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, 2002
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.
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(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock (par value $1.00 per share) American Stock Exchange, Inc.
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 22, 2002 - $42,300,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 22, 2002 - 8,341,635.
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 9, 2002.
(Cover page 1 of 54 pages)
Exhibit Index at Page 48
PART I
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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.
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The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 8,333,865 shares were
outstanding at April 30, 2002, 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 a wholly-owned subsidiary, FEI Government
Systems, Inc. ("FEI-GSI"), 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. Also during
fiscal 2002 the Company formed two other subsidiaries, Frequency Electronics,
Inc. Asia ("FEI-Asia") and FEI- Europe, GmbH Communications ("FEI-Europe"). The
former was established as an Asian-based low cost manufacturer of certain of the
Company's commercial communications products. The latter 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. Both of these subsidiaries
are included in the commercial communications segment. Finally, during fiscal
2002 the Company made an equity investment in Morion, Inc., a Russian
manufacturer. The relationship with Morion 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.
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 principally with COTS
(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, Latin America,
the Middle East and Asia.
FISCAL 2002 AND 2001 SIGNIFICANT EVENTS
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Insurance Reimbursements
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.
On April 18, 2001, the Company settled an action which FEI had initiated in
the prior year against National Union Fire Insurance Company ("National Union").
Under terms of the settlement, National Union paid the Company $3.0 million, FEI
released its claims and the legal action was discontinued.
Acquisition of Gillam, S.A.
On September 13, 2000, the Company completed its acquisition of
substantially all of the outstanding shares of Gillam S.A. ("Gillam"), a
privately-held company organized under the laws of Belgium. See Note 11 to the
accompanying financial statements for a more detailed description of the Gillam
acquisition. The accompanying consolidated statements of operations for the
years ended April 30, 2002 and 2001 include the results of operations of Gillam
from September 13, 2000 through March 31, 2002. (Gillam retains its April 1 to
March 31 fiscal year for financial reporting purposes.)
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 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 2002, 2001 and 2000 approximately 63%, 74% and 85%,
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 26% and 19%
of fiscal 2002 and 2001 revenues, respectively. For the years ended April 30,
2002, 2001 and 2000, approximately 11%, 7%, and 15%, 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. As a
result, prior to the current fiscal year, the Company experienced accelerating
growth in commercial communications revenues. Under current overall market
conditions in the telecommunications industry, the revenue growth trend has been
interrupted. However, the Company anticipates that this industry will provide an
opportunity for substantial sales growth in the future when capital spending by
telecommunication companies returns to more normal levels.
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) and 3G (3rd Generation) systems, to provide not only
improved voice connectivity but also Internet, video and data transmission.
Wireless communication networks consist of numerous installations located
throughout a service area, each with its own base station connected by wire or
microwave radio through a network switch. Network operators are in the process
of converting older networks from analog to digital technology in order to
expand network coverage, increase capacity and improve transmission quality.
This upgrade requires precise frequency control at the base stations 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.
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 extends 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. 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.
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. 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.
BACKLOG
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As of April 30, 2002, the Company's consolidated backlog amounted to
approximately $31 million (see Item 7). Of this backlog, approximately 61%
represents orders for the commercial communications segment, 16% for the
Gillam-FEI segment and 23% for the U.S. Government segment. Approximately 75% of
this backlog is expected to be filled during the Company's fiscal year ending
April 30, 2003. 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 in
fiscal 2002 and 2001, totaled approximately 42%, 29% and 12% of net sales in
fiscal years 2002, 2001 and 2000, respectively.
The Company's products are sold to a variety of customers, both commercial
and governmental. For the years ended April 30, 2002, 2001 and 2000,
approximately 11%, 7% and 15%, 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,
2002, 2001 and 2000 included sales to Motorola Corp. ("Motorola") of
approximately $15.5 million, $17.7 million and $14.0 million, respectively.
These amounts represent 38%, 36% and 53%, respectively, of consolidated sales
for each of those years. 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, 2002, sales to Motorola and SSL
were made by the Company's commercial communications segment, accounting for 65%
in fiscal 2002, 63% in fiscal 2001 and 67% in fiscal 2000 of that segment's
total sales. During fiscal 2002, two customers, France Telecom and Belgacom,
accounted for 18% and 12%, respectively, of the revenues of the Gillam-FEI
segment. In fiscal 2001, Itissalat al Maghrib and France Telecom accounted for
29% and 11%, respectively, of Gillam-FEI's revenues. Fiscal 2002 revenues in the
U.S. Government segment included sales to three customers, Boeing Satellite
Systems, Inc. ("Boeing"), Raytheon Missile Systems, Inc. ("Raytheon") and BAE
Systems Aerospace, Inc., accounting for 32%, 26% and 19%, respectively, of total
segment revenues. In fiscal 2001, two customers, Raytheon and Boeing, accounted
for 68% of U.S. Government revenues and in fiscal 2000, three customers,
Raytheon, Lockheed Martin and Boeing, accounted for 61% of total segment
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
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The Company's technological expertise continues to be an important factor
to support future growth in revenues and earnings. Until a few years ago,
virtually all research and development activities had taken place in connection
with customer-sponsored development-oriented products conducted under fixed
price contracts and subcontracts in support of U.S. Government programs. The
Company was successful in applying its resources to develop prototypes and
preproduction hardware for use in navigation, communication, guidance and
electronic countermeasure programs and space application. The output of these
customer-sponsored projects, in all cases, was of a proprietary nature.
