SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- --------------------------------------------------------------------------------
Common Stock (par value $1.00 per share) American Stock Exchange
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes _ No X
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of October 31, 2004 - $57,800,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 22, 2005 - 8,525,600.
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 September 29, 2005.
(Cover page 1 of 61 pages)
Exhibit Index at Page 54
PART I
Item 1. Business
GENERAL DISCUSSION
Frequency Electronics, Inc. (sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the 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.
In the mid-1990's, the Company transformed itself from primarily a defense
contract manufacturer into a high-tech provider of precision time and frequency
products for commercial applications found in both ground-based communication
stations and on-board satellites. The Company also continues to support the
United States government with products for defense and space applications.
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 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 providing reference frequencies for certain
military, commercial and scientific, terrestrial and space applications.
The Company has divided its operations into four principal market areas:
(1) Products for commercial communications which are based either on the
ground or in space. 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.
(2) Products used by the United States Government for defense or space
applications. The Company's subsidiary, FEI Government Systems, Inc.
("FEI-GSI"), was formed in fiscal year 2002 to focus on supplying the Company's
technology and legacy proprietary products to the United States military and
other U.S. government agencies.
(3) Products for wireline and network synchronization systems. These
products are produced by Gillam-FEI, the Company's Belgian subsidiary, acquired
in September 2000. Products delivered by Gillam-FEI provide essential network
monitoring and wireline synchronization for a variety of industries and
telecommunications providers in Europe, Africa, the Middle East and Asia.
(4) Products that incorporate global positioning systems ("GPS")
technology. These precision time and frequency generation and synchronization
products are manufactured by the Company's subsidiary FEI-Zyfer, Inc.
("FEI-Zyfer"). As described more fully below, early in fiscal year 2004, the
Company acquired the business and net assets of Zyfer, Inc. forming a new
wholly-owned subsidiary. FEI-Zyfer's GPS capability complements the Company's
existing technologies and permits the combined entities to provide a broader
range of embedded systems for a variety of timing functions.
During fiscal year 2002, the Company formed two new wholly-owned
subsidiaries to provide broader manufacturing capabilities and worldwide reach
for the Company's proprietary products. Frequency Electronics, Inc. Asia
("FEI-Asia") was established as an Asian-based low cost manufacturer of certain
of the Company's commercial communications products. FEI-Asia is located in the
Free-Trade Zone in Tianjin, China. FEI-Europe, GmbH ("FEI-Europe") was
established as a European sales and marketing office to promote the Company's
new line of crystal oscillators as well as other proprietary products.
2
During fiscal year 2005, the Company decided to close FEI-Europe and merge its
functions into Gillam-FEI. FEI-Asia and the partial year activities of
FEI-Europe are included in the Company's commercial communications operations.
Also in fiscal year 2002 the Company made an initial strategic investment
in Morion, Inc., a Russian crystal oscillator manufacturer located in St.
Petersburg, Russia. The Company's equity investment in Morion permits the
Company to secure a low cost source for high precision quartz resonators and
crystal oscillators, many of which are based on the Company's design and
development work. In September 2004, the Company increased its investment in
Morion from 19.8% to 36.2% of Morion's outstanding shares. Accordingly, the
Company changed its method of carrying the Morion investment from cost to equity
as required by generally accepted accounting principles. Under the equity
method, the Company records its proportionate share of the earnings of Morion.
In addition, certain amounts in prior period financial statements have been
adjusted for the retroactive application of the equity method since the
inception of the Company's investment in Morion.
FISCAL 2005 AND 2004 SIGNIFICANT EVENTS
Real Estate Transactions
During the fourth quarter of fiscal year 2005, the Company recorded a gain
of $4.6 million related to the conversion of its real estate operating
partnership units into shares of Reckson Associates Realty Corp. common stock
("REIT stock"). This gain reflects the currently realizable portion related to
the fiscal year 1998 sale and leaseback of the Company's building to Reckson
Operating Partnership, LP. (See Item 2. Properties and Note 6 to the
accompanying consolidated financial statements.) An additional gain of $1.3
million is deferred and will be recorded over the remaining term of the
Company's building lease in accordance with the accounting provisions for sale
and leaseback transactions. Subsequent to the conversion, the Company sold a
portion of the REIT stock and realized additional gains of approximately $2.3
million, or total pretax gains of approximately $6.9 million. As a result of
these gains, the Company also accrued a contractually mandated incentive
compensation expense of $416,000, which amount is included in operating
expenses.
Acquisition of Zyfer, Inc.
On May 9, 2003, the Company acquired the business and net assets of Zyfer,
Inc., a wholly-owned subsidiary of Odetics, Inc., in a cash transaction. (Note-
Subsequent to this transaction, Odetics changed its corporate name to Iteris,
Inc.) The Company paid $2.3 million at closing, plus acquisition costs of
approximately $400,000. According to the terms of the purchase agreement, the
Company is required to pay up to a maximum of $1 million to Iteris, Inc. in each
of fiscal years 2004 and 2005 if FEI-Zyfer achieves certain revenue levels in
those years. The contingent payments are based on a percentage of revenues in
excess of $6 million in fiscal year 2004 and a percentage of revenues in excess
of $8 million in fiscal year 2005. Based on FEI-Zyfer's performance in fiscal
years 2005 and 2004, the Company will pay an additional $217,000 to Iteris, Inc.
FEI-Zyfer, with its own management team, is a fourth reportable segment in the
Company's financial statements.
Tax Adjustments
During fiscal year 2004, the Company realized a tax benefit of $400,000 as
the result of the reversal of certain tax liabilities. Such liabilities were
established in prior years to recognize the potential tax contingency for
certain judgmental tax adjustments and tax estimates. The Company's income tax
returns for the relevant years were examined by the Internal Revenue Service and
no changes were required. Accordingly, the tax liabilities established in those
years are no longer required and the reversal of such liabilities was recorded
as a tax benefit.
REPORTABLE SEGMENTS
The Company operates under four reportable segments, aligned with the four
markets described above: (1) Commercial Communications; (2) U.S. Government; (3)
Gillam-FEI; and (4) FEI-Zyfer. Within each segment the Company designs,
develops, manufactures and markets precision time and frequency control products
for different markets as described below.
3
The products for the Commercial Communications segment are principally
marketed to wireless communications networks and to the commercial satellite
market. The operations of FEI-Asia and FEI-Europe are included in the Commercial
Communications segment. Most product design, development and manufacturing for
the Commercial Communications and the U.S. Government segments is conducted in
the Company's 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. The Gillam-FEI segment designs, develops and
manufactures products for wireline and network synchronization. Its products are
currently sold to non-U.S. customers. The FEI-Zyfer segment designs and
manufactures products which incorporate GPS technologies. FEI-Zyfer sells its
products to both commercial and U.S. Government customers and collaborates with
other FEI segments on joint product development activities.
During fiscal years 2005, 2004 and 2003 approximately 55%, 56% and 47%,
respectively, of the Company's sales were for products used for terrestrial or
space-based commercial communications and foreign governments. Sales of
Gillam-FEI were approximately 19%, 17% and 25% of fiscal years 2005, 2004 and
2003 revenues, respectively. For the years ended April 30, 2005, 2004 and 2003,
sales of the U.S. Government segment accounted for approximately 10%, 14% and
28%, respectively, of the Company's sales. In fiscal years 2005 and 2004, sales
for the FEI-Zyfer segment were 16% and 13% of consolidated revenues,
respectively. Sales information for the Commercial Communications, U.S.
Government, Gillam-FEI, and FEI-Zyfer markets during each of the last five years
are set forth in Item 6 (Selected Financial Data).
Consolidated revenues include sales to end-users in countries located
outside of the United States. During fiscal years 2005, 2004 and 2003, foreign
sales comprised 50%, 54% and 38%, respectively, of consolidated revenues.
Segment information regarding revenues, including foreign sales, operating
profits, depreciation and assets is more fully disclosed in Note 16 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. Revenues
for this segment have varied considerably over the past 6 fiscal years, based on
infrastructure spending patterns by wireless telecommunication companies and
demand for new commercial satellites. Over this time frame, the Company
initially experienced accelerated growth in commercial communications revenues
followed by a "telecom trough" in fiscal years 2002 and 2003, reacceleration in
late fiscal year 2004 and early fiscal year 2005, to be followed by another slow
down. The Company anticipates that this industry provides a large opportunity
for future sales growth but the timing of revenue growth will be based on
capital spending decisions by domestic and worldwide telecommunication
companies. Additional revenues will be derived from deployment of new or
replacement commercial satellites.
Terrestrial- Wireless
The development of new or improved technologies brings expanded and more
reliable telecommunications services to the public. As digital cellular systems
and PCS networks grow they require more base stations to meet the demand for
better connectivity, higher data rates and quality of cell phone service.
Cellular infrastructure integrators and original equipment manufacturing
companies, consisting of some of the world's largest telecommunications
companies, are building out existing networks even as they develop new
technologies, such as EDGE (Enhanced Data rates for Global Evolution), 3G (3rd
Generation) and other systems, to provide not only improved voice connectivity
but also Internet, video and data transmission.
Wireless communication networks consist of numerous installations located
throughout a service area, each with its own base station connected by wire or
microwave radio through a network switch. Network operators are in the process
of converting older networks from analog to digital technology and enhanced
systems such as CDMA (Code Division Multiple Access). These upgrades require
more precise frequency control at the base stations to achieve a higher degree
and quality of services.
4
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), UMTS
(Universal Mobile Telecommunications System) or GSM (Global System for Mobile
Communications) or a hybrid, such as EDGE (Enhanced Data rates for Global
Evolution), timing to ensure signal synchronization is essential.
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
oven-controlled quartz crystal oscillators are cost-effective precision clocks
suited for high-end performance required in satellite transmissions, airborne
telephony and geophysical survey positioning systems. Commercial satellite
programs such as Intelsat, ANIK, Eutelsat, Inmarsat and Worldstar have utilized
the Company's space-qualified products.
U.S. Government segment:
The Company's sales in the U.S. Government segment are generally 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, the MILSTAR Satellite System and the AEHF Satellite System, are 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 secure communications, surveillance and positioning
systems for the United States Air Force, Navy and Army.
Gillam-FEI segment:
Gillam-FEI extends the Company's competencies into wire-line
synchronization, network monitoring, and specialized test equipment. 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 technology, 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
5
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 are mainly targeted for the telecommunications
industry.
FEI-Zyfer segment:
FEI-Zyfer designs, develops and manufactures products for precision time
and frequency generation and synchronization, primarily incorporating GPS
technology. The products make use of both "in-the-clear" civil and
"crypto-secured" military signals from GPS. In most cases, FEI-Zyfer's products
are integrated into communications systems, computer networks, test equipment,
and military command and control terminals for ground and satellite link
applications. Approximately 60% of revenues are derived from sales where the end
user is the U.S. Government. FEI-Zyfer's products are an important extension of
FEI's core product line, particularly in the area of GPS capabilities.
PRODUCTS
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 and low-g sensitivity units for
moving platforms and satellite systems, and fast warm-up, low power consumption
units for mobile applications, including 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.
6
High reliability 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.
7
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 ("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.
The Company's subsidiary, FEI-Zyfer, manufactures products incorporating
GPS technology by utilizing GPS signals to derive time and frequency
information. These systems and subsystems are used in secure government (SAASM-
Selective Acquisition Anti-spoofing Module) and commercial communications and
other applications.
The GPS expertise of FEI-Zyfer has been joined with the technological
capabilities and experience of FEIC in building crystal oscillators for harsh
environments, to jointly develop a new system to be utilized to enhance seismic
data in deep earth and other exploratory drilling.
BACKLOG
As of April 30, 2005, the Company's consolidated backlog amounted to
approximately $31 million (see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations). Approximately 80% of this
backlog is expected to be filled during the Company's fiscal year ending April
30, 2006. 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
The Company markets its products both directly and through approximately
50 independent sales representative organizations located in the United States,
Europe and Asia. Sales to non-U.S. customers, including the sales of its
overseas subsidiaries, totaled approximately 50%, 54% and 38% of net sales in
fiscal years 2005, 2004 and 2003, respectively.
The Company's products are sold to a variety of customers, both commercial
and governmental. For the years ended April 30, 2005, 2004 and 2003,
approximately 20%, 21% and 28%, 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,
2005, 2004 and 2003 included sales to Motorola Corp. ("Motorola") of
approximately $15.5 million, $16.1 million and $10.0 million, respectively.
These amounts represent 28%, 32% and 32%, respectively, of consolidated sales
for each of those years. Lucent Technologies ("Lucent") accounted for $6.5
million and $5.5 million of revenues in fiscal years 2005 and 2004 or 12% and
11%, respectively, of consolidated sales. In fiscal year 2003, Northrop Grumman
Corporation ("Northrop") accounted for $3.5 million of revenues or 11% of
consolidated sales.
8
During the three years ended April 30, 2005, sales to Motorola and Lucent
were made by the Company's Commercial Communications segment, accounting for 70%
in fiscal year 2005, 76% in fiscal year 2004 and 73% in fiscal year 2003 of that
segment's total sales.
Fiscal years 2005, 2004 and 2003 revenues in the U.S. Government segment
included sales to four customers, Northrop, Raytheon Missile Systems, Inc.
("Raytheon"), BAE Systems Aerospace, Inc. ("BAE"), and Lockheed Martin
("Lockheed") accounting for 87%, 85% and 77%, respectively, of total segment
sales.
During fiscal years 2005, 2004 and 2003, France Telecom and Belgacom were
major customers of the Gillam-FEI segment. These European telecom companies
accounted for 59%, 31% and 23%, respectively, of the segment's revenues in those
fiscal years.
In fiscal year 2005, Northrop and Computer Sciences Corporation accounted
for 21% of the revenues in the FEI-Zyfer segment. In fiscal year 2004, General
Dynamics accounted for 19% of the revenues in the FEI-Zyfer segment.
The loss by the Company of any one of these customers would have a
material adverse effect on the Company's business. The Company believes its
relationship with these companies to be mutually satisfactory and is not aware
of any prospect for the cancellation or significant reduction of any of its
commercial or existing U.S. Government contracts.
The Company purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Company is not dependent upon any one supplier or source of supply
for any of its component part purchases and maintains alternative sources of
supply for all of its purchased components. The Company has found its suppliers
generally to be reliable and price-competitive.
RESEARCH AND DEVELOPMENT
The Company's technological expertise continues to be an important factor
to support future growth in revenues and earnings. The Company has focused its
internal research and development efforts on improving the core physics and
electronic packages in its time and frequency products, conducting research to
develop new time and frequency technologies, improving product manufacturability
by seeking to reduce its production costs through product redesign and process
improvements and other measures to take advantage of lower cost components.
The Company continues to focus a significant portion of its own resources
and efforts on developing hardware for satellite (commercial and U.S.
Government) and terrestrial commercial communications systems, including
wireless, wireline and GPS-related systems. During fiscal years 2005, 2004 and
2003, the Company expended $6.8 million, $5.3 million and $4.6 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 2006, the Company is targeting to spend
approximately $6.0 million on research and development in similar areas. The
actual amount spent will depend on market conditions and identification of new
opportunities.
PATENTS AND LICENSES
The Company believes that for the most part its business is not dependent
on patent or license protection. Rather, it is primarily dependent upon the
Company's technical competence, the quality of its products and its prompt and
responsible contract performance. However, employees working for the Company
assign all rights to inventions to the Company and the Company presently holds
such patents and licenses. In certain limited circumstances, the U.S. Government
may use or permit the use by the Company's competitors of certain patents or
licenses the government has funded. During fiscal year 2003, the Company
received a broad and significant patent for new, proprietary quartz oscillator
technology which the Company intends to exploit in both legacy and new
applications.
