UNITED
STATES
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, 2007
OR
o 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 incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
|
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:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock (par value $1.00 per share)
|
NASDAQ
Global
Market
|
Securities
registered pursuant to Section 12 (g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
o
No
x
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
o
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer o
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of voting stock held by non-affiliates of the Registrant
as of October 31, 2006 - $70,400,000
APPLICABLE
ONLY TO CORPORATE ISSUERS:
The
number of shares outstanding of Registrant's Common Stock, par value $1.00
as of
July 23, 2007 - 8,704,591
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 26, 2007.
(Cover
page 1 of 84 pages)
Exhibit
Index at Page 59
PART
I
Item
1. Business
GENERAL
DISCUSSION
Frequency
Electronics, Inc. (sometimes referred to as "Registrant", "Frequency
Electronics" or the "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 identified the following major markets for its products and
technology:
SATELLITE
PAYLOADS
(1)
Commercial communication satellites- The globe is encircled by over 120
geostationary satellites used for communication, TV and video broadcasting,
and
data transmission. These satellites are going through a replacement cycle which
will last for many years with an average of 20 such new satellites expected
to
be built each year.
(2)
Satellites for U.S. Government Department of Defense (“DOD”) and National
Aeronautics and Space Administrations (“NASA”)- Such satellites, which may be in
geostationary, mid- and low-earth orbits, are used for secure communications,
surveillance, guidance, global positioning (GPS) and weather tracking. Industry
estimates predict approximately 20 new and replacement satellites will be built
each year over the next decade.
TELECOMMUNICATION
NETWORKS
(3)
Wireless communications- Cellular telephone infrastructure requires precise
signal synchronization. In the architecture of many of the cellular systems,
this synchronization is obtained through oscillators provided by the Company.
As
more services are added and more users come online, the need for synchronization
is increased.
(4)
WiMAX- The nascent Internet access technology is part of the wireless
communications alternatives. The consortium of Motorola, Intel and Sprint,
for
example, are currently building WiMax networks in select cities in the United
States as well as in other countries. As in cellular telephone networks, precise
signal synchronization is provided by Frequency’s oscillators.
(5)
Wireline synchronization- World-wide, a vast infrastructure supports the wired
communications networks. These networks also require significant synchronization
equipment which is housed in thousands of Central Offices operated by the
telephone companies. These equipments require upgrade and replacement to
maintain the integrity of the wireline networks.
2
U.S.
GOVERNMENT & DOD (non-space)
(6)
U.S.
Government applications- In addition to DOD and NASA satellites, the U.S.
Government is in need of ever more secure communication capabilities and is
developing a secure radio for all branches of the military. The military is
also
increasing its use of unmanned aerial vehicles (UAVs) and improving the accuracy
of the radar and guidance systems on all moving platforms.
OTHER
INDUSTRIAL APPLICATIONS
(7)
Remote management of networks, such as power grids and gas lines, can be
accomplished through the Company’s LYNX SCADA system.
(8)
Deep
earth drilling for oil and gas in harsh environments can be done more
efficiently through utilization of the Company’s high temperature tolerant
oscillators and GPS technology.
To
address these markets, the Company has formed several corporate entities which
operate under three reportable segments. (See also the section entitled
REPORTABLE SEGMENTS below):
1.
FEI-NY
The
Company’s space and terrestrial commercial communications products are designed,
developed and manufactured by its wholly owned subsidiary, FEI Communications,
Inc. (“FEIC”). FEIC was incorporated in Delaware in December 1991, as a separate
subsidiary company to provide ownership and management of assets and other
services appropriate for commercial clients, both domestic and foreign.
Frequency
Electronics, Inc. Asia (“FEI-Asia”) was established in fiscal year 2002 to be
the Company’s Asian-based low cost manufacturer of certain commercial
communications products used primarily in the wireless and wireline markets.
FEI-Asia is located in the Free-Trade Zone in Tianjin, China.
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.
2.
Gillam-FEI
- The
Company’s Belgian subsidiary, acquired in September 2000, develops and
manufactures products for wireline and network synchronization systems. Products
delivered by Gillam-FEI provide essential network management and wireline
synchronization for a variety of industries and telecommunications providers
in
Europe, Africa, the Middle East and Asia.
3.