In the last four years, the Company has focused its internal research and
development efforts on improving the core physics and electronic packages in its
time and frequency products; conducting research to develop new time and
frequency technologies; improving product manufacturability by seeking to reduce
its production costs through product redesign and other measures to take
advantage of lower cost components.
The Company continues to focus a significant portion of its own resources
and efforts on developing hardware for satellite and terrestrial commercial
communications systems, including wireless, wireline and fiber optic systems.
During fiscal 2002, 2001 and 2000, the Company expended $6.6 million, $4.8
million, and $5.4 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 2003, the
Company is targeting to spend from $5.5 million to $6.5 million on research and
development but will spend more or less as market conditions and opportunities
warrant. Such funds will be used to introduce Gillam-FEI's wireline
synchronization products to the US market, to further develop third generation
(3G) cellular telephony products and to develop other products for emerging
wireless, optical and wireline communications technologies.
PATENTS AND LICENSES
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The Company believes that its business is not dependent on patent or
license protection. Rather, it is primarily dependent upon the Company's
technical competence, the quality of its products and its prompt and responsible
contract performance. However, the rights to inventions of employees working for
the Company are assigned to the Company and the Company presently holds such
patents and licenses. Also, in certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses it has funded. The Company does not believe that patents and
licenses are material to its business.
COMPETITION
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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 as well as to joint venture partners
and more recently to its wholly-owned subsidiary, FEI-Asia in Tianjin, China and
to its relationship with Morion, Inc. in which the Company is a minority
shareholder. The Company expects this outsourcing to enhance its competitive
position on cost while maintaining its high quality standards. The Company
believes its ability to obtain raw materials, manufacture finished products,
integrate them into systems and sub-systems, and interface these systems with
end-user applications provides a strong competitive advantage.
Certain of the Company's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs.
With respect to its instruments and systems, the Company competes with
Hewlett-Packard Company, Datum, Inc., E. G. and G., Inc. and others. Systems for
the wireline industry produced by the Gillam-FEI segment compete with Datum,
Inc. and Symmetricom, Inc. which recently announced their intention to merge
their businesses. The Company's principal competition for space products is the
in-house capability of its major customers.
EMPLOYEES
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The Company employs approximately 375 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
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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 70,900 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 the balance recognized in income on the date of liquidation. (See
Note 6 to the accompanying financial statements.)
The properties located in Belgium and France were acquired upon completion
of the Gillam S.A. acquisition. These facilities are adequate to meet the
present and future operational requirements of Gillam-FEI.
The Tianjin, China facility is the location of the Company's newly
established subsidiary, FEI-Asia. Space has been leased within a manufacturing
facility located in the Trade-Free Zone. The lease is for a one-year term with
rent of $9,850 payable quarterly. The amount of space is adequate for the
near-term manufacturing expectations for the Company.
Item 3. Legal Proceedings
- -------------------------
Qui Tam Action
--------------
A qui tam action was commenced in the United States District Court for the
Eastern District of New York entitled, "The United States of America ex rel.
Ralph Muller, Plaintiff, against Frequency Electronics, Inc., Raytheon Company,
Raytheon Company Subsidiaries #1-10, fictitious names for subsidiaries of
Raytheon Company, Hughes Aircraft Company, Hughes Aircraft Company subsidiaries
#1-20, fictitious names for subsidiaries of Hughes Aircraft Company, and Martin
Bloch, Defendants", index number CV-92 5716 ("Muller Qui Tam Action"). The
Muller Qui Tam Action was brought pursuant to the provisions of the False Claims
Act and is an action by which an individual may, under certain circumstances,
sue one or more third persons on behalf of the Government for damages and other
relief.
The complaint was filed on or about December 3, 1992, in camera and under
seal pursuant to the provisions of the False Claims Act. The complaint was
served on FEI and Martin B. Bloch on March 28, 1994 and March 30, 1994,
respectively. Under the provisions of the False Claims Act, the Government is
permitted to take over the prosecution of the action. The Government has
declined to prosecute the Muller Qui Tam Action and the plaintiff, Ralph Muller
("Muller"), is proceeding with the action on behalf of the Government as is
permitted under the False Claims Act. Moreover, while the action named as
parties defendant, Hughes Aircraft Company ("Hughes") and Raytheon Company
("Raytheon"), along with several of their subsidiaries, the Muller Qui Tam
Action was dismissed voluntarily by Muller on April 6, 1994, as to Hughes,
Raytheon and their respective subsidiaries. On February 6, 1996, plaintiff
served an amended complaint ("Amended Complaint").