COMPETITION
The Company experiences competition in all areas of its business. The
Company competes primarily on the basis of the accuracy, performance and
reliability of its products, the ability of its products
9
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 products, the Company has few competitors. For
lower precision components there is significant competition from a number of
suppliers.
In recent years, the Company has successfully outsourced certain component
manufacturing processes to third parties and more recently to its wholly-owned
subsidiary, FEI-Asia in Tianjin, China and to Russian-based Morion, Inc., in
which the Company is a minority shareholder. The Company expects this
outsourcing to enhance its competitive position on cost while maintaining its
high quality standards. The Company believes its ability to obtain raw
materials, manufacture finished products, integrate them into systems and
sub-systems and interface these systems with end-user applications provides a
strong competitive advantage.
Certain of the Company's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs. The
Company has a strong history of competing successfully in this environment due
to the quality, reliability and outstanding record of performance its products
have achieved.
With respect to its instruments and systems, the Company competes with
Hewlett-Packard Company, Symmetricom, Inc, E. G. and G., Inc. and others.
Systems for the wireline industry produced by the Gillam-FEI segment compete
with Symmetricom, Inc. The Company's principal competition for space products is
the in-house capability of its major customers.
EMPLOYEES
The Company employs approximately 375 persons worldwide. None of the U.S.
employees are represented by labor unions, while in Europe approximately five
employees in one facility are represented by a French labor union.
OTHER ASPECTS
The Company's business is not seasonal although it expects to experience
some fluctuation in revenues during the second fiscal quarter as a result of
extended holiday periods in August. No unusual working capital requirements
exist.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers hold office until the annual meeting of the Board
of Directors following the annual meeting of stockholders, subject to earlier
removal by the Board of Directors.
The names of all executive officers of the Company and all positions and
offices with the Company which they presently hold are as follows:
Joseph P. Franklin - Chairman of the Board of Directors
Martin B. Bloch - President, Chief Executive Officer and Director
Markus Hechler - Executive Vice President, President of FEI
Government Systems, Inc. and Assistant Secretary
Michel Gillard - President, Gillam-FEI
Steven Strang - President, FEI-Zyfer
Hugo Fruehauf - Chief Technical Officer
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Marketing and Sales
Oleandro Mancini - Vice President, Business Development
Thomas McClelland - Vice President, Commercial Products
Alan Miller - Treasurer and Chief Financial Officer
Harry Newman - Secretary
None of the officers and directors is related.
10
Joseph P. Franklin, age 71, has served as a Director of the Company since
March 1990. In December 1993 he was elected Chairman of the Board of Directors.
He also served as Chief Executive Officer from December 1993 through October
1998 and as Chief Financial Officer from September 1996 through October 1998.
From August 1987 to November 1993, he was the Chief Executive Officer of
Franklin S.A., a Spanish business consulting company located in Madrid, Spain,
specializing in joint ventures, and was a director of several prominent Spanish
companies. General Franklin was a Major General in the United States Army until
he retired in July 1987.
Martin B. Bloch, age 69, has been a Director of the Company and of its
predecessor since 1961. Mr. Bloch is the Company's President and Chief Executive
Officer and has held such positions since inception of the Company, except for
the period from December 1993 through October 1998 when General Franklin held
the CEO position. Previous to forming the Company, Mr. Bloch served as chief
electronics engineer of the Electronics Division of Bulova Watch Company.
Markus Hechler, age 59, joined the Company in 1967. He was elected to the
position of Executive Vice President in February 1999, prior to which he served
as Vice President, Manufacturing since 1982. In October 2001, he was named
President of the Company's subsidiary, FEI Government Systems, Inc. He has
served as Assistant Secretary since 1978.
Michel Gillard, age 64, became an officer of the Company when Gillam S.A.
was acquired in September 2000. Gillam S.A., a company engaged in the design,
manufacture and marketing of wireline and network synchronization systems, was
founded by Mr. Gillard in 1974.
Steve Strang, age 41, was named President of FEI-Zyfer, Inc., effective
May 1, 2005. Previously, Mr. Strang was Executive Vice President of this
subsidiary and its predecessor companies where he has served for 17 years in
various technical and management positions.
Hugo Fruehauf, age 66, became an officer of the Company when the net
assets of Zyfer, Inc. were acquired in May 2003. Effective May 1, 2005, Mr.
Fruehauf was named Chief Technical Officer of the Company. Mr. Fruehauf served
as CEO and CTO of Zyfer, Inc. for 6 years. Prior to joining Zyfer, Mr. Fruehauf
was vice president of Alliant Techsystems from 1995 to 1997 and from 1982 to
1995 was president of Datum-Efratom and its predecessor, Ball-Efratom.
Charles S. Stone, age 74, joined the Company in 1984, and has served as
its Vice President since that time. Prior to joining the Company, Mr. Stone
served as Senior Vice President of Austron Inc., from 1966 to 1979, and Senior
Scientist of Tracor Inc., from 1962 to 1966.
Leonard Martire, age 68, joined the Company in August 1987 and served as
Executive Vice President of FEI Microwave, Inc., the Company's wholly-owned
subsidiary, until May 1993 when he was elected Vice President, Marketing and
Sales.
Oleandro Mancini, age 56, joined the Company in August 2000 as Vice
President, Business Development. Prior to joining the Company, Mr. Mancini
served from 1998 as Vice President, Sales and Marketing at Satellite
Transmission Systems, Inc. and from 1995 to 1998 as Vice President, Business
Development at Cardion, Inc., a Siemens A.G. company. From 1987 to 1995, he held
the position of Vice President, Engineering at Cardion, Inc.
Thomas McClelland, age 50, joined the Company as an engineer in 1984 and
was elected Vice President, Commercial Products in March 1999.
Alan Miller, age 56, joined the Company in November 1995 as its corporate
controller and was elected to the position of Treasurer and Chief Financial
Officer in October 1998. Prior to joining the Company, Mr. Miller served as an
operations manager and a consultant to small businesses from 1992 through 1995
and as a Senior Audit Manager with Ernst & Young, L.L.P. from 1980 to 1991.
Harry Newman, age 58, Secretary, has been employed by the Company since
1979, prior to which he served as Divisional Controller of Jonathan Logan, Inc.,
apparel manufacturers, from 1976 to 1979, and as supervising Senior Accountant
with Clarence Rainess and Co., Certified Public Accountants, from 1971 to 1975.
11
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
Anaheim, CA 20,000 Lease
Liege, Belgium 34,000 Own
Chalon Sur Saone, France 37,000 Own
Tianjin, China 27,000 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 which encompass the principal operations of
the Commercial Communication and U.S. Government segments.
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 513,000
participation units of Reckson Operating Partnership, L.P. ("REIT units") which
were valued at closing at $12 million. Each REIT unit was convertible into one
share of the common stock of the REIT. Under the accounting provisions for sale
and leaseback transactions, the sale of this building was considered a financing
and the REIT units received were reflected as a noncurrent liability while the
related building continued to be reflected as an asset. In March 2005, the
Company exercised its option to convert all of the REIT units into 513,000
shares of the REIT. Upon conversion of the REIT units, the Company recognized a
gain of $4.6 million and deferred an additional $1.3 million gain. The deferred
gain will be recognized into income over the remaining term of the initial
leaseback period. As a result of the conversion of the REIT units, both the
building and the noncurrent liability were removed from the balance sheet of the
Company. (See Note 6 to the accompanying financial statements.)
The properties located in Belgium and France were acquired upon completion
of the Gillam S.A. acquisition. These facilities are adequate to meet the
present and future operational requirements of Gillam-FEI. During the year ended
April 30, 2003, the Company sold a portion of the building owned by its
subsidiary in France, receiving proceeds of $275,000 and realizing a gain of
$152,000 which amount is included in other income and expense.
The Tianjin, China facility is the location of the Company's wholly-owned
subsidiary, FEI-Asia. In late fiscal year 2005, the subsidiary acquired
additional leased space within a manufacturing facility located in the Tianjin
Trade-Free Zone. The lease is renewable annually with rent of $14,000 payable
quarterly. The new facility is adequate for the near-term manufacturing
expectations for the Company.
The Anaheim, California facility is leased by the Company's subsidiary,
FEI-Zyfer, Inc. The facility consists of a combination office and manufacturing
space. The lease, which expires in May 2007, requires monthly payments of
$21,000.
12
Item 3. Legal Proceedings
No material legal proceedings are pending.
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 2005.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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
-------------- --------- --------
2005 -
FIRST QUARTER $14.70 $11.65
SECOND QUARTER 13.40 10.22
THIRD QUARTER 16.05 12.00
FOURTH QUARTER 15.90 9.80
2004 -
FIRST QUARTER $10.80 $ 8.00
SECOND QUARTER 11.05 9.35
THIRD QUARTER 14.99 10.18
FOURTH QUARTER 17.13 12.25
As of July 22, 2005, the approximate number of holders of record of common
stock was 600. The closing share price of the Company's stock on April 30, 2005
was $11.48. The closing share price of the Company's stock on July 22, 2005 was
$11.75.
DIVIDEND POLICY
Since 1997, the Company has adhered to a policy of distributing a cash
dividend to shareholders of record as of 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.
STOCK BUYBACK PROGRAM
In March 2005, the Company's Board of Directors authorized a stock
repurchase program for up to $5 million of the Company's outstanding common
stock. Shares may be purchased in open market purchases, private transactions or
otherwise at such times and from time to time, and at such prices and in such
amounts as the Company believes appropriate and in the best interests of its
shareholders. The timing and volume of repurchases will vary depending on market
conditions and other factors. Purchases may be commenced or suspended at any
time without notice. During fiscal year 2005, the Company repurchased 6,300
shares under the buyback program, paying an average of $10.38 per share.
13
EQUITY COMPENSATION PLAN INFORMATION
Number of Securities
Remaining available for
Number of Securities to Weighted-Average Future Issuance under
be Issued upon exercise Exercise Price of Equity Compensation Plans
of Outstanding Options Outstanding Options (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a))
- ----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity Compensation Plans
Approved by Security Holders 459,300 $ 9.38 109,750
Equity Compensation Plans Not
Approved by Security Holders 814,237 $12.82 189,500
---------- -------
TOTAL 1,273,537 $11.58 299,250
========= ====== =======
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, 2005. The
information has been derived from the audited financial statements of the
Company for the respective periods.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Years Ended April 30,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(in thousands, except share and dividend data)
Net Sales
Commercial Communications $31,464 $28,235 $15,051 $26,663 $ 36,290
U.S. Government 5,603 7,053 8,906 4,513 3,727
Gillam-FEI 12,599(1) 12,197(1) 8,137 11,223 9,276
FEI-Zyfer 8,803 6,560 - - -
less intersegment sales (3,296)(1) (3,939)(1) (567) (1,220) (83)
------- ------- ------- ------- --------
Total Net Sales $55,173 $50,106 $31,527 $41,179 $ 49,210
======= ======= ======= ======= ========
Operating (Loss) Profit $(1,269) $(1,646) ($12,490)(5) $ 89(6) $ 5,939(8)
======= ======= ======= ======= ========
Net Income (Loss) $ 5,037(2) $ 320(3,4) ($ 8,811)(4) $ 1,378(7) $ 5,644(9)
======= ======= ======= ======= ========
Average Common Shares Outstanding
Basic 8,484,682 8,374,399 8,331,785 8,350,735 8,198,569
Diluted 8,684,758 8,542,575 8,331,785 8,529,175 8,431,823
Earnings per Common Share
Basic $ 0.59 $ 0.04(4) ($ 1.06) $ 0.17 $ 0.69
======= ======= ======= ======= ========
Diluted $ 0.58 $ 0.04(4) ($ 1.06) $ 0.16 $ 0.67
======= ======= ======= ======= ========
CONSOLIDATED BALANCE SHEET DATA
Total Assets $88,374 $92,867(10) $85,778(10) $96,011 $102,039
======= ======= ======= ======= ========
Long-Term Obligations
and Deferred Items $ 9,337 $17,609 $17,903 $17,796 $ 18,074
======= ======= ======= ======= ========
Cash dividend declared
per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= ======= ========
14
Notes to Selected Financial Data
(1) Includes intercompany sales to FEI Communications of $2.4 million
and $3.5 million in fiscal years 2005 and 2004, respectively, for
development of US5G product.
(2) Includes $6.9 million from gain on conversion of REIT units into
REIT common shares and subsequent sale of a portion of the REIT
common shares.
(3) Includes $400,000 reversal of tax liabilities established in prior
years
(4) Includes $158,000 and $49,000, respectively, for restatement of
equity income from Morion, Inc. in fiscal years 2004 and 2003, which
also increased fiscal year 2004 Earnings per Common Share by $0.02
from the amount reported before restatement.
(5) Includes goodwill impairment of $6.2 million and adjustments to
inventory of $3.6 million.
(6) 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.
(7) In addition to items in (6) above, includes $300,000 investment loss
for an other than temporary decline of value in a marketable
security.
(8) Includes insurance reimbursement of $2.8 million (net of
professional fees) for expenses related to certain litigation with
the U.S. Government, increased inventory reserves of $2.0 million
related to certain product lines and $300,000 of acquisition-related
nonrecurring costs.
(9) In addition to items in (8) above, includes $287,000 investment loss
for an other than temporary decline of value in a marketable
security.
(10) Total assets are restated by $207,000 for fiscal year 2004 and by
$49,000 for fiscal year 2003 from amounts reported in prior fiscal
years to reflect the Company's equity interest in Morion, Inc.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995:
The statements in this Annual Report on Form 10-K 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, inability to
integrate operations and personnel, actions by significant customers or
competitors, general domestic and international economic conditions, consumer
spending trends, reliance on key customers, 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 any
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.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 1 to
the consolidated financial statements. The Company believes its most critical
accounting policies to be the recognition of revenue and costs on production
contracts and the valuation of inventory. Each of these areas requires the
Company to make use of reasonable estimates including estimating the cost to
complete a contract, the realizable value of its inventory or the market value
of its products. Changes in estimates can have a material impact on the
Company's financial position and results of operations.
Revenue Recognition
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred. Each
15
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 and FEI-Zyfer segments, smaller
contracts or orders in the other business segments and 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 and installation completed.
Costs and Expenses
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
Inventory
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year. Inventory reserves are established
for slow-moving and obsolete items and are based upon management's experience
and expectations for future business. Any changes in reserves arising from
revised expectations are reflected in cost of sales in the period the revision
is made.
Equity-based Compensation
The Company applies the disclosure-only provisions of FAS No. 148,
"Accounting for Stock-Based Compensation- Transition and Disclosure" and
continues to measure compensation cost in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Historically, this has not resulted
in compensation cost upon the grant of options under a qualified stock option
plan. However, in accordance with FAS No. 148, the Company provides pro forma
disclosures of net income (loss) and income (loss) per share as if the fair
value method had been applied beginning in fiscal 1996.
