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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------
Common Stock(par value $1.00 per share) American Stock Exchange, Inc.
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 21, 1998 - $73,760,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 21, 1998 - 7,729,221.
DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by
reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held on or about October 5, 1998.
(Cover page 1 of 195 pages)
Exhibit Index at Page 55
PART I
Item 1. Business
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GENERAL DISCUSSION
Frequency Electronics, Inc. (sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the area of time and frequency control. Unless the context
indicates otherwise, references to the Registrant are to Frequency Electronics,
Inc. and its subsidiaries. References to "FEI" are to the parent company alone
and do not refer to any of the subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became the
successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 7,712,346 shares were
outstanding at April 30, 1998, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.,
At its inception, Registrant was involved principally in military defense
contracting by way of the design, development, manufacture, and marketing of
precision time and frequency control products. Its products are used in guidance
and navigation, communications, surveillance and electronic counter measure and
timing systems. Such products are used on many of the United States' most
sophisticated military aircraft, satellites, and missiles. The Registrant's
business was highly dependent upon the defense and space spending policies of
the U.S. Government. In recent years, changing defense priorities and severe
federal government budget pressures have significantly changed the market
environment for defense related products.
In an effort to better serve customers on a more competitive basis,
Registrant has transformed itself from a defense contract manufacturer into a
high-tech provider of precision time and frequency products used to synchronize
voice, data and video transmissions in commercial satellites and wireless
communications. Registrant has segmented its operations into two principal
industries: commercial products for space and wireless communications and
defense and space applications for United States Government end-use. The
Registrant's commercial space and commercial communications programs are
produced by its wholly-owned subsidiary FEI Communications, Inc. ("FEIC"). FEIC
was incorporated in Delaware in December 1991, and was created as a separate
subsidiary company to provide ownership and management of assets and other
services appropriate for commercial clients, both domestic and foreign.
Registrant has focused its internal research and development on
re-engineering its core technologies for the commercial markets. During fiscal
1998, 1997 and 1996 approximately 82%, 70% and 45%, respectively, of the
Registrant's sales were for commercial products used for commercial space
applications, wireless communications and foreign governments. For the years
ended April 30, 1998, 1997 and 1996, approximately 18%, 30% and 55%,
respectively, of the Registrant's sales were for U.S. Government end-use.
Registrant believes a substantial commercial market exists for its legacy
technologies and has developed several new commercial product lines as discussed
later in this Item 1.
MATERIAL DEVELOPMENTS
On June 19, 1998, FEI and the United States Government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and Related Documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters with the Government all of which is discussed at length
under Item 3. Legal Proceedings. Under the terms of the Settlement Agreement,
FEI paid an aggregate of $8 million to the Government. These settlement payments
are reflected in Registrant's consolidated results of operations for the fiscal
year ended April 30, 1998.
By letter dated July 9, 1998, FEI was notified by the U.S. Department of
the Air Force of FEI's proposed debarment from Government contracting and from
directly or indirectly receiving the benefits of federal assistance programs.
The proposed debarment is based upon FEI's guilty plea entered in connection
with the Global Disposition and the Settlement Agreement. The proposed debarment
is effective as of July 9, 1998. The consequences of the proposed debarment and
its potential effect on FEI are discussed at length under Item 3. Legal
Proceedings.
In January 1998, in two transactions, Registrant sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust. In one sale
transaction, Registrant sold the building which it had leased to Laboratory
Corporation of America ("LCA"), receiving cash of approximately $15.6 million
and realizing a gain of approximately $5.4 million after selling expenses. In
the other sale, Registrant effected a tax-deferred exchange of the building
which it occupies for approximately 486,000 participation units of Reckson
Operating Partnership, L.P. ("REIT units") which were valued at closing at $12
million. The REIT units are convertible into an equivalent number of shares of
Reckson Associates Realty Corp., a publicly-traded company, after January 6,
1999. Registrant leased back approximately 43% of the building from the
purchaser. (See Item 2. Properties and Notes 6 and 8 to the accompanying
financial statements for additional information regarding these transactions and
the related accounting treatment.)
A portion of the cash proceeds from the LCA building sale were used to
repay the $9 million loan obtained to finance the original construction of the
LCA building. Preceeding the sale of its buildings, Registrant prepaid the
balance of its Nassau County Industrial Development Agency bonds in the amount
of $820,000, including accrued interest.
PRODUCTS
Historically, Registrant has designed, developed, manufactured and
marketed precision time and frequency control products for two principal
markets:. commercial space applications and wireless communications markets and
the traditional heritage government and military markets. Sales summaries for
the two markets during each of the last five years are set forth in Item 6
(Selected Financial Data).
Registrant's products are manufactured from raw material which, when
combined with conventional electronic components available from multiple
sources, become finished products, subsystems and systems used for satellite
applications, space exploration, wireless communications, position location,
radar, sonar and electronic counter-measures. These products, subsystems and
systems are employed in ground-based earth stations, domestic and international
satellites, fixed, transportable, portable and mobile communications
installations as well as aircraft, ships, submarines and missiles. The
Registrant's products are marketed as components, instruments, or complete
systems. Prices are determined based upon the complexity, design requirement and
delivery schedule as determined by project detail.
Components - The Registrant's key technologies include quartz, rubidium
and cesium from which it manufactures precision time and frequency standards and
higher level assemblies which allow the users to generate, synchronize,
transmit, and receive signals in order to locate their position, secure a
communications system, or guide a missile. The components class of 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 assemblies.
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
applications, including commercial aircraft and telephony.
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 (cesium and
rubidium) are manufactured totally from raw materials. The rubidium lamp, filter
and resonance cell provide the optical subassembly used in the manufacture of
the 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.
High reliability, MIL-M-38510 Class S and B, custom hybrid assemblies are
manufactured in thick and thin film technologies for applications from DC to 44
GHz. These are used in manufacturing the Registrant's products, and also
supplied directly to customers, for space and other high reliability systems.
The Registrant, under an agreement with TRW's Electronics and Technology
Division, markets an extensive line of microwave products, including
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.
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.
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, cesium beam atomic standards and VSAT transceivers.
The quartz frequency standard is an electronically controlled solid-state
device which utilizes a quartz crystal oscillator to produce a highly stable
output signal at a standardized frequency. The 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 solid-state
instrument which provides both timing and low phase noise references used in
wireless communications systems. Rubidium oscillators combine sophisticated
glassware, light detection devices and electronics packages to generate a highly
stable frequency output. Rubidium, when energized by a specific radio frequency,
will absorb less light. The oscillator's electronics package generates this
specific frequency and the light detection device ensures, through monitoring
the decreased absorption of light by the rubidium and the use of feedback
control loops, that this specific frequency is maintained. This highly stable
frequency is then captured by the electronics package and generated as an output
signal. Rubidium oscillators provide atomic oscillator stability, at lower costs
and in smaller packages.
The cesium beam atomic standard utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency, several orders of
magnitude more accurate than other types of quartz frequency generators. The
atomic standard is a compact, militarized solid-state device which generates
these precision frequencies for use with advanced communications and navigation
equipment. A digital time-of-day clock is incorporated which provides visual
universal time display and provides digital timing for systems use. The atomic
standard manufactured by Registrant is a primary standard, capable of producing
time accuracies of better than one second in seven hundred thousand years.
The VSAT transceivers consisting of C and KU Bands are intended for use in
satellite communications primarily for private data and voice earth stations.
As communications systems become more precise, the requirement for precise
frequency signals to drive a multitude of electronic equipment is greatly
expanded. To meet this requirement, the 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 and
systems that meet customer-defined needs. This is done by utilizing its unique
knowledge of interfacing these technologies and experience in applying them to a
wide range of systems. 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 these signals depending on the system application.
The Systems portion of the business includes a complete line of time and
frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. The time and
frequency control systems combine Registrant's cesium, rubidium and/or crystal
instruments with its other products, to provide systems for space and ground
based communications, space exploration, satellite tracking stations,
satellite-based navigation and position location, secure communication,
submarine and ship navigation calibration, and electronic counter-measures
applications. A number of these time and frequency control systems provide up to
quadruple redundancy to assure operational longevity.