The Amended Complaint, insofar as it pertains to FEI and Martin Bloch,
contains a series of allegations to the effect that Hughes and Raytheon
contracted with the Government to supply it with Advanced Medium Range Air to
Air Missiles ("AMRAAMS"); Hughes and Raytheon (collectively, the "Contractors")
entered into a subcontract with FEI pursuant to which FEI was to design,
manufacture, test, sell and deliver to the Contractors certain oscillators which
constituted components of the AMRAAMS; that FEI improperly designed,
manufactured and tested the oscillators; that numerous faulty and defective
oscillators were delivered to the Contractors; that the oscillators did not meet
contract specifications; that FEI was aware of the defective and faulty nature
of the oscillators; that FEI and Martin Bloch knowingly directed non-disclosure
of the design flaws; that the concealed design defects in developmental
oscillators permitted FEI to manufacture additional defective oscillators which
were used in operational missiles; that as a direct result of FEI's fraudulent
concealment of the defects, FEI was contracted to design and manufacture
additional oscillators; that when missiles were returned to FEI for repair, FEI
charged the Government for repair even though FEI knew the units had been
defective at the time of delivery; that FEI falsified test results and FEI and
Martin Bloch directed the falsification of test results; and that FEI sold and
delivered the oscillators to the Contractors; as a result of the faulty and
defective oscillators, many of the AMRAAMS failed to function properly; and that
the Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act,
and that the plaintiff Muller be awarded a bounty. Under the False Claims Act, a
recovery can be made in favor of the Government for a civil penalty of not less
than $5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses.
FEI has determined to vigorously defend the Muller Qui Tam Action. It has
answered the Amended Complaint, denied the material allegations, asserted
seventeen affirmative defenses, and counterclaims for: libel and product libel -
demanding damages of $3,000,000; republication of the libel and product libel -
demanding damages of $3,000,000; slander - demanding damages of $3,000,000;
tortious interference with prospects for additional business relations -
demanding damages of $1,865,010; prima facie tort - demanding damages of
$1,865,010; conversion - demanding damages of $11 plus an amount to be
determined at trial; breach of employment contract - demanding damages of
$1,865,010; breach of fiduciary duty - demanding damages of $1,865,010; plus
punitive damages in the amount of $30,000,000 on each of the tort causes of
action, and legal fees and expenses. The substance of the counterclaims alleged
against Muller are predicated upon a letter dated November 23, 1992 ("November
23 Letter") written by Muller's attorneys Schneider, Harris, Harris and Furman
("SHHF") to the Government which allegedly contained false and libelous
statements concerning FEI's design, manufacture and production of components for
Hughes and Raytheon in connection with the AMRAAMS.
In addition, FEI has instituted a third party action against SHHF, Robert
Harris, Esq. and Rod Kovel, Esq., attorneys for Muller, in connection with their
alleged authoring and publishing of the November 23 Letter provided to the
Government. The third-party complaint asserts the same claims against the
attorneys as are asserted in the counterclaims against Muller, for libel and
product libel, republication of the libel and product libel, slander, tortious
interference with contractual relations, prima facie tort and conversion. The
counterclaims and third-party complaint have been served. Muller has replied to
the counterclaims asserted in FEI's answer to the Amended Complaint, denied the
substantive allegations and asserted various affirmative defenses. The
third-party defendants have replied to the third-party complaint and have denied
the allegations and asserted various affirmative defenses.
On April 11, 1997, in open Court and on the record, the Court ordered that
the Muller Qui Tam Action was stayed. Thereafter, in September 1998 litigation
was resumed. To date, the parties have engaged in limited discovery since the
Government has determined that all classified and unclassified documents
relating to this action are deemed classified documents subject to Department of
Defense security regulations. As a result, extraordinary procedures have been
put in place for purposes of conducting discovery. On January 20, 2000, the
Court stayed further proceedings pending a decision of the Supreme Court of the
United States in a case where certain legal issues were raised that could have
been dispositive of certain legal issues in the Muller Qui Tam Action. That case
was decided and on July 20, 2000, the Court determined that this litigation will
resume.
In August 1999, the attorneys representing Muller withdrew as his counsel.
Since that time Muller has been representing himself on a pro se basis.
In May 2002 the defendants filed and argued a motion for summary judgment
dismissing the Amended Complaint. The motion is under consideration by the Court
and the defendants are continuing to pursue their counterclaims.
No opinion can be offered as to the outcome of the Muller Qui Tam Action,
the FEI counterclaims, or the third-party action.
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 2002.
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
-------------- --------- --------
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
2001 -
FIRST QUARTER $29.50 $15.00
SECOND QUARTER 38.25 15.61
THIRD QUARTER 22.50 11.51
FOURTH QUARTER 22.00 10.61
As of July 22, 2002, the approximate number of holders of record of common stock
was 694.
DIVIDEND POLICY
- ---------------
On March 24, 1997, the Company announced a policy of distributing a cash
dividend to shareholders of record on April 30 and October 31, payable on June 1
and December 1, respectively. The Board of Directors will determine dividend
amounts prior to each declaration based on the Company's financial condition and
financial performance.
Item 6. Selected Financial Data
- -------------------------------
The following table sets forth selected financial data including net sales
and operating profit (loss) for the five-year period ended April 30, 2002. The
information has been derived from the audited financial statements of the
Company for the respective periods.
