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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended April 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- ---------------------------------------- -----------------------------
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 ___ No _X_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes___ No _X_
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of October 31, 2002 - $48,000,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 22, 2003 - 8,356,350.
DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by
reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held on or about October 16, 2003.
(Cover page 1 of 60 pages)
Exhibit Index at Page 50
PART I
Item 1. Business
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GENERAL DISCUSSION
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Frequency Electronics, Inc. (sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the technology of time and frequency control. Unless the
context indicates otherwise, references to the Registrant or the Company are to
Frequency Electronics, Inc. and its subsidiaries. References to "FEI" are to the
parent company alone and do not refer to any of the subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became the
successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500 and its website is
WWW.FREQUENCYELECTRONICS.COM.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 8,339,201 shares were
outstanding at April 30, 2003, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.
The Company is a world leader in the design, development and manufacture
of high-technology frequency, timing and synchronization products for satellite
and terrestrial voice, video and data telecommunications. The Company's
technologies provide unique solutions that are essential building blocks for the
next generation of broadband wireless and fiber optic communications systems,
and for the ongoing expansion of existing wireless and wireline networks. The
Company's mission is to provide the most advanced control of frequency and time-
essential factors for synchronizing communication networks and for certain
military and space applications.
The Company has segmented its operations into three principal industries:
(1) products for commercial communications which are based either on the ground
or in space, (2) the business of Gillam-FEI, principally wireline and network
synchronization systems and (3) products used by the United States Government
for defense or space applications. The Company's space and terrestrial
commercial communications programs are produced by its wholly owned subsidiary,
FEI Communications, Inc. ("FEIC"). FEIC was incorporated in Delaware in December
1991, and was created as a separate subsidiary company to provide ownership and
management of assets and other services appropriate for commercial clients, both
domestic and foreign. Gillam-FEI is the Company's Belgian subsidiary, acquired
in September 2000, which currently sells its products in non-U.S. markets.
During fiscal 2002, the Company formed three wholly-owned subsidiaries and made
a strategic investment in a Russian crystal oscillator manufacturer to provide
broader manufacturing capabilities and worldwide reach for the Company's
proprietary products. FEI Government Systems, Inc. ("FEI-GSI") was formed to
focus on supplying the Company's technology and legacy proprietary products to
the United States military and other U.S. government agencies. This
organizational step was taken in response to the increasing demand for the
Company's products by the U.S. Government. Frequency Electronics, Inc. Asia
("FEI-Asia") was established as an Asian-based low cost manufacturer of certain
of the Company's commercial communications products. FEI- Europe, GmbH
Communications ("FEI-Europe") was established as a European sales and marketing
office to promote the Company's new line of crystal oscillators as well as other
proprietary products. The operations of FEI-Asia and FEI-Europe are included in
the commercial communications segment. The Company's equity investment in
Morion, Inc., a Russian manufacturer, permits the Company to secure a low cost
source for high precision quartz resonators and crystal oscillators, many of
which will be based on the Company's design and development work.
As described more fully below, shortly after the end of fiscal year 2003,
the Company acquired the business and net assets of Zyfer, Inc. from Odetics,
Inc., forming a new wholly-owned subsidiary, FEI-Zyfer, Inc. ("FZI"). FZI is a
designer and manufacturer of precision time and frequency generation and
synchronization products which incorporate global positioning systems ("GPS")
technology. This capability complements the Company's existing technologies and
permits the combined entities to provide a broader range of embedded systems for
a variety of timing functions.
2
In the mid-1990's, the Company transformed itself from a defense contract
manufacturer into a high-tech provider of precision time and frequency products
found in both ground-based communication stations and on-board commercial
satellites. The Company also continues to support the United States government
with products for defense and space applications with emphasis on Commercial
Off-The-Shelf products. Products delivered by Gillam-FEI provide essential
network monitoring and wireline synchronization products for a variety of
industries and telecommunications providers in Europe, Africa, the Middle East
and Asia.
FISCAL 2003 AND 2002 SIGNIFICANT EVENTS
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Goodwill Impairment
In the fourth quarter of 2003, the Company performed an impairment test of
the Gillam-FEI reporting unit. The fair value of this reporting unit was
determined based upon valuations utilized in recent industry acquisition
transactions and current market values of publicly-traded competitors and
customers in the same industry as Gillam-FEI. Based on this test, the Company
further analyzed its investment in Gillam-FEI and concluded that the goodwill
associated with this acquisition was impaired. Consequently, the Company
recorded a non-cash charge of $6.2 million against operating income for fiscal
2003 to reflect the write down of the full value of goodwill related to the
Gillam-FEI acquisition.
Inventory Adjustments
The Company reduced the value of its inventory by approximately $3.6
million during the 4th quarter of fiscal 2003 due to events occurring at the end
of the fiscal year. In April, the Company was notified by a customer it had
cancelled an export-related contract which required the Company to write-off the
related work-in-process inventory. Second, after experiencing modest improvement
in telecommunications-related revenues earlier in the year, fourth quarter
Commercial Communications segment revenue declined nearly 40% from the third
quarter. As a consequence, noting the competitive environment, the Company
reduced certain inventory to estimated realizable value based on lowered sales
volume expectations. Finally, during the fourth quarter, the Company completed
certain process and product improvement projects which resulted in re-valuation
or disposal of certain products built under previous designs.
Insurance Reimbursement
On April 30, 2002, the Company settled an arbitration proceeding FEI had
commenced in June 2001 against The Home Insurance Company of Illinois ("Home")
under an excess directors and officers liability insurance policy. FEI had
asserted claims for its loss relating to, among other matters, sums it paid in
connection with the Global Settlement and Disposition with the Government on
June 19, 1998. (See Item 3. Legal Proceedings and Note 9 to the accompanying
financial statements.) Under the terms of the settlement agreement, Home paid
FEI $1.5 million, FEI released its claims and the arbitration was discontinued.
SUBSEQUENT EVENT
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On May 9, 2003, the Company acquired the business and net assets of Zyfer,
Inc., a wholly-owned subsidiary of Odetics, Inc., in a cash transaction. The
Company paid $2.3 million at closing, plus acquisition costs estimated at
approximately $400,000. According to the terms of the purchase agreement, the
Company will pay up to a maximum of $1 million in each of fiscal years 2004 and
2005 if the new subsidiary, FEI-Zyfer, Inc., achieves certain revenue levels in
those years. The contingent payments are based on a percentage of revenues in
excess of $6 million in fiscal 2004 and as a percentage of revenues in excess of
$8 million in fiscal 2005. The acquired business recorded revenue of $6.5
million for the year ended March 31, 2003 and $4.5 million in the prior fiscal
year. FEI-Zyfer, with its own management team, will be a fourth reportable
segment in the Company's future financial statements.
3
REPORTABLE SEGMENTS
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The Company designs, develops, manufactures and markets precision time and
frequency control products for three principal markets: (1) commercial
communications applications, either space- or ground-based, (2) wireline
synchronization and network monitoring systems produced by Gillam-FEI, and (3)
its heritage U.S. Government and military markets.
Wireline and network synchronization products manufactured by the
Company's wholly-owned subsidiary, Gillam-FEI, are currently sold to non-U.S.
customers. The products for the other two reportable segments are similar in
function and are currently manufactured in the Company's production facility
located in New York. The operations of its FEI-Asia facility are included in the
Commercial Communications segment. The Company identifies the U.S Government
business as a reportable segment based upon the regulatory environment (Federal
Acquisition Regulations or "FAR") under which it operates when dealing with U.S.
Government procurement contracts versus the less restrictive commercial
environment.
During fiscal 2003, 2002 and 2001 approximately 47%, 63% and 74%,
respectively, of the Company's sales were for products used for terrestrial or
space-based commercial communications and foreign governments. Sales for
Gillam-FEI, which was acquired in September 2000, were approximately 25%, 26%
and 19% of fiscal 2003, 2002 and 2001 revenues, respectively. For the years
ended April 30, 2003, 2002 and 2001, approximately 28%, 11% and 7%,
respectively, of the Company's sales were for U.S. Government end-use. Sales
summaries for the Commercial Communications, Gillam-FEI and U.S. Government
markets during each of the last five years are set forth in Item 6 (Selected
Financial Data). Segment information regarding revenues, operating profits,
depreciation and assets is more fully disclosed in Note 14 to the accompanying
financial statements.
Commercial Communications segment:
The Company provides high-tech precision time and frequency products that
are found in both ground-based communication stations and on-board commercial
satellites. The Company has made a substantial investment in research and
development to apply its core technologies to the commercial markets. In
previous years, the Company experienced accelerated growth in commercial
communications revenues. However, under current overall market conditions in the
telecommunications industry, the revenue growth trend has been interrupted. The
Company anticipates that this industry will provide an opportunity for
substantial future sales growth based on increased capital spending by
telecommunication companies and new or replacement orders for commercial
communication satellites.
Terrestrial- Wireless
The development of new or improved technologies will bring expanded and
more reliable telecommunications services to the public. As digital cellular
systems and PCS networks grow they will require more base stations to meet the
demand for better connectivity and quality of cell phone service. Cellular
infrastructure original equipment manufacturing companies, consisting of some of
the world's largest telecommunications companies, are building out existing
networks even as they develop new technologies, such as EDGE (Enhanced Data
rates for Global Evolution), 3G (3rd Generation) and other systems, to provide
not only improved voice connectivity but also Internet, video and data
transmission.