BACKLOG
As of April 30, 1998, the Registrant's backlog amounted to approximately
$21.6 million as compared to the approximately $14 million backlog at April 30,
1997 (see Item 7). The backlog includes purchase orders and contracts from
commercial and foreign customers of approximately $20 million compared to $10
million last year. Approximately 50% of this backlog is expected to be filled
during Registrant's fiscal year ending April 30, 1999. 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 27
independent sales representative organizations located principally in the United
States. Sales to non-U.S. customers totaled approximately 18%, 21%, and 17% of
net sales in fiscal years 1998, 1997 and 1996 respectively.
The Registrant's products are sold to a variety of customers, both
commercial and governmental. For the years ended April 30, 1998, 1997 and 1996,
approximately 18%, 30% and 55%, respectively, of the Registrant's sales were
made under contracts to the U.S. Government or subcontracts for U.S. Government
end-use.
Sales to Space Systems Loral ("SSL") and Motorola Corp. each exceeded 10%
of the Company's consolidated sales for the year ended April 30, 1998.
Collectively these two companies accounted for approximately 49% of the
Registrant's consolidated sales for the fiscal year. For the years ended April
30, 1997 and 1996, sales to Hughes Aircraft Company ("HAC") and SSL exceeded 10%
individually and were 51% and 39%, collectively, of consolidated sales. During
the three years ended April 30, 1998, sales to SSL and Motorola were for space
applications and commercial communications, respectively, while sales to HAC
were substantially for U.S. government end-use. The loss by the Registrant of
any one of these companies (except with respect to U.S. government end-use
business) would have a material adverse effect on the Registrant's business. The
Registrant believes its relationship with these companies to be mutually
satisfactory and, except for the proposed debarment by the U.S. Government
discussed in Item 3, is not aware of any prospect for the cancellation or
significant reduction of any of its commercial or existing U.S. Government
contracts.
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.
COMMERCIAL MARKETS
Registrant has transformed itself from a defense contract manufacturer
into a high-tech provider of time and frequency products used to synchronize
voice, data and video transmissions in commercial satellites and digital
wireless communications. Registrant has focused its internal research and
development on re-engineering its core technologies for the commercial markets.
As a result, Registrant has experienced accelerating growth in commercial
revenues and anticipates continued substantial sales growth in these areas.
Commercial Space:
The commercial use of satellites launched for communications, navigation,
weather forecasting, video and data transmissions has led to the increased need
and ability to transmit information to earth based receivers. This requires
precise timing and frequency control at the satellite. For example, Registrant
manufactures the master clocks (quartz, rubidium and cesium) and other
significant timing products for many satellite communication systems.
Registrant's space hybrid assemblies are used onboard spacecraft for command,
control and power distribution. Efficient and reliable DC-DC power converters
are also manufactured for the Registrant's own instruments and as stand alone
products for space and satellite applications. Registrant's subminiature
oven-controlled quartz crystal oscillator is a low cost, small size, precision
crystal oscillator suited for high-end performance required in satellite
transmissions, airborne telephony and geophysical survey positioning systems.
Registrant's space-quallified products have been utilized by commercial
satellite programs such as Globalstar, Eutelsat, Inmarsat and Worldstar. New
products based on Registrant's heritage military designs are being introduced to
take advantage of this emerging market. These new products include local
frequency generators, up and down converters, low noise amplifiers and complete
satellite transceivers.
Terrestrial Wireless Communications:
The telecommunications industry is rapidly expanding as a result of the
conversion from analog to digital systems and the expansion of cellular and PCS
networks. Wireless communication services have become an integral part of the
telecommunications market.
Wireless communication networks consist of numerous installations located
throughout a service area, each with its own base station connected by wire or
microwave radio through a network switch. Network operators are in the process
of converting older networks from analog to digital technology in order to
expand network coverage, increase capacity and improve transmission quality.
This upgrade requires very accurate frequency control at the base stations
accomplished through quartz or rubidium oscillators to achieve a higher degree
of precision.
Currently three leading digital technologies are utilized: Time Division
Multiple Access, Code Division Multiple Access and Global System for Mobile
Communications. These transmission protocols are segmented and transmitted over
a wider spectrum of bandwidths than available under analog systems. Digital
systems have a need for more accurate synchronization which is accomplished
through use of precise timing devices located throughout the system. Registrant
manufactures a Commercial Rubidium Atomic Standard, an extremely small, low
cost, low phase noise, stable atomic standard and temperature stable quartz
crystal oscillators ideally suited for use in advanced cellular communications
and wireless telecommunications.
GOVERNMENT CONTRACTS
During the fiscal years ended April 30, 1998, 1997 and 1996, approximately
18%, 30% and 55%, 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 of these contracts
were 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.
The Registrant's proprietary products have been used in guidance,
navigation, communications, radar, sonar surveillance and electronic
countermeasure and timing systems. Products are built in accordance with
Department of Defense standards and are in use on many of the United States'
most sophisticated military aircraft, satellites and missiles. The Global
Positioning Satellite System, as well as the MILSTAR Satellite System, are two
examples of the programs in which the Registrant participates. The Registrant
has manufactured the master clock for the Trident missile, the basic timing
system for the Voyager I and Voyager II deep space exploratory missions and the
quartz timing system for the Space Shuttle. The 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.
Sales summaries for the Commercial and U.S. Government markets during each
of the last five years are set forth in Item 6 (Selected Financial Data).
RESEARCH AND DEVELOPMENT
The Registrant's technological expertise has been an important factor in
its growth. Until a few years ago, virtually all of its research and development
activities had taken place in connection with customer-sponsored
development-oriented products conducted under fixed price contracts and
subcontracts in support of U.S. Government programs. The Registrant has been
successful in applying its resources to develop prototypes and preproduction
hardware for use in navigation, communication, guidance and electronic
countermeasure programs and space application. The output of these
customer-sponsored projects, in all cases, is of a proprietary nature.
Registrant has focused its internal research and development efforts on
improving the core physics and electronic packages in its time and frequency
products. Registrant continues to conduct research in developing new time and
frequency technologies and improving product manufacturability by seeking to
reduce its production costs through product redesign and other measures to take
advantage of lower cost components.
The Registrant continues to focus a significant portion of its own
resources and efforts on developing hardware for commercial satellite programs
and terrestrial wireless communications systems which it anticipates will result
in future growth and increased profits. During fiscal 1998, 1997 and 1996, the
Registrant expended $1.4 million, $1.5 million, and $1.1 million of its own
funds, respectively, on such research and development activity. (See also Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.) For fiscal 1999, the Registrant has committed up to an additional
$5.5 million to develop hardware for the growing commercial telecommunications
satellite market. This development effort is intended to meet the demand for
satellite transponder components in response to the anticipated launching of
over 2,000 commercial satellites, world-wide, over the next five to seven years.
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. Also, in certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses it has funded. 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 space, 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.
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., and E. G. and G., Inc. The Registrant's
principal competition for space products is the in-house capability of its major
customers.
EMPLOYEES
The Registrant employs 225 persons, none of whom are represented by labor
unions.
OTHER ASPECTS
The Registrant's business is not seasonal and no unusual working capital
requirements exist.
Item 2. Properties
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Registrant occupies 93,000 square feet of a manufacturing and office
facility located in Mitchel Field, Long Island, New York. This facility is part
of the building which Registrant constructed in 1981 and expanded in 1988 on
land leased from Nassau County. In January 1998, the Registrant sold this
building and the related land lease with the County of Nassau, to Reckson
Associates Realty Corp. ("Reckson"), and leased back the space which it
presently occupies.
Registrant leases its manufacturing and office space from Reckson under an
11-year lease at an annual rental of $400,000 per year with Registrant paying
its pro rata share of real estate taxes along with the costs of utilities and
insurance. The lease provides for two 5-year renewal periods, exercisable at the
option of Registrant, with annual rentals of $600,000 during the first renewal
period and $800,000 during the second renewal period. Under the terms of the
lease, new office and engineering facilities for the Registrant were constructed
at the cost of Reckson. The leased space is adequate to meet Registrant's
present and future operational needs.