Years Ended April 30,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except share data)
Net Sales
Commercial Communications $26,119 $36,207 $22,554 $14,547 $26,364
U.S. Government 4,512 3,727 3,981 4,411 5,633
Gillam-FEI 10,548 9,276 - - -
-------- --------- ------------ ------------- -------------
Total Net Sales $41,179 $49,210 $26,535 $18,958 $31,997
======= ======= ======= ======= =======
Operating Profit (Loss) $ 89(1) $ 5,939(3) $ 1,008 $ (701)(5) ($ 9,105)(6)
========== ======== ======== ========= =========
Net Income $ 1,378(2) $ 5,644(4) $ 3,144 $ 1,173 $ 64 (7)
======== ======== ======== ======== ==========
Average Common Shares Outstanding
Basic 8,350,735 8,198,569 7,673,497 7,502,260 7,368,472
Diluted 8,529,175 8,431,823 8,043,727 7,820,742 7,787,140
Earnings per Common Share
Basic $ 0.17 $ 0.69 $ 0.41 $ 0.16 $ 0.01
====== ====== ====== ====== ======
Diluted $ 0.16 $0.67 $ 0.39 $ 0.15 $ 0.01
====== ===== ====== ====== ======
Total Assets $96,011 $102,039 $80,847 $78,355 $88,780
======= ======== ======= ======= =======
Long-Term Obligations
and Deferred Items $17,796 $18,074 $16,849 $16,959 $18,841
======= ======= ======= ======= =======
Cash dividend declared
per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= ======= =======
(1) 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.
(2) In addition to items in (1) above, includes $300,000 investment loss for an
other than temporary decline of value in a marketable security.
(3) 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.
(4) In addition to items in (3) above, includes $287,000 investment loss for an
other than temporary decline of value in a marketable security.
(5) Includes insurance reimbursement of $4.5 million for legal fees related to
certain litigation with the U.S. Government.
(6) Includes litigation settlement of $8 million and U.S. Government-related
inventory writedowns and reserves of $4.8 million.
(7) In addition to items in (6) above, includes net gain on sale of buildings
of $4.9 million and the reversal of the valuation allowance on deferred tax
assets of $2.6 million.
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.
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.
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year. 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.
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:
2002 2001 2000
---- ---- ----
Net Sales
Commercial Communications 63.4% 73.6% 85.0%
U.S. Government 11.0 7.6 15.0
Gillam-FEI 25.6 18.8 -
------ ------ --------
100.0 100.0 100.0
Cost of Sales 65.8 65.4 56.1
Selling and Administrative expenses 21.7 17.9 19.9
Insurance Reimbursement, net (3.6) (5.2) -
Research and Development expenses 15.9 9.8 20.2
------ ----- -----
Operating Profit 0.2 12.1 3.8
Other Income (Expense) 3.9 4.7 12.9
Provision for Income Taxes 0.8 5.3 4.8
----- ----- ------
Net Income 3.3% 11.5% 11.9%
===== ==== =====
Significant Fiscal 2002 & 2001 Events
-------------------------------------
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal 2002 and 2001 results of
operations were materially impacted by several specific events. 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 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.
In both years, the Company determined that a writeoff or reserves against
certain work-in-progress and component inventory was appropriate. Consequently,
cost of sales was impacted by $1.0 million in fiscal 2002 and by $2.0 million in
fiscal 2001. These inventory items relate to certain product lines that the
Company is no longer marketing, to excess costs on certain work in process and
to quantities of certain component parts in excess of near-term requirements.
During the fourth quarters of fiscal 2002 and 2001, the Company determined that
the decline in market value of its investment in certain marketable securities
was not temporary. Accordingly, the Company wrote down the investments to their
then reported market value and recorded a charge against investment income of
approximately $300,000 in fiscal 2002 and $287,000 in fiscal 2001.
During fiscal 2001, the Company acquired Gillam-FEI. Included in the fiscal
2001 results are certain non-recurring charges to expense the "step-up" value of
acquired inventory of $300,000 as well as amortization of goodwill in the amount
of $193,000.
Operating Profit
----------------
Operating profit for the year ended April 30, 2002, decreased by $5.8
million compared to the profit for fiscal 2001. In addition to a 16% decline in
sales, gross margins were lower, reflective of the more challenging market faced
by the Company in fiscal 2002. The Company also made strategic investments such
as opening a manufacturing facility in China, the costs of which are included in
selling and administrative expenses, and developing new products and improving
manufacturing processes.
The operating profit for the year ended April 30, 2001 increased by $4.9
million over the profit for fiscal 2000. Excluding the nonrecurring items as
discussed above (see Items 6 and 7), the increase in operating profit would have
been $4.8 million. Approximately $400,000 of this increase is attributable to
the results of Gillam-FEI. The major portion of the improved profitability is
due to the 51% increase in revenues, exclusive of Gillam-FEI, while maintaining
gross profit margins. Selling and administrative costs increased in proportion
to the increased revenues while self-funded research and development spending
declined from the fiscal 2000 levels.
Net Sales
---------
Net sales for fiscal 2002 decreased by $8.0 million (16%) over fiscal 2001
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 declined by
$9.6 million (27%), while revenues increased by 21% for both the U.S. Government
($786,000) and Gillam-FEI ($1.9 million) over fiscal 2001. (Gillam-FEI's fiscal
2001 revenues are from the date of acquisition by the Company.) Given the
uncertainties in telecommunications markets, the Company is unable to make any
assessment for near-term future sales in the commercial communications or
Gillam-FEI segments of its business. However, the Company does anticipate that
revenues for its U.S. Government segment will increase as more funding is
provided by the government for such projects as secure communication satellites
and missile guidance systems. Over the long-term, the Company continues to
believe that the telecommunications markets, including cellular network
infrastructure and wireline synchronization, will be the dominant growth areas
of its business.