Wireless communication networks consist of numerous installations located
throughout a service area, each with its own base station connected by wire or
microwave radio through a network switch. Network operators are in the process
of converting older networks from analog to digital technology in order to
expand network coverage, increase capacity and improve transmission quality.
This upgrade requires precise frequency control at the base stations to achieve
a higher degree of services.
With increased demand for wireless services on limited bandwidth, the
requirement for precise timing becomes paramount. The Company manufactures a
Rubidium Atomic Standard, a small, low cost, stable atomic "clock" as well as
temperature stable quartz crystal oscillators, which are ideally suited for use
in advanced cellular communications base stations. Whether the network uses CDMA
(Code Division Multiple Access), TDMA (Time Division Multiple Access) or GSM
(Global System for Mobile Communications) or a hybrid, such as EDGE, timing to
ensure signal synchronization, is of the essence.
4
Terrestrial-Optical Networks
The Company has developed products that will enable greater utilization of
the available spectrum in Fiber Optic systems. High-speed modems which convert
electronic signals to light and back again require highly sophisticated signal
synchronization. The Company provided prototypes and limited production models
for such systems in calendar 2001. These products represent a new application of
the Company's core technology. Since the products are just one of several
competing technologies of a nascent industry, the ultimate market size cannot be
determined at this time.
Space-based
The commercial use of satellites launched for communications, navigation,
weather forecasting, video and data transmissions has increased the need to
transmit information to earth-based receivers. This requires precise timing and
frequency control at the satellite. The Company manufactures the master clocks
(quartz, rubidium and cesium) and other significant timing products for many
satellite communication systems. The Company's space hybrid assemblies are used
onboard spacecraft for command, control and power distribution. Efficient and
reliable DC-DC power converters are also manufactured for the Company's own
instruments and as stand-alone products for space applications. The Company's
subminiature oven-controlled quartz crystal oscillator is a low cost, small
size, precision crystal oscillator suited for high-end performance required in
satellite transmissions, airborne telephony and geophysical survey positioning
systems. Commercial satellite programs such as Globalstar, Eutelsat, Inmarsat
and Worldstar have utilized the Company's space-qualified products.
Gillam-FEI segment:
The acquisition of Gillam-FEI in September 2000 extended the Company's
competencies into wire-line synchronization, network monitoring, specialized
test equipment, and power supply products. With the advent of new digital
broadband transmission technologies, reliable synchronization has become the
warranty to quality of service for telecom operators. Gillam-FEI is among the
world leaders in the field of wireline synchronization, and its products are
targeted for telecommunication operators and network equipment manufacturers
that utilize modular and flexible platforms to build reliable
digital-network-systems worldwide. Telecommunications operators such as
Belgacom, France Telecom, Telefonica and other service providers are among
Gillam-FEI's major customers.
Network monitoring systems marketed under the brand name LYNX, are a
flexible suite of complementary software modules that are arranged to satisfy
the specific needs of telecom operators, electrical utilities, and other
operators of distribution networks. The multi-task capability of the LYNX system
allows operators to supervise and manage the distribution of electricity, gas,
video cables, public lighting, and other networks. Deregulation of utilities,
especially in Europe, has created a greater demand for the LYNX product. Major
customers presently using LYNX include SIG Electrical Services of Geneva,
Switzerland; Electricity Distribution Management for the city of Lausanne,
Switzerland; UEM Electricity Distribution Management for the city of Metz,
France; Brussels International Airport and Belgian Railways.
Specialized test equipment and power supply products are mainly targeted
for the telecommunications industry.
U.S. Government segment:
The Company's sales in the U.S. Government segment are made under fixed
price contracts either directly with U.S. Government agencies or indirectly
through subcontracts intended for government end-use. The price paid to the
Company is not subject to adjustment by reason of the costs incurred by the
Company in the performance of the contract, except for costs incurred due to
contract changes ordered by the customer. These contracts are on a negotiated
basis under which the Company bears the risk of cost overruns and derives the
benefit from cost savings.
Negotiations on U.S. Government contracts are sometimes based in part on
Certificates of Current Costs. An inaccuracy in such certificates may entitle
the government to an appropriate recovery. From time to time, the Defense
Contracts Audit Agency ("DCAA") of the Department of Defense audits the
Company's accounts with respect to these contracts. The Company is not aware of
any basis for recovery with respect to past certificates.
All government end-use contracts are subject to termination by the
purchaser for the convenience of the U.S. Government and are subject to various
other provisions for the protection of the U.S.
5
Government. In the event of such termination, the Company is entitled to receive
compensation as provided under such contracts and in the applicable U.S.
Government regulations.
The Company's proprietary products have been used in guidance, navigation,
communications, radar, sonar surveillance and electronic countermeasure and
timing systems. Products are built in accordance with Department of Defense
standards and are in use on many of the United States' most sophisticated
military aircraft, satellites and missiles. The Global Positioning Satellite
System, as well as the MILSTAR Satellite System, are two examples of the
programs in which the Company participates. The Company has manufactured the
master clock for the Trident missile, the basic timing system for the Voyager I
and Voyager II deep space exploratory missions and the quartz timing system for
the Space Shuttle. The Company's cesium beam atomic clock is presently employed
in low frequency secure communications, surveillance and positioning systems for
the United States Air Force, Navy and Army.
PRODUCTS
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The Company's products are manufactured from raw material which, when
combined with conventional electronic parts available from multiple sources,
become finished products used for commercial wireless and wireline
communications, satellite applications, space exploration, position location,
radar, sonar and electronic counter-measures. These products are employed in
ground-based earth stations, fixed, transportable, portable and mobile
communications installations, domestic and international satellites, as well as
aircraft, ships, submarines and missiles. The Company's products are marketed as
components, instruments, or complete systems. Prices are determined based upon
the complexity, design requirement, purchased quantity and delivery schedule.
Components - The Company's key technologies utilize quartz, rubidium and
cesium to manufacture precision time and frequency standards and higher level
assemblies which allow the users to generate, transmit, and receive synchronous
signals in order to communicate effectively, locate their position, secure a
communications system, or guide a missile. The components class of the Company's
products includes crystal filters and discriminators, surface acoustic wave
resonators, and high-reliability thick and thin film hybrid assemblies for space
and other applications.
Precision quartz oscillators use quartz resonators in conjunction with
electronic circuitry to produce signals with accurate and stable frequency. The
Company's products include several types of quartz oscillators, suited to a wide
range of applications, including ultrastable units for satellite systems, and
fast warm-up, low power consumption units for mobile applications, including
wideband-CDMA voice and data communications.
The ovenized quartz oscillator is the most accurate type, wherein the
oscillator crystal is enclosed in a temperature controlled environment called a
proportional oven. The Company manufactures several varieties of temperature
controlling devices and ovens.
The voltage-controlled quartz oscillator is an electronically controlled
device wherein the frequency may be stabilized or modulated, depending upon the
application.
The temperature compensated quartz oscillator is electronically controlled
using a temperature sensitive device to directly compensate for the effect of
temperature on the oscillator's frequency.
The rubidium lamp, filter and resonance cell provide the optical
subassembly for the manufacture of the Company's optically pumped atomic
rubidium frequency standards. The cesium tube resonator is used in the
manufacture of the Company's cesium primary standard atomic clocks.
High reliability, MIL-M-38510 Class S and B, hybrid assemblies are
manufactured in thick and thin film technologies for applications from DC to 44
GHz. These are used in manufacturing the Company's products and also supplied
directly to customers, for space and other high reliability systems.
Efficient and reliable DC-DC power converters are manufactured for the
Company's own instruments and as stand alone products, for space applications.
The Company manufactures filters and discriminators using its crystal
resonators for its own radio-frequency and microwave receiver, signal
conditioner and signal processor products.
6
Instruments - The Company's instrument line consists of three basic time
and frequency generating instruments and a number of instruments which test and
distribute the time and frequency. The Company's time and frequency generating
instruments are the quartz frequency standard, rubidium atomic standard and
cesium beam atomic standard.
The quartz frequency standard is an electronically controlled solid-state
device which utilizes a quartz crystal oscillator to produce a highly stable
output signal at a standardized frequency. The Company's frequency standard is
used in communications, guidance and navigation and time synchronization. The
Company's products also include a precision frequency standard with battery
back-up and memory capability enabling it to remain in operation if a loss of
power has occurred.
The optically pumped atomic rubidium frequency standard is a solid-state
instrument which provides both timing and low phase noise frequency references
used in commercial communications systems. Rubidium oscillators combine
sophisticated glassware, light detection devices and electronics packages to
generate a highly stable frequency output. Rubidium, when energized by a
specific radio frequency, will absorb less light. The oscillator's electronics
package generates this specific frequency and the light detection device
ensures, through monitoring the decreased absorption of light by the rubidium
and the use of feedback control loops, that this specific frequency is
maintained. This highly stable frequency is then captured by the electronics
package and generated as an output signal. Rubidium oscillators provide atomic
oscillator stability, at lower costs and in smaller packages.