The sale of its building to Reckson, a real estate investment trust whose
shares are traded on the New York Stock Exchange ("REIT"), was effected through
a tax-deferred exchange of the building for approximately 486,000 participation
units of Reckson Operating Partnership, L.P. ("REIT units") which were valued at
closing at $12 million. Each REIT unit is convertible into one share of the
common stock of the REIT after January 6, 1999. REIT units may not be sold,
transferred, pledged or disposed of until January 1999. In addition,
approximately 27,000 REIT units have been placed in escrow which may be released
to Registrant based upon the price per share of the REIT on the date of
conversion of REIT units. Under the accounting provisions for sale and leaseback
transactions, the sale of this building is considered a financing and the REIT
units received are reflected as a noncurrent liability while the related
building continues to be reflected as an asset. Upon liquidation of the REIT
units, a portion of the resulting gain on this sale will be deferred and
recognized into income over the term of the leaseback with the balance
recognized in income on the date of liquidation.
In a separate transaction, Registrant also sold to Reckson an adjoining
building which Registrant had constructed and leased to Laboratory Corporation
of America. Registrant received cash of approximately $15.6 million and realized
a gain of approximately $5.4 million after selling expenses. A portion of the
cash proceeds of this sale were used to repay the $9 million loan obtained to
finance the original construction of the LCA building. Preceeding the sale of
its buildings, the Company prepaid the balance of its Nassau County Industrial
Development Bonds in the amount of $820,000, including accrued interest. (See
Note 7 to the accompanying financial statements.)
Item 3. Legal Proceedings
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On June 19, 1998 FEl and the United States government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and related documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters, as follows:
1. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern ,District
of New York, CR No. 93/1261 ("Indictment").
2. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CR No. 93/0176 ("Superseding Indictment"). (The
Indictment and Superseding Indictment are collectively
referred to as the "Criminal Cases").
3. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CV No. 93/5200 ("Fox Civil Case").
4. United States of America, ex rel, Howard B. Geldart,
Plaintiff-Relator vs. Frequency Electronics, Inc., Markus
Hechler, Harry Newman, Marvin Norworth and Steven Calceglia,
Defendants, United States District Court, Eastern District of
New York, CV No. 93/4750 ("Geldart qui tam Action").
5. AMRAAM/cesium Grand Jury investigation, United States District
Court, Eastern District of New York ("AMRAAM Investigation").
The foregoing matters are collectively referred to as the "Litigations".
On June 19, 1998 the Criminal Cases were disposed of, as follows: all
criminal charges brought by the United States against FEI's president, Martin B.
Bloch, its director, Abraham Lazar, its secretary/treasurer, Harry Newman, and
its retired contracts manager, Marvin Norworth, have been dismissed, with
prejudice, with all known criminal investigations of these individuals having
been resolved; and the criminal charges brought by the United States against FEI
have been dismissed, with prejudice, with the exception of a single charge of
submitting a false statement, which failed to disclose the full explanation of
its costs on a highly classified government project, as to which FEI pled guilty
and paid the U.S. a fine of $400 Thousand and $1.1 Million as reimbursement for
costs of its investigation, with all known criminal investigations of FEI having
been resolved.
On June 19, 1998 the Fox Civil Case was dismissed, with prejudice, as to
all defendants and FEI paid the U.S. $1.5 Million to settle this case.
On June 19, 1998 the Geldart qui tam Action was dismissed, with prejudice,
as to all defendants and FEI paid the U.S. $5 Million to settle this case.
The individual defendants to the Litigations made no payments to the
government with respect to the Settlement Agreement and Global Disposition. The
Settlement Agreement specifically provided that nothing in the Settlement
Agreement or any payment made pursuant to it constitutes evidence of an
admission of liability, and shall not be construed as an admission with respect
to any issue of law or fact by anyone other than as to FEI with respect to its
guilty plea. As a result of the dismissals of the Criminal Cases as to the
individual defendants, Martin B. Bloch has resumed his position as President of
FEI, Harry Newman has resumed his position as secretary/treasurer, and both
Martin B. Bloch and Abraham Lazar have resumed their original positions as
members of the Board of Directors. The Global Disposition eliminates the
substantial costs and expenses for defending the Litigations which would have
otherwise continued for many years. The payments made pursuant to the Settlement
Agreement have a material effect on Registrant's fiscal 1998 financial results.
A qui tam action was commenced in the United States District Court for the
Eastern District of New York entitled, "The United States of America ex rel.
Ralph Muller, Plaintiff, against Frequency Electronics, Inc., Raytheon Company,
Raytheon Company Subsidiaries #1-10, fictitious names for subsidiaries of
Raytheon Company, Hughes Aircraft Company, Hughes Aircraft Company subsidiaries
#1-20, fictitious names for subsidiaries of Hughes Aircraft Company, and Martin
Bloch, Defendants", index number CV-92 5716 ("Muller Qui Tam Action"). The
Muller Qui Tam Action was brought pursuant to the provisions of the False Claims
Act and is an action by which an individual may, under certain circumstances,
sue one or more third persons on behalf of the Government for damages and other
relief.
The complaint was filed on or about December 3, 1992, in camera and under
seal pursuant to the provisions of the False Claims Act. The Court unsealed the
complaint by order dated December 3, 1993, after FEI complained to the United
States Attorney for the Eastern District of New York regarding newspaper
articles that charged FEI with manufacturing defective products based upon
claims in an unspecified and undisclosed qui tam action. It is believed that the
Government made applications to the Court on one or more occasions after
December 3, 1992, to continue to have the file in the Muller Qui Tam Action
remain under seal. The complaint was served on FEI and Martin B. Bloch on March
28, 1994 and March 30, 1994, respectively. Under the provisions of the False
Claims Act, the Government is permitted to take over the prosecution of the
action. The Government has declined to prosecute the Muller Qui Tam Action and
the plaintiff, Ralph Muller ("Muller"), is proceeding with the action on behalf
of the Government as is permitted under the False Claims Act. Moreover, while
the action 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 Advanced Medium Range Air to
Air Missiles ("AMRAAMS"); Hughes and Raytheon (collectively, the "Contractors")
entered into a subcontract with FEI pursuant to which FEI was to design,
manufacture, test, sell and deliver to the Contractors certain oscillators which
constituted components of the AMRAAMS; that FEI improperly designed,
manufactured and tested the oscillators; that numerous faulty and defective
oscillators were delivered to the Contractors; that the oscillators did not meet
contract specifications; that FEI was aware of the defective and faulty nature
of the oscillators; that FEI and Martin Bloch knowingly directed non-disclosure
of the design flaws; that the concealed design defects in developmental
oscillators permitted FEI to manufacture additional defective oscillators which
were used in operational missiles; that as a direct result of FEI's fraudulent
concealment of the defects, FEI was contracted to design and manufacture
additional oscillators; that when missiles were returned to FEI for repair, FEI
charged the Government for repair even though FEI knew the units had been
defective at the time of delivery; that FEI falsified test results and FEI and
Martin Bloch directed the falsification of test results; and that FEI sold and
delivered the oscillators to the Contractors; as a result of the faulty and
defective oscillators, many of the AMRAAMS failed to function properly; and that
the Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act,
and that the plaintiff Muller be awarded a bounty. Under the False Claims Act, a
recovery can be made in favor of the Government for a civil penalty of not less
than $5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses.
FEI has determined to vigorously defend the Muller Qui Tam Action. It has
answered the Amended Complaint, denied the material allegations, asserted
seventeen affirmative defenses, and counterclaims for: libel and product libel -
demanding damages of $3,000,000; republication of the libel and product libel -
demanding damages of $3,000,000; slander - demanding damages of $3,000,000;
tortious interference with prospects for additional business relations -
demanding damages of $1,865,010; prima facie tort - demanding damages of
$1,865,010; conversion - demanding damages of $11 plus an amount to be
determined at trial; breach of employment contract - demanding damages of
$1,865,010; breach of fiduciary duty - demanding damages of $1,865,010; plus
punitive damages in the amount of $30,000,000 on each of the tort causes of
action, and legal fees and expenses. The substance of the counterclaims alleged
against Muller are predicated upon a letter dated November 23, 1992 ("November
23 Letter") written by Muller's attorneys Schneider, Harris, Harris and Furman
("SHHF") to the Government which allegedly contained false and libelous
statements concerning FEI's design, manufacture and production of components for
Hughes and Raytheon in connection with the AMRAAMS.