Net sales for fiscal 2001 increased by $22.7 million (85%) over fiscal 2000
sales. Excluding Gillam-FEI sales, revenues would have increased by $13.5
million (51%) over comparable fiscal 2000 sales. Sales in the commercial
communications segment improved by $13.7 million (61%) over fiscal 2000 while
revenues from the U.S. Government segment declined by $250,000 (6%). Strong
demand for the Company's rubidium atomic standard, which is the key
synchronization element of many cellular network base stations, led the increase
but the Company also experienced significant growth in other areas. Revenues
from space programs increased from the depressed levels of fiscal 2000 and the
Company developed a new source of revenues from fiber optic networks. These two
areas accounted for approximately 44% of the growth in revenues in the
commercial communication segment and 27% of consolidated revenue growth.
Gross Margins
-------------
Gross margins for the fiscal year ended April 30, 2002 were 34% compared to
35% in fiscal 2001. Excluding the inventory adjustments noted above, gross
margins would have been 37% and 39%, respectively. The lower result in fiscal
2002 is attributable to the lower volume of sales and the mix of sales. In
particular, a greater percentage of consolidated sales were made in the
Gillam-FEI segment, where costs are generally higher than in the U.S. segments.
However, Gillam-FEI margins were significantly improved over fiscal 2001, rising
from the high "teens" range to over 30%. The Company's target is to achieve an
overall gross margin of 40% or better through greater sales volume and continued
process improvements at Gillam-FEI.
Gross margins for fiscal 2001 were 35% compared to 44% in the fiscal year
ended April 30, 2000. During fiscal 2001, the Company had been engaged in two
significant development efforts which were customer-funded. The costs of these
efforts, which approximate the revenue recognized on the contracts, are a
component of cost of sales. Excluding these contracts as well as the inventory
adjustments mentioned above, gross margins would have been 41%. The principal
cause for the decline in the rate from the prior year is due to the mix of
products sold. In particular, costs at Gillam-FEI are typically higher than in
the U.S. due to labor cost structure. Excluding the effects of Gillam-FEI, the
inventory adjustments and the development contracts, gross margins would have
exceeded 47% in 2001.
Selling and Administrative expenses
-----------------------------------
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.
Selling and administrative costs for the year ended April 30, 2001,
increased by $3.5 million (67%) over fiscal 2000. Of this increase, $1.4 million
is attributable to expenses incurred by Gillam-FEI. The remaining $2.1 million
is attributable to increased personnel costs, including accruals for bonuses as
a result of improved profit margins and increased selling costs and travel
expenses, as the Company seeks to continue the expansion of its world-wide
commercial markets. In addition, the Company incurred legal fees related to the
insurance recovery and litigation settlement, and administrative expenses
related to the Company's establishment of a manufacturing facility in China.
Research and Development expenses
---------------------------------
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. 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.
Fiscal 2001 research and development spending declined by 10% from fiscal
2000 levels. Development spending by Gillam-FEI was less than 5% of the
consolidated total and not significant in fiscal 2001. The reduction in research
and development spending in fiscal 2001 was not indicative of a decrease in the
Company's development effort. During fiscal 2001, the Company was successful in
obtaining funding from customers on two separate projects. This reduced the
level of self-funded research and development spending but increased the cost of
sales.
The Company will continue to focus its research and development activities
on those commercial products which it expects will provide the best return on
investment and greatest prospects for the future growth of the Company. For
fiscal year 2003, the Company will complete its development of the 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 (Expense)
----------------------
Other income (expense) decreased by $718,000 (31%) in fiscal 2002 compared
to fiscal 2001 and decreased by $1.1 million (32%) in fiscal 2001 compared to
fiscal 2000.
Investment income in fiscal 2002 includes a $300,000 writedown to market
value of a certain marketable security whose decline in value was deemed to be
other than temporary. This 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. In fiscal 2000, the Company had
realized gains $1.6 million. Excluding these net gains and losses, investment
income in 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 fiscal 2001, non-gain related investment income was $198,000
(9%) higher than fiscal 2000. In addition to interest income, the Company also
realizes quarterly dividend income on its REIT units. The Company anticipates
that investment income in future years will remain fairly constant assuming a
relatively stable interest rate environment and if the level of investments
remains the same.
Interest expense in fiscal 2002 decreased by $31,000 (9%) from fiscal 2001.
Fiscal 2001 interest expense increased by $27,000 (9%) from fiscal 2000.
Included in the fiscal 2002 and 2001 amounts is $36,000 and $56,000,
respectively, of interest expense paid by Gillam-FEI. Except for the inclusion
of interest expense from Gillam-FEI in fiscal 2001, interest expense would have
continued its decline as the Company retires its long-term financing
obligations. It incurs interest expense on Gillam-FEI's credit obligations, the
financing arrangement for the leaseback of the U.S. manufacturing facility and
for certain deferred compensation payments. The Company anticipates that
interest expense in fiscal 2003 will be approximately the same as the expense
for fiscal 2002.