The cesium beam atomic standard utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency several orders of
magnitude more accurate and stable than other types of quartz frequency
generators. The Company's atomic standard is a compact, militarized solid-state
device which generates these precision frequencies for use with advanced
communications and navigation equipment. A digital time-of-day clock is
incorporated which provides visual universal time display and digital timing for
systems use. The atomic standard manufactured by the Company is a primary
standard, capable of producing time accuracies of better than one second in
seven hundred thousand years.
As the demands on communications systems increase, the requirement for
precise frequency signals to drive a multitude of electronic equipment is
greatly expanded. To meet this requirement, the Company manufactures a
distribution amplifier which is an electronically controlled solid-state device
that receives a base frequency from a frequency standard and provides multiple
signal outputs of the input frequency. A distribution amplifier enables many
items of electronic equipment in a single facility, aircraft or ship to receive
a standardized frequency and/or time signal from a quartz, rubidium or cesium
atomic standard.
Systems - The systems portion of the Company's business includes
manufacturing and integrating selections of its specialized components into
higher level subsystems and systems that meet customer-defined needs. The
Company has a unique knowledge of interfacing these technologies and experience
in applying them to a wide range of systems. The systems generate electronic
frequencies of predetermined value and then divide, multiply, mix, convert,
modulate, demodulate, filter, distribute, combine, separate, switch, measure,
analyze, and/or compare these signals depending on the system application.
This portion of the Company's business includes a complete line of time
and frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. Time and frequency
control systems combine the Company's cesium, rubidium and/or crystal
instruments with its other components, to provide systems for wireless,
wireline, space and defense applications.
For the wireless industry, the Company integrates its core components such
as quartz oscillators and rubidium atomic standards with software applications,
microprocessors, and other digital circuitry into complete subsystems. These
subsystems supply frequency and time reference signals that facilitate wireless
communications and are necessary for the various wireless technologies to
operate properly. The customers for these subsystems are global wireless
infrastructure manufacturers.
For the wireline industry, the Company integrates its core components with
other electronic modules into high-level platforms that provide a total
synchronization solution. These signal synchronization units or "SSUs," are
primarily designed and manufactured by Gillam-FEI. SSUs are inserted into
digital telecommunication networks and provide reliable synchronization for
proper operation of the network.
7
The systems are primarily sold to telecommunication operators and vary from a
few SSUs for a simple network to hundreds of units for complex networks. For
operators of distribution networks such as electrical utilities and
telecommunications operators, the Company offers the LYNX system--a flexible
suite of complementary software modules that are distinctively combined to
satisfy the requirements of the users. With the advent of digital broadband
transmission technologies, reliable synchronization has become the Quality of
Service for telecommunications operators world-wide.
For the space and defense sectors the Company combines its core products
in a wide range of diverse applications that provide systems for space and
ground based communications, space exploration, satellite tracking stations,
satellite-based navigation and position location, secure communication,
submarine and ship navigation, calibration, and electronic counter-measures
applications. These time and frequency control systems can provide up to
quadruple redundancy to assure operational longevity and dependability.
The Company's new subsidiary, FEI-Zyfer, manufactures products
incorporating GPS technology by utilizing GPS signals to derive time and
frequency information. These systems and subsystems are used in Enhanced
wireless 911 (E911), secure government and commercial communications and other
applications.
BACKLOG
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As of April 30, 2003, the Company's consolidated backlog amounted to
approximately $31 million (see Item 7). Approximately 60% of this backlog is
expected to be filled during the Company's fiscal year ending April 30, 2004.
The backlog, which reflects only firm purchase orders and contracts, is subject
to change by reason of several factors including possible cancellation of
orders, change orders, terms of the contracts and other factors beyond the
Company's control. Accordingly, the backlog is not necessarily indicative of the
revenues or profits (losses) which may be realized when the results of such
contracts are reported.
CUSTOMERS AND SUPPLIERS
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The Company markets its products both directly and through 27 independent
sales representative organizations located principally in the United States and
Europe. Sales to non-U.S. customers, including all of the sales of Gillam-FEI,
totaled approximately 38%, 42% and 29% of net sales in fiscal years 2003, 2002
and 2001, respectively.
The Company's products are sold to a variety of customers, both commercial
and governmental. For the years ended April 30, 2003, 2002 and 2001,
approximately 28%, 11% and 7%, respectively, of the Company's sales were made
under contracts to the U.S. Government or subcontracts for U.S. Government
end-use.
The Company's consolidated sales for each of the years ended April 30,
2003, 2002 and 2001 included sales to Motorola Corp. ("Motorola") of
approximately $10.0 million, $15.5 million and $17.7 million, respectively.
These amounts represent 32%, 38% and 36%, respectively, of consolidated sales
for each of those years. Northrop Grumman Corporation ("Northrop") accounted for
$3.5 million of revenues in fiscal 2003 or 11% of consolidated sales. For the
year ended April 30, 2001, sales to Space Systems Loral ("SSL") were $5.2
million or 11% of the Company's consolidated sales. During the three years ended
April 30, 2003, sales to Motorola and SSL were made by the Company's Commercial
Communications segment, accounting for 66% in fiscal 2003, 65% in fiscal 2002
and 63% in fiscal 2001 of that segment's total sales. During fiscal 2003 and
2002, France Telecom and Belgacom were major customers of the Gillam-FEI
segment. France Telecom accounted for 13% and 18%, respectively, and Belgacom
accounted for 10% and 12%, respectively, of the segment's revenues in those
fiscal years. In fiscal 2001, Itissalat al Maghrib and France Telecom accounted
for 29% and 11%, respectively, of Gillam-FEI's revenues. Fiscal 2003 revenues in
the U.S. Government segment included sales to three customers, Northrop,
Raytheon Missile Systems, Inc. ("Raytheon") and BAE Systems Aerospace, Inc.
("BAE"), accounting for 40%, 22% and 14%, respectively of total segment sales.
In fiscal 2002, Boeing Satellite Systems, Inc. ("Boeing"), Raytheon and BAE
accounted for 32%, 26% and 19%, respectively, of total segment revenues. In
fiscal 2001, two customers, Raytheon and Boeing, accounted for 68% of U.S.
8
Government revenues. The loss by the Company of any one of these customers would
have a material adverse effect on the Company's business. The Company believes
its relationship with these companies to be mutually satisfactory and is not
aware of any prospect for the cancellation or significant reduction of any of
its commercial or existing U.S. Government contracts.
The Company purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Company is not dependent upon any one supplier or source of supply
for any of its component part purchases and maintains alternative sources of
supply for all of its purchased components. The Company has found its suppliers
generally to be reliable and price-competitive.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's technological expertise continues to be an important factor
to support future growth in revenues and earnings. The Company has focused its
internal research and development efforts on improving the core physics and
electronic packages in its time and frequency products; conducting research to
develop new time and frequency technologies; improving product manufacturability
by seeking to reduce its production costs through product redesign and process
improvements and other measures to take advantage of lower cost components.
The Company continues to focus a significant portion of its own resources
and efforts on developing hardware for satellite and terrestrial commercial
communications systems, including wireless, wireline and fiber optic systems.
During fiscal years 2003, 2002 and 2001, the Company expended $4.6 million, $6.6
million and $4.8 million of its own funds, respectively, on such research and
development activity. (See also Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.) For fiscal year 2004, the
Company is targeting to spend from $3.5 million to $5.0 million on research and
development in similar areas but will spend more or less as market conditions
and opportunities warrant.
PATENTS AND LICENSES
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The Company believes that for the most part, its business is not dependent
on patent or license protection. Rather, it is primarily dependent upon the
Company's technical competence, the quality of its products and its prompt and
responsible contract performance. However, the rights to inventions of employees
working for the Company are assigned to the Company and the Company presently
holds such patents and licenses. In certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses the government has funded. During fiscal 2003, the Company
received a broad and significant patent for new, proprietary quartz oscillator
technology which the Company will exploit in both legacy and new applications.
COMPETITION
- -----------
The Company experiences competition in all areas of its business. The
Company competes primarily on the basis of the accuracy, performance and
reliability of its products; the ability of its products to function under
severe conditions, such as in space or other extreme hostile environments;
prompt and responsive contract performance; technical competence and price. The
Company has a unique and broad product line which includes all three frequency
standards - quartz, rubidium, and cesium. Because of the very high precision of
certain of its components, the Company has few competitors. For lower precision
components there is significant competition from a number of suppliers.
In recent years, the Company has successfully outsourced certain component
manufacturing processes to third parties and more recently to its wholly-owned
subsidiary, FEI-Asia in Tianjin, China and to Russian-based Morion, Inc., in
which the Company is a minority shareholder. The Company expects this
outsourcing to enhance its competitive position on cost while maintaining its
high quality standards. The Company believes its ability to obtain raw
materials, manufacture finished products, integrate them into systems and
sub-systems, and interface these systems with end-user applications provides a
strong competitive advantage.
9
Certain of the Company's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs.
With respect to its instruments and systems, the Company competes with
Hewlett-Packard Company, Symmetricom, Inc, E. G. and G., Inc. and others.
Systems for the wireline industry produced by the Gillam-FEI segment compete
with Symmetricom, Inc. which recently merged with another competitor. The
Company's principal competition for space products is the in-house capability of
its major customers.
EMPLOYEES
- ---------
The Company employs approximately 340 persons worldwide. None of the U.S.
employees are represented by labor unions while in Europe, approximately 20
employees in one facility are represented by a French labor union.
