier fiscal years.
Other income, net, which consists principally of rental income under
the long-term direct finance lease with Lab Corporation of America, should
continue at moderately increasing levels over the 15-year term of the lease. As
noted above, in fiscal 1995, the Company also realized a one-time gain on the
sale of certain marketable securities which was recorded in this line item of
the statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working
capital position of $41.8 million and $39.1 million at April 30, 1996 and 1995,
respectively. Included in working capital at April 30, 1996 is $21.5 million of
cash, cash equivalents and short-term investments which are readily convertible
to cash should the need arise. The Company's current ratio at April 30, 1996 is
10 to 1 compared to a 13 to 1 ratio at April 30, 1995. The decline in the
current ratio is due principally to an increase in trade accounts payable as a
consequence of the parts procurement and screening services for the Globalstar
Satellite program and to the accrual of certain year-end incentive bonuses as
the result of the profitable year experienced by the Company.
Net cash provided by operating activities for the year ended April 30,
1996, was almost $7 million compared to $4.3 million for fiscal 1995. This
significant increase in cash inflow is the result of the return to profitability
in 1996 with net income of $2.8 million, certain noncash charges of an
additional $2.9 million and the net change in assets and liabilities of $1.3
million.
Net cash provided by investing activities for the year ended April 30,
1996, was $6.1 million. Of this amount, $5.9 million was provided by the
conversion of certain U.S. government and agency securities to short-term money
market investments. The Company may continue to convert short-term investments
to cash equivalents or invest cash equivalents in longer-term securities as
dictated by its investment strategies. An additional $500,000 was received upon
the sale of the building owned by the Company's former west coast operation. In
addition to cash, the Company received a promissory note in the amount of $1.8
million for the balance of the sale price. The promissory note for the building
sale will be repaid in monthly installments over a period of 5 years with a
balloon payment at the end.
During fiscal 1996, the Company acquired new computer software to
manage its financial and operational systems. Installation of the software will
occur in the early part of fiscal 1997. The total capitalized cost of the
software and installation costs is expected to be less than $500,000. The
Company has no other material commitments for capital expenditures. Total fixed
asset purchases in fiscal 1996 approximated $330,000, including the capitalized
software costs.
Net cash used in financing activities for the year ended April 30,
1996, was $1.4 million compared to $3.3 million in fiscal 1995. Of this amount,
$749,000 was used to make regularly scheduled long-term debt payments and
$698,000 was used to acquire 185,500 shares of common stock to be held in
treasury. The Company may continue to purchase shares for its treasury whenever
appropriate opportunities arise but it has neither a formal repurchase plan nor
commitments to purchase additional shares in the future.
The Company will continue to expend its resources and efforts to
develop hardware for commercial satellite programs and commercial ground
communication and navigation systems which management believes will result in
future growth and continued profitability. Internally generated cash will be
adequate to fund development efforts in these markets.
At April 30, 1996, the Company's backlog amounted to approximately $15
million of which approximately $13.7 million is funded. This is compared to the
approximately $15 million backlog at April 30, 1995. The April 30, 1996, backlog
consists of approximately $8.6 million (57%) for commercial and foreign
customers and $6.4 million (43%) for U.S. Government contracts. As discussed
more thoroughly in Material Developments, Item 3 and Note 9 to the consolidated
financial statements, the Company is temporarily suspended from contracting with
any agency of the U.S. Government. Although the Company is becoming less
dependent on U. S. Government contracts, the suspension, unless withdrawn, is
likely to have a material adverse effect on the Company's business prospects,
financial condition and results of operations.
The Company also has available for income tax purposes, approximately
$11.4 million of net operating loss carryforwards which may be applied against
future taxable income.
OTHER MATTERS
On May 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement 115"). Pursuant to Statement 115,
investments in certain debt and equity securities are categorized as
available-for-sale and are carried at fair value, with unrealized gains and
losses excluded from income and recorded directly to stockholders' equity. In
accordance with Statement 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The favorable cumulative
effect of this change in accounting principle was approximately $215,000 or $.04
per share which was recorded during the year ended April 30, 1995.
Effective May 1, 1994, the Company changed its method of accounting for
its Employee Stock Ownership Plan ("ESOP") in accordance with Statement of
Position ("SOP") 93-6. In fiscal years 1996 and 1995, in accordance with SOP
93-6, the annual expense related to the leveraged ESOP is determined as interest
incurred on the note plus compensation cost based on the fair value of the
shares released. For the year ended April 30, 1994, compensation cost was based
on the cost of the shares released. The effect of this change on the statement
of operations for the year ended April 30, 1995 was a benefit of $208,000 or
$.04 per share. The SOP also requires that ESOP shares that are committed to be
released are considered outstanding for purposes of calculating earnings per
share. Prior to fiscal 1995 all ESOP shares were considered outstanding for
purposes of calculating earnings per share.