During fiscal 2002, other income, net, increased by $42,000 over fiscal
2001 and by $211,000 from fiscal 2000 to 2001. Gillam-FEI contributed $127,000
and $76,000 of this growth in fiscal years 2002 and 2001, respectively. In
fiscal 2000, the Company incurred approximately $170,000 of expenses related to
an attempted acquisition of another company. The Company anticipates that in
future years other income, net, will not be a significant contributor to pretax
earnings.
Income Taxes
------------
As a result of the acquisition of Gillam S.A. during fiscal 2001, the
Company is now subject to taxation in several countries. The statutory federal
rates vary from 34% in the United States to 40% in Europe. The effective rate
for the Company for the year ended April 30, 2002 was 19% compared to 31% in
fiscal 2001 and to 29% in fiscal 2000. In all three years, the effective rate is
lower than the statutory rate primarily due to the availability of Research and
Development Tax Credits in the United States. (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 may be utilized for an indefinite period of time.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $66.2 million at April 30, 2002. Included in working
capital at April 30, 2002 is $36.2 million of cash, cash equivalents and
short-term investments, including approximately $12 million representing the
fair market value of REIT units which are convertible to Reckson Associates
Realty Corp. common stock. (See Note 6 to the financial statements.) The
Company's current ratio at April 30, 2002 is 9.7 to 1.
Net cash provided by operating activities for the year ended April 30,
2002, was $4.9 million compared to $4.0 million provided in fiscal 2001. While
fiscal 2002 earnings were less than the prior year, $4.5 million was 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% is attributable to the insurance
reimbursements. Additional cash was provided by collections on accounts
receivable which was offset by payments against beginning of the year accrued
expenses.
Net cash provided by investing activities for the year ended April 30,
2002, was $607,000. Approximately $2.5 million was generated by the sale and
conversion of certain marketable securities, net of purchases. Approximately
$1.5 million was used to acquire additional property, plant and equipment and
approximately $300,000 was used to make an investment in Morion, Inc., a Russian
crystal oscillator manufacturer. 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 2003. Internally generated cash will be adequate to
acquire this capital equipment.
Net cash used by financing activities for the year ended April 30, 2002,
was $2.2 million. Of this amount, $1.7 million was used to pay the Company's
semi-annual cash dividends to shareholders and $750,000 was used to make
regularly scheduled long-term liability payments. These outflows were partially
offset by proceeds of $88,000 from new borrowings and payments of $95,000
received from the sale of shares of common stock from treasury to satisfy the
exercise of stock options granted to certain officers and employees in prior
years . The Company will continue to use treasury shares to satisfy the future
exercise of stock options granted to officers and employees. The Company may
repurchase shares of its common stock for treasury whenever appropriate
opportunities arise but it has neither a formal repurchase plan nor commitments
to purchase additional shares in the future.
The Company will continue to expend resources to develop and improve
products for wireless and wireline commercial communication systems, which
management believes will result in future growth and continued profitability.
During fiscal 2003, 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, 2002, the Company's consolidated backlog amounted to
approximately $31 million (see Item 1). Of this backlog, approximately 61%
represents orders for the Commercial Communications segment, 16% for the
Gillam-FEI segment and 23% for the U.S. Government segment. Approximately 75% of
this backlog is expected to be filled during the Company's fiscal year ending
April 30, 2003.
Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting and
eliminates the pooling method of accounting. The Company will apply the
provisions of SFAS No. 141 on all future acquisitions and business combinations.
The acquisition of Gillam-FEI in September 2000 was recorded as a purchase.
Under SFAS No.142, which was adopted by the Company on May 1, 2001,
goodwill is no longer subject to amortization over its estimated useful life.
However, goodwill is subject to at least an annual assessment for impairment and
more frequently if circumstances warrant. Annually, the Company will perform a
fair value based goodwill impairment test. If the recorded value of goodwill and
certain intangibles exceeds fair value, a write-down of goodwill would be
charged to results of operations in the period in which the impairment is
identified. The adoption of SFAS 142 eliminated amortization of goodwill thereby
reducing selling and administrative expenses by approximately $193,000 from the
fiscal 2001 amount which was recorded from the date of acquisition of
Gillam-FEI.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS 121 and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations for a Disposal of a
Segment of a Business." SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company will adopt SFAS 144 as of May 1, 2002 and does
not expect that the adoption of this statement will have a significant impact on
the Company's financial position and results of operations.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No.4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections". In general, SFAS 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under
Statement 4. Gains or losses from extinguishments of debt for fiscal years
beginning after May 15, 2002 shall not be reported as extraordinary items unless
the extinguishment qualifies as an extraordinary item under the provisions of
APB Opinion No.30.
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 $16.7 million and $14.2 million, respectively, at April 30,
2002. The investments are carried at fair value with changes in unrealized gains
and losses recorded as adjustments to stockholders' equity. The fair value of
investments in marketable securities is generally based on quoted market prices.