FEI-Zyfer
-
Precision time and frequency generation and synchronization products that
incorporate global positioning systems (“GPS”) technology are manufactured by
the Company’s subsidiary FEI-Zyfer, Inc. (“FEI-Zyfer”), which was acquired in
fiscal year 2004. 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.
In
addition to the operating segments, the Company has made a strategic investment
in Morion, Inc. (“Morion”), a Russian crystal oscillator manufacturer located in
St. Petersburg, Russia. The Company’s equity investment in Morion permits the
Company to secure a cost-effective source for high precision quartz resonators
and crystal oscillators, many of which are based on the Company’s design and
development work. As of April 30, 2007, the Company owned 36.6% of the
outstanding shares of Morion’s common stock. Accordingly, the Morion investment
was accounted for under the equity method and the Company’s statement of
operations includes its proportionate share of the earnings of
Morion.
In
December 2006, the Company acquired a 25% interest (20% on a fully-diluted
basis) in Elcom Technologies, Inc. (“Elcom”), a privately-held RF microwave
company. Elcom designs and manufactures high switching speed, low phase noise
microwave synthesizers, up-down converters, receivers, ceramic resonant
oscillators and dielectric resonant oscillators up to 40 GHz. These instruments
and components are critical for communication, surveillance, signal
intelligence, automatic testing, satellite ground stations and satellite
payloads.
3
FISCAL
2007 SIGNIFICANT EVENT
Subsequent
Event
In
June
2007, the Company reduced its investment in Morion from 36.6% to 8% of Morion’s
outstanding shares. Based upon a determination by the Russian Federation that
Morion was in a “strategic industry,” Gazprombank, a Russian government
majority-owned joint stock bank, acquired the majority interest
in Morion previously held by the European Bank for Reconstruction and
Development and a portion of the shares previously held by Frequency
Electronics, both at the same price per share. Gazprombank, through its
wholly-owned subsidiary, Finproject, Ltd., paid the Company approximately $5.8
million. In the first quarter of fiscal year 2008, which ends July 31, 2007,
the
Company will recognize a pre-tax gain of approximately $3.0 million. This is
in
addition to approximately $2.0 million in equity income realized in prior
periods from the Morion investment. In future periods, the Company will account
for its remaining investment in Morion on the cost basis.
REPORTABLE
SEGMENTS
The
Company operates under three reportable segments, primarily aligned with its
geographical locations: (1) FEI-NY, (2) Gillam-FEI; and (3) FEI-Zyfer. Within
each segment the Company designs, develops, manufactures and markets precision
time and frequency control products for different markets as described below.
Beginning
with the first quarter of fiscal year 2007, the Company is reporting its segment
information on an essentially geographic basis. The former Commercial
Communications and U.S. Government segments, which operate out of the Company’s
New York headquarters facility, have been combined into the new segment, FEI-NY.
This segment also includes the operations of the Company’s wholly-owned
subsidiary, FEI-Asia, which functions primarily as a manufacturing facility
for
the FEI-NY segment.
Previously,
the Company identified its New York-based U.S. Government business as a separate
segment even though that segment shared the same facility, equipment and
personnel with the Commercial Communications segment. With the acquisition
of
FEI-Zyfer in fiscal year 2004, the Company now does business on U.S. Government
programs out of two separate subsidiaries. The Company’s Chief Executive Officer
measures segment performance based on total revenues and profits generated
by
each geographic center rather than on the specific types of customers or
end-users. Consequently, the Company determined that limiting the number of
segments to the three indicated above more appropriately reflects the way the
Company’s management views the business.
Prior
year segment information has been reclassified to conform to the new segment
presentation. This includes reclassifying the property, plant and equipment
located in the New York facility to the FEI-NY segment and not to corporate
assets.