In addition, FEI has instituted a third party action against SHHF, Robert
Harris, Esq. and Rod Kovel, Esq., attorneys for Muller, in connection with their
alleged authoring and publishing of the November 23 Letter provided to the
Government. The third-party complaint asserts the same claims against the
attorneys as are asserted in the counterclaims against Muller, for libel and
product libel, republication of the libel and product libel, slander, tortious
interference with contractual relations, prima facie tort and conversion. The
counterclaims and third-party complaint have been served. Muller has replied to
the counterclaims asserted in FEI's answer to the Amended Complaint, denied the
substantive allegations and asserted various affirmative defenses. The
third-party defendants have replied to the third-party complaint and have denied
the allegations and asserted various affirmative defenses. Discovery has not
commenced.
Muller moved to dismiss the counterclaims in the answer and the third
party defendants moved to dismiss the third-party complaint. FEI and Martin
Bloch moved to dismiss the complaint in the Muller Qui Tam Action. The motions
were argued on January 5, 1996 and at the time the Court directed the plaintiff
to serve the Amended Complaint. At the oral argument, the Court deferred a
portion of its decision and, in addition, it indicated a formal decision and
order would be provided as to certain of the relief requested. By order dated
August 29, 1996, the Court stated that on January 5, 1996, the Government had
agreed to unseal the case file and that the balance of the relief requested was
denied or otherwise dealt with as reflected on the record at the oral argument
on January 5, 1996. On April 11, 1997, in open Court and on the record, the
Court ordered that the Muller Qui Tam Action is stayed pending resolution of the
Criminal Cases. The Criminal Cases are now resolved by reason of the Global
Disposition. Accordingly, it is anticipated prosecution of this action and the
counterclaims will be resumed.
No opinion can be offered as to the outcome of the Muller Qui Tam Action,
the FEI counterclaims, third-party action or the pending motions.
On December 1, 1993, FEI was served with a complaint in an action
entitled, "In the Court of Chancery of the State of Delaware In and For New
Castle County, Diane Solash Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, Abraham Lazar, John C. Ho, E. John Rosenwald,
Jr., individuals, Defendants and Frequency Electronics, Inc., a Delaware
Corporation, Nominal Defendant", Civil Action No. 13266 ("Solash Action"). At
the time this action was instituted, all of the individual defendants named in
the complaint were directors of FEI, Martin B. Bloch was president and chairman
of the board of directors and Abraham Lazar was a vice-president. Joseph P.
Franklin is presently chairman of the board of directors, Lazar has retired and
is no longer a vice president. On January 24, 1994, plaintiff served an amended
complaint adding as named defendants Harry Newman, FEI's secretary/treasurer and
Marvin Norworth, then FEI's contracts manager. This is a derivative action which
is permitted by law to be instituted by a shareholder for the benefit of a
corporation to enforce an alleged right or claim of the corporation where it is
alleged that such corporation has either failed and refused to do so or may not
reasonably be expected to do so. FEI is named as a nominal defendant. In the
Solash Action, the complaint alleges that the members of FEI's board of
directors may not reasonably be expected to authorize an action against
themselves.
The substance of the amended complaint contains allegations, in general,
as follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The amended complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the amended complaint, together with interest, costs, legal and other
experts' fees.
FEI and all of the individual defendants have moved to dismiss the
complaint in the Solash Action ("Motion(s)"). To date, the Motions have not been
heard by the Court. FEI has determined to vigorously defend the Solash Action.
Discovery has not commenced. No opinion can be offered as to the outcome of the
Motions or with respect to the Solash Action.
On February 4, 1994, FEI was served with a complaint in an action entitled
"Supreme Court of the State of New York, County of New York, Moise Katz,
Plaintiff, against Martin B. Bloch, Joseph P. Franklin, Joel Girsky, John C. Ho,
Abraham Lazar, E. John Rosenwald, Jr., Defendants, and Frequency Electronics,
Inc., Nominal Defendant", Index Number 93-129450 ("Katz Action"). This 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. At the time this action was instituted, all of the
individual defendants named in the complaint were directors of FEI, Martin B.
Bloch was president and chairman of the board of directors and Abraham Lazar was
a vice president. Joseph P. Franklin is presently chairman of the board of
directors. Lazar has retired and is no longer a vice president.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a
consequence, the matters alleged in the Indictment occurred; that the individual
defendants were grossly negligent and as a consequence the matters alleged in
the Indictment occurred; that the individual defendants voluntarily participated
in such wrongdoing and attempted to conceal it; and that the individual
defendants intentionally and negligently breached their fiduciary duty to FEI
and its shareholders. The complaint seeks judgment against these defendants in
favor of FEI in the amount of all losses and damages suffered by FEI on account
of the facts alleged in the complaint, together with interest, costs, legal and
other experts' fees.
FEI and all of the defendants 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. Lazar has
retired and is no longer a vice president. Newman is FEI's secretary/treasurer
and Norworth was FEI's contracts manager and is retired. This is a derivative
action which is permitted by law to be instituted by a shareholder for the
benefit of a corporation to enforce an alleged right or claim of the corporation
where it is alleged that such corporation has either failed or refused to do so
or may not reasonably be expected to do so. FEI is named as a nominal defendant.
In the Katz Delaware Action, the complaint 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 naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage, and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the complaint, together with interest, costs, legal, and other experts' fees.
Pursuant to the order of the Court, the Solash Action and the Katz
Delaware Action have been consolidated under consolidated Civil Action No.
13266, with the caption "In Re Frequency Electronics Derivative Litigation"
("Derivative Litigation").
In the Derivative Litigation, FEI and all of the individual defendants
have moved to dismiss the consolidated complaint and to stay the Derivative
Litigation pending a disposition of the Indictment and the Superseding
Indictment ("Motion(s)"). To date, the Motions have not been heard by the Court.
However, as a result of the Motions, pursuant to a Stipulation and Order of the
Court dated May 17, 1995, and a Stipulation and Order of the Court dated June
14, 1995, the Derivative Litigation has been dismissed as to Newman and Norworth
and is otherwise stayed pending a disposition of the Indictment, Superseding
Indictment and related investigations until the further order of the Court. The
Indictment, Superseding Indictment and the related investigations have been
disposed of by reason of the Global Disposition. Accordingly, it is anticipated
the prosecution of the Derivative Litigation will be resumed. 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.
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 Fox Civil
Case, the Muller Qui Tam Action, the AMRAAM Investigation, 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 $741,000, $890,000 and
$919,000 for fiscal years 1998, 1997 and 1996, respectively.
Government Contract Suspension and Debarment
By letter dated July 13, 1998, FEI was notified by the U.S. Department of
the Air Force that it terminated the suspension proceedings initiated against
FEI's president and director, Martin B. Bloch, its former vice president and
director, Abraham Lazar, its secretary/treasurer, Harry Newman and its former
contracts manager, Marvin Norworth. By letter dated July 9, 1998, FEI was
notified by the U.S. Department of the Air Force of FEI's proposed debarment
from Government contracting and from directly or indirectly receiving the
benefits of federal assistance programs. The proposed debarment is based upon
FEI's guilty plea entered in connection with the Global Disposition and the
Settlement Agreement. The proposed debarment is effective as of July 9, 1998 and
has the following consequences:
1. FEI's name will be published in the List of Parties Excluded
From Federal Procurement and Nonprocurement Programs, a
publication of the General Services Administration containing
the names of contractors debarred, suspended, proposed for
debarment, or declared ineligible by any agency of the Federal
Government. Proposed debarment is effective throughout the
executive branch of the Federal Government.