The following table illustrates the effect on the Company's consolidated
statements of operations for the fiscal years ended April 30, had compensation
cost for stock option awards under the plans been determined based on the fair
value at the grant dates consistent with the provisions of FAS No. 148:
(in thousands, except per share data)
2005 2004 2003
---- ---- ----
Net Income (Loss), as reported $5,037 $ 320 ($8,811)
Cost of stock options, net of taxes (525) (707) (752)
------- ------- --------
Net Income (Loss)- pro forma $4,512 ($ 387) ($9,563)
====== ===== =======
Income (Loss) per share, as reported:
Basic $0.59 $ 0.04 ($ 1.06)
===== ====== =======
Diluted $0.58 $ 0.04 ($ 1.06)
===== ====== =======
Income (Loss) per share- pro forma
Basic $0.53 ($ 0.05) ($ 1.15)
===== ====== =======
Diluted $0.52 ($ 0.05) ($ 1.15)
===== ====== =======
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in each of the three years ended
April 30, 2005, 2004 and 2003; dividend yield of 1.10%, 1.8% and 2.4%; expected
volatility of 59%, 63% and 63%; risk free interest rate of 3.9%, 3.6% and 4.1%;
and expected lives of six and one-half years, respectively.
16
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:
2005 2004 2003
---- ---- ----
Net Sales (exclusive of
intercompany sales)
Commercial Communications 55.4% 55.5% 46.9%
U.S. Government 10.2 14.1 28.3
Gillam-FEI 18.5 17.3 24.8
FEI-Zyfer 15.9 13.1 -
------ ------ ------
100.0 100.0 100.0
Cost of Sales 67.1 68.9 81.5
------ ------ ------
Gross Margin 32.9 31.1 18.5
Selling and Administrative expenses 21.2 22.3 24.0
Compensation Charges 1.6 1.5 -
Goodwill writedown - - 19.5
Research and Development expenses 12.4 10.6 14.6
------ ------ ------
Operating Loss (2.3) (3.3) (39.6)
Other Income, net & Minority 15.2 3.8 5.9
Interest
Provision (Benefit) for Income Taxes 3.8 0.2 (5.6)
------ ------ ------
Net Income (Loss) 9.1% 0.3% (28.1%)
====== ====== ======
Significant Events
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal year 2005, 2004 and 2003
results of operations were materially impacted by several specific events.
During fiscal year 2005, the Company recorded a gain of $4.6 million on the
conversion of its real estate operating partnership units ("REIT units") into
shares of Reckson Associates Realty Corp. common stock ("REIT stock"), thus
completing a transaction which was initiated in fiscal year 1998. (See Item 2.
Properties and Note 6 to the accompanying consolidated financial statements.)
Subsequent to the conversion, the Company sold a portion of the REIT stock and
realized additional gains of approximately $2.3 million, or total pretax gains
of approximately $6.9 million. As a result of these gains, the Company also
accrued a contractually mandated incentive compensation expense of $416,000,
which amount is included in operating expenses under the caption "Compensation
Charges."
During fiscal year 2004, the Company acquired the business and net assets
of Zyfer, Inc. In addition to the purchase price, the Company invested an
additional $2.5 million of working capital to support the operations of
FEI-Zyfer until it could return to profitability. Also, in fiscal year 2004, the
Company realized a $400,000 tax benefit as the result of the reversal of certain
tax liabilities established in prior years. In fiscal 2003, the Company
determined that the goodwill associated with its investment in Gillam-FEI had
become impaired and wrote off the full amount of goodwill in the amount of $6.2
million.
Without these significant events, the Company's operating (loss) profit,
pre-tax income (loss) and net income (loss) would be materially different from
that reported in the financial statements. See Note 12 to the financial
statements for pro forma presentation related to the acquisition of FEI-Zyfer,
Inc.
Operating Loss
The operating loss for the fiscal year ended April 30, 2005, decreased by
$377,000 (23%) to $1.3 million from the $1.6 million operating loss for fiscal
year 2004. The improvement is attributable to the 10% year-over-year increase in
sales coupled with improved gross margins but offset by higher selling and
administrative costs, compensation charges and research and development
expenditures. The research and development expenditures represent investments
that keep the Company's products at the leading edge of time and frequency
technology and enhance competitiveness for future sales.
17
The operating loss for the fiscal year ended April 30, 2004, decreased
$10.8 million (87%) to $1.6 million from the operating loss of $12.5 million
reported in fiscal year 2003. The improvement is directly attributable to the
year-over-year increase in sales volume during fiscal year 2004 as well as the
significant fiscal year 2003 events which did not recur in fiscal year 2004: the
$6.2 million goodwill impairment (see above) and $3.6 million in inventory
adjustments. These improvements were offset by the fiscal year 2004 operating
loss of $1.1 million recorded by FEI-Zyfer.
Net Sales
Net sales for fiscal year 2005 increased by $5.1 million (10%) to $55.2
million from fiscal year 2004 revenues of $50.1 million. Sales increases were
experienced in three of the Company's four segments. Commercial Communication
revenues increased by $2.7 million, largely on increased revenues from
commercial space programs. Gillam-FEI revenue (exclusive of intercompany sales
of $2.4 million related to a research and development program) improved by $1.5
million of which approximately 40% is attributable to appreciation in the value
of the euro to the dollar during fiscal year 2005. FEI-Zyfer's revenues
increased by $2.2 million or 34%, continuing its improved performance which
began in the second half of fiscal year 2004. Only the revenues of the U.S.
Government segment experienced a decline of $1.5 million (21%) compared to
fiscal year 2004 as the Company worked on several smaller dollar development
contracts versus higher volume production programs. The Company expects to
realize significant revenue increases in the U.S. Government segment during
fiscal year 2006 based on new production programs and recent contract awards.
Similarly, each of the other three segments is expected to show increased
revenues in fiscal year 2006 as compared to fiscal year 2005.
Net sales for fiscal year 2004 increased by $18.6 million (59%) to $50.1
million from fiscal year 2003 revenues of $31.5 million. These revenues include
$6.5 million from FEI-Zyfer, or 21% of the year-over-year increase, while sales
from the other segments increased by $12.0 million (38%) over the prior year.
This increase is attributable to strong second half revenues in the Commercial
Communications and Gillam-FEI segments compared to both the first half of the
fiscal year as well as to fiscal year 2003 revenues. Commercial Communication
revenues were up 93% ($14 million) over the prior year on the strength of
increased capital spending on cellular network infrastructure and sales related
to commercial satellites. Gillam-FEI revenues (exclusive of $3.5 million in
intersegment sales related to a research and development program) increased by
over $500,000 (6%) from the prior year, benefiting primarily from the 20%
year-over-year increase in the value of the euro to the dollar. Fiscal year 2004
revenues from the U.S. Government segment declined by $1.8 million (20%) from
the prior year as the Company worked on several developmental programs under
U.S. Government contracts as compared to more production-type contracts in the
prior year.
Demand for the Company's Commercial Communications products by wireless
infrastructure original equipment manufacturers, has fluctuated in recent years.
Demand peaked during the Company's fourth quarter of fiscal year 2004 and
through the first quarter of fiscal year 2005. This was followed by sequential
declines in the subsequent quarters of fiscal year 2005 as end-users postponed
deployment of next generation cellular base stations. The Company continues to
believe, however, that the world-wide market for its synchronization products
for the wireless industry remains extremely large and will grow. The Company
anticipates that some of this growth will materialize during the latter portion
of fiscal year 2006. In addition, world-wide capital spending on commercial
satellites and wireline synchronization systems is increasing. Accordingly, the
Company believes future sales in the Commercial Communications and Gillam-FEI
segments will increase over the levels achieved in fiscal year 2005. Based on
the Company's recent work on U.S. Government-sponsored development contracts and
current proposal activity, the Company expects revenues from U.S. Government
programs to increase during fiscal year 2006. The U.S. Government is expected to
provide funding for such projects as secure radios, new communication
satellites, unmanned aerial vehicles, weapons guidance systems and secure
communications. The resultant increased revenue stream will benefit the
Company's U.S. Government and FEI-Zyfer segments.
Gross Margin Rates
The gross margin rate for fiscal year 2005 improved to 33% of net sales
compared to 31% in fiscal year 2004. The improvement is primarily attributable
to increased revenue in fiscal year 2005 which is able to absorb a greater share
of fixed costs. Gross margin improvements were partially offset by
18
additional work required on certain space programs to address technical issues
encountered at the near conclusion of these programs.
The gross margin rate for fiscal year 2004 improved to 31% of net sales
compared to 19% in fiscal year 2003. The fiscal year 2003 rate was reduced by
11% due to a $3.6 million inventory adjustment. Although fiscal year 2004 sales
increased substantially over the prior year, the volume was insufficient to
fully absorb the overhead, particularly in the first half of the current fiscal
year when lower revenues were recorded. In the second half of the year, the
Company experienced rising revenues but also built up its support structure to
sustain the expected higher level of sales. The Company also reduced the value
of its inventory by $530,000 as the result of an inventory revaluation during
fiscal year 2004.
The Company's target is to achieve an overall gross margin rate of 40% or
better through greater sales volume, continued process improvements and
utilization of lower cost manufacturing in Russia and China. During fiscal year
2006, if revenues increase as anticipated, the Company expects to realize gross
margin rates approaching its targeted rate.
Compensation Charges
Under the caption "Compensation Charges," the Company has recorded certain
expenses which are defined as operating expenses which are not expected to
recur.
As indicated above, during fiscal year 2005 the Company accrued a $416,000
incentive compensation expense related to the conversion and sale of REIT units.
In addition, the Company recorded a non-cash charge of $327,000 to increase the
liability under its deferred compensation plan. This charge was based on updated
life expectancy charts utilized by the Company's actuary. (See Note 13 to the
accompanying consolidated financial statements.) The Company's Belgian
subsidiary recorded an accrual for $133,000 related to litigation with a former
employee.
During fiscal year 2004, the Company's majority-owned subsidiary in France
substantially completed a restructuring of its operations as a result of the
Company's decision to convert it from a manufacturing facility to a regional
sales office. This resulted in a charge to earnings of $428,000, consisting
primarily of employee severance costs, for the year ended April 30, 2004. The
Company does not expect to incur significant costs in the future related to this
restructuring although it may recognize a gain during fiscal year 2006 upon the
sale of the subsidiary's current manufacturing facility. In addition, in the
fourth quarter of fiscal year 2004, in connection with an employment agreement
initiated in 1993, the Company awarded its Chairman of the Board and former CEO
a stock bonus of 20,000 shares which had a value of approximately $297,000.
Selling and Administrative expenses
Selling and administrative costs in fiscal year 2005 increased by $557,000
(5%) to $11.7 million from $11.2 million in fiscal year 2004. Compared to fiscal
year 2004, the Company incurred larger deferred compensation expense (exclusive
of the charge included in "Compensation Charges"), increased salaries for
support personnel, incurred information technology consulting fees as the
Company upgraded its ERP system and higher professional fees related to the
Company's efforts to comply with the provisions of Section 404 of the
Sarbanes-Oxley Act of 2002. These expenses were partially offset by savings
obtained from the mid-year closing of the Company's European sales office and
merging those functions into the Company's Belgian subsidiary.
Selling and administrative costs in fiscal year 2004 increased by $3.6
million (47%) to $11.2 million from $7.6 million in fiscal year 2003. The
largest component of this increase is the approximately $2.8 million of selling
and administrative expenses incurred at then newly-acquired FEI-Zyfer. The
additional $800,000 of expenses is commensurate with the increased volume of
business that the Company experienced in fiscal year 2004. Costs such as
commission expenses, salaries of additional marketing and support personnel and
performance related compensation all contributed to increased selling and
administrative expenses in fiscal year 2004. These increases were offset by
declines in deferred compensation expenses. In addition, the value of the euro
to the US dollar continued to rise throughout fiscal year 2004. As a result,
Gillam-FEI's euro-denominated selling and administrative costs declined by 5%
but, when converted to US dollars, reflected a 13% increase over fiscal year
2003.
As a percentage of sales, selling and administrative expenses were 21.2%
in fiscal year 2005, 22.3% in fiscal year 2004 and 24.0% in fiscal year 2003.
The Company targets selling and administrative
19
expenses not to exceed 20% of consolidated sales. The level of sales, which were
lower than anticipated each fiscal year, prevented the Company from achieving
its target. If revenues improve as anticipated in fiscal year 2006, the Company
expects to achieve its targeted level of selling and administrative expenses.
Research and Development expenses
Research and development expenses in fiscal year 2005 increased by $1.5
million (28%) to $6.8 million from $5.3 million in fiscal year 2004. The Company
devoted significant resources to completion of its new US5G and associated
products for wireline synchronization, developed new hardware for space
applications and further enhanced the performance of low-g (gravity) sensitivity
oscillators which have broad applications in both commercial and U.S. Government
systems. These research and development expenditures represent investments that
keep the Company's products at the leading edge of time and frequency technology
and enhance competitiveness for future sales.
Research and development expenses in fiscal year 2004 increased by
$731,000 (16%) to $5.3 million from $4.6 million in fiscal year 2003. This
increase is entirely attributable to development costs incurred at FEI-Zyfer
which approximated $840,000. Without FEI-Zyfer, research and development expense
would have declined by 2% from fiscal year 2003. During fiscal year 2004, those
resources previously devoted to the Company's internal research and development
efforts were often redirected to funded research projects. Consequently, the
costs of these resources are reflected in cost of sales rather than in research
and development expenses. Internal development efforts during fiscal year 2004
were focused on Gillam-FEI's US5G system, developing a digital rubidium
oscillator, and further improving the performance of crystal oscillators,
including low-g sensitivity crystal oscillators.
The Company will continue to focus its research and development activities
on those products which it expects will provide the best return on investment
and greatest prospects for the future growth of the Company. For fiscal year
2006, the Company will make additional investments in developing manufacturing
process improvements for its new US5G wireline synchronization product.
Additional funds will be invested in improving and miniaturizing rubidium atomic
clocks, developing new GPS-based synchronization products and further enhancing
the capabilities of its line of crystal oscillators. 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 increased by $6.5 million (335%) to $8.4 million in fiscal
year 2005 from $1.9 million in fiscal year 2004. The largest component of this
increase is described above under Significant Events for fiscal year 2005: the
conversion of REIT units for REIT stock and the subsequent partial sale of these
shares.
Other income (expense), increased by $60,000 (3%) to $1.93 million in
fiscal year 2004 from $1.87 million in fiscal year 2003. Amounts for both years
have been restated from prior year reporting as a result of a change in
accounting for the Company's investment in Morion, Inc. With its increased
ownership interest at 36% of Morion's outstanding shares, the Company changed
its method of accounting from the cost to the equity method. Accordingly, prior
years include the Company's share of Morion's net income in the amount of
$158,000 for fiscal year 2004 and $49,000 for fiscal year 2003.
Investment income during fiscal year 2005 increased by $1.5 million (66%)
over fiscal year 2004 and fiscal year 2004 increased by $491,000 (27%) over
fiscal year 2003. In all three years, the Company recorded realized gains and
losses on marketable securities. In fiscal year 2005, the Company realized gains
of $2.3 million on the sale of a portion of the REIT stock. (See Item 2.
Properties and Note 6 to the accompanying financial statements.) In fiscal year
2004, the Company realized gains of $590,000 on the sale of certain marketable
securities. In fiscal year 2003, realized losses on marketable securities of
$130,000 were partially offset by realized gains of $90,000. Investment income
also includes interest and dividends earned on marketable securities, including
dividend income from REIT units. Interest income has declined in each of fiscal
years 2005, 2004 and 2003 from that realized in each prior year due to a
combination of lower interest rates and a decreased level of invested assets.
The Company anticipates
20
that during fiscal year 2006 it will realize additional gains on marketable
securities, particularly on additional sales of the REIT stock. These gains will
be offset by lower income from interest and dividends since invested assets will
decline after payment of income tax obligations related to the investment gains
and as the Company invests the net proceeds in lower yielding instruments.