The
products for the FEI-NY segment are principally marketed to wireless
communications networks, to the commercial and U.S. Government satellite markets
and to other U.S. Department of Defense programs. The Gillam-FEI segment
designs, develops and manufactures products for wireline and network
synchronization. Its products are currently sold to non-U.S. customers and
its
US5G system has recently been introduced to the domestic U.S. market. 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 2007, 2006 and 2005 approximately 71%, 68% and 67%, respectively,
of the Company’s consolidated revenues were from products sold by the FEI-NY
segment. Sales by Gillam-FEI were approximately 20%, 17% and 23% of fiscal
years
2007, 2006 and 2005 consolidated revenues, respectively. In fiscal years 2007,
2006 and 2005, sales for the FEI-Zyfer segment were 13%, 19% and 16% of
consolidated revenues, respectively. Additional sales information for the
FEI-NY, Gillam-FEI, and FEI-Zyfer segments during each of the last five years
is
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 2007, 2006 and 2005, foreign sales comprised 32%,
35% and 50%, 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.
4
FEI-NY
SEGMENT:
The
Company provides precision time, frequency and synchronization products that
are
found in ground-based communication stations, on-board earth-orbiting satellites
and imbedded in moving platforms operated by the U.S. military. The Company
has
made a substantial investment in research and development to apply its core
technologies to telecommunication and satellite payload markets. Revenues for
this segment have varied considerably over the past eight fiscal years, based
on
infrastructure spending patterns by wireless telecommunication companies and
demand for new satellites. Over this eight-year time frame, the Company
initially experienced accelerated growth in wireless infrastructure revenues
followed by a “telecom trough” in fiscal years 2002 and 2003. Accelerated growth
began again in late fiscal year 2004 and continued through early fiscal year
2005, to be followed by another slow down into the first two quarters of fiscal
year 2006. Beginning in the latter portion of fiscal year 2006, revenues from
satellite payloads, both for commercial and U.S. Government applications, began
to accelerate. The Company expects to continue to generate substantial revenues
from deployment of new and replacement satellites. The Company also believes
that the wireless industry provides a large opportunity for future sales growth
but the timing of any growth will be based on capital spending decisions by
domestic and worldwide telecommunications companies.
Terrestrial
Communications
The
development of new and enhanced technologies will bring 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 dependable high quality for cell
phone service. Cellular infrastructure integrators and original equipment
manufacturers, consisting of some of the world’s largest telecommunications
companies, are building out existing networks even as they develop new
technologies for future systems. These new technologies include advances such
as
EDGE (Enhanced Data rates for Global Evolution), 3G (3rd
Generation) and others, that can provide not only improved voice connectivity
but also Internet, video and data transmission. A full buildout of WiMAX
networks in the United States alone, contemplates hundreds of thousands of
base
stations. Mobile WiMAX would require high levels of synchronization such as
that
provided by Frequency Electronics.
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 dependability
and quality of services.
With
increased demand for wireless services on limited bandwidth, the requirement
for
precise timing to ensure system-wide synchronization becomes paramount. The
Company manufactures a Rubidium Atomic Standard, a small, low cost,
temperature-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 of these systems, timing to ensure signal synchronization is
essential.
Over
the
past five years, in conjunction with its European subsidiary, Gillam-FEI, the
Company has developed a new, state-of-the-art signal synchronization unit
identified as the US5G. This unit is intended to provide synchronization for
wireline networks within the United States where approximately 35,000 “shelves”
are located in 25,000 Central Offices around the country. The current equipment
in these Central Offices is old and in need of upgrade or replacement. The
Company’s US5G unit is currently in the validation phase at two of the Regional
Bell Operating Companies (“RBOC”) and the Company anticipates initial U.S. sales
of this product during fiscal year 2008.
Satellite
Payloads
The
use
of satellites launched for communications, navigation, weather forecasting,
video and data transmissions has expanded the need to transmit increasing
amounts of voice, video, and data to earth-based receivers. This requires more
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, and many of the Company’s
other space 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. Newly developed frequency generators, synthesizers, distribution
amplifiers and up/down converters and receivers have augmented the Company’s
product offerings and positioned the Company to provide a greater share of
a
typical satellite’s payload. Commercial satellite programs such as Intelsat,
ANIK, Eutelsat, Inmarsat and Worldstar have utilized the Company’s
space-qualified products.
5
In
the
years ahead, the U.S. Government’s DOD will require more secure communication
capabilities, more assets in space and greater bandwidth. 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 product offerings for U.S.
Government satellite programs are similar in design and function to those used
on commercial satellites, as described above.
U.S.