2. Offers will not be solicited from, contracts will not be
awarded to, exiisting contracts will not be renewed or
otherwise extended for, and subcontracts requiring Government
approval will not be approved for FEI by any agency in the
executive branch of the Federal Government unless the head of
the agency taking the contracting action or a designee states
in writing the compelling reason for continued business
dealings between FEI and the agency.
3. FEI may not conduct business with the Federal Government as an
agent or representative of other contractors.
4. No Government contractor may award a subcontract equal to or
in excess of $25,000 to FEI unless there is a compelling
reason to do so and the contractor first notifies the
contracting officer and further complies with certain
Government regulations.
5. No agency in the executive branch shall enter into, renew or
extend primary or lower tier covered transactions in which FEI
is either a participant or principal, unless the head of the
agency grants an exception in writing.
6. FEI may not act as an agent or representative of other
participants in federal assistance programs.
7. FEI's affiliation with or relationship to any organization
doing business with the Government will be carefully examined
to determine the impact of those ties on the responsibility of
the organization to be Government contractor or subcontractor.
Counsel for FEI have met with the Air Force suspension authority and have
explained FEI's position as to why the debarment is inappropriate. The period of
the proposed debarment has not been determined as yet. Debarment is imposed for
a period commensurate with the seriousness of the causes. Generally, debarment
does not exceed three years. The duration of FEI's preexisting 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 has the
authority to reduce the period or extent of the debarment. Based upon applicable
Government regulations, FEI does not believe that the proposed debarment should
be for an extended period of time, although FEI is unable to predict the period
of such debarment.
On February 14, 1997, FEI commenced an action in the United States
District Court for the Eastern District of Virginia, Alexandria Division,
entitled "Frequency Electronics, Inc., Plaintiff, v. United States of America,
Department of the Air Force, Defendant", which sought (1) a declaration that (i)
the Government's decision to continue the Company's suspension from Government
contracting beyond three years violates the applicable provisions of the Federal
Acquisition Regulations ("FAR"), (ii) its continuation of the suspension beyond
three years is punitive in nature, (iii) the summary nature of the
administrative decision to continue the suspension violates the Company's rights
under the Due Process Clause of the Fifth Amendment, denies the procedural due
process and the principles of fundamental fairness mandated by the FAR, and is
otherwise arbitrary and capricious, and an abuse of discretion, and (iv) further
consideration of the matter on remand to the Air Force Suspension Official would
prove to be an exercise in futility, (2) a preliminary and permanent injunction
prohibiting defendant from (i) continuing the Company's suspension, or (ii)
imposing a new suspension or debarment relating to the facts and circumstances
known by the Government at the time of the imposition of the suspension on
December 13, 1993, and (3) an order directing the Government to promptly and
expeditiously take the necessary action to remove the Company's name from the
GSA Lists of Parties Excluded from Federal Procurement or Non-Procurement
Programs.
The Air Force moved for summary judgment. On March 14, 1997, the District
Court granted the Air Force judgment, dismissed the action with prejudice, and
refused to grant and decide the Company's motion for a preliminary injunction.
The Company appealed the District Court's order to the United States Court of
Appeals for the Fourth Circuit. By an Order dated July 1, 1998 the Court of
Appeals affirmed the District Court Order. Registrant has not as yet decided
whether it will seek reargument or will petition the United States Supreme Court
for certiorari to review such decision.
In fiscal year 1999, Registrant anticipates that less than 10% of its
business will be comprised of prime and subcontracts in which the Government is
the end-user. Registrant expects that the balance of its business (greater than
90%), which it has been expanding in recent years, will be in commercial and
export markets unrelated to the Government. While FEI and Registrant believe
debarment is a serious matter, Registrant does not believe debarment will have a
material adverse effect on Registrant's business prospects, its financial
condition, results of its operations or its 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 1998.
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 and as adjusted for the 3-for-2 stock split in
the form of a 50% stock dividend, effective October 31, 1997.
FISCAL QUARTER HIGH SALE LOW SALE
1998 -
FIRST QUARTER $11 3/8 $ 6 3/8
SECOND QUARTER 19 1/2 10 13/16
THIRD QUARTER 20 13 1/8
FOURTH QUARTER 17 3/8 13 1/4
1997 -
FIRST QUARTER $ 6 1/8 $3 5/16
SECOND QUARTER 6 7/8 4 9/16
THIRD QUARTER 8 9/16 5 11/16
FOURTH QUARTER 8 1/2 6 1/8
As of July 21, 1998, the approximate number of holders of record of common
stock was 922.
DIVIDEND POLICY
On March 24, 1997, Registrant announced a policy of distributing a cash
dividend to shareholders of record on April 30 and October 31, payable on June 1
and December 1, respectively. Dividend amounts will be determined by the Board
of Directors prior to each declaration based on the Company's financial
condition and financial performance.
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth selected financial data including net sales
and operating profit (loss) for the five year period ended April 30, 1998. The
information has been derived from the audited financial statements of the
Company for the respective periods.
Years Ended April 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Commercial $26,364 $19,612 $11,220 $ 6,103 $ 8,597
U.S. Government 5,633 8,317 13,872 17,978 18,867
------- -------- ------- ------- -------
Total Net Sales $31,997 $27,929 $25,092 $24,081 $27,464
======= ======= ======= ======= =======
Operating Profit
(Loss) ($ 9,105)(1) $ 2,675 $ 1,047 ($ 6,025) ($ 6,174)
======= ======= ======= ======= ========
Net Earnings
(Loss) $ 64 (2) $ 4,863 $ 2,822 ($ 3,843) ($ 4,622)
======= ======= ======= ======= ========
Average Common Shares Outstanding (3)
Basic 7,368,472 6,967,109 6,939,872 7,253,051 7,401,602
Diluted 7,787,140 7,319,250 6,995,133 7,253,051 7,401,602
Earnings (Loss) per Common Share (3)
Basic $ 0.01 $ 0.70 $ 0.41 ($ 0.53) ($ 0.62)
====== ====== ====== ====== =======
Diluted $ 0.01 $ 0.66 $ 0.40 ($ 0.53) ($ 0.62)
====== ====== ====== ====== =======
Total Assets $88,780 $74,866 $68,770 $65,032 $72,655
======= ======= ======= ======= =======
Long-Term Obligations
and Deferred Items $18,841 $ 5,460 $14,877 $14,959 $15,327
======= ======= ======= ======= =======
Cash dividend declared
per common share (3) $ 0.20 $ 0.10 - - -
======= ======= ======= ======= =======
(1) Includes litigation settlement of $8 million and US government-related
inventory writedowns and reserves of $4.8 million.
(2) In addition to items in (1) above, includes net gain on sale of
buildings of $4.9 million and the reversal of the valuation allowance
on deferred tax assets of $2.6 million.
(3) All share and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31,
1997.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
The table below sets forth for the fiscal years ended April 30 the
percentage of consolidated net sales represented by certain items in the
Company's consolidated statements of operations:
1998 1997 1996
---- ---- ----
Net Sales
Commercial 82.4% 70.2% 44.7%
US Government 17.6 29.8 55.3
----- ----- -----
100.0 100.0 100.0
Cost of Sales 80.9 64.7 66.5
Selling and administrative expenses 18.1 20.5 25.1
Litigation settlement 25.0 0.0 0.0
Research and development expenses 4.5 5.2 4.2
----- ----- -----
Operating profit (loss) (28.5) 9.6 4.2
Other income (expense) 24.3 8.6 7.8
Provision (benefit) for income taxes (4.4) 0.7 0.8
------ ----- -----
Net Earnings 0.2% 17.4% 11.2%
===== ===== =====
Significant Fiscal 1998 Events
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal 1998 results of operations
were materially impacted by three singular events: (1) the settlement of the
litigations with the U.S. government (Item 3. Legal Proceedings and Note 9 to
the financial statements); (2) the sale of its real estate holdings (Item 2.
Properties and Notes 6 and 7 to the financial statements) and (3) the writedown
or reserve for inventories related to phasing out U.S. government business.