Typically, the fair market value of investments in fixed interest rate debt
securities will increase as interest rates fall and decrease as interest rates
rise. Based on the Company's overall interest rate exposure at April 30, 2002, 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 acquisition of Gillam-FEI in September 2000, and the establishment
of a manufacturing facility in China, FEI- Asia, the Company has become 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, 2002, the amount related to foreign currency exchange
rates is a $108,000 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.
European Union Conversion to Euro
- ---------------------------------
Effective January 1, 2002, the eleven participating countries of the
European Union converted the "legacy" currency of each country into the Euro.
Thereafter, all cash transactions are to be conducted solely in the Euro with
legacy currencies canceled. The Company's European-based subsidiaries operate in
two of the participating countries and are therefore obligated to comply with
the new currency requirements. To the knowledge of Company management, this
conversion has had little, if any, impact on contractual agreements, banking
arrangements, employment agreements or similar matters. The subsidiaries'
accounting systems and records were modified to accommodate the new currency but
the cost of doing so was nominal.
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 2002, as in the two prior fiscal years, the impact of
inflation on the Company's business has not been materially significant.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The information required by this item is included in the text in response
to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, above and is incorporated herein by reference.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
The statements in this Annual Report on Form 10K regarding future earnings
and operations and other statements relating to the future constitute
"forward-looking" statements pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. Factors that would cause
or contribute to such differences include, but are not limited to, continued
acceptance of the Company's products in the marketplace, competitive factors,
new products and technological changes, product prices and raw material costs,
dependence upon third-party vendors, competitive developments, changes in
manufacturing and transportation costs, the availability of capital, and the
outcome of certain litigation and arbitration proceedings. By making these
forward-looking statements, the Company undertakes no obligation to update these
statements for revisions or changes after the date of this report.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Frequency Electronics, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 47 present fairly, in all material
respects, the financial position of Frequency Electronics, Inc. and its
subsidiaries as of April 30, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
2002 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 14(a)(2) on page 47 presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted 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.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
June 26, 2002
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2002 and 2001
-----------
ASSETS: 2002 2001
---- ----
(In thousands)
Current assets:
Cash and cash equivalents $ 5,383 $ 2,121
Marketable securities 30,848 33,407
Accounts receivable, net of allowance for
doubtful accounts of $124 in 2002
and $190 in 2001 11,725 15,160
Inventories 19,601 20,471
Deferred income taxes 3,645 4,313
Income taxes receivable 1,328 --
Prepaid expenses and other 1,350 4,662
-------- --------
Total current assets 73,880 80,134
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,361 11,997
Deferred income taxes 280 69
Goodwill, net of amortization in 2001 4,938 4,987
Other assets 5,552 4,852
-------- --------
Total assets $ 96,011 $102,039
======== ========
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2002 and 2001
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 2002 2001
---- ----
(In thousands)
Current liabilities:
Current portion of debt $ 384 $ 699
Accounts payable - trade 2,359 2,408
Accrued liabilities 4,073 7,228
Dividend payable 833 829
Income taxes payable -- 2,370
--------- ---------
Total current liabilities 7,649 13,534
Deferred compensation 6,496 5,726
REIT liability and other liabilities 11,300 12,348
--------- ---------
Total liabilities 25,445 31,608
--------- ---------
Commitments and contingencies (Notes 6 and 9)
Minority interest in subsidiary 224 226
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 - 9,163,939 shares 9,164 9,164
Additional paid-in capital 43,077 42,860
Retained earnings 20,939 21,226
--------- ---------
73,180 73,250
Common stock reacquired and held in treasury -
at cost (830,074 shares in 2002 and
872,669 shares in 2001) (2,806) (3,127)
Other stockholders' equity (116) (122)
Accumulated other comprehensive income 84 204
--------- ---------
Total stockholders' equity 70,342 70,205
--------- ---------
Total liabilities and stockholders' equity $ 96,011 $ 102,039
========= =========
The accompanying notes are an integral part of these financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 2002, 2001 and 2000
-----------
2002 2001 2000
---- ---- ----
(In thousands, except share data)
Net sales $ 41,179 $ 49,210 $ 26,535
Cost of sales 27,090 32,180 14,884
----------- ----------- -----------
Gross margin 14,089 17,030 11,651
Selling and administrative expenses 8,932 8,820 5,275
Insurance reimbursement, net (1,500) (2,576) --
Research and development expenses 6,568 4,847 5,368
----------- ----------- -----------
Operating profit 89 5,939 1,008
Other income (expense):
Investment income 1,864 2,655 3,929
Interest expense (302) (333) (306)
Other, net 46 4 (207)
----------- ----------- -----------
Income before minority interest and
provision for income taxes 1,697 8,265 4,424
Minority interest in (loss) income of
consolidated subsidiary (1) 29 --
----------- ----------- -----------