Government-
non-space:
In
addition to space-based programs, the Company’s proprietary products have been
used in airborne and ground-based guidance, navigation, communications, radar,
sonar surveillance and electronic countermeasure and timing systems. The Company
has recently developed a low-g (gravity) sensitivity oscillator which offers
a
100-fold improvement in accuracy for certain guidance and targeting systems.
The
Company has demonstrated the functionality of its oscillators on over a dozen
U.S. Government platforms and anticipates that many of these programs will
be a
source of substantial future revenue. Products are built in accordance with
DOD
standards and are in use on many of the United States’ most sophisticated
military aircraft, satellites and missiles.
The
Company’s sales on U.S. Government programs 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 negotiated on terms 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") 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
U.S.
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.
GILLAM-FEI
SEGMENT:
Gillam-FEI
extends the Company’s competencies into wireline synchronization, network
management,
and
specialized test equipment. With the advent of new digital broadband
transmission technologies, reliable synchronization has become the warranty
to
quality of service for telecommunications 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 such as
Belgacom, France Telecom, Telefonica and other service providers are among
Gillam-FEI’s major customers. With the development of the US5G unit for the
FEI-NY segment and the U.S. market, Gillam-FEI also developed a state-of-the-art
US5Ge unit and ancillary products intended for deployment in the European,
Middle Eastern, Asian and African markets.
Network
management 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.
6
Gillam-FEI’s
specialized test equipment is 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.
FEI-Zyfer’s 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. More
than 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, specifically 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 position accurately, 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. These products also feature fast warm-up and
low power consumption for mobile applications, including voice and data
communications.
The
ovenized quartz oscillator is the most accurate of the Company’s crystal
oscillators. The 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 features electronic controls for frequency
stabilization or modulation, depending upon the application.
The
temperature compensated quartz oscillator is controlled using a temperature
sensitive device to directly compensate for the effect of temperature on the
oscillator's frequency.
The
rubidium lamp, filter and resonance cell provide the optical subassembly for
the
manufacture of the Company's optically pumped atomic rubidium frequency
standards. The cesium tube resonator is used in the manufacture of the Company's
cesium primary standard atomic clocks.
High
reliability hybrid assemblies are manufactured in thick and thin film
technologies for applications from DC to 44 GHz. These hybrids are used in
manufacturing the Company's products and also supplied directly to customers,
for use in 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.
7
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. These frequency standards are used in
communications, guidance and navigation and time synchronization systems. 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 several 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 growing 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
and
demonstrated capability to interface these technologies and experience in
applying them to a wide range of systems. The systems generate electronic
frequencies of predetermined value and then divide, multiply, mix, convert,
modulate, demodulate, filter, distribute, combine, separate, switch, measure,
analyze, and/or compare these signals depending on the system
application.
This
portion of the Company’s business includes a complete line of time and frequency
control systems, capable of generating many frequencies and time scales that
may
be distributed to widely dispersed users, or within the confines of a facility
or platform, or for a single dedicated purpose. Time and frequency control
systems combine the Company's cesium, rubidium and/or crystal instruments with
its other components, to provide systems for wireless, wireline, space and
defense applications.
For
the
wireless industry, the Company integrates its core components such as quartz
oscillators and rubidium atomic standards with software applications,
microprocessors, and other digital circuitry into complete subsystems. These
subsystems supply frequency and time reference signals that facilitate wireless
communications and are necessary for the various wireless technologies to
operate properly. The customers for these subsystems are global wireless
infrastructure manufacturers.
For
the
wireline industry, the Company integrates its core components with other
electronic modules into high-level platforms that provide a total
synchronization solution. These signal synchronization units (“SSUs”) are
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.
8
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 past experience of major
contactors in these sectors has led satellite integrators to outsource
increasing amounts of these systems to highly qualified producers who have
validated their capabilities through extensive successful participation in
past
defense and space programs. Historically, the Company ranks among the top
producers in this category.
The
Company’s subsidiary, FEI-Zyfer, manufactures products incorporating GPS
technology by utilizing GPS signals to provide required performance in
conjunction with precision time and frequency information. These systems and
subsystems are used in secure government programs such as 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 the FEI-NY segment 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 for natural
resources.
BACKLOG
As
of
April 30, 2007, the Company's consolidated backlog amounted to approximately
$44
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, 2008. 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 revenues of its
overseas subsidiaries, totaled approximately 32%, 35% and 50% of net sales
in
fiscal years 2007, 2006 and 2005, respectively.