The financial information reported herein is not necessarily indicative of
future operating results or of the future financial condition of Registrant.
Except as noted, management is unaware of any impending transactions or events
that are likely to have a material adverse effect on results from operations.
INFLATION
During fiscal 1996, as in the two prior fiscal years, the impact of
inflation on the Registrant's business has not been materially significant.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
------------------
To the Board of Directors and Stockholders of Frequency Electronics, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES listed in
Item 14(a) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Frequency Electronics, Inc. and Subsidiaries as of April 30, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended April 30, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
As more fully discussed in Note 9 to the consolidated financial
statements, the Company and certain of its employees were indicted and served
with a civil suit by the United States Government (the "Government") commencing
in November 1993 in the United States District Court for the Eastern District of
New York (the "Eastern District") alleging fraud and certain criminal acts
relating to certain Government contracts. In addition, certain derivative
actions have been filed against the Company, as a nominal defendant, its board
of directors, and certain individuals essentially seeking recovery on behalf of
the Company for any losses it may incur as a result of the Government indictment
and civil actions. The Company, its former chief executive officer and others
have also been named as defendants in certain qui tam actions in which claims
are made by individuals on behalf of the Government that the Company
manufactured certain defective components which were ultimately sold to the
Government. The Company was notified by an agency of the Government that it has
been temporarily suspended from contracting with the government pending the
outcome of the legal proceedings in the Eastern District. The Company and the
individual defendants have pleaded not guilty to the indictment and have denied
the allegations of the Government, derivative and qui tam actions and will
vigorously contest all such civil and criminal proceedings. The government civil
action has been stayed pending the resolution of the indictment. The ultimate
outcome of these actions and the government's suspension, as well as their
impact, if any, on the consolidated financial statements and operations cannot
presently be determined. Accordingly, no provision for any liability that may
result has been made in the accompanying consolidated financial statements.
In 1995, as discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for certain investments
in debt and equity securities and, as discussed in Note 11, changed its method
of accounting for contributions to its Employee Stock Ownership Plan.
COOPERS & LYBRAND L.L.P.
Melville, New York
June 26, 1996.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1996 and 1995
-----------
ASSETS: 1996 1995
---- ----
(In thousands)
Current assets:
Cash and cash equivalents $15,915 $ 4,291
Marketable securities (Note 3) 5,632 11,387
Accounts receivable, net of allowance for
doubtful accounts of $483 in 1996 and $562
in 1995 (Note 4) 13,415 13,894
Inventories (Note 5) 10,281 11,168
Prepaid expenses and other 1,026 1,257
Refundable income taxes 318
------- -------
Total current assets 46,269 42,315
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization (Notes 6 and 7) 8,839 9,192
Investment in direct finance lease (Note 8) 9,607 9,452
Other assets 4,055 1,777
Asset held for sale (Note 2) 2,296
------- -------
Total assets $68,770 $65,032
======= =======
The accompanying notes are an integral part of these
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1996 and 1995
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 1996 1995
---- ----
(In thousands)
Current liabilities:
Current maturities of long-term debt (Note 7) $ 750 $ 750
Accounts payable - trade 1,379 727
Accrued liabilities 2,262 1,782
Income taxes payable 79
------- -------
Total current liabilities 4,470 3,259
Long-term debt, net of current maturities (Note 7) 11,438 12,187
Deferred compensation (Note 11) 3,302 2,628
Other 137 144
------- -------
19,347 18,218
------- -------
Commitments and contingencies (Notes 8 and 9)
Stockholders' equity (Note 11):
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued- 6,006,300
shares in 1996 and 1995 6,006 6,006
Additional paid-in capital 35,024 35,131
Retained earnings 16,265 13,443
------- -------
57,295 54,580
Common stock reacquired and held in treasury -
at cost (1,159,905 shares in 1996 and
964,305 shares in 1995) (5,075) (4,387)
Unamortized ESOP debt (Notes 7 and 11) (2,000) (2,500)
Notes receivable - common stock (Note 10) (740) (822)
Unearned compensation (113) (18)
Unrealized holding gain (loss) 56 (39)
-------- --------
Total stockholders' equity 49,423 46,814
-------- --------