(Note 5 to the financial statements)
In June 1998, the Company settled all outstanding criminal and civil cases
brought by the U.S. government and made total payments of $8 million (Item 3.
Legal Proceedings). Accordingly, including related accrued litigation expenses,
the Company recorded a charge of $8.15 million against fiscal 1998 earnings.
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust, and leased back
a portion of the building which it occupies. (Item 2. Properties) In one sale
transaction, the Company sold the building which it had leased to Laboratory
Corporation of America, receiving cash of approximately $15.6 million and
realizing a gain of approximately $5.4 million after selling expenses. A portion
of the proceeds were used to repay the $9 million loan obtained to finance the
original construction of this building. In the other sale, the Company effected
a tax-deferred exchange of the building which it occupies for approximately
486,000 participation units of Reckson Operating Partnership, L.P. ("REIT
units") which were valued at closing at $12 million. The Company leased back
approximately 43% of this building from Reckson and incurred approximately
$500,000 of relocation expenses related to this leaseback during fiscal 1998.
Under the accounting provisions for sale and leaseback transactions, most of the
ultimate gain on this sale will be deferred and recognized into income over the
term of the lease with the balance recognized in income upon sale or conversion
of the REIT units into shares of Reckson Associates Realty Corp., a
publicly-traded company. Preceeding the sale of its building, the Company
prepaid the balance of its Nassau County Industrial Development Bonds in the
amount of $820,000, including accrued interest.
During the fiscal year, the Company determined that a writeoff or reserve
of $4.8 million of certain work-in-progress and component parts inventory
related to US Government programs was appropriate. These inventory adjustments
result from the Company's transformation to a commercial space and
telecommunications manufacturer as well as its expectation for reduced
procurement volumes by the US Government due to both smaller Defense Department
budgets and the Government's migration to alternate technologies.
As a result of the building sales coupled with continued operating profits
before nonrecurring charges, the Company has utilized most of its tax net
operating loss carryforward. In addition, with the settlement of the U.S.
government litigation the uncertainty regarding realizability of the Company's
net deferred income tax asset has been removed thus eliminating the need for a
valuation allowance on such amount. Accordingly, during fiscal 1998, the Company
recorded a deferred tax benefit of $2.6 million (net).
Without these significant events, the Company's fiscal 1998 operating
profit, pre-tax earnings and net earnings would be materially different from
that reported in the financial statements as illustrated below:
1998 1997 1996
---- ---- ----
Operating profit (loss)- as reported $(9,105) $2,675 $1,047
Add back:
Litigation settlement and expenses 8,150 - -
Inventory writedowns and reserves 4,764 - -
------ ------- ------
Adjusted operating profit 3,809 2,675 1,047
------ ------- ------
Other income (expense) - as reported 7,769 2,388 1,975
Less:
Gain on building sale, net of expenses (4,927) - -
------ ------ ------
Adjusted Other income (expense) 2,842 2,388 1,975
------ ------ ------
Adjusted pretax earnings $6,651 $5,063 $3,022
====== ====== ======
Operating Profit (Loss)
Operating profit for the year ended April 30, 1998 decreased by $11.8
million from fiscal 1997. Without the litigation settlement and the inventory
adjustments described above, the operating loss would have been a profit of $3.8
million or an increase of $1.1 million (42%) over fiscal 1997's results. This
results from the 15% increase in net sales, a relatively constant gross margin
rate (34% vs. 35%) and a small decline in selling and administrative expenses.
Operating profit for the year ended April 30, 1997, improved by $1.6
million over the year ended April 30, 1996. This result was achieved through the
75% increase in sales to non-U.S. Government customers coupled with significant
improvement in gross margins due to cost cutting efforts. Reduced selling and
administrative expenses and more focused research and development costs, as
discussed below, further enhanced the operating results for the 1997 fiscal
year.
Net Sales
Net sales in fiscal 1998 increased by $4.1 million (15%) over fiscal 1997
with sales to commercial customers increasing by $6.8 million (34%). The
increasing proportion of commercial sales illustrates the Company's successful
transformation into a non-US government provider of specialty timing devices for
commercial space and terrestrial wireless applications. Both fiscal 1998 and
1997 commercial revenues reflect increasing sales of the Company's commercial
rubidium product line for application primarily in the cellular telephone
industry. Sales of this product line have more than doubled in each of the last
three years and are expected to continue to grow at a rapid pace as the Company
further advances its products into the marketplace.
Net sales in fiscal 1997 increased by $2.8 million (11%) over fiscal 1996.
Sales to commercial customers for the fiscal year ended April 30, 1997 increased
by $8.4 million (75%) over fiscal 1996 as the Company continued to establish
itself as a hardware supplier to the commercial marketplace.
The Company believes that its 36-year legacy in building high-reliability,
precision timing and frequency generation devices for US Government programs
(principally DOD and NASA), uniquely positions it to successfully exploit the
much greater emerging markets in commercial space and wireless communications.
The Company therefore intends to focus its energies on these markets and is
phasing out its business with the U.S. Government. However, the Company will
continue to fulfill its current contractual obligations to US government
programs and will make its proprietary technology available for the benefit of
our country. Consequently, in fiscal 1999 and beyond, the proportion of sales to
be generated from US government programs is expected to continue the declining
trend. This will be significantly offset by increasing demands for the Company's
products in commercial space hardware and terrestrial wireless communications.
Gross margins
Gross margins for the fiscal year ended April 30, 1998 were negatively
impacted by the inventory writedowns and reserves described above. Without such
charges, gross margins would have been 34%. During fiscal 1998, the
profitability of commercial programs versus US government programs became more
distinct. Aggregate gross margins on commercial programs was 38%. US government
programs showed margins of 16% before inventory adjustments and recorded
negative margins of 69% after such adjustments.
Gross margins for the fiscal year ended April 30, 1997, improved modestly
over fiscal year 1996 increasing to 35.3% from 33.5%. These results reflect a
continuation of the cost reductions and process improvements which were
initiated in fiscal 1996. These results also reflect the growth in the
commercial product lines where margins, in general, are larger than on U.S.
government related contracts although the difference in fiscal 1997 was not as
great as that discussed above for fiscal 1998.
Included in the Company's overhead pool, a component of cost of sales, is
a charge for amortization of the Company's ESOP program (see Note 11 to the
financial statements). Due to a change in accounting for this program during
fiscal 1994, the Company recognizes an expense based upon the average market
value of the underlying shares of Company stock which are allocated to the ESOP
each year. As a result of the significant increase in the value of the Company's
stock during fiscal 1998, the charge to ESOP amortization has also increased
significantly, rising to approximately $1.2 million or 125% of the amount
charged to the overhead pool in fiscal 1997. (This is also primarily a non-cash
charge, exceeding the actual cash obligation of the Company by over $800,000.)
Without this excess amortization charge, aggregate gross margins on the
Company's commercial sales during fiscal 1998 would have exceeded 40%. The
impact of this charge in fiscal 1997 and 1996 was negligible. If the Company's
stock value remains at current or higher levels during the next two years, gross
margins will continue to be dampened by this additional noncash ESOP
amortization expense. Despite this potential reduction in margins, with the
continuing growth in sales of its commercial products, the Company anticipates
that future gross margins will be significantly higher than that experienced
during fiscal 1998.
Selling and administrative expenses
Selling and administrative costs, excluding the litigation settlement and
related costs, declined by $77,000 or 1% for the year ended April 30, 1998, over
fiscal 1997. This decline resulted from reduced litigation-related spending
during much of the fiscal year, reduced accrual for bonuses and lower deferred
compensation expense to certain officers. These reductions were offset by
increased spending for computer system expense and stock-based compensation
amortization expenses, including $236,000 of ESOP amortization expense (see
discussion above under Gross Margins). The fiscal 1998 ESOP amortization is
$115,000 (95%) greater than the amount recorded in fiscal 1997 and exceeds the
actual cash outflow by $150,000.