The
Company's products are sold to both commercial and governmental customers.
For
the years ended April 30, 2007, 2006 and 2005, approximately 24%, 25% and 20%,
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, 2007 and 2006
included sales to Motorola Corp. (“Motorola”), Alcatel-Lucent (“Lucent”) and
Space Systems/Loral (“SS/L”), each of which accounted for greater than 10% of
consolidated sales. In fiscal year 2005, Motorola and Lucent each accounted
for
greater than 10% of consolidated sales. In the aggregate, for fiscal years
2007
and 2006 these three customers accounted for 43% and 42%, respectively, of
consolidated sales. In fiscal year 2005 Motorola and Lucent accounted for an
aggregate of 40% of consolidated sales. In fiscal years 2007 and 2006, revenues
from these three companies accounted for an aggregate of 61% and 63% of the
Company’s FEI-NY segment. In fiscal year 2005, Motorola and Lucent accounted for
an aggregate of 59% of that segment’s sales.
During
fiscal years 2007, 2006 and 2005, France Telecom and Belgacom were major
customers of the Gillam-FEI segment. These European telecommunication companies
accounted for an aggregate of 35%, 41% and 59%, respectively, of the segment’s
revenues in those fiscal years.
In
the
FEI-Zyfer segment, during fiscal year 2007, Computer Sciences Corporation
(“CSC”) and SI International accounted for an aggregate of 21% of the segment’s
revenues; in fiscal year 2006, CSC and L-3 Communications accounted for 19%
of
revenues and in fiscal year 2005, Northrop Grumman Corporation and CSC accounted
for an aggregate of 21% of revenues.
9
None
of
the customers in the Gillam-FEI
or
FEI-Zyfer segments 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 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 2007, 2006 and 2005, the Company
expended $9.4 million, $6.3 million and $6.8 million of its own funds,
respectively, on such research and development activity. (See also Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.) For fiscal year 2008, the Company is targeting to spend between
$6.0 million and $8.0 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 its business is generally 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. In 2006, the
Company obtained a basic patent for its low-g technology.
COMPETITION
The
Company experiences competition in all areas of its business. The Company
competes primarily on the basis of the accuracy, performance and reliability
of
its products, the ability of its products to function under severe conditions,
such as in space or other extreme hostile environments, prompt and responsive
contract performance, technical competence and price. The Company has a unique
and broad product line which includes all three frequency standards - quartz,
rubidium, and cesium. Because of the very high precision of certain of its
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.
10
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 for timing and synchronization, the
Company competes with Agilent
Technologies,
Symmetricom, Inc, E. G. and G., Inc., Vectron, Inc. and others. Systems for
the
wireline industry produced by the Gillam-FEI segment compete with Symmetricom,
Inc. and Oscilloquartz, a division of Swatch. The Company’s principal
competition for space products is the in-house capability of its major
customers.
EMPLOYEES
The
Company employs approximately 500 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
|
|
Steven
Strang
|
-
|
President,
FEI-Zyfer
|
|
Hugo
Fruehauf
|
-
|
Chief
Technical Officer
|
|
Charles
S. Stone
|
-
|
Vice
President, Low Noise Development
|
|
Leonard
Martire
|
-
|
Vice
President, Program Management
|
|
Oleandro
Mancini
|
-
|
Vice
President, Business Development
|
|
Thomas
McClelland
|
-
|
Vice
President, Commercial Products
|
|
Adrian
Lalicata
|
-
|
Vice
President, RF & Microwave Systems
|
|
-
|
Treasurer
and Chief Financial Officer
|
|
|
Harry
Newman
|
-
|
Secretary
|
None
of
the officers and directors is related.
Joseph
P.
Franklin, age 73, 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 71, 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.
11
Markus
Hechler, age 61, 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.
Steven
Strang, age 43, 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 68, 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 76, 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 70, 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. In fiscal
year
2007, Mr. Martire assumed a new role as Vice President Program
Management.
Oleandro
Mancini, age 58, 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 52, joined the Company as an engineer in 1984 and was elected
Vice President, Commercial Products in March 1999.