Interest expense for the year ended April 30, 2005 decreased by $67,000
(18%) as compared to fiscal year 2004 and the expense for the year ended April
30, 2004 increased by $82,000 (29%) compared to fiscal year 2003. The decline in
fiscal year 2005 is due to the paydown during the year of both short-term and
long-term credit obligations. The increase in fiscal 2004 is attributable to
short-term borrowings by the Company to fund its working capital requirements.
Rather than liquidating certain marketable securities, the Company established a
credit line with a financial institution and borrowed approximately $3 million.
The interest rate on this line (approximately half of what marketable securities
are earning for the Company) plus similar short-term financing in the European
subsidiaries increased interest expense during fiscal year 2004. The Company
also incurred interest expense on the financing arrangement for the leaseback of
the U.S. manufacturing facility and for certain deferred compensation payments.
With the conversion of the REIT units, as described previously, the Company will
no longer record interest expense on the leaseback arrangement, thus, combined
with the debt repayments, the Company anticipates that interest expense in
fiscal year 2006 will be substantially lower than that recorded in fiscal years
2005 and 2004.
For the year ended April 30, 2005, Other, net includes a $4.6 million gain
on the conversion of the REIT units to REIT stock, as described above. (See Item
2. Properties and Note 6 to the accompanying consolidated financial statements.)
This gain was offset by certain recurring, non-operating expenses. In fiscal
year 2004, Other, net expense was $181,000 compared to net income of $277,000 in
fiscal year 2003. The variances in this account were impacted primarily by costs
and income recorded at the Company's French subsidiary. During fiscal year 2004,
this subsidiary incurred certain one-time charges of approximately $100,000
whereas during fiscal year 2003, the same subsidiary realized a gain of
approximately $150,000 on the sale of a portion of real property and received a
government agency subsidy of approximately $200,000 to support a development
activity. In future fiscal years, Other, net will include annual amortization
into income of the $1.3 million deferred gain on the 1998 sale of its building.
Using the straightline method over the remaining 44 months of the initial
leaseback period, the Company will recognize approximately $350,000 of amortized
income during fiscal year 2006. The Company anticipates that in future years
other items in this category will not be significant to pretax earnings.
Income Taxes
The Company is subject to taxation in several countries. The statutory
federal rates vary from 34% in the United States to 35% in Europe. The effective
rate for the Company for the year ended April 30, 2005 was 30%, compared to 26%
in fiscal year 2004 and a 17% (benefit) in fiscal year 2003. The effective rate
is impacted by the income or loss of certain of the Company's European and Asian
subsidiaries which are currently not taxed. In addition, the Company utilizes
the availability of research and development tax credits in the United States to
lower its tax rate. In fiscal year 2004, the Company reversed certain tax
liabilities which had been established in prior years to cover certain tax
contingencies. During fiscal year 2004, the Company's income tax returns were
examined by the Internal Revenue Service and no changes were required for the
years under audit. Accordingly, the tax liabilities established for the audited
years are no longer required and the reversal of such tax liabilities were
recorded as a tax benefit in fiscal year 2004. In fiscal year 2003, the
effective tax rate was impacted by the non-deductibility of goodwill impairment.
(See Note 14 to the Consolidated Financial Statements.)
The Company's European subsidiaries have available net operating loss
carryforwards of approximately $2.4 million to offset future taxable income.
These loss carryforwards have no expiration date.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $59.7 million at April 30, 2005. Included in working
capital at April 30, 2005 is $30.2 million consisting of cash, cash equivalents
and short-term investments. The Company's current ratio at April 30, 2005 is 7.1
to 1.
21
Net cash provided by operating activities for the year ended April 30,
2005, was $2.5 million compared to cash used in operations of $2.6 million in
fiscal year 2004. Cash was generated by collection on accounts receivable offset
by growth in inventories and payments against accounts payable. The primary
increase in cash is due to the deferment of income taxes due on current year
profits until after the end of the fiscal year. In fiscal year 2004, cash was
absorbed primarily during the first half of the fiscal year as the Company's
European subsidiaries recorded operating losses and the Company made working
capital investments in the operations of newly-acquired FEI-Zyfer to enable it
to return to profitability. With increasing sales in the second half of fiscal
year 2004, the Company realized net inflows of cash but these were not
sufficient to overcome the larger outlays in the earlier part of the year. In
fiscal year 2003, the Company recorded an $8.8 million net loss which included
substantial non-cash charges, such as the writedown of goodwill for $6.2 million
and certain adjustments to inventory. Additionally, cash was provided by
collections on accounts receivable and reductions of inventory offset by
payments against accounts payable and other liabilities.
Net cash provided by investing activities for the fiscal year ended April
30, 2005, was $3.6 million Approximately $6.1 million was generated by the sale
or maturity of certain marketable securities, primarily REIT stock, net of
purchases of other marketable securities. The Company also made additional
investments in FEI-Zyfer, Satel-FEI and Morion, Inc. which aggregated $970,000
and acquired capital equipment of $1.6 million. Net cash provided by investing
activities for the fiscal year ended April 30, 2004, was $529,000. Approximately
$4.4 million was generated by the sale or maturity of certain marketable
securities, net of purchases. Most of this cash was used to acquire FEI-Zyfer
for $2.5 million (excludes $120,000 of acquisition expenses paid in fiscal year
2003) and to provide additional working capital support for this subsidiary as
indicated above. (See Note 12 to the accompanying financial statements.)
Approximately $1.3 million was used to acquire additional capital equipment.
Investing activities in fiscal year 2003 resulted in cash inflow of $506,000
consisting of net transactions in marketable securities of $1.2 million offset
by capital expenditures of $834,000. 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 year 2006. Internally generated cash will be adequate to
acquire this capital equipment.
In fiscal year 2004, the Company established a $5 million line of credit
with the financial institution which also manages a substantial portion of its
investment in marketable securities. The line is secured by the investments
which earn, on average, approximately a 5.5% annual return. Rather than
liquidate some of these investments to meet short-term working capital
requirements, during fiscal years 2005 and 2004, the Company borrowed $1.5
million and $3.2 million, respectively against the line of credit at fixed and
variable interest rates between 2.39% and 4.10%. The Company must annually repay
any borrowings under the line of credit on their anniversary date but may also
obtain new funding up to the credit limit. In addition, the Company's European
subsidiaries have available approximately $3.7 million in bank credit lines to
meet short-term cash flow requirements. The rate of interest on these borrowings
is based on the one month EURO Interbank Offered Rate (EURIBOR). During fiscal
year 2005, the Company repaid all outstanding debt balances such that, as of
April 30, 2005, no amounts were outstanding under any lines of credit.
Net cash used in financing activities in fiscal year 2005 was $5.3
million. The primary causes for this decline was payment of the Company's
semi-annual cash dividend of $1.7 million and payment of $5.3 million against
lines of credit offset by additional borrowings of $1.5 million. (See above and
Note 7 to the financial statements.) Net cash provided by financing activities
in fiscal year 2004 was $1.5 million. The principal source of funds was
short-term financing from financial institutions in the amount of $3.4 million.
Cash was used to pay the Company's semi-annual cash dividend of $1.7 million and
$479,000 was used to make regularly scheduled long-term liability payments.
These outflows were partially offset by the receipt of $252,000 for repayment of
a stock loan and the exercise of stock options. Net cash used by financing
activities for the year ended April 30, 2003, was $2.7 million and included
dividend payments of $1.7 million and long-term liability payments of $741,000.
During fiscal year 2003, the Company also acquired 80,000 shares of its common
stock for treasury at a cost of $501,000. These outflows were partially offset
by proceeds of $111,000 from new borrowings and payments of $67,000 received
from the sale of shares of common stock from treasury to satisfy the exercise of
stock options granted to certain
22
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 has been authorized by its Board of Directors to
repurchase up to $5 million worth of shares of its common stock for treasury
whenever appropriate opportunities arise but it has neither a formal repurchase
plan nor commitments to purchase additional shares in the future.
The Company will continue to expend resources to develop and improve
products for wireless and wireline communication systems which management
believes will result in future growth and continued profitability. During fiscal
year 2006, the Company intends to make a substantial investment of capital and
technical resources to develop new products to meet the needs of the U.S.
Government, commercial space and commercial communications marketplaces 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.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
Contractual obligations
As of April 30, 2005
Total Less than More than
Contractual Obligations (in thousands) 1 Year 1 to 3 Years 3 to 5 Years 5 Years
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations. $ 9 $ 9 $ 0 $ 0 $ 0
Operating Lease Obligations 2,034 708 1,326 0 0
Deferred Compensation 7,812* 225 374 296 6,917
------- ----- ------ ----- ------
Total $ 9,855 $ 942 $1,700 $ 296 $6,917
======= ===== ====== ===== ======
* Deferred Compensation liability (See Note 13 in the accompanying
financial statements) reflects payments due to current retirees receiving
benefits. The amount of $6,917 in the more than 5 years column includes benefits
due to participants in the plan who are not yet receiving benefits although some
participants may opt to retire and begin receiving benefits within the next 5
years.
As of April 30, 2005, the Company's consolidated backlog amounted to
approximately $31 million (see Item 1). Approximately 80% of this backlog is
expected to be filled during the Company's fiscal year ending April 30, 2006.
*******
The Company's liquidity is adequate to meet its foreseeable operating and
investment needs. In addition, with its available cash and marketable
securities, the Company is able to continue paying semi-annual dividends,
subject to the review and approval of its Board of Directors.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement No. 151 "Inventory Costs."
("FAS 151") This statement amends Accounting Research Bulletin No. 43, Chapter
4, "Inventory Pricing" and removes the "so abnormal" criterion that under
certain circumstances could have led to the capitalization of these items. FAS
151 requires that idle facility expense, excess spoilage, double freight and
re-handling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal." FAS 151 also requires that allocation
of fixed production overhead expenses to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of this statement
are effective for fiscal years beginning after June 15, 2005; i.e., fiscal year
2007 for the Company. The adoption of FAS 151 is not expected to have a material
impact on the Company's financial position or results of operations.
23
In December 2004, the FASB issued Statement No. 123(R), "Stock-Based
Payment" ("FAS 123(R)"). FAS 123(R) supercedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and amends FAS No. 95, "Statement of Cash
Flows." Generally, the approach in FAS 123(R) is similar to the approach
described in FAS 123. FAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
FAS 123(R) requires that the fair value of such equity instruments be recognized
as an expense in the historical financial statements as services are performed.
Prior to FAS 123(R), only certain pro forma disclosures of fair value were
required. The provisions of this statement are effective for fiscal years
beginning after June 15, 2005; i.e., fiscal year 2007 for the Company. The
adoption of FAS 123(R) will have an impact on the Company's financial position
and results of operations similar to the pro forma disclosure in the
Equity-based Compensation disclosure in Note 1 to the accompanying financial
statements.
In December 2004, the FASB issued Statement No. 153, "Exchange of
Non-monetary Assets", ("FAS 153") an amendment of Accounting Principles Board
Opinion No. 29 ("APB 29"), which differed from the International Accounting
Standards Board's ("IASB") method of accounting for exchanges of similar
productive assets. FAS 153 replaces the exception from fair value measurement in
APB 29, with a general exception from fair value measurement for exchanges of
non-monetary assets that do not have commercial substance. The statement is to
be applied prospectively and is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005; i.e., August 1, 2005
for the Company. The adoption of FAS 153 is not expected to have a material
impact on the Company's financial position or result of operations.
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 2005, 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
Interest Rate Risk
The Company is exposed to market risk related to changes in interest rates
and market values of securities. The Company's investments in fixed income and
equity securities were $16.2 million and $7.3 million, respectively, at April
30, 2005. The investments are carried at fair value with changes in unrealized
gains and losses, net of taxes, 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, 2005, a 10% change in market interest rates would not have a material
effect on the fair value of the Company's fixed income securities or results of
operations (investment income).
Foreign Currency Risk
With its investment in Gillam-FEI, FEI-Europe and FEI-Asia, the Company is
subject to foreign currency translation risk. For each of these investments, the
Company does not have any near-term intentions to repatriate its invested cash.
For this reason, the Company does not intend to initiate any exchange rate
hedging strategies which could be used to mitigate the effects of foreign
currency
24
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, 2005, the amount related to foreign currency exchange
rates is a $3,957,000 unrealized gain. Note that the value of the Chinese Yuan
is "pegged" to the value of the US dollar. Accordingly, no foreign currency
gains or losses have been realized or are included in the unrealized gain
indicated above. If the Chinese government decides to change its policy and
permits the Yuan to "float" against other world currencies, the Company would
report the effect in other comprehensive income, as appropriate.
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.
25
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------
The Board of Directors and Shareholders
Frequency Electronics, Inc. and Subsidiaries
Mitchel Field, New York
We have audited the accompanying consolidated balance sheet of Frequency
Electronics, Inc. and Subsidiaries as of April 30, 2005 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. We have also audited the consolidated schedule listed in
Item 15(a)(2) of this Form 10-K for the year ended April 30, 2005. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Frequency Electronics, Inc. and Subsidiaries at April 30, 2005 and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related consolidated financial statement schedule for
the year ended April 30, 2005, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ Holtz Rubenstein Reminick LLP
- ---------------------------------
Melville, New York
July 18, 2005
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
---------------------------------------------
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 15(a)(1) on page 52 present fairly, in all material
respects, the financial position of Frequency Electronics, Inc. and Subsidiaries
at April 30, 2004, and the results of their operations, changes in stockholders'
equity, and their cash flows for each of the two years in the period ended April
30, 2004 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 15(a)(2) on page 52 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 10, the Company has changed its method of accounting for
its investment in an entity from the cost method to the equity method for all
periods presented due to an increase in the ownership of such entity in fiscal
2005.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Melville, New York
July 6, 2004, except for Note 10,
as to which the date is September 28, 2004
27
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2005 and 2004
-----------
ASSETS: 2005 2004
---- ----
(In thousands)
Current assets:
Cash and cash equivalents $ 6,701 $ 5,699
Marketable securities 23,532 25,690
Accounts receivable, net of allowance for
doubtful accounts of $172 in 2005
and $140 in 2004 12,728 15,036
Inventories, net 22,948 21,925
Deferred income taxes 2,269 2,585
Income taxes receivable - 242
Prepaid expenses and other 1,362 1,658
-------- --------
Total current assets 69,540 72,835
Property, plant and equipment, at cost,
less accumulated depreciation and amortization 6,770 11,486
Deferred income taxes 2,644 593
Goodwill and other intangible assets 591 616
Cash surrender value of life insurance 5,838 5,355
Other assets 2,991 1,982
-------- --------
Total assets $ 88,374 $ 92,867
======== ========
Continued
28
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2005 and 2004
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY: 2005 2004
---- ----
(In thousands)
Current liabilities:
Short-term credit obligations $ - $ 3,408
Accounts payable - trade 1,896 3,470
Accrued liabilities 3,912 4,106
Income taxes payable 3,184 -
Dividend payable 852 843
------- -------
Total current liabilities 9,844 11,827
Deferred compensation 7,812 6,854
Deferred gain and REIT liability 1,525 10,755
------- -------
Total liabilities 19,181 29,436
------- -------
Minority interest in consolidated subsidiary - 48
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued - -
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued - 9,163,940 shares 9,164 9,164
Additional paid-in capital 45,289 44,442
Retained earnings 12,440 9,104
------- -------
66,893 62,710
Common stock reacquired and held in treasury -
at cost (646,709 shares in 2005 and
738,428 shares in 2004) (2,601) (2,797)
Other stockholders' equity - (17)
Accumulated other comprehensive income 4,901 3,487
------- -------
Total stockholders' equity 69,193 63,383
------- -------
Total liabilities and stockholders' equity $88,374 $92,867
======= =======
The accompanying notes are an integral part of these financial statements.