Selling and administrative costs declined by $588,000 or 9% for the year
ended April 30, 1997, over fiscal 1996. This decrease resulted primarily from a
decrease in bad debt expense by $538,000 after the writeoff in fiscal 1996 of
certain outstanding receivables. While provisions for incentive bonuses in
fiscal 1997 increased in tandem with the improved profitability of the Company,
this was more than offset by decreases in other compensation-related areas such
as adjustments in deferred compensation accruals, better than expected growth in
cash surrender values of officers' and employees' life insurance, and lower
administrative headcount which was effected in the first quarter of fiscal 1996.
Without regard to bad debt expenses, bonuses and the legal fees related to the
government litigation, selling and administrative costs in fiscal 1997 were
$476,000 lower (10%) than in 1996. This result was achieved through a reduction
in the number of personnel, reduced insurance costs, lower usage of professional
services and improved operating efficiencies.
As sales increase, the ratio of selling and administrative expenses to net
sales is expected to decrease. As a result of its settlement of all outstanding
criminal and civil cases brought by the US government, the Company expects the
future level of legal costs to be significantly less than that experienced in
each of the last three years. Because a smaller proportion of Company personnel
are included in the selling and administrative category, the proportional impact
of increasing ESOP amortization will be less than that incurred in cost of
sales.
Research and development expenses
The level of effort in Company-funded research and development projects
during fiscal 1998 was comparable to that of fiscal 1997 with costs decreasing
by $20,000 (1%) from fiscal 1997 levels. Such costs reflect the successful
development of the rubidium and VSAT commercial product lines (see Item 1.
Business) but do not reflect satellite hardware development costs which were
partially funded by customer projects. While the Company retains production
rights to any technology which results from customer-funded, non-recurring
engineering efforts, the costs of such development are recorded in cost of
sales.
Research and development costs in the year ended April 30, 1997, increased
by $411,000 (39%) over fiscal 1996. This increase is due principally to costs
related to the Company's successful commmercial rubidium development efforts.
The Company will continue to focus its research and development activities
on those commercial projects which it expects will provide the best return on
investment and provide the best prospects for the future growth of the Company.
For fiscal 1999, the Company will make a substantial investment of capital and
technical resources to develop generic products for the satellite transponder
market. Where possible, the Company will attempt to secure partial customer
funding for such development efforts but is prepared to spend up to $5.5 million
of its own funds in order to bring such products to the market by the end of
fiscal 1999.
Other Income (Expense)
Other income (expense) for the year ended April 30, 1998, included the
$4.9 million net gain on the sale of the Company's real estate holdings. Without
such gain, other income (expense) increased by $455,000 (19%) over fiscal 1997.
For the year ended April 30, 1997, other income (expense) increased by $413,000
(21%) over fiscal 1996.
In particular, fiscal 1998 investment income increased by $592,000 (38%)
over fiscal 1997 and fiscal 1997's income increased by $250,000 (19%) over
fiscal 1996. These results were achieved by continuing increases in
interest-earning assets in fiscal 1997 and fiscal 1998. Such assets grew
significantly in the last quarter of fiscal 1998 as a result of the net proceeds
from the real estate sales. In addition to interest income, the Company also
realizes quarterly dividend income on its REIT units. Interest rates, which
impact the level of investment income, were relatively stable in all three
years. Assuming interest rates remain stable, the Company anticipates that
investment income will increase modestly over the level attained in fiscal 1998.
Interest expense in fiscal 1998 decreased by $207,000 (24%) from fiscal
1997 and fiscal 1997 expense decreased by $88,000 (9%) from 1996 levels. During
the third quarter of fiscal 1998, the Company repaid its real estate-related
loans thus realizing significant reductions in its interest payments. For fiscal
1997, the reduced interest expense was the result of declining long-term debt
balances as the Company made scheduled principal payments. As a result of the
loan paydowns and a stable interest rate environment, the Company anticipates
that interest expense will be markedly lower in fiscal 1999 when compared to
earlier fiscal years.
Other income, net, in addition to the net gain on the sale of the
Company's real estate holdings also included rental income through December 1997
under the long-term direct finance lease with Laboratory Corporation of America.
Without the one-time gain, this category declined by $345,000 during fiscal 1998
from fiscal 1997 and by $270,000 from fiscal 1996 levels. This decrease is
attributable to the cessation of finance lease income as a result of the sale of
the leased property during January 1998 as well as additional costs incurred in
moving the Company's operations to new and more efficient space within the
leased back property. The Company anticipates that in future years other income,
net, will be an insignificant contributor to pretax earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $63 million at April 30, 1998, which is a substantial
increase from the working capital position of $37 million at April 30, 1997.
This change is principally due to the sale of the Company's real estate holdings
and the concurrent repayment of long-term debt. Included in working capital at
April 30, 1998 is $45.4 million of cash, cash equivalents and short-term
investments, including $12 million of REIT units which are convertible to
Reckson Associates Realty Corp. common stock after January 6, 1999. The
Company's current ratio at April 30, 1998 is 5.7 to 1 compared to a 3.6 to 1
ratio at April 30, 1997. Both ratios are below the Company's recent historical
current ratio of approximately 10 to 1. For year-end April 30, 1998, this ratio
is due to the accrual of $8 million related to the US government litigation
settlement which was paid in June 1998. Excluding such accrual from both cash
and accrued liabilities results in a current ratio of 12.4 to 1 at April 30,
1998. The lower ratio at April 30, 1997, was due to the classification of the $9
million construction loan, paid in January 1998, as a current liability.
Net cash provided by operating activities for the year ended April 30,
1998, was approximately $3.2 million compared to $4 million for fiscal 1997.
This decrease in cash inflow is due to the growth in unbilled receivables of
$5.9 million offset by payments on billed receivables, lower work-in-process
inventories (excluding writedowns and reserves) and higher accounts payable.
Unbilled receivables have grown due to the increased volume in commercial
contracts which, in general, do not provide upfront funding as is typical of
government-related long-term contracts. Work-in-process inventories have
decreased as more projects are accounted for on the percentage completion method
of revenue recognition. Accounts payable have increased by 45% from the balance
at April 30, 1997 due to the timing of the purchases for certain inventory and
purchases of capitalizable assets related to relocation of the Company's office
space within its leased back portion of the building.
Net cash provided by investing activities for the year ended April 30,
1998, was $2.1 million. Of this amount, $6.6 million was from the proceeds of
the sale of the Company's real estate holdings after repayment of the real
estate construction loan. Through the real estate sale the Company also obtained
$12 million of REIT units. Such units are convertible into shares of Reckson
Associates Realty Corp. common stock after January 6, 1999 and, as such, are
treated as a non-cash item for fiscal 1998. (See Item 2. Properties) The Company
used $3.5 million (net) to acquire certain U.S. government and agency
securities. The Company may continue to invest cash equivalents in longer-term
securities or to convert short-term investments to cash equivalents as dictated
by its investment strategies. The Company also invested $750,000 in production
equipment which will improve the efficiency of its operations and an additional
$280,000 was used to obtain new computer hardware and a new telephone system
which will improve its financial and operational information systems. The
Company will continue to acquire more efficient equipment to automate its
production process and intends to spend $1.5 million to $2 million on capital
equipment related to the development and manufacture of new products. In the
second quarter of fiscal 1999, the Company intends to install the next upgrade
of its financial software, the cost of which is not expected to exceed $150,000,
including the acquisition of next generation personal computers for users. The
purchase of this financial software package two years ago, including the
upgrades, has satisfactorily addressed the issue of compliance with the year
2000 problem. The Company has determined that additional operational,
nonfinancial software must be obtained to resolve the year 2000 issue in certain
production and support areas, the cost of which will not exceed $50,000.
Net cash provided by financing activities for the year ended April 30,
1998, was $47,000. Of this amount, $1.9 million was received in full payment of
the mortgage note receivable due from the purchaser of the Company's former west
coast facility. In addition, payments of $914,000 were received from the sale of
shares of common stock from treasury to satisfy the exercise of stock options
granted to certain employees and payments of $148,000 were received against
notes receivable from certain officers and employees. These inflows were
partially offset by $1.4 million used to retire long-term debt and an additional
$1.5 million used to pay semi-annual cash dividends to shareholders. The Company
will continue to use treasury shares to satisfy the future exercise of stock
options granted to officers and employees in previous years. The Company may
repurchase shares of its common stock for treasury whenever appropriate
opportunities arise but it has neither a formal repurchase plan nor commitments
to purchase additional shares in the future.