Adrian
Lalicata, age 60, joined the Company in 2006 as Vice President, RF &
Microwave Systems. Prior to joining the Company, Mr. Lalicata served as Vice
President of Engineering at Herley-CTI and Communication Techniques, a Dover
Company. Mr Lalicata has served as Director of Engineering at Microphase Corp.
and Adcomm, Inc. He also held leading engineering positions at Loral Electronic
Systems, Cardion Electronics, and Airborne Instruments
Laboratories.
Alan
Miller, age 58, 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 60, 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.
Item
1A. Risk Factors
In
addition to the other information contained in this Form 10-K and the exhibits
hereto, the following risk factors should be considered carefully in evaluating
the Company’s business. Additional risks not presently known to the Company or
that the Company currently deems immaterial may also adversely affect its
business, financial condition, or results of operations.
A
variety of factors may cause the price of the Company’s stock to be
volatile.
In
recent
years, the stock market in general, and the market for shares of technology
companies in particular, including Frequency Electronics, have experienced
price
fluctuations. For example, for fiscal year 2007, the price of the Company’s
Common Stock ranged from a closing high of $14.25 to a closing low of $10.30.
The market price of the Company’s Common Stock is likely to continue to
fluctuate significantly in the future, including fluctuations unrelated to
its
performance. The Company believes that fluctuations of its stock price may
be
caused by a variety of factors, including:
|
·
|
fluctuations
in the Company’s operating
results;
|
12
|
·
|
announcements
of technological innovations, new commercial products or other
developments by the Company or its
competitors;
|
|
·
|
published
reports by securities analysts;
|
|
·
|
general
market conditions, general economic
conditions;
|
|
·
|
announcements
by the Company or its competitors of significant acquisitions, strategic
partnerships or joint ventures;
|
|
·
|
the
Company’s cash position and cash commitments;
|
|
·
|
additions
or departures of key personnel;
|
|
·
|
sales
or purchases of the Company’s Common Stock in the
marketplace;
|
|
·
|
an
outbreak of hostilities, diseases, natural disasters or
terrorism;
|
|
·
|
developments
in patents or other intellectual property rights;
and
|
|
·
|
developments
in the Company’s relationships with customers and
suppliers.
|
If
the Company fails to keep pace with rapid technological change and evolving
industry standards, its products could become less competitive or
obsolete.
The
markets for the Company’s products are characterized by technological change,
new product introductions, changes in customer requirements and evolving
industry standards. The Company may cease to be competitive if it fails to
timely introduce new products or product enhancements that address these
factors. To continue to introduce new products and product enhancements on
a
timely basis, the Company must:
|
·
|
identify
emerging technological trends in the Company’s target
markets;
|
|
·
|
accurately
define and design new products or product enhancements to meet market
needs;
|
|
·
|
develop
or license the underlying core technologies necessary to create new
products and product enhancements;
and
|
|
·
|
respond
effectively to technological changes and product introductions by
the
Company’s competitors.
|
If
the
Company fails to timely identify, develop, manufacture, market or support new
or
enhanced products successfully, its competitors could gain market share or
its
new or enhanced products might not gain market acceptance.
Delays
in the development of new or enhanced products could harm the Company’s
operating results and its competitive position.
The
development of new, technologically advanced products is a complex and uncertain
process requiring high levels of innovation, highly skilled engineering and
development personnel and accurate anticipation of technological and market
trends. Consequently, product development delays are typical in the Company’s
industry. If the Company fails to timely introduce a product for an emerging
standard or customers defer or cancel orders expecting the release of a new
or
enhanced product, its operating results could suffer. Product development delays
may result from numerous factors, including:
|
·
|
changing
product specifications and customer
requirements;
|
|
·
|
unanticipated
engineering complexities;
|
|
·
|
difficulties
with or delays by contract manufacturers or suppliers of key components
or
technologies;
|
|
·
|
difficulties
in allocating engineering resources and overcoming resource limitations;
and
|
|
·
|
difficulties
in hiring and retaining necessary technical
personnel.
|
The
Company faces uncertainty relating to economic conditions affecting its
customers.
The
Company faces uncertainty in the degree to which the current global economic
climate will affect the rate of growth for its existing and potential customers.
In particular, the timing and magnitude of capital spending by international
telecommunications companies, including those in China, will materially impact
the Company’s business. Frequency Electronics may experience instances of
customers delaying or deferring orders and longer lead times to close sales.