OTHER ASPECTS
- -------------
The Company's business is not seasonal although it expects to experience
some fluctuation in revenues during the second fiscal quarter as a result of
extended holiday periods in August. No unusual working capital requirements
exist.
Item 2. Properties
- -------------------
The Company operates out of several facilities located around the world.
Each facility is used for manufacturing its products and for administrative
activities. The following table presents the location, size and terms of
ownership/occupation:
Location Size (sq. ft.) Own or Lease
-------- -------------- ------------
Long Island, NY 93,000 Lease
Liege, Belgium 34,000 Own
Chalon Sur Saone, France 37,000 Own
Tianjin, China 6,000 Lease
The Company's facility located in Mitchel Field, Long Island, New York, is
part of the building that the Company constructed in 1981 and expanded in 1988
on land leased from Nassau County. In January 1998, the Company sold this
building and the related land lease to Reckson Associates Realty Corp.
("Reckson"), leasing back the space that it presently occupies.
The Company leases its manufacturing and office space from Reckson under
an 11-year lease at an annual rental of $400,000 per year with the Company
paying its pro rata share of real estate taxes along with the costs of utilities
and insurance. The lease provides for two 5-year renewal periods, exercisable at
the option of the Company, with annual rentals of $600,000 during the first
renewal period and $800,000 during the second renewal period. Under the terms of
the lease, new office and engineering facilities for the Company were
constructed at the cost of Reckson. The leased space is adequate to meet the
Company's domestic operational needs.
The sale of its building to Reckson, a real estate investment trust
("REIT") whose shares are traded on the New York Stock Exchange, was effected
through a tax-deferred exchange of the building for approximately 486,000
participation units of Reckson Operating Partnership, L.P. ("REIT units") which
were valued at closing at $12 million. Each REIT unit is convertible into one
share of the common stock of the REIT. In addition, approximately 27,000 REIT
units have been placed in escrow which may be released to the Company based upon
the price per share of the REIT on the date of conversion of REIT units. Under
the accounting provisions for sale and leaseback transactions, the sale of this
building is considered a financing and the REIT units received are reflected as
a noncurrent liability while the related building continues to be reflected as
an asset. Upon liquidation of the REIT units, a portion of the resulting gain on
this sale will be deferred and recognized into income over the term of the
leaseback with
10
the balance recognized in income on the date of liquidation. (See Note 6 to the
accompanying financial statements.)
The properties located in Belgium and France were acquired upon completion
of the Gillam S.A. acquisition. These facilities are adequate to meet the
present and future operational requirements of Gillam-FEI. During the year ended
April 30, 2003, the Company sold a portion of the building owned by its
subsidiary in France, receiving proceeds of $275,000 and realizing a gain of
$152,000 which amount is included in other income and expense.
The Tianjin, China facility is the location of the Company's newly
established subsidiary, FEI-Asia. Space has been leased within a manufacturing
facility located in the Trade-Free Zone. The lease is renewable annually with
rent of $9,850 payable quarterly. The amount of space is adequate for the
near-term manufacturing expectations for the Company.
Item 3. Legal Proceedings
- --------------------------
A judgment in favor of the Company, dated September 3, 2002, was entered
by the United States District Court for the Eastern District of New York in
connection with its dismissal of a qui tam action which was brought in March
1994 by Ralph Muller, a former FEI employee. A qui tam action is an action
wherein an individual may, under certain circumstances, bring a legal action
against one or more third persons on behalf of the Government for damages and
other relief by reason of one or more alleged wrongs perpetrated against the
Government by such third persons. The judgment is based on the Court's decision
on the merits in favor of Frequency Electronics, Inc. and its CEO, Martin B.
Bloch, dated August 23, 2002. The judgment preserves all of FEI's rights to
recover costs and its causes of action against the plaintiff and third party
defendants. (For a more complete description of the litigation brought against
the Company and the related settlement actions, see Item 3. Legal Proceedings in
the Company's Annual Report on Form 10-K for the year ended April 30, 2001, a
copy of which is on file with the Securities and Exchange Commission.)
Directors' and Officers' Insurance Coverage
-------------------------------------------
On April 30, 2002, FEI settled the arbitration proceeding it had commenced
in June 2001 before the American Arbitration Association against The Home
Insurance Company ("Home") under a $2.0 million excess directors and officers
liability insurance policy. FEI had asserted claims for its loss relating to,
among other matters, sums it paid in connection with the Settlement Agreement
and Global Disposition with the Government on June 19, 1998. (For a description
of these litigations, the Settlement Agreement and Global Disposition, refer to
Item 3 of the Registrant's Annual Report on Form 10-K for the year ended April
30, 1998, a copy of which is on file with the Securities and Exchange
Commission.) Under the terms of the settlement agreement, Home paid FEI $1.5
million, FEI released its claims and the arbitration was discontinued.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were required to be submitted by Registrant to a vote of
security holders during the fourth quarter of fiscal 2003.
11
PART II
-------
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Common Stock of the Company is listed on the American Stock Exchange
under the symbol "FEI". The following table shows the high and low sale price
for the Company's Common Stock for the quarters indicated, as reported by the
American Stock Exchange.
FISCAL QUARTER HIGH SALE LOW SALE
-------------- --------- --------
2003 -
FIRST QUARTER $13.04 $ 5.62
SECOND QUARTER 8.00 5.00
THIRD QUARTER 11.50 7.34
FOURTH QUARTER 10.25 8.16
2002 -
FIRST QUARTER $19.20 $12.90
SECOND QUARTER 17.90 9.00
THIRD QUARTER 15.40 11.10
FOURTH QUARTER 14.00 11.10
As of July 22, 2003, the approximate number of holders of record of common
stock was 600. The closing share price of the Company's stock on July 22, 2003
was $9.85.
DIVIDEND POLICY
- ---------------
On March 24, 1997, the Company announced a policy of distributing a cash
dividend to shareholders of record on April 30 and October 31, payable on June 1
and December 1, respectively. The Board of Directors will determine dividend
amounts prior to each declaration based on the Company's financial condition and
financial performance.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------
Number of Securities
Remaining available for
Number of Securities to Weighted-Average Future Issuance under
be Issued upon exercise Exercise Price of Equity Compensation Plans
of Outstanding Options Outstanding Options (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a))
- --------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity Compensation Plans
Approved by Security Holders 343,750 $ 7.76 297,750
Equity Compensation Plans Not
Approved by Security Holders 824,162 $12.52 298,000
12
Item 6. Selected Financial Data
The following table sets forth selected financial data including net sales
and operating profit (loss) for the five-year period ended April 30, 2003. The
information has been derived from the audited financial statements of the
Company for the respective periods.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Years Ended April 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Commercial Communications $15,051 $26,663 $36,290 $22,554 $14,547
U.S. Government 8,906 4,513 3,727 3,981 4,411
Gillam-FEI 8,137 11,223 9,276 - -
less intersegment sales (567) (1,220) (83) - -
-------- ------- ------- ------- -------
Total Net Sales $31,527 $41,179 $49,210 $26,535 $18,958
========= ======= ======= ======= =======
Operating Profit (Loss) ($12,490)(1) $ 89(2) $ 5,939(4) $ 1,008 $ (701)(6)
========= ======= ======= ======= =======
Net (Loss) Income ($ 8,860) $ 1,378(3) $ 5,644(5) $ 3,144 $ 1,173
========= ======= ======= ======= =======
Average Common Shares Outstanding
Basic 8,331,785 8,350,735 8,198,569 7,673,497 7,502,260
Diluted 8,331,785 8,529,175 8,431,823 8,043,727 7,820,742
Earnings per Common Share
Basic ($ 1.06) $ 0.17 $ 0.69 $ 0.41 $ 0.16
========= ======= ======= ======= =======
Diluted ($ 1.06) $ 0.16 $0.67 $ 0.39 $ 0.15
========= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA
Total Assets $85,729 $96,011 $102,039 $80,847 $78,355
========= ======= ======= ======= =======
Long-Term Obligations
and Deferred Items $17,903 $17,796 $18,074 $16,849 $16,959
========= ======= ======= ======= =======
Cash dividend declared
per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
========= ======= ======= ======= =======
(1) Includes writedown of Goodwill of $6.2 million and adjustments to
inventory of $3.6 million.
(2) Includes insurance reimbursement of $1.5 million for expenses
related to certain litigation with the U.S. Government less
inventory reserves and writeoffs aggregating $1.0 million.
(3) In addition to items in (2) above, includes $300,000 investment loss
for an other than temporary decline of value in a marketable
security.
(4) Includes insurance reimbursement of $2.8 million (net of
professional fees) for expenses related to certain litigation with
the U.S. Government, inventory reserves of $2.0 million related to
certain product lines and $300,000 of acquisition-related
nonrecurring costs.
(5) In addition to items in (4) above, includes $287,000 investment loss
for an other than temporary decline of value in a marketable
security.
(6) Includes insurance reimbursement of $4.5 million for legal fees
related to certain litigation with the U.S. Government.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 1 to
the consolidated financial statements. The Company believes its most critical
accounting policies to be the recognition of revenue and costs on production
contracts and the valuation of inventory. Each of these areas requires the
Company to make use of reasoned estimates including estimating the cost to
complete a contract, the realizable value of its inventory or the market value
of its products. Changes in estimates can have a material impact on the
Company's financial position and results of operations.