29
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 2005, 2004 and 2003
-----------
2005 2004(a) 2003(a)
---- ------- -------
(In thousands, except share data)
Net sales $ 55,173 $ 50,106 $ 31,527
Cost of sales 37,013 34,529 25,681
-------- --------- --------
Gross margin 18,160 15,577 5,846
Selling and administrative expenses 11,719 11,162 7,573
Compensation charges 876 725 -
Research and development expenses 6,834 5,336 4,605
Goodwill impairment - - 6,158
-------- --------- --------
Operating loss (1,269) (1,646) (12,490)
Other income (expense):
Investment income 3,850 2,321 1,830
Equity in Morion (a) 315 158 49
Interest expense (298) (365) (283)
Other, net 4,548 (181) 277
-------- --------- --------
Income (loss) before minority interest and
provision (benefit) for income taxes 7,146 287 (10,617)
Minority interest in loss of
consolidated subsidiary (1) (144) (33)
-------- --------- --------
Income (loss) before provision (benefit)
for income taxes 7,147 431 (10,584)
Provision (benefit) for income taxes 2,110 111 (1,773)
-------- --------- --------
Net income (loss) $ 5,037 $ 320 ($ 8,811)
======== ========= ========
Net income (loss) per common share:
Basic $ 0.59 $ 0.04 ($ 1.06)
====== ====== ======
Diluted $ 0.58 $ 0.04 ($ 1.06)
====== ====== ======
Average shares outstanding:
Basic 8,484,682 8,374,399 8,331,785
========= ========= =========
Diluted 8,684,758 8,542,575 8,331,785
========= ========= =========
(a) Prior period amounts have been restated to reflect the
Company's equity income from its investment in Morion, Inc.
The accompanying notes are an integral part of these financial statements.
30
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 2005, 2004 and 2003
(In thousands, except share data)
Accumulated
Other other
Additional Treasury stock Stock- compre-
Common Stock paid in Retained (at cost) holders hensive
Shares Amount capital earnings Shares Amount equity income (loss) Total
------ ------ ------- -------- ------ ------ ------ ----------- -----
Balance at May 1, 2002 9,163,940 $9,164 $43,077 $20,939 830,074 ($2,806) ($116) $ 84 $70,342
- ----------------------
Exercise of stock options 29 (11,000) 38 67
Issuance of stock for Gillam
acquisition 447 (35,000) 88 535
Contribution of stock to 253 (39,335) 119 372
401(k) plan
Repurchase of stock for
treasury 80,000 (501) (501)
Cash dividend (1,664) (1,664)
Decrease in market value of
marketable securities (1,039) (1,039)
Foreign currency translation
adjustment 2,457 2,457
Net loss (restated) (8,811) (8,811)
Comprehensive loss- 2003 --------- ------ ------- ------- -------- ------- ------ ------- -------
Balance at April 30, 2003 9,163,940 9,164 43,806 10,464 824,739 (3,062) (116) 1,502 61,758
- -------------------------
Exercise of stock options 74 (25,300) 79 153
Stock grant to officer 236 (20,000) 61 297
Contribution of stock to
401(k) plan 326 (41,011) 125 451
Repayment of receivable
common stock 99 99
Cash dividend (1,680) (1,680)
Increase in market value of
marketable securities 991 991
Foreign currency translation
adjustment 994 994
Net income (restated) 320
320
Comprehensive income- 2004 2,305
--------- ------ ------- ------- -------- ------- ------ ------- -------
Balance at April 30, 2004 9,163,940 9,164 44,442 9,104 738,428 (2,797) (17) 3,487 63,383
- -------------------------
Exercise of stock options 109 (24,950) 68 177
Contribution of stock to
401(k) plan 300 (30,621) 93 393
Repayment of receivable 17 17
common stock
Cash dividend (1,701) (1,701)
Additional investment in
Morion, Inc. 438 (42,448) 101 539
Repurchase of stock for
treasury 6,300 (66) (66)
Increase in market value of
marketable securities 1,018 1,018
Foreign currency translation
adjustment 396 396
Net income 5,037 5,037
Comprehensive income- 2005 6,451
--------- ------ ------- ------- -------- ------- ------ ------- -------
Balance at April 30, 2005 9,163,940 $9,164 $45,289 $12,440 646,709 ($2,601) $ - $4,901 $69,193
- ------------------------- ========= ====== ======= ======= ======= ======= ===== ======== =======
The accompanying notes are an integral part of these financial statements.
31
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2005, 2004 and 2003
-----------
2005 2004 2003
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income (loss) $5,037 $ 320 ($8,811)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Deferred tax (benefit) expense (2,610) 411 (123)
Depreciation and amortization 2,014 2,098 1,600
Provision for losses on accounts
receivable and inventories 771 710 3,634
Gain on REIT conversion (4,629) - -
Gain on marketable securities and
other assets, net (2,169) (618) (67)
Stock grant to officer - 297 -
Minority interest in loss of
consolidated subsidiary (1) (144) (33)
Equity income from Morion (315) (158) (49)
Goodwill impairment - - 6,158
Changes in assets and liabilities, exclusive
of assets and liabilities acquired:
Accounts receivable 2,868 (4,149) 4,515
Inventories (1,526) (3,035) (1,115)
Prepaid and other 364 (379) 370
Other assets (526) (500) (549)
Accounts payable trade (1,729) 1,004 (2,209)
Accrued liabilities (118) 200 (823)
Liability for employee benefit plans 1,655 719 973
Income taxes 3,517 975 (19)
Other liabilities (67) (320) (1,004)
------- ------- -------
Net cash provided by (used in) operating
activities 2,536 (2,569) 2,448
------- ------- -------
Cash flows from investing activities:
Payment for acquisition (135) (2,538) (120)
Purchase of minority interest in
manufacturing partner (835) - -
Purchase of marketable securities (6,393) (6,053) (7,378)
Proceeds from sale or redemption
of marketable securities 12,514 10,435 8,598
Capital expenditures (1,640) (1,343) (834)
Other- net 72 28 240
------- -------- --------
Net cash provided by investing activities 3,583 529 506
------- -------- --------
Continued
32
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2005, 2004 and 2003
(Continued)
-----------
2005 2004 2003
---- ---- ----
(In thousands)
Cash flows from financing activities:
Payment of short-term credit and
other long-term obligations (5,264) (479) (741)
Proceeds from short-term debt 1,548 3,361 111
Payment of cash dividend (1,692) (1,671) (1,664)
Repurchase of stock for treasury (66) - (501)
Repayment of officer loan 17 99 -
Exercise of stock options 177 153 67
-------- -------- ---------
Net cash (used in) provided by financing
activities (5,280) 1,463 (2,728)
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents before effect of exchange
rate changes 839 (577) 226
Effect of exchange rate changes on cash and
cash equivalents 163 324 343
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 1,002 (253) 569
Cash and cash equivalents at beginning of year 5,699 5,952 5,383
------- ------- -------
Cash and cash equivalents at end of year $6,701 $5,699 $5,952
====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 303 $ 271 $ 264
======= ===== =======
Income taxes $1,200 $ 450 $ 0
======= ===== =======
Other activities which affect assets or
liabilities but did not result in
cash flow during the fiscal years:
Declaration of cash dividend, not paid $ 852 $ 843 $ 834
====== ====== ======
Acquired net assets of Zyfer, Inc.
Accounts receivable - $ 894 -
Inventory - 1,397 -
Customer Lists - 602 -
Goodwill $ 83 134 -
Other current assets - 25 -
Fixed assets - 787 -
Accounts payable - (974) -
Accrued expenses - (71) -
-------- --------
$ 83 $2,794 -
====== ====== =====
The accompanying notes are an integral part of these financial statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of Frequency
Electronics, Inc. and its wholly-owned subsidiaries (the "Company" or
"Registrant"). References to "FEI" are to the parent company alone and do not
refer to any of its subsidiaries. The Company is principally engaged in the
design, development and manufacture of precision time and frequency control
products and components for microwave integrated circuit applications. See Note
16 for information regarding the Company's Commercial Communications (which
includes the subsidiaries FEI Communications, Inc., FEI-Europe, GmbH and
FEI-Asia, Inc.), Gillam-FEI, U.S. Government (subsidiary FEI-Government Systems,
Inc.) and FEI-Zyfer 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. Any material events which may occur during
the intervening month at Gillam-FEI will be accounted for in the consolidated
financial statements.
These financial statements have been prepared in conformity with generally
accepted accounting principles and require management to make estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from these estimates.
Change in Accounting:
Prior period financial statements have been restated to reflect the
Company's change in accounting from the cost method to the equity method for its
investment in Morion, Inc. (See Note 10.)
Reclassifications:
Certain prior year amounts have been reclassified to conform to current
year presentation. These reclassifications had no effect on reported
consolidated earnings.
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company places its temporary cash investments with high credit
quality financial institutions. Such investments may be in excess of the FDIC
insurance limit. No losses have been experienced on such investments.
Marketable Securities:
Marketable securities consist of investments in common stocks, mutual
funds, and debt securities of U.S. government agencies. Substantially all
marketable securities at April 30, 2005 were held in the custody of two
financial institutions. Investments in debt and equity securities are
categorized as available for sale and are carried at fair value, with unrealized
gains and losses excluded from income and recorded directly to stockholders'
equity. The Company recognizes gains or losses when securities are sold using
the specific identification method.
Allowance for Doubtful Accounts:
Losses from uncollectible accounts receivable are provided for by
utilizing the allowance for doubtful accounts method based upon management's
estimate of uncollectible accounts. Management specifically analyzes accounts
receivable and the potential for bad debts, customer concentrations, credit
worthiness, current economic trends and changes in customer payment terms when
evaluating the allowance for doubtful accounts.
Inventories:
Inventories, which consist of finished goods, work-in-process, raw
materials and components, are accounted for at the lower of cost (specific and
average) or market.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost and include interest on
funds borrowed to finance construction. Expenditures for renewals and
betterments are capitalized; maintenance and repairs are charged to income when
incurred. When fixed assets are sold or retired, the cost and related
accumulated depreciation and amortization are eliminated from the respective
accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
Depreciation and Amortization:
Depreciation of fixed assets is computed on the straight-line method based
upon the estimated useful lives of the assets (40 years for buildings and 3 to
10 years for other depreciable assets). Leasehold improvements are amortized on
the straight-line method over the shorter of the term of the lease or the useful
life of the related improvement.
Amortization of identifiable intangible assets is based upon the expected
lives of the assets and is recorded at a rate which approximates the Company's
utilization of the assets
Intangible Assets
Intangible assets consist of customer lists which result from the excess
purchase price over the fair value of acquired tangible assets. The customer
lists are measured at fair value and amortized over the estimated useful life of
3 to 5 years.
Goodwill:
The Company records goodwill as the excess of purchase price over the fair
value of identifiable net assets acquired. In accordance with Statement of
Financial Accounting Standards ("FAS") No. 142 "Goodwill and Other Intangible
Assets," goodwill is tested for impairment on at least an annual basis. When it
is determined that the carrying value of investments may not be recoverable, the
Company writes down the related goodwill to an amount commensurate with the
revised value of the acquired assets. The Company measures impairment based on
revenue projections, recent transactions involving similar businesses and
price/revenue multiples at which they were bought and sold, price/revenue
multiples of competitors, and the present market value of publicly-traded
companies in the Company's industry.
Revenue and Cost Recognition:
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred.
On production-type contracts, revenue is recorded as units are delivered
with the related cost of sales recognized on each shipment based upon a
percentage of estimated final contract costs. Changes in job performance may
result in revisions to costs and revenue and are recognized in the period in
which revisions are determined to be required. Provisions for anticipated losses
are made in the period in which they become determinable.
For contracts in the Company's subsidiaries, and smaller contracts or
orders in the other business segments, sales of products and services to
customers are reported in operating results upon shipment of the product or
performance of the services pursuant to contractual terms.
Contract costs include all direct material, direct labor costs,
manufacturing overhead and other direct costs related to contract performance.
Selling, general and administrative costs are charged to expense as incurred.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains or losses, net of
tax, on securities available for sale during the year and the effects of foreign
currency translation adjustments.
Research and Development expenses:
The Company engages in research and development activities to identify new
applications for its core technologies, to improve existing products and to
improve manufacturing processes to achieve cost reductions and manufacturing
efficiencies. Research and development costs include direct labor, manufacturing
overhead, direct materials and contracted services. Such costs are expensed as
incurred. In the normal course of business the Company is also contracted to
perform research and development for others. The costs incurred under such
contracts are recorded in cost of sales.
Income Taxes:
The Company recognizes deferred tax liabilities and assets based on the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Earnings Per Share:
Basic earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share are computed by dividing net earnings by the sum of the weighted
average number of shares of common stock and the if-converted effect of
unexercised stock options.
Fair Values of Financial Instruments:
Cash and cash equivalents and loans payable are reflected in the
accompanying consolidated balance sheets at amounts considered by management to
reasonably approximate fair value based upon the nature of the instrument and
current market conditions. Management is not aware of any factors that would
significantly affect the value of these amounts.
Foreign Currency Adjustments
The local currency is the functional currency of each of the Company's
non-US subsidiaries. No foreign currency gains or losses are recorded on
intercompany transactions since they are effected at current rates of exchange.
The results of operations of foreign subsidiaries, when translated into US
dollars, reflect the average rates of exchange for the periods presented. The
balance sheets of foreign subsidiaries, except for equity accounts, are
translated into US dollars at the rates of exchange in effect on the date of the
balance sheet. 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.
Equity-based Compensation:
The Company applies the disclosure-only provisions of FAS No. 148,
"Accounting for Stock-Based Compensation," and continues to measure compensation
cost in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." Historically, this has not resulted
in compensation cost upon the grant of options under a qualified stock option
plan. However, in accordance with FAS No. 148, the Company provides pro forma
disclosures of net income (loss) and income (loss) per share as if the fair
value method had been applied beginning in fiscal 1996.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table illustrates the effect on the Company's consolidated
statements of operations had compensation cost for stock option awards under the
plans been determined based on the fair value at the grant dates consistent with
the provisions of FAS No. 123:
(in thousands, except per share data)
2005 2004 2003
---- ---- ----
Net Income (Loss), as reported $5,037 $320 ($8,811)
Cost of stock options, net of taxes (525) (707) (752)
------ ---- ------
Net Income (Loss)- pro forma $4,512 ($387) ($9,563)
====== ==== ======
Income (Loss) per share, as reported:
Basic $0.59 $0.04 ($1.06)
===== ===== =====
Diluted $0.58 $0.04 ($1.06)
===== ===== =====
Income (Loss) per share- pro forma
Basic $0.53 ($0.05) ($1.15)
===== ===== =====
Diluted $0.52 ($0.05) ($1.15)
===== ===== =====
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in each of the three years ended
April 30, 2005, 2004 and 2003; dividend yield of 1.10%, 1.8% and 2.4%; expected
volatility of 59%, 63% and 63%; risk free interest rate of 3.9%, 3.6% and 4.1%;
and expected lives of six and one-half years, respectively.
New Accounting Pronouncements:
In November 2004, the FASB issued Statement No. 151 "Inventory Costs."