Similarly, spending on U.S. Government programs is determined by the annual
defense department budget. To the extent that support for the liberation and
rebuilding of Iraq takes precedence, funding for certain Department of Defense
programs may be delayed or significantly reduced in the near term. Such delays
can have a materially negative impact on the Company’s business, its operating
results and financial condition.
13
The
Company faces competition. Its inability to remain competitive in the industry
would adversely affect the Company’s ability to maintain its current sales and
growth.
The
Company experiences competition in all areas of its business. Frequency
Electronics competes primarily on the basis of the accuracy, performance and
reliability of its products, the ability of its products to function under
severe conditions, such as in space or other extreme hostile environments,
prompt and responsive contract performance, technical competence and price.
The
Company has a unique and broad product line which includes all three frequency
standards - quartz, rubidium, and cesium. For its high precision products,
the
Company has few competitors, but for lower precision components, the Company
faces significant competition from a number of suppliers. Certain of the
Company’s competitors are larger, have greater financial resources and have
larger research and development and marketing staffs. If its competitors develop
more accurate or reliable products, or otherwise improve their products,
Frequency Electronics could experience a decline in its sales or loss of market
acceptance of its products.
With
respect to the Company’s instruments and systems, it competes with Agilent
Technologies,
Symmetricom, Inc, E. G. and G., Inc.,
Vectron,
Inc. and
others. Systems for the wireline industry produced by the Gillam-FEI segment
compete with Symmetricom, Inc. and
Oscilloquartz, a division of Swatch.
Frequency Electronics’ principal competition for space products is the in-house
capability of its major customers.
The
Company’s reliance on third parties could materially adversely affect its
business.
In
recent
years, the Company has 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.
Any
unanticipated changes in such third parties’ ability to perform the component
manufacturing processes or any delay in such manufacturing could materially
adversely affect the Company’s business, financial condition and operating
results.
The
Company’s executive officers and certain key personnel are critical to its
business.
The
Company’s future success is dependent upon the contributions of its senior
corporate management team, particularly Martin Bloch, President and Chief
Executive Officer, who has been with the Company since 1961, Markus Hechler,
Executive Vice President, who has been with the Company since 1967, Oleandro
Mancini, Vice President of Business Development, who has been with the Company
since 2001 and certain other key employees. If Messrs. Bloch, Hechler and
Mancini no longer serve in their positions, the Company’s business, financial
conditions and results of operation could be substantially adversely affected.
The
Company’s future operating results also depend in significant part upon its
ability to attract and retain qualified management, manufacturing, technical,
engineering, marketing, sales and support personnel. Competition for qualified
personnel is intense, and the Company cannot ensure success in attracting or
retaining qualified personnel. There may be only a limited number of persons
with the requisite skills to serve in these positions and it may be increasingly
difficult for the Company to hire personnel over time. The Company’s business,
financial conditions and results of operation could be substantially adversely
affected by its inability to attract and retain skilled employees.
Economic,
political and other risks associated with international sales and operations
could adversely affect sales.
Because
the Company sells its products worldwide, its business is subject to risks
associated with doing business internationally. The Company recognized 32%
of
its revenue from sales to end-users in countries located outside of the United
States in the fiscal year ended April 30, 2007. The Company anticipates that
revenue from international operations will continue to represent a substantial
portion of its revenue. In addition, several of the Company’s manufacturing
facilities and suppliers are located outside the United States of America.
Accordingly, the Company’s future results could be harmed by a variety of
factors, including:
|
·
|
changes
in a specific country’s or region’s political or economic conditions,
particularly in emerging
markets;
|
14
|
·
|
tariff
and trade policies;
|
|
·
|
export
license requirements and restrictions of the export of
technology;
|
|
·
|
import
regulations;
|
|
·
|
domestic
and foreign tax policies;
|
|
·
|
foreign
governmental regulations;
|
|
·
|
difficulty
in staffing and managing widespread
operations;
|
|
·
|
ongoing
health epidemics (e.g., Bird Flu);
|
|
·
|
fluctuations
in foreign currency exchange rates;
|
|
·
|
stability
of international monetary
conditions;
|
|
·
|
differing
labor regulations;
|
|
·
|
political
unrest, war, actual or threatened acts of terrorism, other international
conflicts and the resulting military, economic and political responses
(including, without limitation, war between sovereign nations) as
well as
heightened security measures which may cause significant disruption
to
commerce worldwide;
|
|
·
|
differing
protection of intellectual property;
and
|
|
·
|
unexpected
changes in regulatory requirements.
|
The
Company’s products may contain defects that cause it to incur significant
corrective costs, divert its attention from product development efforts and
result in a loss of customers.