Revenue Recognition
-------------------
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred. Each month management reviews
estimated contract costs. The effect of any change in the estimated gross margin
percentage for a contract is reflected in revenues in the period in which the
change is known. Provisions for anticipated losses on contracts are made in the
period in which they become determinable.
On production-type contracts, revenue is recorded as units are delivered
with the related cost of sales recognized on each shipment based upon a
percentage of estimated final contract costs. Changes in job performance may
result in revisions to costs and income and are recognized in the period in
which revisions are determined to be required. Provisions for anticipated losses
on contracts are made in the period in which they become determinable.
For contracts in the Company's Gillam-FEI segment, and smaller contracts
or orders in the other business segments, sales of products and services to
customers are reported in operating results based upon shipment of the product
or performance of the services pursuant to contractual terms. When payment is
contingent upon customer acceptance of the installed system, revenue is deferred
until such acceptance is received.
Costs and Expenses
------------------
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
Inventory
---------
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year. Inventory reserves are established
for slow-moving and obsolete items and are based upon management's experience
and expectations for future business. Any changes in reserves arising from
revised expectations are reflected in cost of sales in the period the revision
is made.
Equity-based Compensation
-------------------------
The Company applies the disclosure-only provisions of FAS No. 123,
"Accounting for Stock-Based Compensation," and continues to measure compensation
cost in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Historically, this has not resulted in
compensation cost upon the grant of options under a qualified stock option plan.
However, in accordance with FAS No. 123, the Company provides pro forma
disclosures of net earnings (loss) and earnings (loss) per share as if the fair
value method had been applied beginning in fiscal 1996.
14
The following table illustrates the effect on the Company's consolidated
statements of operations had compensation cost for stock option awards under the
plans been determined based on the fair value at the grant dates consistent with
the provisions of FAS No. 123:
(in thousands, except per share data)
2003 2002 2001
---- ---- ----
Net (Loss) Income, as reported ($8,860) $1,378 $5,644
======== ====== ======
Net (Loss) Income - pro forma ($9,574) $474 $5,233
======== ====== ======
(Loss) Earnings per share, as reported:
Basic ($ 1.06) $0.17 $ 0.69
======== ====== ======
Diluted ($ 1.06) $0.16 $ 0.67
======== ====== ======
(Loss) Earnings per share- pro forma
Basic ($ 1.15) $0.06 $ 0.64
======== ====== ======
Diluted ($ 1.15) $0.06 $ 0.62
======== ====== ======
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in 2003, 2002 and 2001,
respectively, dividend yield of 1.83%, 1.83% and 3.0%; expected volatility of
63%, 65%, and 70%; risk free interest rate (ranging from 5.5% to 8.0%); and
expected lives ranging from seven to ten years.
RESULTS OF OPERATIONS
- ---------------------
The table below sets forth for the fiscal years ended April 30 the
percentage of consolidated net sales represented by certain items in the
Company's consolidated statements of operations:
2003 2002 2001
Net Sales ---- ---- ----
Commercial Communications 46.9% 63.4% 73.6%
U.S. Government 28.3 11.0 7.6
Gillam-FEI 24.8 25.6 18.8
----- ----- -----
100.0 100.0 100.0
Cost of Sales 81.5 65.8 65.4
----- ----- -----
Gross Margin 18.5 34.2 34.6
Selling and Administrative expenses 24.0 21.7 17.9
Goodwill writedown 19.5 - -
Insurance Reimbursement, net - (3.6) (5.2)
Research and Development expenses 14.6 15.9 9.8
----- ----- -----
Operating (Loss) Profit (39.6) 0.2 12.1
Other Income (Expense) 5.8 3.9 4.7
(Benefit) Provision for Income Taxes (5.6) 0.8 5.3
----- ----- -----
Net (Loss) Income (28.2%) 3.3% 11.5%
===== ===== =====
Significant Events
------------------
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal 2003, 2002 and 2001 results of
operations were materially impacted by several specific events. In fiscal 2003,
the Company determined that the goodwill associated with its investment in
Gillam-FEI had become impaired and wrote off the full amount of goodwill in the
amount of $6.2 million. In fiscal 2002 and 2001, the Company recovered $1.5
million and $2.8 million (net of $200,000 in expenses in 2001), respectively,
from two insurance companies related to expenses incurred
15
in defense and settlement of the Company's litigation with the U.S. Government.
(See Item 3. Legal Proceedings and Note 9 to the financial statements.) In
October 2000, the Company also settled a derivative suit stemming from its U.S.
Government litigation and paid approximately $224,000 in attorneys' fees and
expenses.
Without these significant events, the Company's operating (loss) profit,
pre-tax earnings and net earnings would be materially different from that
reported in the financial statements. The table below illustrates the impact of
the special income and expense items on the results of operations for each of
the three years ended April 30:
2003 2002 2001
---- ---- ----
Operating (loss) profit - as reported ($12,490) $ 89 $ 5,939
Add back:
Goodwill impairment charge/amortization 6,158 - 193
Less:
Insurance reimbursement, net - (1,500) (2,576)
--------- --------- --------
Operating (loss) profit, excluding special items $(6,332) $ (1,411) $ 3,556
========= ========= ========
Operating (Loss) Profit
-----------------------
The operating (loss) profit for the year ended April 30, 2003, decreased
by $12.5 million from the operating profit reported in the prior fiscal year. In
addition to the special items listed above, the Company wrote-off or reserved
against certain work-in-process and component inventory in the amount of $3.6
million in fiscal 2003 and $1.0 million in fiscal 2002. Excluding the special
items identified above and the inventory adjustments in both fiscal years, the
operating loss in fiscal 2003 increased by $2.3 million compared to the
operating loss for fiscal 2002. Revenues declined by 23% while gross margins,
exclusive of inventory adjustments, decreased to 30% of revenue from 37% a year
ago. These results reflect the continuing low level of telecommunication-related
business. Although the Company has reduced costs in all categories, it has
maintained its core operational capabilities while continuing to invest in new
products, efficient manufacturing processes and development of non-US
manufacturing capacity.
During fiscal 2002, the operating profit decreased by $5.8 million from
the operating profit recorded for the year ended April 30, 2001. In each year,
the Company wrote-off or reserved against certain work-in-process and component
inventory in the amount of $1.0 million in fiscal 2002 and $2.0 million in
fiscal 2001. Excluding the inventory adjustments and special items as described
in the table above, the operating loss was $6.3 million lower than the operating
profit recorded in fiscal 2001. Revenues declined by 16% and gross margins,
exclusive of inventory adjustments, were lower, reflective of the more
challenging market faced by the Company beginning in fiscal 2002. Despite the
near-term slowdown in the telecommunications industry, the Company believed it
was critical to its future success to continue making strategic investments.
Funds were provided to the manufacturing facility in China to qualify it for
expected new business opportunities in Asia, the costs of which are included in
selling and administrative expenses. In addition, the Company developed new
products, including Gillam-FEI's wireline synchronization product for the US
market, and improved product designs and manufacturing processes, many of which
were not completed until fiscal 2003.
Net Sales
---------
Net sales for fiscal 2003 decreased by $9.7 million (23%) from fiscal 2002
sales. The principal cause for the decline is attributable to the world-wide
slowdown in capital spending in the telecommunications industry which the
Company serves. Revenues for the Commercial Communications segment decreased by
$11.6 million (44%) and Gillam-FEI revenues decreased by $3.1 million (28%).
Offsetting these declines, revenues for the US Government segment almost doubled
from the fiscal 2002 levels, to $8.9 million, as the Company responded to the US
Government's need for more sophisticated secure communications and weaponry.
Fiscal 2002 revenues decreased by $8.0 million (16%) over fiscal 2001
sales. The decline in telecommunication spending began during fiscal 2002.
Revenues for the Commercial Communications segment declined by $9.6 million
(27%), while revenues increased by 21% for both the U.S. Government
16
($786,000) and Gillam-FEI ($1.9 million) over fiscal 2001. (Gillam-FEI's fiscal
2001 revenues are from the date of acquisition by the Company.)
Given the uncertainties in telecommunications markets, the Company is
unable to make any assessment for near-term future sales in the Commercial
Communications or Gillam-FEI segments of its business. The Company anticipates
revenues for its U.S. Government segment will continue to increase as more
funding is provided by the government for such projects as secure radios, new
communication satellites, unmanned aerial vehicles and weapons guidance systems.
Over the long-term, the Company continues to believe that the telecommunications
markets, including cellular network infrastructure and wireline synchronization
world-wide, will be important growth areas of its business.
Gross Margins
-------------
The gross margin rate for fiscal year 2003 decreased to 19% of net sales
compared to 34% in fiscal 2002 and 35% in fiscal 2001. Excluding the inventory
adjustments described above, gross margin rates as a percentage of sales in each
fiscal year would have been 30%, 37% and 39%, respectively. Decreasing sales
account for much of the decline as a lower level of sales absorbed a greater
percentage of fixed overhead costs. In addition, in fiscal 2003 gross margin
rates were reduced by approximately 3% as the Company experienced a high level
of warranty expenses.