Total liabilities and stockholders' equity $ 68,770 $ 65,032
======== ========
The accompanying notes are an integral part of these
financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 1996, 1995, and 1994
-----------
1996 1995 1994
(In thousands, except share data)
Net sales (Note 13) $25,092 $24,081 $27,464
------- ------- -------
Cost of sales 16,689 20,602 25,083
Selling and administrative expenses 6,306 7,564 7,188
Research and development expenses 1,050 1,940 1,367
------- ------- -------
Total operating expenses 24,045 30,106 33,638
------- ------- -------
Operating profit (loss) 1,047 (6,025) (6,174)
Other income (expense):
Interest income 1,293 758 869
Interest expense (967) (1,034) (973)
Other, net (Notes 3 and 8) 1,649 2,325 1,606
------- ------- -------
Earnings (Loss) before (provision)
benefit for income taxes 3,022 (3,976) (4,672)
(Provision) benefit for income
taxes (Note 12) (200) (82) 50
------- ------- -------
Net Earnings (Loss) before cumulative
effect of change in accounting principle 2,822 (4,058) (4,622)
Cumulative effect of change in
accounting principle 215
------- ------- -------
Net Earnings (Loss) $ 2,822 ($3,843) ($4,622)
======= ======= =======
Earnings (Loss) per common share before
cumulative effect of change in
accounting principle (Note 1) $ .61 ($ .84) ($ .85)
Cumulative effect of change in
accounting principle .04
----- ------- -------
Earnings (Loss) per common share $ .61 ($ .80) ($ .85)
===== ======= =======
Weighted average common shares and
common share equivalents outstanding
(Note 1) 4,626,581 4,835,367 5,410,762
========= ========= =========
The accompanying notes are an integral part of these
financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 1996, 1995 and 1994
(In thousands, except share data)
---------------------------
Unrealized
gain or
(loss) on
Additional Treasury stock Receivable noncurrent
Common Stock paid-in Retained (at cost) Unamortized Common Unearned marketable
Shares Amount capital earnings Shares Amount ESOP debt Stock compensation securities Total
------ ------ ------- -------- ------ ------ --------- ----- ------------ ---------- -------
Balance at May 1, 1993 6,006,300 $6,006 $35,339 $21,908 496,505 ($2,423) ($3,500) ($215) $57,115
Exercise of restricted
stock purchase rights (4,000) 4 (33) (29)
Amoritization of unearned
compensation 169 169
Purchase of treasury 126,800 (556) (556)
stock
Amortization of ESOP debt
as a result of shares
allocated 500 500
Net loss (4,622) (4,622)
--------- ----- ------ ------ ------- ------ ------ ----- ------ ------ -------
Balance at April 30, 1994 6,006,300 6,006 35,339 17,286 619,305 (2,975) (3,000) (79) 52,577
Amortization of unearned
compensation 61 61
Purchase of treasury 345,000 (1,412) (1,412)
stock
Amortization of ESOP debt
as a result of shares
allocated (208) 500 292
Decrease in market value
of marketable (39) (39)
securities
Advances to officers and
employees for the
purchase of stock (822) (822)
Net loss (3,843) (3,843)
--------- ----- ------ ------ ------- ------ ------ ----- ------ ------ -------
Balance at April 30, 1995 6,006,300 6,006 35,131 13,443 964,305 (4,387) (2,500) (822) (18) (39) 46,814
Amortization of ESOP debt
as a result of shares
allocated (156) 500 344
Shares issued under
restricted stock plan 49 (25,000) 92 (116) 25
Purchase of treasury 200,600 (698) (698)
stock
Restricted stock
surrendered
to treasury stock 20,000 (82) 82
Amortization of unearned
compensation 21 21
Increase in market value
of marketable securities 95 95
Net earnings 2,822 2,822
--------- ------ ------- ------- --------- ------- ------- ----- ------ ---- -------
Balance at April 30, 1996 6,006,300 $6,006 $35,024 $16,265 1,159,905 ($5,075) ($2,000) ($740) ($113) $ 56 $49,423
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1996, 1995 and 1994
-----------
1996 1995 1994
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net earnings (loss) $2,822 ($3,843) ($4,622)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization
Property 974 995 1,576
Other 20 20 (425)
Provision for losses on accounts
receivable and inventories 996
(Gains) losses on marketable securities (59) (1,197) (94)
Loss (gain) on sale or disposal of
property, plant and equipment (4) 560
Common stock issued for compensation
plans 4
Amortization resulting from
allocation of ESOP shares 344 292 500
Employee benefit plan provisions 765 717 237
Finance lease accretion (155) (188) (156)
Changes in assets and liabilities:
Accounts receivable (101) 8,318 10,265
Inventories 180 322 1,672
Prepaid and other 231 (360) 290
Other assets (511) 685 883
Accounts payable - trade 652 (357) (111)
Accrued liabilities 480 (800) (4,912)
Income taxes payable 79 (281)
Refundable income taxes 318 (31) 1,335
Other liabilities (78) (311) __
------ ------ ------
Net cash provided by operating activities 6,953 4,262 6,721
------ ------ ------
Cash flows from investing activities:
Purchase of marketable securities (11,094)
Proceeds from disposition of marketable 5,910 3,440
securities
Capital expenditures (330) (168) (404)
Proceeds from sale of property, plant
and equipment 513 34