("FAS 151") This statement amends Accounting Research Bulletin No. 43, Chapter
4, "Inventory Pricing" and removes the "so abnormal" criterion that under
certain circumstances could have led to the capitalization of these items. FAS
151 requires that idle facility expense, excess spoilage, double freight and
re-handling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal." FAS 151 also requires that allocation
of fixed production overhead expenses to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of this statement
are effective for fiscal years beginning after June 15, 2005; i.e., fiscal year
2007 for the Company. The adoption of FAS 151 is not expected to have a material
impact on the Company's financial position or results of operations.
In December 2004, the FASB issued Statement No. 123(R), "Stock-Based
Payment" ("FAS 123(R)"). FAS 123(R) supercedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and amends FAS No. 95, "Statement of Cash
Flows." Generally, the approach in FAS 123(R) is similar to the approach
described in FAS 123. FAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
FAS 123(R) requires that the fair value of such equity instruments be recognized
as an expense in the historical financial statements as services are performed.
Prior to FAS 123(R), only certain pro forma disclosures of fair value were
required. The provisions of this statement are effective for fiscal years
beginning after June 15, 2005; i.e., fiscal year 2007 for the Company. The
adoption of FAS 123(R) will have an impact on the Company's financial position
and results of operations similar to the pro forma disclosure in the
Equity-based Compensation disclosure in Note 1.
In December 2004, the FASB issued Statement No. 153, "Exchange of
Non-monetary Assets", ("FAS 153") an amendment of Accounting Principles Board
Opinion No. 29 ("APB 29"), which differed from the International Accounting
Standards Board's ("IASB") method of accounting for exchanges of similar
productive assets. FAS 153 replaces the exception from fair value measurement in
APB 29, with a general exception from fair value measurement for exchanges of
non-monetary assets that do not have commercial substance. The statement is to
be applied prospectively and is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005; i.e., August 1, 2005
for the
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Company. The adoption of FAS 153 is not expected to have a material impact on
the Company's financial position or result of operations.
2. Accounts Receivable
Accounts receivable include costs and estimated earnings in excess of
billings on uncompleted contracts accounted for on the percentage of completion
basis of approximately $4,138,000 at April 30, 2005 and $2,428,000 at April 30,
2004. Such amounts represent revenue recognized on long-term contracts that has
not been billed, pursuant to contract terms, and was not billable at the balance
sheet date.
3. Earnings Per Share
Reconciliations of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Years ended April 30,
---------------------------------
2005 2004 2003
---- ---- ----
Basic EPS Shares outstanding
(weighted average) 8,484,682 8,374,399 8,331,785
Effect of Dilutive Securities 200,076 168,176 ***
--------- --------- ---------
Diluted EPS Shares outstanding 8,684,758 8,542,575 8,331,785
========= ========= =========
*** Dilutive securities are excluded for the year ended April 30, 2003
since the inclusion of such shares would be antidilutive due to the net loss for
the year then ended.
Options to purchase 505,550, 471,750 and 677,362 shares of common stock
were outstanding during the years ended April 30, 2005, 2004 and 2003,
respectively, but were not included in the computation of diluted earnings per
share because the exercise price of the options was greater than the average
market price of the Company's common shares during the respective periods. Since
the inclusion of such options would have been antidilutive they are excluded
from the computation.
4. Inventories
Inventories, which are reported net of reserves of $4,289,000 and
$3,495,000 at April 30, 2005 and 2004, respectively, consisted of the following
(in thousands):
2005 2004
---- ----
Raw Materials and Component Parts $ 10,353 $ 8,608
Work in Progress and Finished Goods 12,595 13,317
-------- --------
$ 22,948 $ 21,925
======== ========
5. Marketable Securities
Marketable securities at April 30, 2005 and 2004 are summarized as follows
(in thousands):
April 30, 2005
-----------------------------------
Unrealized
Market Holding
Cost Value (Loss) Gain
---- ----- -----------
Fixed income securities $ 16,627 $ 16,221 $ (406)
Equity securities 5,331 7,311 1,980
-------- -------- -------
$ 21,958 $ 23,532 $ 1,574
======== ======== =======
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2004
-----------------------------------
Unrealized
Market Holding
Cost Value (Loss) Gain
---- ----- -----------
REIT units $ 12,000 $ 12,000 $ -
Fixed income securities 13,767 13,672 (95)
Equity securities 46 18 (28)
-------- -------- -------
$ 25,813 $ 25,690 ($ 123)
======== ======== =======
See Note 6 for discussion of the disposition of the REIT units.
Maturities of fixed income securities classified as available-for-sale at
April 30, 2005 are as follows (in thousands):
Current $ 993
Due after one year through five years 6,581
Due after five years through ten years 9,053
---------
$16,627
=======
During fiscal year 2005, the decline in market value of certain fixed
income securities was deemed to be other than temporary. Accordingly, during
that fiscal year, the Company charged $20,000 against investment income to
record the impairment in value of these securities.
6. Property, Plant and Equipment
Property, plant and equipment at April 30, 2005 and 2004, consists of the
following (in thousands):
2005 2004
---- ----
Buildings and building improvements $ 4,185 $12,726
Machinery, equipment and furniture 31,351 29,377
-------- --------
35,536 42,103
Less, accumulated depreciation 28,766 30,617
-------- --------
$ 6,770 $11,486
======== =======
Depreciation expense for the years ended April 30, 2005, 2004 and 2003 was
$1,908,000, $1,969,000 and $1,600,000, respectively.
Maintenance and repairs charged to operations for the years ended April
30, 2005, 2004 and 2003 was approximately $585,000, $437,000 and $242,000
respectively.
In January 1998, the Company sold the Long Island New York building that
it occupies to Reckson Associates Realty Corp., a real estate investment trust
("REIT") whose shares are traded on the New York Stock Exchange. The sale
involved a tax-deferred exchange of the building for approximately 513,000
participation units of Reckson Operating Partnership, L.P. ("REIT units") which
were valued at closing at $12 million. Each REIT unit was convertible into one
share of the common stock of the REIT.
The Company leased back approximately 43% of the building from the
purchaser (the "Reckson lease"). Under the accounting provisions for sale and
leaseback transactions, the sale of this building was considered a financing and
the REIT units received were reflected as a noncurrent liability ($10,534,000 at
April 30, 2004) while the related building continued to be reflected as an
asset. In March 2005, the Company exercised its option to convert all of the
REIT units into 513,000 shares of the REIT. Upon conversion of the REIT units,
the Company recognized a gain of $4.6 million and deferred an additional $1.3
million gain. The deferred gain will be recognized into income over the
remaining term of the initial leaseback period. As a result of the conversion of
the REIT units, both the building and the noncurrent liability were removed from
the balance sheet of the Company. Prior to conversion of the REIT units, the
Company's annual rental payment of $400,000 was characterized as repayment of
the financing with a portion allocated to interest expense at an assumed
interest rate of 6.5% and the balance
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
was considered repayment of principal. During the years ended April 30, 2005,
2004 and 2003, the Company charged $80,000, $114,000 and $132,000, respectively,
to interest expense under the financing agreement.
The Reckson lease contains two five-year renewal periods at the option of
the Company. Annual rental payments are $400,000 for the initial 11-year term
which ends in January 2009. Under the terms of the lease, the Company is
required to pay its proportional share of real estate taxes, insurance and other
charges. In addition, the Company's subsidiaries in China and California lease
their office and manufacturing facilities. The lease for the FEI-Asia facility
is for a one-year term with rent of $13,892 payable quarterly. The lease for the
FEI-Zyfer facility is for a two year term at a rate of $21,012 per month,
terminable with six months written notice.
Future minimum lease payments required by the leases are as follows (in
thousands):
Years ending
April 30,
---------
2006 $ 708
2007 654
2008 405
2009 267
-------
$2,034
======
7. Debt Obligations
----------------
The Company has a $5 million line of credit with the financial institution
which also manages a substantial portion of its investment in marketable
securities. The line is secured by the investments. During the 2005 fiscal year,
the Company had additional net borrowings of $500,000 but repaid the outstanding
balance of $3.3 million before the end of the fiscal year. During the year,
advances against the line of credit bore interest at fixed and variable interest
rates between 2.61% and 4.10%.
The Company's European subsidiaries have available approximately 2.9
million Euros (approximately $3.7 million based on current rates of exchange
between the dollar and the Euro) in bank credit lines to meet short-term cash
flow requirements. As of April 30, 2005, no amount was outstanding under such
lines of credit compared to $634,000 outstanding on April 30, 2004. Interest on
these credit lines varies from 0.5% to 1.5% over the EURO Interbank Offered rate
(EURIBOR). At April 30, 2005 and 2004, the rate was 2.096% and 2.056%,
respectively, based on the 1 month EURIBOR.
All remaining debt that was scheduled to mature has been repaid in full at
April 30, 2005.
8. Accrued Liabilities
-------------------
Accrued liabilities at April 30, 2005 and 2004 consist of the following
(in thousands):
2005 2004
---- ----
Other compensation including payroll taxes $2,202 $2,062
Payment due for investment in affiliated
companies 83 666(A)
Due customers 506 222
Vacation accrual 552 476
Other 569 680
------ ------
$3,912 $4,106
====== ======
(A) In April 2004, the Company increased its investment in Morion, Inc.
("Morion"), a Russian producer of low cost, high precision quartz
resonators and crystal oscillators. Settlement of the additional
investment did not occur until after the fiscal year end.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
9. Notes Receivable - Common Stock
In October 1994, certain officers and employees acquired an aggregate of
375,000 shares of the Company's common stock in the open market. The purchase
price of these shares of approximately $822,000 was financed by advances from
the Company to such officers and employees. The notes, collateralized by the
shares of common stock purchased, accrued interest at 1/2% above prime (5.25% at
April 30, 2005) which was payable and adjusted annually. The principal was
originally due in its entirety at the earlier of termination of employment or
October 1999 but was extended until October 2004 for certain officers.
Repayments were received during fiscal years 2005 and 2004 for $16,500 and
$99,000, respectively. No payments were received during fiscal year 2003. All
outstanding balances have been repaid in full as of April 30, 2005.
10. Investment in Morion, Inc.
On September 28, 2004, the Company increased its investment in Morion from
19.8% to 36% of the privately-held Russian company's outstanding shares. The
acquisition was accomplished by a cash payment and the issuance of 42,448 shares
of the Company's common stock.
As a result of the increased ownership of Morion, the Company changed its
method of carrying the investment from cost to equity as required by generally
accepted accounting principles. Under the equity method, the Company records its
proportionate share of the earnings of Morion. The effect of the change in
accounting method for the fiscal year ended April 30, 2005, was to increase
income before provision for income taxes and net income by $315,000 ($0.04 per
diluted share). The financial statements for the prior fiscal years have been
restated for the change in accounting method. For the fiscal year ended April
30, 2004, income before income taxes and net income were increased by $158,000
($0.02 per share). For the fiscal year ended April 30, 2003, the loss before
income taxes and the net loss were reduced by $49,000 ($0.01 per share).
Retained earnings as of the beginning of fiscal year 2005 have been increased by
$207,000 for the effect of retroactive application of the equity method.
At April 30, 2005, 2004, and 2003, the Company's share of the underlying
net assets of Morion exceeded the investment by $549,000, $249,000 and $52,000,
respectively. The excess relates to certain property, plant and equipment and is
being amortized into income by increasing the Company's share of Morion's net
income. The Company uses the straightline method to amortize the excess over the
remaining useful lives of the property, plant and equipment.
During the fiscal years ended April 30, 2005, 2004 and 2003, the Company
acquired product from Morion in the aggregate amount of approximately $606,000,
$730,000 and $350,000, respectively. During the fiscal years ended April 30,
2005, 2004 and 2003, the Company sold product to Morion in the aggregate amount
of approximately $181,000, $181,000 and $9,000, respectively.
11. Acquisition of Gillam-FEI.
During fiscal year 2001, using a combination of cash and FEI's common
stock, the Company acquired Gillam-FEI, a Belgian-based company which also owns
a French company. Under terms of the purchase agreement, the market value of
FEI's stock was measured on July 25, 2002, and required that an additional
35,000 shares of FEI stock be issued to certain former shareholders of
Gillam-FEI during fiscal year 2003.
Goodwill Impairment
The Gillam-FEI acquisition was treated as a purchase. The purchase price
was allocated to net assets acquired and to goodwill. In the fourth quarter of
2003, the Company performed an impairment test of the Gillam-FEI reporting unit.
The fair value of this reporting unit was determined based upon valuations
utilized in recent industry acquisition transactions and current market values
of publicly-traded competitors and customers in the same industry as Gillam-FEI.
Based on this test, the Company further analyzed its investment in Gillam-FEI
and concluded that the goodwill associated with this acquisition was impaired.
Consequently, the Company recorded a non-cash charge of $6.2 million against
operating income for fiscal year 2003 to reflect the write down of the full
value of goodwill related to the Gillam-FEI acquisition.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
12. Acquisition of Zyfer, Inc.
On May 9, 2003, the Company acquired the business and net assets of Zyfer,
Inc., a wholly-owned subsidiary of Odetics, Inc., in a cash transaction. (Note-
Subsequent to this transaction, Odetics changed its corporate name to Iteris,
Inc.) The business of the new subsidiary, FEI-Zyfer, Inc., is the design and
manufacture of products for precision time and frequency generation and
synchronization, primarily incorporating GPS technology.
The Company paid $2.3 million at closing, plus acquisition costs of
approximately $400,000. According to the terms of the purchase agreement, the
Company is required to make additional payments up to a maximum of $1 million in
each of fiscal years 2004 and 2005 if FEI-Zyfer achieves certain revenue levels
in those years. The contingent payments are based on a percentage of revenues in
excess of $6 million in fiscal year 2004 and as a percentage of revenues in
excess of $8 million in fiscal year 2005. Based on FEI-Zyfer's performance, with
sales of $8.8 million and $6.5 million during fiscal years 2005 and 2004,
respectively, the Company will pay an additional $217,000 to Iteris, Inc.
The FEI-Zyfer acquisition is treated as a purchase acquisition. The
purchase price has been allocated to net assets acquired of approximately $1.8
million. The purchase price in excess of net assets acquired, approximately
$900,000, has been allocated to fixed assets ($300,000) and to customer lists
($600,000) which will be amortized over the next 4 years. Amortization expense
for the years ended April 30, 2005 and 2004 was approximately $106,000 and
$127,000, respectively. For the next three fiscal years ending April 30, 2008,
amortization expense will decline from approximately $78,000 to $48,000,
followed by a "balloon" writeoff of the customer list balance, expected to be
$186,000, for the year ending April 30, 2009. As of April 30, 2005, the Company
also recorded goodwill in the amount of approximately $217,000 based on the
contingent payments described above.
13. Employee Benefit Plans
Profit Sharing Plan:
The Company adopted a profit sharing plan and trust under section 401(k)
of the Internal Revenue Code. This plan allows all eligible employees to defer a
portion of their income through voluntary contributions to the plan. In
accordance with the provisions of the plan, the Company can make discretionary
matching contributions in the form of cash or common stock. For the years ended
April 30, 2005, 2004 and 2003, the Company contributed 30,621, 41,011 and 39,335
shares of common stock, respectively. The approximate value of these shares at
the date of issuance was $393,000 in fiscal year 2005, $451,000 in fiscal year
2004 and $372,000 in fiscal year 2003.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees which
are based on operating profits of the Company. The Company also adopted a plan
for the President and Chief Executive Officer of the Company, which formula is
based on pre-tax profits. The Company charged $626,000 and $315,000 to
operations under these plans for the fiscal years ended April 30, 2005 and 2004,
respectively. For fiscal year 2003, no amount for bonuses was recorded in
selling and administrative expenses due to the lack of earnings.