In addition to lower sales in fiscal 2002, a greater percentage of
consolidated sales (27%) were made from the Gillam-FEI segment than in fiscal
2001 (19%). Costs in this segment are generally higher than in the U.S.
segments. In both fiscal 2003 and 2002, Gillam-FEI gross margin rates were 30%
compared to 15% in fiscal 2001.
The Company's target is to achieve an overall gross margin rate of 40% or
better through greater sales volume, continued process improvements and
utilization of lower cost manufacturers in Russia and China.
Selling and Administrative expenses
-----------------------------------
Selling and administrative costs in fiscal 2003 decreased by $1.4 million
(15%) from fiscal 2002 as the Company responded to the lower level of business
volume. During the year, Gillam-FEI lowered its administrative support costs by
18% in euros but the savings were reduced to $175,000 (7%) when translated to US
dollars due to the 13% increase in the value of the Euro to the US dollar during
fiscal 2003. Costs associated with the establishment of the Company's FEI-Asia
facility were halved (approximately $250,000 lower) as less time was required by
US-based personnel to support that operation and more costs were borne in the
China facility where operating expenses are much lower than in the US.
Offsetting those cost reductions was an increase in the costs to support the new
European sales office. In the US subsidiaries, cost savings in fiscal 2003 of
$1.1 million were related to personnel reductions, lower charges to deferred
compensation expense, reduced sales commissions and reduction in legal and other
professional fees.
Selling and administrative costs for the year ended April 30, 2002,
increased by $112,000 or 1% over fiscal 2001. As a percentage of sales, these
costs increased from 18% in fiscal 2001 to 22% in fiscal 2002. (The Company
targets selling and administrative expenses to be less than 20% of sales.) The
2002 amounts include approximately $500,000 attributable to start-up operating
costs of the Company's new China manufacturing facility. Excluding this expense,
selling and administrative costs would have been 20% of sales. For fiscal 2002,
significant increases in selling and administrative expenses aggregating $1.4
million over the prior year, resulted from a full year of expenses for
Gillam-FEI compared to the partial year in fiscal 2001 and an increase in the
accrual for certain long-term compensation programs as a result of benefit
adjustments authorized during fiscal 2002. These increases were offset by
substantial cost reductions aggregating $1.7 million related to lower incentive
compensation accruals due to reduced profitability in fiscal 2002, lower
employee recruitment expenses, reduced travel-related costs, elimination of
amortization of goodwill and a decrease in amortization expense related to
independent contractor stock options awarded in prior years.
Research and Development expenses
---------------------------------
Research and development expenses in fiscal 2003 were $2.0 million lower
(30%) than fiscal 2002 spending and were approximately 15% of revenues. During
fiscal 2003, the Company completed
17
development of certain manufacturing process improvements and new product
designs. Related personnel and other resources were refocused on production
activities as development projects were concluded. Other research and
development activities are on-going and involve further product and process
improvements, development of a common platform for time and frequency generators
which will enable the interchange of a crystal or rubidium oscillator, and to
maintain the Company's competitive position in the markets it serves.
Research and development expenditures for the year ended April 30, 2002,
increased by $1.7 million or 36% over the amounts incurred in fiscal 2001 and
were approximately 16% of sales. Of this amount, approximately $1.0 million was
incurred to develop wireline synchronization products for the U.S. market. Other
development efforts were focused on manufacturing process improvements,
completion of a high precision quartz oscillator as well as next-generation
products for cellular network infrastructure markets.
The Company will continue to focus its research and development activities
on those products which it expects will provide the best return on investment
and greatest prospects for the future growth of the Company. For fiscal year
2004, the Company will complete its initial development of the enhanced
Gillam-FEI wireline synchronization product and will make further investment in
new designs and manufacturing process improvements. The Company's target is to
spend approximately 10% of revenues on research and development activities,
although the actual level of spending is dependent on new opportunites and the
rate at which it succeeds in bringing new products to market. Internally
generated cash and cash reserves will be adequate to fund these development
efforts.
Other Income, net
-----------------
Other income, net, increased by $216,000 (13%) in fiscal 2003 compared to
fiscal 2002 and decreased by $718,000 (31%) in fiscal 2002 compared to fiscal
2001.
Investment income during the year ended April 30, 2003 decreased by
$34,000 compared to fiscal 2002 and fiscal 2002 was lower by $791,000 (30%)
compared to fiscal 2001. In all three years, the Company recorded realized gains
and losses on marketable securities. In fiscal 2003, realized losses on
marketable securities of $130,000 were partially offset by realized gains of
$90,000. Similarly, during fiscal 2002 the Company recorded a $300,000 writedown
to market value of a certain marketable security whose decline in value was
deemed to be other than temporary which loss was offset by realized gains on
sales of marketable securities of $172,000. This is compared to fiscal 2001 when
the Company had realized gains of $469,000 on the sale of marketable securities
less a $287,000 writedown to market value of a marketable security whose decline
in value was deemed to be other than temporary. Excluding these net gains and
losses, investment income in fiscal 2003 was $122,000 (6%) lower than fiscal
2002 and fiscal 2002 was lower by $480,000 (19%) than fiscal 2001. This decline
is attributable to a combination of lower interest rates and a decreased level
of invested assets as a result of the Gillam acquisition in the first half of
fiscal 2001. In addition to interest income, the Company also realizes quarterly
dividend income on its REIT units. The Company anticipates that investment
income in 2004 will decrease as a result of cash used to acquire and support
FEI-Zyfer (see Note 17 to the financial statements), and a lower interest rate
environment.
Interest expense for the year ended April 30, 2003 decreased by $19,000
(6%) compared to fiscal 2002 which decreased by $31,000 (9%) from fiscal 2001.
As the Company retires its short and long-term financing obligations, interest
expense will continue to decline. The Company incurs interest expense on
Gillam-FEI's credit obligations, the financing arrangement for the leaseback of
the U.S. manufacturing facility and for certain deferred compensation payments.
The Company anticipates that interest expense in fiscal 2004 will be
approximately the same as the expense for fiscal 2003.
During the year ended April 30, 2003, other income, net, increased by
$231,000 over the prior fiscal year. The largest component of this increase was
the realized gain of approximately $150,000 on the sale of a portion of real
property owned by the Company's French subsidiary. In fiscal 2002, other income,
net, increased by $42,000 over fiscal 2001. Gillam-FEI contributed $127,000 and
$76,000 of this growth in fiscal years 2002 and 2001, respectively. The Company
anticipates that in future years other income, net, will not be a significant
contributor to pretax earnings.
18
Income Taxes
------------
The Company is subject to taxation in several countries. The statutory
federal rates vary from 34% in the United States to 35% in Europe. The effective
rate for the Company for the year ended April 30, 2003 was 17% (benefit)
compared to 19% in fiscal 2002 and 31% in fiscal 2001. In fiscal 2003, the tax
benefit rate is impacted by the non-deductibility of the goodwill writedown. In
the two prior years, the effective rate is lower than the statutory rate
primarily due to the availability of Research and Development Tax Credits in the
United States. (See Note 13 to the Consolidated Financial Statements.)
The Company's European subsidiaries have available net operating loss
carryforwards of approximately $2.0 million to offset future taxable income.
These loss carryforwards have no expiration date.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $62.0 million at April 30, 2003. Included in working
capital at April 30, 2003 is $33.8 million consisting of cash, cash equivalents
and short-term investments, including approximately $9.7 million representing
the fair market value of REIT units which are convertible to Reckson Associates
Realty Corp. common stock. (See Note 6 to the financial statements.) The
Company's current ratio at April 30, 2003 is 11.5 to 1.
Net cash provided by operating activities for the year ended April 30,
2003, was $2.4 million compared to $4.9 million provided in fiscal 2002. The
Company recorded an $8.9 million net loss for fiscal 2003, which included
substantial non-cash charges, such as the writedown of goodwill for $6.2 million
and certain adjustments to inventory. Additionally, cash was provided by
collections on accounts receivable and reductions of inventory offset by
payments against accounts payable and other liabilities. Fiscal 2002 cash from
operations was partially derived from $4.5 million received during the year for
reimbursement of expenses under directors' and officers' liability insurance
coverage. (See Item 3. Legal Proceedings and Note 9 to the financial
statements.) This inflow was offset by payment of income taxes of $3.3 million,
of which approximately 45% was attributable to the insurance reimbursements.
Net cash provided by investing activities for the year ended April 30,
2003, was $506,000. Approximately $1.2 million was generated by the sale and
maturity of certain marketable securities, net of purchases. Approximately
$834,000 was used to acquire additional property, plant and equipment while
approximately $275,000 was received from the sale of a portion of real property
owned by the Company's French subsidiary. An additional $120,000 was recorded as
capitalized investment costs related to the Company's May 2003 acquisition of
FEI-Zyfer. (See Note 16 to the accompanying financial statements.) Investing
activities in fiscal 2002 resulted in cash inflow of $607,000 consisting of net
transactions in marketable securities of $2.5 million offset by capital
expenditures of $1.5 million and an investment in a Russian crystal manufacturer
of $300,000. In fiscal 2001, net cash used in investing activities was $5.0
million. The major transaction during fiscal 2001 was the acquisition of
Gillam-FEI for which the Company utilized cash of $8.9 million, including
transaction costs. This purchase was partially funded by the redemption of
certain marketable securities of approximately $6.2 million and was also offset
by the acquired cash of Gillam-FEI of $758,000. The Company acquired and sold
other marketable securities that resulted in a net outflow of cash in the amount
of $1.1 million. The Company may continue to invest cash equivalents in
longer-term securities or to convert short-term investments to cash equivalents
as dictated by its investment and acquisition strategies. The Company will
continue to acquire more efficient equipment to automate its production process.