Income before provision for income taxes 1,698 8,236 4,424
Provision for income taxes 320 2,592 1,280
----------- ----------- -----------
Net Income $ 1,378 $ 5,644 $ 3,144
=========== =========== ===========
Net Income per common share:
Basic $ 0.17 $ 0.69 $ 0.41
=========== =========== ===========
Diluted $ 0.16 $ 0.67 $ 0.39
=========== =========== ===========
Average shares outstanding:
Basic 8,350,735 8,198,569 7,673,497
=========== =========== ===========
Diluted 8,529,175 8,431,823 8,043,727
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 2002, 2001 and 2000
(In thousands, except share data)
Additional Treasury stock
Common Stock paid in Retained (at cost)
Shares Amount capital earnings Shares Amount
------ ------ ------- -------- ------ ------
Balance at May 1, 1999 9,009,259 $9,009 $36,940 $15,653 1,346,850 ($4,058)
- ----------------------
Exercise of stock options 341 (330,298) 414
Amortization of Independent
Contractor stock options 170
Amortization of ESOP debt 478
Payment received for common
stock subscribed
Amortization of unearned compensation
Cash dividend (1,558)
Decrease in market value of
marketable securities
Net income 3,144
Comprehensive income- 2000 --------- ----- ------ ------ --------- ------
Balance at April 30, 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)
========= ====== ======= ======= ======= ========
Accumulated
Other other
Unamortized Stockholders' comprehensive
ESOP debt equity income (loss) Total
--------- ------ ------------- -------
Balance at May 1, 1999 ($500) ($334) ($203) $56,507
- ----------------------
Exercise of stock options 755
Amortization of Independent
Contractor stock options 170
Amortization of ESOP debt 500 978
Payment received for common
stock subscribed 172 172
Amortization of unearned compensation 27 27
Cash dividend (1,558)
Decrease in market value of
marketable securities (1,205) (1,205)
Net income 3,144
-----
Comprehensive income- 2000 1,939
--- ----- ------- ------
Balance at April 30, 2000 0 (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 0 (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 $ 0 ($116) $84 $70,342
===== ====== === =======
The accompanying notes are an integral part of these financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2002, 2001 and 2000
-----------
2002 2001 2000
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 1,378 $ 5,644 $ 3,144
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Deferred tax expense (benefit) 358 (1,408) 840
Depreciation and amortization 1,460 1,446 1,117
Provision for losses on accounts
receivable and inventories 452 2,001 151
Loss (Gain) on marketable securities and
notes receivable- net 128 (181) (1,654)
Tax benefit from stock option exercise -- 809 --
Amortization resulting from
allocation of ESOP shares -- -- 978
Minority interest in (loss) earnings of subsidiary (1) 29 --
Changes in assets and liabilities, exclusive of assets and liabilities
acquired:
Accounts receivable 3,360 (1,195) 2,583
Inventories 546 (4,612) (3,745)
Prepaid and other 308 (262) (174)
Other assets (341) (373) (359)
Accounts payable trade (21) 44 182
Insurance reimbursement receivable 3,000 (3,000) --
Accrued liabilities (2,524) 1,150 773
Liability for employee benefit plans 1,429 1,271 766
Income taxes payable (3,698) 2,781 (676)
Other liabilities (939) (193) (383)
-------- -------- --------
Net cash provided by operating activities 4,895 3,951 3,543
-------- -------- --------
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 (21,154) (4,318) (24,611)
Proceeds from sale or redemption of marketable
securities 23,615 9,384 27,468
Capital expenditures (1,541) (1,929) (668)
-------- -------- --------
Net cash provided by (used in) investing activities 607 (5,001) 2,189
-------- -------- --------
Continued
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2002, 2001 and 2000
(Continued)
-----------
2002 2001 2000
---- ---- ----
(In thousands)
Cash flows from financing activities:
Principal payments of long-term debt and
other long-term obligations (750) (929) (700)
Proceeds from long-term obligations 88 -- --
Payment of cash dividend (1,661) (1,627) (1,532)
Payment on notes
receivable from employees -- -- 172
Exercise of stock options 95 716 755
------- ------- -------
Net cash used in financing activities (2,228) (1,840) (1,305)
------- ------- -------
Net increase (decrease) in cash and cash equivalents
before effect of exchange rate changes 3,274 (2,890) 4,427
Effect of exchange rate changes on cash and
cash equivalents (12) 17 --
------- ------- -------
Net increase (decrease) in cash and cash equivalents 3,262 (2,873) 4,427
Cash and cash equivalents at beginning of year 2,121 4,994 567
------- ------- -------
Cash and cash equivalents at end of year $ 5,383 $ 2,121 $ 4,994
======= ======= =======
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 283 $ 297 $ 312
======= ======= =======
Income taxes $ 3,352 $ 971 $ 1,159
======= ======= =======
Other activities which affect assets or liabilities but did not result in
cash flow during the fiscal years:
Declaration of cash dividend $ 833 $ 829 $ 799
======= ======= =======
The accompanying notes are an integral part of these financial statements.
1. Summary of Accounting Policies
- ---------------------------------
Principles of Consolidation:
The consolidated financial statements include the accounts of Frequency
Electronics, Inc. and its wholly-owned subsidiaries (the "Company" or
"Registrant". References to "FEI" are to the parent company alone and do not
refer to any of its subsidiaries). The Company is principally engaged in the
design, development and manufacture of precision time and frequency control
products and components for microwave integrated circuit applications. See Note
14 for information regarding the Company's Commercial Communications, Gillam-FEI
and U.S. Government business segments. Intercompany accounts and significant
intercompany transactions are eliminated in consolidation. To accommodate the
different fiscal periods of Gillam-FEI, the company recognizes its share of net
income or loss on a one month lag.
These financial statemen