Independent Contractor Stock Option Plan:
The Company has an Independent Contractor Stock Option Plan under which up
to 350,000 shares may be granted. An Independent Contractor Stock Option
Committee determines to whom options may be granted from among eligible
participants, the timing and duration of option grants, the option price, and
the number of shares of common stock subject to each option. Options were
granted in prior fiscal years to certain independent contractors at a price
equal to the then fair market value of the Company's common stock. The options
were exercisable over specified periods per terms of the individual agreements.
In fiscal year 2005, the Company granted 30,000 shares to a new member of the
Company's Board of Directors. One-third of the options may be exercised one year
after the grant date; two-thirds, two years after the grant date and all of the
options, three years after the grant date. The
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
exercise price of the grant is at the then fair market value of the Company's
common stock, consequently, no compensation expense is recognized because the
Company may apply the intrinsic value method for a director of the Company under
the provisions of APB 25. No compensation expense was recorded during the years
ended April 30, 2005, 2004 and 2003 as no other grants were made in those years
and previous grants have been fully expensed.
Transactions under this plan, including the weighted average exercise
prices of the options, are as follows:
2005 2004 2003
-------------------- --------------------- --------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 111,050 $15.49 114,350 $15.31 114,350 $15.31
Granted 30,000 $14.76 - - -
Exercised - - (3,300) $9.25 -
------- ------- -------
Outstanding at end of year 141,050 $15.33 111,050 $15.49 114,350 $15.31
======= ======= ========
Exercisable at end of year 111,050 $15.49 111,050 $15.49 111,350 $15.29
======= ======= =======
Available for grant at end of year 189,500 219,500 219,500
======= ======= =======
Weighted average fair value
of options granted during the year $ 7.81 $ - $ -
====== ======= =======
Employee Stock Option Plans:
The Company has various stock option plans for key management employees,
including officers and directors who are employees. The plans are both
Nonqualified Stock Option ("NQSO") plans and Incentive Stock Option ("ISO")
plans. Under both types of plans, options are granted at the discretion of the
Stock Option committee at an exercise price not less than the fair market value
of the Company's common stock on the date of grant. Under one NQSO plan the
options are exercisable one year after the date of grant. Under the remaining
plans the options are exercisable over a four-year period beginning one year
after the date of grant. The options expire ten years after the date of grant
and are subject to certain restrictions on transferability of the shares
obtained on exercise. As of April 30, 2005, eligible employees had been granted
options to purchase 1,143,500 shares of Company stock under ISO plans of which
approximately 365,000 options are outstanding and approximately 150,000 are
exercisable. Through April 30, 2005, eligible employees have been granted
options to acquire 1,090,000 shares of Company stock under NQSO plans. Of the
NQSO options, approximately 745,000 are both outstanding and exercisable (see
tables below).
The excess of the consideration received over the par value of the common
stock or cost of treasury stock issued under both types of option plans has been
recognized as an increase in additional paid-in capital. No charges are made to
income with respect to the ISO or NQSO plans.
Transactions under these plans, including the weighted average exercise
prices of the options, are as follows:
2005 2004 2003
-------------------- ---------------------- --------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 1,081,437 $11.00 1,031,062 $12.63 969,062 $13.14
Granted 59,500 $14.40 128,500 $9.13 83,500 $6.62
Exercised (24,950) $7.06 (22,000) $5.58 (3,500) $7.27
Expired or canceled (6,000) $8.80 (56,125) $5.86 (18,000) $12.91
---------- ---------- ----------
Outstanding at end of year 1,109,987 $11.26 1,081,437 $11.00 1,031,062 $12.63
========= ========= =========
Exercisable at end of year 895,587 $11.46 760,312 $11.07 665,562 $11.64
======= ======= =======
Available for grant at end of year 11,500 71,000 278,000
====== ====== =======
Weighted average fair value
of options granted during the year $7.60 $5.57 $4.03
===== ===== =====
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table summarizes information about stock options outstanding
at April 30, 2005:
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Actual Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 4/30/05 Life Price at 4/30/05 Price
- --------------- ---------- ---- ----- ---------- -----
$4.375 - 9.575 502,300 5.4 $ 7.60 375,275 $ 7.32
10.167 - 16.625 525,687 5.5 12.80 438,312 12.69
23.75 82,000 5.3 23.75 82,000 23.75
Restricted Stock Plan:
During fiscal 1990, the Company adopted a Restricted Stock Plan which
provides that key management employees may be granted rights to purchase an
aggregate of 375,000 shares of the Company's common stock. The grants,
transferability restrictions and purchase price are determined at the discretion
of a special committee of the board of directors. The purchase price may not be
less than the par value of the common stock.
2005 2004 2003
---------------------- ------------------- --------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 22,500 $4.00 22,500 $4.00 30,000 $4.00
Granted - - - - - -
Expired - - - - - -
Exercised - - - - (7,500) $4.00
------ ----- ------ ----- ------- -----
Outstanding at end of year 22,500 $4.00 22,500 $4.00 22,500 $4.00
====== ====== ======
Exercisable at end of year 22,500 $4.00 22,500 $4.00 22,500 $4.00
====== ====== ======
Balance of shares available for
grant at end of year 98,250 98,250 98,250
====== ====== ======
Transferability of shares is restricted for a four-year period, except in
the event of a change in control as defined. Amounts shown as unearned
compensation in stockholders' equity represent the excess of the fair market
value of the shares over the purchase price at the date of grant which is being
amortized as compensation expense over the period in which the restrictions
lapse.
Employee Stock Ownership Plan/Stock Bonus Plan:
During 1990 the Company amended its Stock Bonus Plan to become an Employee
Stock Ownership Plan ("ESOP"). By means of a bank note, subsequently repaid, the
Company reacquired 561,652 shares of its common stock during fiscal 1990. These
shares plus approximately 510,000 additional shares issued by the Company from
its authorized, unissued shares were sold to the ESOP in May 1990. Shares were
released for allocation to participants based on a formula as specified in the
ESOP document. By the end of fiscal 2000, all shares (1,071,652) had been
allocated to participant accounts of which 582,053 shares remain in the ESOP.
Deferred Compensation Plan:
The Company has a program for key employees providing for the payment of
benefits upon retirement or death. Under the plan, each key employee receives
specified retirement payments for the remainder of the employee's life with a
minimum payment of ten years' benefits to either the employee or
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
his beneficiaries. The plan also provides for reduced benefits upon early
retirement or termination of employment. The Company pays the benefits out of
its working capital but has also purchased whole life insurance policies on the
lives of certain of the participants to cover the optional lump sum obligations
of the plan upon the death of the participant.
Deferred compensation expense charged to operations during the years ended
April 30, 2005, 2004 and 2003 was approximately $1,266,000, $371,000 and
$602,000, respectively. During fiscal year 2005, the Company recorded a change
in accounting estimate in the amount of $327,000 to reflect the use of updated
actuarial mortality tables to determine its deferred compensation liability.
14. Income Taxes
------------
The income (loss) before provision (benefit) for income taxes consisted of
(in thousands):
Year Ended April 30,
--------------------
2005 2004 2003
---- ---- ----
U.S. $6,977 $ 466 ($ 3,680)
Foreign 170 (35)(a) (6,904)(a)
------ ------ ---------
$7,147 $ 431 ($10,584)
====== ====== =======
(a) Prior period amounts have been restated to reflect the
Company's equity income from its investment in Morion, Inc.
The provision (benefit) for income taxes consists of the following (in
thousands):
2005 2004 2003
---- ---- ----
Current:
Federal $4,200 ($ 300) ($ 1,650)
Foreign 70 - -
State 450 - -
------ ------ ---------
Current benefit 4,720 (300) (1,650)
------ ------ ---------
Deferred
Federal (2,250) - (352)
Foreign 40 95 (171)
State (400) - (200)
Valuation allowance- foreign - 316 600
------ ------ ---------
Deferred provision (benefit) (2,610) 411 (123)
------ ------ ---------
Total provision (benefit) $ 2,110 $ 111 ($ 1,773)
======= ===== =======
The following table reconciles the reported income tax expense with the
amount computed using the federal statutory income tax rate (in thousands).
2005 2004 2003
---- ---- ----
Computed "expected" tax (benefit) expense $2,430 $ 147 ($3,599)
State and local tax, net of federal benefit 297 - (139)
Nontaxable income from foreign subsidiaries (61) (50) (11)
Valuation allowance on foreign deferred taxes - 316 600
Nondeductible losses at foreign subsidiaries - 218 135
Nondeductible goodwill impairment - - 2,094
Nondeductible expenses 159 121 164
Nontaxable life insurance cash value increase (96) (103) (51)
Reversal of tax liabilities - (400) -
Tax credits (549) (144) (784)
Other items, net, none of which individually
exceeds 5% of federal taxes at statutory rates (70) 6 (182)
------ ------ ---------
$2,110 $ 111 ($1,773)
====== ===== ======
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The components of deferred taxes are as follows (in thousands):
2005 2004
---- ----
Deferred tax assets:
Employee benefits $4,012 $3,465
Inventory 1,550 1,200
Accounts receivable 100 100
Marketable securities 170 49
Credit and loss carryforwards - 400
Research & development 430 436
Other liabilities 8 7
Foreign net operating loss carryforwards 430 594
Miscellaneous 118 308
-------- --------
Total deferred tax asset 6,818 6,559
-------- --------
Deferred tax liabilities:
Property, plant and equipment 838 2,388
-------- --------
Net deferred tax asset 5,980 4,171
Valuation allowance (1,067) (993)
-------- --------
$4,913 $3,178
======== ========
At April 30, 2005, the Company has available approximately $2.4 million
in net operating losses available to offset future income of certain of its
foreign subsidiaries. The Company's valuation allowance was increased by
$393,000 in fiscal year 2004 to reflect the fact that the potential benefit
arising from losses of a foreign subsidiary is not likely to be realized. The
total valuation allowance relates to deferred tax assets of foreign
subsidiaries.
15. Product Warranties
The Company generally provides its customers with a one-year warranty
regarding the manufactured quality and functionality of its products. For some
limited products, the warranty period has been extended. The Company establishes
warranty reserves based on its product history, current information on repair
costs and annual sales levels. Changes in the carrying amount of accrued product
warranty costs are as follows (in thousands):
Year Ended April 30,
--------------------
2005 2004 2003
---- ---- ----
Balance at beginning of year $400 $300 $300
Warranty costs incurred (319) (280) (900)
Product warranty accrual 119 380 900
----- ----- -----
Balance at end of year $200 $400 $300
===== ===== =====
The higher than expected warranty expense level in fiscal year 2003 was
primarily related to a unique manufacturing defect in one of the Company's
products which occurred over a limited period of time. The defect was identified
and corrected and, as of April 30, 2005, the Company had substantially completed
the warranty rework related to this product.
16. Segment Information
The Company operates under four reportable segments:
(1) Commercial Communications - consists principally of time and
frequency control products used in two principal markets- commercial
communication satellites and terrestrial cellular telephone or other
ground-based telecommunication stations.
(2) U.S. Government - consists of time and frequency control products
used for national defense or space-related programs.
(3) Gillam-FEI - the Company's Belgian subsidiary primarily sells
wireline synchronization and network monitoring systems.
(4) FEI-Zyfer - the products of the Company's subsidiary incorporate
Global Positioning System (GPS) technologies into systems and
subsystems for secure communications, both government and
commercial, and other locator applications.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The accounting policies of the four segments are the same as those
described in the "Summary of Significant Accounting Policies." The Company
evaluates the performance of its segments and allocates resources to them based
on operating profit which is defined as income before investment income,
interest expense and taxes. The Company's Commercial Communications and U.S.
Government segments operate principally out of a U.S.-based manufacturing
facility with both segments sharing the same managers, manufacturing personnel,
and machinery and equipment. Consequently, data for these two segments includes
allocations of depreciation and corporate-wide general and administrative
charges. The assets of these two segments consist principally of inventory and
accounts receivable. All other U.S.-based assets are assigned to the corporation
for the benefit of all four segments. The European-based director of Gillam-FEI
and the president of FEI-Zyfer manage the assets of these segments. All acquired
assets, including intangible assets, are included in the assets of these
segments.
The table below presents information about reported segments for each of
the years ended April 30 with reconciliation of segment amounts to consolidated
amounts as reported in the statement of operations or the balance sheet for each
of the years (in thousands):
2005 2004 2003
---- ---- ----
Net sales:
Commercial Communications $31,464 $28,235 $15,051
U.S. Government 5,603 7,053 8,906
Gillam-FEI 12,599** 12,197** 8,137
FEI-Zyfer 8,803 6,560 -
less intersegment sales (3,296)** (3,939)** (567)
------- ------- -------
Consolidated Sales $55,173 $50,106 $31,527
======= ======= =======
Operating (loss) profit:
Commercial Communications $ 968** ($ 1,093)** ($ 7,123)
U.S. Government (1,584) 656 1,887
Gillam-FEI 200** 353** (6,972)
FEI-Zyfer 292 (1,059) -
Corporate (1,145) (503) (282)
------- ------- -------
Consolidated Operating (Loss) Profit ($ 1,269) ($ 1,646) $(12,490)
======= ======= ========
** For the fiscal years ended April 30, 2005 and 2004, includes Gillam-FEI
intersegment sales of $2.4 million and $3.5 million, respectively, to the
Commercial Communications segment for development of a wireline
synchronization product for ultimate production and sale in the U.S. These
amounts were recorded as research and development expense of the Commercial
Communications segment, resulting in lower operating profit in fiscal year
2005 and an operating loss in fiscal year 2004 at that segment and operating
profits in the Gillam-FEI segment in each of those fiscal years.
2005 2004 2003
---- ---- ----
Identifiable assets:
Commercial Communications $26,261 $22,988 $14,733
U.S. Government 6,245 5,189 6,147
Gillam-FEI 13,877 14,904 12,305
FEI-Zyfer 4,796 5,541 -
less intersegment balances (9,892) (5,673) (964)
Corporate 47,087 49,918 53,557
------- ------- -------
Consolidated Identifiable Assets $88,374 $92,867 $85,778
======= ======= =======
Depreciation and amortization (allocated):
Commercial Communications $1,105 $1,100 $ 930
U.S. Government 220 267 327
Gillam-FEI 244 307 324
FEI-Zyfer 426 405 -
Corporate 19 19 19
------- ------- -------
Consolidated Depreciation Expense $2,014 $2,098 $1,600
======= ======= ======
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Major Customers
In fiscal year 2005, sales to two customers of the Commercial
Communications segment aggregated $22.0 million or 70% of that segment's total
sales. These customers accounted for 28% and 12%, respectively, of the Company's
consolidated sales for the year. In the U.S. Government segment, sales to four
customers aggregated $4.9 million or 87% of that segment's revenues in fiscal
year 2005. In the Gillam-FEI segment, sales to two customers aggregated $6.0
million or 59% of that segment's revenues (exclusive of the $2.4 million
intersegment sale). In the FEI-Zyfer segment, two customers accounted for $1.9
million or 21% of that segment's sales. None of the customers in the U.S.
Government, Gillam-FEI or FEI-Zyfer segments accounted for more than 10% of
consolidated revenues.