It intends to spend less than $2 million on capital equipment during fiscal
2004. Internally generated cash will be adequate to acquire this capital
equipment.
Net cash used by financing activities for the year ended April 30, 2003,
was $2.7 million. Of this amount, $1.7 million was used to pay the Company's
semi-annual cash dividends to shareholders and $741,000 was used to make
regularly scheduled long-term liability payments. During the year, the Company
also acquired 80,000 shares of its common stock for treasury at a cost of
$501,000. These outflows were partially offset by proceeds of $111,000 from new
borrowings and payments of $67,000 received from the sale of shares of common
stock from treasury to satisfy the exercise of stock options granted to certain
officers and employees in prior years. The Company will continue to use treasury
19
shares to satisfy the future exercise of stock options granted to officers and
employees. The Company may repurchase shares of its common stock for treasury
whenever appropriate opportunities arise but it has neither a formal repurchase
plan nor commitments to purchase additional shares in the future.
The Company will continue to expend resources to develop and improve
products for wireless and wireline communication systems which management
believes will result in future growth and continued profitability. During fiscal
2004, the Company intends to make a substantial investment of capital and
technical resources to develop new products to meet the needs of the commercial
communications marketplace and to invest in more efficient product designs and
manufacturing procedures. Where possible, the Company will secure partial
customer funding for such development efforts but is targeting to spend its own
funds at a rate of approximately 10% of revenues to achieve its development
goals. Internally generated cash will be adequate to fund these development
efforts.
As of April 30, 2003
Total Less
(in than 1 to 3 3 to 5 More than
Contractual Obligations thousands) 1 Year Years Years 5 Years
- --------------------------------- ---------- --------- --------- ---------- ---------
Long-Term Debt Obligations....... $ 78 $ 20 $ 58 $ 0 $ 0
Operating Lease Obligations...... 2,267 400 1,200 667
Other Long -Term Liabilites
Reflected in the Registrant's
Balance Sheet under GAAP 17,845**
------- ----- ------ -----
Total $20,190 $ 420 $1,258 $ 667
======= ===== ====== =====
** Consists of Deferred Compensation liability (See Note 12 in the
accompanying financial statements) and liabilities, deferred income and deferred
taxes related to the REIT units received on sale of the Company's building to
Reckson Associates in 1998. (See Item 2. Properties and Note 6. Property, Plant
and Equipment in the accompanying financial statements.) These liabilities have
no defined maturity.
As of April 30, 2003, the Company's consolidated backlog amounted to
approximately $31 million (see Item 1). Approximately 60% of this backlog is
expected to be filled during the Company's fiscal year ending April 30, 2004.
*******
The Company's liquidity is adequate to meet its foreseeable operating and
investment needs, including the acquisition and support of its new FEI-Zyfer
subsidiary. In addition, with its available cash and marketable securities, the
Company is able to continue paying semi-annual dividends, subject to the review
and approval of its Board of Directors.
Recent Accounting Pronouncements
--------------------------------
In July 2002, the FASB issued Statement No. 146 ("FAS 146), "Accounting
for Costs Associated with Exit or Disposal Activities." FAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." FAS 146 revises the accounting for certain lease termination
costs and employee termination benefits, which are generally recognized in
connection with restructuring activities. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not anticipate that the adoption of FAS 146 will have a
material impact on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), effective prospectively for
guarantees issued or modified after December 31, 2002. The disclosure
20
requirements of FIN 45 are effective for periods ending after December 15, 2002.
Under FIN 45, a guarantor is required to recognize, at the inception of certain
guarantees, a fair value liability for the obligations it has undertaken in
issuing the guarantee, including its ongoing obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. All guarantees subject to the disclosure
provisions of FIN 45, such as product warranties, have been disclosed in the
accompanying notes to the consolidated financial statements. At April 30, 2003,
the Company does not have any outstanding guarantees required to be disclosed or
recorded as obligations upon adoption of FIN 45.
In December 2002, the FASB issued Statement No. 148 ("FAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure." FAS 148
amends FAS 123, "Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, FAS 148 amends the
disclosure requirements of FAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure provisions of this Standard are effective for fiscal
years beginning after December 15, 2002 and have been incorporated into these
financial statements and accompanying footnotes.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). This Interpretation changes the method of
determining whether certain entities should be included in the Company's
consolidated financial statements. An entity is subject to FIN 46 and is called
a variable interest entity ("VIE") if it has (1) equity that is insufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties, or (2) equity investors that cannot make
significant decisions about the entity's operations, or that do not absorb the
expected losses or receive the expected returns of the entity. All other
entities are evaluated for consolidation under FAS No. 94, Consolidation of All
Majority-Owned Subsidiaries. The provisions of FIN 46 are to be applied
immediately to VIEs created after January 31, 2003, and to VIEs in which an
enterprise obtains an interest after that date. For VIEs in which an enterprise
holds a variable interest that it acquired before February 1, 2003, FIN 46
applies in the first fiscal period beginning after June 15, 2003. The Company
does not expect the adoption of FIN 46 to have a material effect on its
financial position, results of operations or cash flows.
In April 2003, the FASB issued Statement No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149
amends FAS 133 for certain decisions made by the FASB as part of the Derivatives
Implementation Group process. FAS 149 also amends FAS 133 to incorporate
clarifications of the definition of a derivative. FAS 149 is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and requires prospective application. The Company does not expect the effect of
adopting FAS 149 to be material to its results of operations or financial
condition.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("FAS 150"). This statement establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. FAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the provisions of
this statement to have a significant impact on the Company's results of
operations or financial position.
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
Interest Rate Risk
The Company is exposed to market risk related to changes in interest rates
and market values of securities, including participation units in the Reckson
Operating Partnership, L.P. (REIT units, see Item 2. Properties and Note 6 to
the financial statements). The Company's investments in fixed income and equity
securities were $17.8 million and $10.0 million, respectively, at April 30,
2003. The investments
21
are carried at fair value with changes in unrealized gains and losses recorded
as adjustments to stockholders' equity. The fair value of investments in
marketable securities is generally based on quoted market prices. Typically, the
fair market value of investments in fixed interest rate debt securities will
increase as interest rates fall and decrease as interest rates rise. Based on
the Company's overall interest rate exposure at April 30, 2003, a 10% change in
market interest rates would not have a material effect on the fair value of the
Company's fixed income securities or results of operations (investment income).
Foreign Currency Risk
With its investment in Gillam-FEI, the Company is subject to foreign
currency translation risk. For each of these investments, the Company does not
have any near-term intentions to repatriate its invested cash. For this reason,
the Company does not intend to initiate any exchange rate hedging strategies
which could be used to mitigate the effects of foreign currency fluctuations.
The effects of foreign currency rate fluctuations will be recorded in the equity
section of the balance sheet as a component of other comprehensive income. As of
April 30, 2003, the amount related to foreign currency exchange rates is a
$2,565,000 unrealized gain.
The results of operations of foreign subsidiaries, when translated into US
dollars, will reflect the average rates of exchange for the periods presented.
As a result, similar results in local currency can vary significantly upon
translation into US dollars if exchange rates fluctuate significantly from one
period to the next.
OTHER MATTERS
- -------------
The financial information reported herein is not necessarily indicative of
future operating results or of the future financial condition of the Company.
Except as noted, management is unaware of any impending transactions or events
that are likely to have a material adverse effect on results from operations.
INFLATION
- ---------
During fiscal 2003, as in the two prior fiscal years, the impact of
inflation on the Company's business has not been materially significant.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The information required by this item is included in the text in response
to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, above and is incorporated herein by reference.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995:
The statements in this Annual Report on Form 10K regarding future earnings
and operations and other statements relating to the future constitute
"forward-looking" statements pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. Factors that would cause
or contribute to such differences include, but are not limited to, continued
acceptance of the Company's products in the marketplace, competitive factors,
new products and technological changes, product prices and raw material costs,
dependence upon third-party vendors, competitive developments, changes in
manufacturing and transportation costs, the availability of capital, and the
outcome of certain litigation and arbitration proceedings. By making these
forward-looking statements, the Company undertakes no obligation to update these
statements for revisions or changes after the date of this report.