In addition to the above investing and financing activities, as a result
of the building sales in January 1998, the Company received REIT units with a
value of $12 million and used $9 million from the cash proceeds of the LCA
building sale to pay down the real estate construction loan. Neither of these
transactions are reflected in the statement of cash flows. Only the net cash
proceeds of the LCA building sale are reflected in investing activities. (See
Item 2. Properties)
The Company will continue to expend its resources and efforts to develop
hardware for commercial satellite programs and terrestrial wireless
communication systems which management believes will result in future growth and
continued profitability. During fiscal 1999, the Company intends to
significantly increase its development spending to develop generic products for
the satellite transponder market. Where possible, the Company will attempt to
secure partial customer funding for such development efforts but is willing to
spend up to $5.5 million of its own funds in order to bring such products to the
market by the end of fiscal 1999. Internally generated cash will be adequate to
fund these development efforts.
At April 30, 1998, the Company's backlog amounted to approximately $21.6
million as compared to the approximately $14 million backlog at April 30, 1997.
Backlog of commercial and foreign customers approximates $20 million at April
30, 1998. Of this backlog, approximately 50% is realizable during fiscal 1999.
As discussed more thoroughly in Item 3. Legal Proceedings and in Notes 9
and 10 to the consolidated financial statements, the Company has received a
notice of proposed disbarment from receiving contracts from any agency of the
U.S. Government, except under certain circumstances. Because of the Company's
transition to commercial products, the continuation of the debarment is not
expected to have a material adverse effect on liquidity, financial condition or
results of operations. Certain nongovernment initiated civil cases remain
outstanding and the Company is unable to determine the ultimate disposition of
such cases. Any disposition is not expected to have a material effect on the
Company's liquidity or financial condition.
The Company also has available for income tax purposes, approximately $1.5
million of net operating loss carryforwards which may be applied against future
taxable income.
OTHER MATTERS
See discussion of recently issued pronouncements included in Note 1 to the
consolidated financial statements. The financial information reported herein is
not necessarily indicative of future operating results orof 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 1998, 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.
In our opinion, the consolidated financial statements listed in the Index
appearing under Item 14.(a)(1) and (2) on page 54 present fairly, in all
material respects, the consolidated financial position of Frequency Electronics,
Inc. and Subsidiaries as of April 30, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Melville, New York
July 13, 1998.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1998 and 1997
-----------
ASSETS: 1998 1997
---- ----
(In thousands)
Current assets:
Cash and cash equivalents $ 8,725 $ 3,448
Marketable securities (Note 3) 36,661 21,112
Accounts receivable, net of allowance for
doubtful accounts of $190 (Notes 4 and 14) 18,640 14,797
Inventories (Note 5) 6,475 11,060
Deferred income taxes (Note 13) 5,000 -
Prepaid expenses and other 986 1,233
------- -------
Total current assets 76,487 51,650
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization (Notes 6 and 7) 9,159 9,059
Investment in direct finance lease - 9,702
Other assets 3,134 4,455
------- -------
Total assets $88,780 $74,866
======= =======
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1998 and 1997
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 1998 1997
---- ----
(In thousands)
Current liabilities:
Current maturities of long-term debt (Note 7) $ 479 $ 9,718
Accounts payable - trade 1,283 882
Accrued liabilities (Note 9) 10,854 2,921
Dividend payable 771 746
Income taxes payable 145 73
------- ------
Total current liabilities 13,532 14,340
Long-term debt, net of current maturities (Note 7) 500 1,687
Deferred compensation (Note 12) 3,905 3,737
Deferred income taxes (Note 13) 2,400 -
Other liabilities (Note 6) 12,036 36
------ ------
32,373 19,800
------ ------
Commitments and contingencies (Notes 8 and 10)
Stockholders' equity (Note 12):
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued - -
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued - 9,009,259 shares 9,009 6,006
Additional paid-in capital 36,306 35,190
Retained earnings 15,983 20,414
------ -------
61,298 61,610
Common stock reacquired and held in treasury -
at cost (1,296,913 shares in 1998 and
1,032,812 shares in 1997) (3,632) (4,612)
Unamortized ESOP debt (Notes 7 and 12) (1,000) (1,500)
Notes receivable-common stock (Note 11) (287) (435)
Unearned compensation (89) (77)
Unrealized holding gain 117 80
------- -------
Total stockholders' equity 56,407 55,066
------- -------
Total liabilities and stockholders' equity $88,780 $74,866
======= =======
The accompanying notes are an integral part of
these financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 1998, 1997 and 1996
-----------
1998 1997 1996
---- ---- ----
(In thousands, except share data)
Net sales (Note 14) $31,997 $27,929 $25,092
------- ------- -------
Cost of sales 25,870 18,075 16,689
Selling and administrative
expenses (Notes 9 and 10) 5,791 5,718 6,306
Litigation settlement (Note 9) 8,000 - -
Research and development expenses 1,441 1,461 1,050
------- ------- -------
Total operating expenses 41,102 25,254 24,045
------- ------- -------
Operating (loss) profit (9,105) 2,675 1,047
Other income (expense):
Investment income 2,135 1,543 1,293
Interest expense (672) (879) (967)
Other, net (Note 6) 6,306 1,724 1,649
------- ------- -------
(Loss) Earnings before (benefit) provision
for income taxes (1,336) 5,063 3,022
(Benefit) Provision for income
taxes (Note 13): (1,400) 200 200
------- ------- -------
Net Earnings $ 64 $ 4,863 $ 2,822
======= ======= =======
Net Earnings per common share:
Basic $ 0.01 $ 0.70 $ 0.41
====== ====== ======
Diluted $ 0.01 $ 0.66 $ 0.40
====== ====== ======
Average shares outstanding (Note 2):
Basic 7,368,472 6,967,109 6,939,872
========= ========= =========
Diluted 7,787,140 7,319,250 6,995,133
========= ========= =========
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, 1998, 1997 and 1996
(In thousands, except share data)
Unrealized
holding
Note gain or
Add'l Treasury stock Receivable (loss) on
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, 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 stock 200,600 (698) (698)
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 April 30, 1996 6,006,300 6,006 35,024 16,265 1,159,905 (5,075) (2,000) (740) (113) 56 49,423
Exercise of stock options (6) (127,093) 463 457
Amortization of ESOP debt
as a result of shares
allocated 172 500 672
Payment received for common
stock subscribed 305 305
Amortization of unearned
compensation 36 36
Increase in market value of
marketable securities 24 24
Cash dividend, $.15 per (714) (714)
share
Net Earnings 4,863 4,863
--------- ----- ------ ------ --------- ------ ------ ----- ------ ---- -------
Balance April 30, 1997 6,006,300 6,006 35,190 20,414 1,032,812 (4,612) (1,500) (435) (77) 80 55,066
Exercise of stock options (83) (162,495) 938 855
Amortization of ESOP debt
as a result of shares
allocated 976 500 1,476
Shares issued under
restricted stock plan 15 (7,500) 42 (52) 5
Independent Contractor
stock options granted 208 208
Payment received for common
stock subscribed 148 148
Amortization of unearned
compensation 40 40
Increase in market value of
marketable securities 37 37
Stock dividend, 3-for-2 3,002,959 3,003 (3,007) 434,096 (4)
Cash dividend, $.20 per (1,488) (1,488)
share
Net Earnings 64 64
--------- ------ ------- ------- --------- ------- ------- ----- ----- ---- -------
Balance April 30, 1998 9,009,259 $9,009 $36,306 $15,983 1,296,913 ($3,632) ($1,000) ($287) ($ 89) $117 $56,407
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The accompanying notes are an
integral part of these financial statements
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1998, 1997 and 1996
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1998 1997 1996
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(In thousands)
Cash flows from operating act