In fiscal year 2004, sales to two customers of the Commercial
Communications segment aggregated $21.6 million or 76% of that segment's total
sales. These customers accounted for 32% and 11%, respectively, of the Company's
consolidated sales for the year. In the U.S. Government segment, sales to three
customers aggregated $5.8 million or 82% of that segment's revenues in fiscal
year 2004. In the Gillam-FEI segment, sales to two customers aggregated $2.7
million or 31% of that segment's revenues (exclusive of the $3.5 million
intersegment sale). In the FEI-Zyfer segment, one customer accounted for $1.2
million or 19% of that segment's sales. None of the customers in the U.S.
Government, Gillam-FEI or FEI-Zyfer segments accounted for more than 10% of
consolidated revenues.
During fiscal year 2003, sales to one customer accounted for approximately
$10.0 million of the Commercial Communications segment's total sales. This
amount represents 66% of Commercial Communications' total revenues and 32% of
consolidated sales. In the U.S. Government segment, sales to three customers
accounted for $6.7 million of sales or 76% of the segment's revenue and 21% of
consolidated revenue. One of the U.S. Government segment's customers accounted
for $3.5 million or 11% of consolidated revenue. Sales to two customers,
aggregating $1.9 million, accounted for 24% of the revenues of the Gillam-FEI
segment. None of the customers in the Gillam-FEI segment accounted for more than
10% of consolidated 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.
Foreign Sales
Revenues in the Commercial Communications and Gillam-FEI segments include
sales to foreign governments or to companies located in foreign countries.
Revenues, based on the location of the procurement entity, were derived from the
following countries:
(in thousands)
2005 2004 2003
---- ---- ----
China $11,422 $14,141 $ 1,814
Belgium 5,171 3,876 3,514
France 4,412 3,987 2,483
Brazil 1,051 1,021 -
Canada 1,021 1,046 -
Other 4,334 3,221 4,324
--------- --------- ---------
$27,411 $27,292 $12,135
======= ======= =======
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
17. Interim Results (Unaudited)
As indicated in Note 10 to the financial statements, in September 2004,
the Company increased its investment in Morion from 19.8% to 36%. As a result,
the Company changed its method of carrying the investment from cost to equity as
required by generally accepted accounting principles. Under the equity method,
the Company records its proportionate share of the earnings of Morion. The
financial statements for the fiscal periods preceding the change in accounting
method have been restated as indicated below.
Quarterly results for fiscal years 2005 and 2004 are as follows:
(in thousands, except per share data)
2005 Quarter
-------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales $17,683 $14,362 $11,222 $11,906
Gross margin 5,778 5,259 3,693 3,430
Net income (loss), as reported 977 854 (368) 3,520
Restated Equity in Morion 54
------
Net income (loss), restated 1,031
*Earnings (loss) per share
Basic $0.12 $0.10 ($0.04) $0.41
Diluted $0.12 $0.10 ($0.04) $0.41
During the fourth quarter of fiscal year 2005, the Company recorded
additional deferred compensation expense of $327,000 to reflect a change in
accounting estimate based on updated life expectancy tables for its deferred
compensation program.
*Quarterly earnings per share data do not equal the annual amount due to
changes in the average common equivalent shares outstanding.
(in thousands, except per share data)
2004 Quarter
-------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales $8,754 $10,025 $14,052 $17,275
Gross margin 2,567 3,320 4,773 4,917
Net income (loss), as reported (742) (234) 333 805
Restated Equity in Morion 16 21 31 90
----- ----- ---- ------
Net income (loss), restated (726) (213) 364 895
*Earnings (loss) per share
Basic ($0.09) ($0.03) $0.04 $0.11
Diluted ($0.09) ($0.03) $0.04 $0.10
During the fourth quarter of fiscal year 2004, the Company reduced its
inventory by $530,000 to adjust for inventory revaluation and realized a tax
benefit of $400,000 as the result of the reversal of certain tax liabilities
that were determined to be no longer required.
*Quarterly earnings per share data do not equal the annual amount due to
changes in the average common equivalent shares outstanding.
49
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Description Balance Charged Charged
at to costs to other Balance at
beginning and accounts- Deductions end of
of period expenses describe -describe period
--------- -------- -------- --------- ------
Year ended April 30, 2005
- -------------------------
Allowance for doubtful
accounts $140 $ 45 - 13(a) $172
Inventory reserves $3,495 $726 $68(c,d) - $4,289
Year ended April 30, 2004
- -------------------------
Allowance for doubtful
accounts $124 $ 16 - $140
Inventory reserves $3,598 $694 $28(c) $825(b) $3,495
Year ended April 30, 2003
- -------------------------
Allowance for doubtful
accounts $124 - - $124
Inventory reserves $2,941 $3,634 $35(c) $3,012(b) $3,598
(a) Accounts written off
(b) Inventory disposed or written off
(c) Foreign currency translation adjustments
(d) Includes $30 reclassification of other liabilities to inventory reserves
50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
NONE
Item 9A Controls and Procedures
Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's chief executive officer and chief financial
officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's chief executive officer and chief financial officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fourth fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item 9B Other Information
NONE
PART III
Item 10. Directors and Executive Officers of the Company
The information required to be furnished pursuant to this item with
respect to Directors of the Company, in compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, and the Company's code of ethics is
incorporated herein by reference from the Company's definitive proxy statement
for the annual meeting of stockholders to be held on or about September 29,
2005. The information required to be furnished pursuant to this item with
respect to Executive Officers is set forth, pursuant to General Instruction G of
Form 10-K, under Part I of this Report.
Item 11. Executive Compensation
This item is incorporated herein by reference from the Company's
definitive proxy statement for the annual meeting of stockholders to be held on
or about September 29, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
This item is incorporated herein by reference from the Company's
definitive proxy statement for the annual meeting of stockholders to be held on
or about September 29, 2005.
Item 13. Certain Relationships and Related Transactions
This item is incorporated herein by reference from the Company's
definitive proxy statement for the annual meeting of stockholders to be held on
or about September 29, 2005.
Item 14. Principal Accountant Fees and Services
This item is incorporated herein by reference from the Company's
definitive proxy statement for the annual meeting of stockholders to be held on
or about September 29, 2005.
51
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Index to Financial Statements, Financial Statement Schedule and Exhibits
The financial statements, financial statement schedule and exhibits are
listed below and are filed as part of this report.
(1) FINANCIAL STATEMENTS
Included in Part II of this report:
Page(s)
-------
Reports of Independent Registered Public Accounting Firms 26-27
Consolidated Balance Sheets
April 30, 2005 and 2004 28-29
Consolidated Statements of Operations
-years ended April 30, 2005, 2004 and 2003 30
Consolidated Statements of Changes in Stockholders' Equity
- years ended April 30, 2005, 2004 and 2003 31
Consolidated Statements of Cash Flows
- years ended April 30, 2005, 2004 and 2003 32-33
Notes to Consolidated Financial Statements 34-49
(2) FINANCIAL STATEMENT SCHEDULE
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 50
Other financial statement schedules are omitted because they are not
required, or the information is presented in the consolidated
financial statements or notes thereto.
(3) EXHIBITS
Exhibit 23.1 Consents of Independent Registered Public
Accounting Firms 57
Exhibit 31.1 Certification of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 58
Exhibit 31.2 Certification of the Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 59
Exhibit 32.1 Certification of the Chief Executive
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 60
Exhibit 32.2 Certification of the Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 61
The exhibits listed on the accompanying Index to Exhibits beginning
on page 54 are filed as part of this annual report.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
By /s/ Martin B. Bloch
-----------------------
Martin B. Bloch
President and CEO
By: /s/ Alan L. Miller
-----------------------
Alan L. Miller
Chief Financial Officer
and Controller
Dated: July 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Joseph P. Franklin Chairman of the Board 7/28/05
----------------------
Joseph P. Franklin
/s/ Joel Girsky Director 7/28/05
---------------------
Joel Girsky
/s/ E. Donald Shapiro Director 7/28/05
---------------------
E. Donald Shapiro
/s/ S. Robert Foley Director 7/28/05
---------------------
S. Robert Foley
/s/ Richard Schwartz Director 7/28/05
---------------------
Richard Schwartz
/s/ Martin B. Bloch President and CEO 7/28/05
--------------------- (Principal Executive
Martin B. Bloch Officer)
/s/ Alan L. Miller Chief Financial Officer 7/28/05
--------------------- and Controller
Alan L. Miller (Principal Financial
Officer)
53
INDEX TO EXHIBITS
ITEM 15(a)(3)
Certain of the following exhibits were filed with the Securities and Exchange
Commission as exhibits, numbered as indicated below, to the Registration
Statement or report specified below, which exhibits are incorporated herein by
reference:
Exhibit No. in
this Form 10-K Description of Exhibit NOTE
- -------------- --------------------------------------------------- ----
3.1 Copy of Certificate of Incorporation of the Registrant
filed with the Secretary of State of Delaware (1)
3.2 Amendment to Certificate of Incorporation of the
Registrant filed with the Secretary of State
of Delaware on March 27, 1981 (2)
3.3 Amendment to Certificate of Incorporation of the Registrant
filed with Secretary of State of Delaware on
October 26, 1984 (6)
3.4 Amendment to Certificate of Incorporation of the Registrant
filed with the Secretary of State of Delaware on
October 22, 1986 (8)
3.5 Amended and Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of Delaware on
October 26, 1987 (10)
3.6 Amended Certificate of Incorporation of the Company filed
with the Secretary of State of Delaware on November 2, 1989 (10)
3.7 Copy of By-Laws of the Registrant, as amended to date (3)
4.1 Specimen of Common Stock certificate (1)
10.1 Registrant's 1997 Independent Contractor Stock Option Plan (11)
10.2 Stock Bonus Plan of Registrant and Trust Agreement
thereunder (4)
10.3 Employment agreement between Registrant and Martin B. Bloch (4)
10.4 Employment agreement between Registrant and Abraham Lazar (4)
10.5 Employment agreement between Registrant and John C. Ho (4)
10.6 Employment agreement between Registrant and Marvin Meirs (4)
10.7 Employment agreement between Registrant and Alfred Vulcan (4)
10.8 Employment agreement between Registrant and Harry Newman (4)
10.9 Employment agreement between Registrant and Marcus Hechler (4)
10.10 Employment agreement between Registrant and Charles Stone (9)
10.11 Employment agreement between Registrant and Jerry Bloch (9)
54
Exhibit No. in
this Form 10-K Description of Exhibit NOTE
- -------------- ----------------------------------------------- ----
10.12 Contribution Agreement between Registrant and Reckson
Operating Partnership L.P. dated January 6, 1998 (12)
10.13 Lease agreement between Registrant and Reckson Operating
Partnership, L.P. dated January 6, 1998 (12)
10.14 Plea Agreement, Civil Settlement and Related Documents
dated June 19, 1998 (12)
10.15 Registrant's 1984 Incentive Stock Option Plan (6)
10.16 Registrant's Cash or Deferral Profit Sharing Plan and
Trust under Internal Revenue Code Section 401,
dated April 1, 1985 (7)
10.17 Amendment dated April 19, 1981 to Stock Bonus Plan
of Registrant and Trust Agreement (3)
10.18 Amendment Restated Effective as of May 1, 1984 of the
Stock Bonus Plan and Trust Agreement of Registrant (7)
10.19 Amendment Restated Effective as of May 1, 1984 of the
Stock Bonus Plan and Trust Agreement of Registrant (8)
10.20 Form of stock escrow agreement between Vincenti &
Schickler as escrow agent and certain officers of
Registrant (4)
10.21 Form of Agreement concerning Executive Compensation (2)
10.22 Registrant's 1987 Incentive Stock Option Plan (9)
10.23 Registrant's Senior Executive Stock Option Plan (9)
10.24 Amendment dated Jan. 1, 1988 to Registrant's Cash or
Deferred Profit Sharing Plan and Trust under Section 401
of Internal Revenue Code (9)
10.25 Executive Incentive Compensation Plan between Registrant
and various employees (9)
10.26 Registrant's Employee Stock Option Plan (10)
10.27 Loan agreement between Registrant and Nat West
dated May 22, 1990 (10)
10.28 Loan Agreement between Registrant's Employee Stock
Ownership Plan and Registrant dated May 22, 1990 (10)
11 Computation of Earnings per Share of Common Stock Included in
the Financial
Statements
15 Registrant's 1982 Incentive Stock Option Plan (5)
21 List of Subsidiaries of Registrant (10)
55
Exhibit No. in
this Form 10-K Description of Exhibit NOTE
- -------------- ----------------------------------------------- ----
23.1 Consent of Independent Registered Public Accounting
Firm to incorporation by reference of 2005 audit
report in Registrant's Form S-8 Registration
Statement. Filed herewith
31.1 Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 Filed herewith
31.2 Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 Filed herewith
32.1 Certification of the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 Filed herewith
32.2 Certification of the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 Filed herewith
NOTES:
(1) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-29609,
which exhibit is incorporated herein by reference.
(2) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-71727,
which exhibit is incorporated herein by reference.
(3) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061 for the year
ended April 30, 1981, which exhibit is incorporated herein by
reference.
(4) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-69527,
which exhibit is incorporated herein by reference.
(5) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1982, which exhibit is incorporated herein by
reference.
(6) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1985, which exhibit is incorporated herein by
reference.
(7) Filed with the SEC as exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1986, which exhibit is incorporated herein by
reference.
(8) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1987, which exhibit is incorporated herein by
reference.
(9) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1989, which exhibit is incorporated herein by
reference.
(10) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1990, which exhibit is incorporated herein by
reference.
(11) Filed with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-8, File No. 333-42233,
which exhibit is incorporated herein by reference.
(12) Filed with the SEC as an exhibit, numbered as indicated above, to the
annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1998, which exhibit is incorporated herein by
reference.
56
EXHIBIT 23.1a
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Frequency Electronics, Inc. and Subsidiaries
Mitchel Field, New York
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-42233) of Frequency Electronics, Inc. of our
report dated July 18, 2005 relating to the consolidated financial statements and
financial statement schedule, which appears in this Form 10-K.
/s/ Holtz Rubenstein Reminick LLP
- ---------------------------------
Melville, New York
July 28, 2005
EXHIBIT 23.1b
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-42233) of Frequency Electronics, Inc. of our
report dated July 6, 2004, except for Note 10 as to which the date is September
28, 2004, relating to the consolidated financial statements and financial
statement schedule as of April 30, 2004 and 2003 and for the years then ended,
which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
Melville, New York
July 28, 2005
Exhibit 31.1
Certification
I, Martin B. Bloch, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Frequency Electronics,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation;
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: July 28, 2005
By: /s/ Martin B. Bloch
-----------------------
Martin B. Bloch
Chief Executive Officer
Exhibit 31.2
Certification
I, Alan L. Miller, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Frequency Electronics,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation;
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: July 28, 2005
By: /s/ Alan L. Miller
----------------------
Alan L. Miller
Chief Financial Officer
Exhibit 32.1
CERTIFICATIONS PURSUANT TO
SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
- --------------------
In connection with the Annual Report of Frequency Electronics, Inc. (the
"Company") on Form 10-K for the year ended April 30, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Martin
B. Bloch, Chief Executive Officer of the Company, certify, pursuant to Section
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Martin B. Bloch July 28, 2005
-------------------
Martin B. Bloch
Chief Executive Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to the
Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of CFO
- --------------------
In connection with the Annual Report of Frequency Electronics, Inc. (the
"Company") on Form 10-K for the year ended April 30, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Alan L.
Miller, Chief Financial Officer of the Company, certify, pursuant to Section 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Alan L. Miller July 28, 2005
------------------
Alan L. Miller
Chief Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to the
Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.