22
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
--------------------
To the Board of Directors and Stockholders of Frequency Electronics, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 16(a)(1) on page 49 present fairly, in all material
respects, the financial position of Frequency Electronics, Inc. and its
subsidiaries as of April 30, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
2003 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 16(a)(2) on page 49 presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 11 to the consolidated financial statements,
on May 1, 2001, the Company adopted the provisions of Statement of Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
PRICEWATERHOUSECOOPERS LLP
Melville, New York
July 11, 2003
23
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2003 and 2002
-----------
ASSETS: 2003 2002
---- ----
(In thousands)
Current assets:
Cash and cash equivalents $ 5,952 $ 5,383
Marketable securities 27,829 30,848
Accounts receivable, net of allowance for
doubtful accounts of $124 9,565 11,725
Inventories 17,734 19,601
Deferred income taxes 4,435 3,645
Income taxes receivable 1,223 1,328
Prepaid expenses and other 1,198 1,350
--------- ---------
Total current assets 67,936 73,880
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,105 11,361
Deferred income taxes 436 280
Goodwill - 4,938
Cash surrender value of life insurance 4,869 4,373
Other assets 1,383 1,179
--------- ---------
Total assets $ 85,729 $ 96,011
========= =========
Continued
24
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2003 and 2002
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 2003 2002
---- ----
(In thousands)
Current liabilities:
Current portion of debt $ 179 $ 384
Accounts payable - trade 1,294 2,359
Accrued liabilities 3,615 4,073
Dividend payable 834 833
-------- --------
Total current liabilities 5,922 7,649
Deferred compensation 6,752 6,496
REIT liability and other liabilities 11,151 11,300
-------- --------
Total liabilities 23,825 25,445
-------- --------
Minority interest in subsidiary 195 224
-------- --------
Commitments and contingencies (Notes 6 and 9)
Stockholders' equity:
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued - -
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued - 9,163,940 shares 9,164 9,164
Additional paid-in capital 43,806 43,077
Retained earnings 10,415 20,939
-------- --------
63,385 73,180
Common stock reacquired and held in treasury -
at cost (824,739 shares in 2003 and
830,074 shares in 2002) (3,062) (2,806)
Other stockholders' equity (116) (116)
Accumulated other comprehensive income 1,502 84
-------- --------
Total stockholders' equity 61,709 70,342
-------- --------
Total liabilities and stockholders' equity $ 85,729 $ 96,011
======== ========
The accompanying notes are an integral part of these financial statements.
25
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 2003, 2002 and 2001
-----------
2003 2002 2001
---- ---- ----
(In thousands, except share data)
Net sales $31,527 $41,179 $49,210
Cost of sales 25,681 27,090 32,180
---------- ---------- ---------
Gross margin 5,846 14,089 17,030
Selling and administrative expenses 7,573 8,932 8,820
Research and development expenses 4,605 6,568 4,847
Insurance reimbursement, net - (1,500) (2,576)
Goodwill writedown 6,158 - -
---------- ---------- ---------
Operating (loss) profit (12,490) 89 5,939
Other income (expense):
Investment income 1,830 1,864 2,655
Interest expense (283) (302) (333)
Other, net 277 46 4
---------- ---------- ---------
(Loss) income before minority interest and
(benefit) provision for income taxes (10,666) 1,697 8,265
Minority interest in (loss) income of
consolidated subsidiary (33) (1) 29
---------- ---------- ---------
(Loss) income before (benefit) provision
for income taxes (10,633) 1,698 8,236
(Benefit) provision for income taxes (1,773) 320 2,592
Net (loss) income ($ 8,860) $ 1,378 $ 5,644
========== ========== =========
Net (loss) income per common share:
Basic ($ 1.06) $ 0.17 $ 0.69
======== ====== ======
Diluted ($ 1.06) $ 0.16 $ 0.67
======== ====== ======
Average shares outstanding:
Basic 8,331,785 8,350,735 8,198,569
========= ========= =========
Diluted 8,331,785 8,529,175 8,431,823
========= ========= =========
The accompanying notes are an integral part of these financial statements.
26
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 2003, 2002 and 2001
(In thousands, except share data)
Treasury stock
Common Stock Additional (at cost)
------------ paid in Retained --------------
Shares Amount capital earnings Shares Amount
------ ------ ------- -------- ------ ------
Balance at May 1, 2000 9,009,259 $9,009 $37,929 $17,239 1,016,552 ($3,644)
Exercise of stock options 510 (129,288) 206
Tax benefit from stock option exercise 809
Amortization of independent
contractor stock options 310
Contribution of stock to 401(k) plan (8) (14,595) 311
Issuance of stock for Gillam acquisition 154,681 155 3,310
Amortization of unearned compensation
Cash dividend (1,657)
Increase in market value of
marketable securities
Foreign currency translation adjustment
Net income 5,644
Comprehensive income- 2001 --------- ----- ------- ------- ------- -------
Balance at April 30, 2001 9,163,940 9,164 42,860 21,226 872,669 (3,127)
Exercise of stock options 52 (14,375) 43
Amortization of independent
contractor stock options 45
Contribution of stock to 401(k) plan 120 (28,220) 278
Amortization of unearned compensation
Cash dividend (1,665)
Increase in market value of
marketable securities
Foreign currency translation adjustment
Net income 1,378
Comprehensive income- 2002 --------- ----- ------- ------- ------- -------
Balance at April 30, 2002 9,163,940 9,164 43,077 20,939 830,074 (2,806)
Exercise of stock options 29 (11,000) 38
Issuance of stock for Gillam acquisition 447 (35,000) 88
Contribution of stock to 401(k) plan 253 (39,335) 119
Repurchase of stock for treasury 80,000 (501)
Cash dividend (1,664)
Decrease in market value of
marketable securities
Foreign currency translation adjustment
Net loss (8,860)
Comprehensive loss- 2003 --------- ------ ------- ------- ------- --------
Balance at April 30, 2003 9,163,940 $9,164 $43,806 $10,415 824,739 ($3,062)
========= ====== ======= ======= ======= ========
Other Accumulated other
Stockholders' comprehensive
equity income (loss) Total
------------- ------------------ -------
Balance at May 1, 2000 ($135) ($1,408) $58,990
Exercise of stock options 716
Tax benefit from stock option exercise 809
Amortization of independent
contractor stock options 310
Contribution of stock to 401(k) plan 303
Issuance of stock for Gillam acquisition 3,465
Amortization of unearned compensation 13 13
Cash dividend (1,657)
Increase in market value of
marketable securities 1,367 1,367
Foreign currency translation adjustment 245 245
Net income 5,644
------
Comprehensive income- 2001 7,256
------ ------ ------
Balance at April 30, 2001 (122) 204 70,205
Exercise of stock options 95
Amortization of independent
contractor stock options 45
Contribution of stock to 401(k) plan 398
Amortization of unearned compensation 6 6
Cash dividend (1,665)
Increase in market value of
marketable securities 17 17
Foreign currency translation adjustment (137) (137)
Net income 1,378
------
Comprehensive income- 2002 1,258
------ ------ ------
Balance at April 30, 2002 (116) 84 70,342
Exercise of stock options 67
Issuance of stock for Gillam acquisition 535
Contribution of stock to 401(k) plan 372
Repurchase of stock for treasury (501)
Cash dividend (1,664)
Decrease in market value of
marketable securities (1,039) (1,039)
Foreign currency translation adjustment 2,457 2,457
Net loss (8,860)
-------
Comprehensive loss- 2003 (7,442)
------ ------ -------
Balance at April 30, 2003 ($116) $1,502 $61,709
====== ====== =======
The accompanying notes are an integral part of these financial statements.
27
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2003, 2002 and 2001
-----------
2003 2002 2001
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net (loss) income ($8,860) $ 1,378 $5,644
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Goodwill writedown 6,158 - -
Deferred tax expense (benefit) (247) 358 (1,408)
Depreciation and amortization 1,600 1,460 1,446
Provision for losses on accounts
receivable and inventories 3,634 1,009 2,001
Loss (gain) on marketable securities and
other assets- net (67) 128 (181)
Tax benefit from stock option exercise - - 809
Minority interest in (loss) earnings of
subsidiary (34) (1) 29
Changes in assets and liabilities, exclusive
of assets and liabilities acquired:
Accounts receivable 4,515 3,360 (1,195)
Inventories (1,115) (11) (4,612)
Prepaid and other 370 308 (262)
Other assets (548) (341) (373)
Accounts payable trade (2,209) (21) 44
Insurance reimbursement receivable - 3,000 (3,000)
Accrued liabilities (823) (2,524) 1,150
Liability for employee benefit plans 973 1,429 1,271
Income taxes receivable 105 (3,698) 2,781
Other liabilities (1,004) (939) (193)
------- ------- -------
Net cash provided by operating activities 2,448 4,895 3,951
------- ------- -------
Cash flows from investing activities:
Payment for acquisition, net of cash
acquired of $758 in 2001 - - (8,138)
Purchase of minority interest in
manufacturing partner - (313) -
Purchase of marketable securities (7,378) (21,154) (4,318)
Proceeds from sale or redemption of
marketable securities 8,598 23,615 9,384
Capital expenditures (834) (1,541) (1,929)
Other- net 120 - -
------- ------- -------
Net cash provided by (used in)
investing activities 506 607 (5,001)
------- ------- -------
Continued
28
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2003, 2002 and 2001
(Continued)
-----------
2003 2002 2001
---- ---- ----
(In thousands)
Cash flows from financing activities:
Principal payments of long-term debt and
other long-term obligations (741) (750) (929)
Proceeds from short-term debt 111 88 -
Payment of cash dividend (1,664) (1,661) (1,627)
Repurchase of stock for treasury (501) - -
Exercise of stock options 67 95 716
------- -------- --------
Net cash used in financing activities (2,728) (2,228) (1,840)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents before effect of exchange
rate changes 226 3,274 (2,890)
Effect of exchange rate changes on cash and
cash equ