Highly
complex products such as the Company’s high-technology frequency, timing and
synchronization products may contain defects when they are installed in its
customers’ systems. If any of the Company’s products contain defects or have
reliability, quality or compatibility problems, its reputation may be damaged
and customers may be reluctant to buy its products. In addition, these defects
could interrupt or delay sales. The Company may have to invest significant
capital and other resources to alleviate these problems. If any problem remains
undiscovered until after the Company has commenced production of a new product,
it may be required to incur additional development costs and product recall,
repair or replacement costs. These problems may also result in claims against
the Company by its customers or others. In addition, these problems may divert
the Company’s technical and other resources from other development
efforts.
If
the Company fails to manage its operations effectively, its business could
suffer.
The
Company’s ability to offer products and implement its business plan successfully
in a rapidly evolving market requires effective planning and management. Failure
by the Company’s management or personnel to properly allocate resources to meet
its current and existing needs as well as unforeseen complications and
inefficiencies in planning its operations can adversely impact the morale of
the
Company’s personnel and lead to further complications and operational
inefficiencies. If this were to occur, the Company’s profitability or financial
position could be negatively impacted and its operating results could
suffer.
Claims
that the Company infringed
third-party intellectual property rights could result in significant expenses
or
restrictions on its ability to sell its products.
Although
the Company’s industry is not characterized by frequent claims or litigation
regarding patent rights, the Company cannot be certain that its products do
not
or will not infringe issued patents or the intellectual property rights of
others. Historically, patent applications in the United States of America have
not been publicly disclosed until the patent is issued, and the Company may
not
be aware of filed patent applications that relate to its products or technology.
If patents are later issued in connection with these applications, the Company
may be liable for infringement. Periodically, other parties, including some
of
the Company’s competitors, may assert patent, copyright and other rights to
technologies in various jurisdictions that are important to its business. Any
claims asserting that the Company’s products infringe or may infringe the rights
of third parties, including claims arising through its contractual
indemnification of its customers, regardless of their merit or resolution,
would
likely be costly and time-consuming, divert the efforts of the Company’s
technical and management personnel, cause product shipment delays or require
the
Company to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all.
15
At
present, the Company does not believe that its products infringe any other
party’s intellectual property rights in any way that would have a material
adverse effect on the Company’s operations. However, if any material claims do
arise and if these claims cannot be resolved through a license or similar
arrangement, the Company could become a party to litigation. The results of
any
litigation are inherently uncertain. In the event of an adverse result in any
litigation with third parties that could arise in the future, the Company could
be required to pay substantial damages, including treble damages if it is held
to have willfully infringed, to cease the manufacture, use and sale of
infringing products, to expend significant resources to develop non-infringing
technology, or to obtain licenses to the infringing technology. In addition,
lawsuits, regardless of their success, would likely be time consuming and
expensive to resolve and would divert management time and attention from the
Company’s business.
Any
failure to protect the Company’s intellectual property adequately may
significantly harm its business.
The
Company protects its proprietary processes, software, know-how and other
intellectual property and related rights through copyrights, patents, trademarks
and the maintenance of trade secrets, including entering into confidentiality
agreements. The Company’s success and ability to compete depends in part on its
proprietary technology. However, the Company cannot provide any assurance that
other companies will not develop technologies that are similar to its
technology. Although the Company has patent applications pending, patents may
not issue as a result of these or other patent applications. Any patents that
ultimately issue may be successfully challenged or invalidated, or may not
provide the Company with a significant competitive advantage. Despite the
Company’s efforts to protect its intellectual property rights, existing laws in
the United States of America and in differing international jurisdictions and
its contractual arrangements provide only limited protection. Unauthorized
parties may attempt to copy or otherwise obtain and use the Company’s products
or technology. Third parties may breach confidentiality agreements or other
protective contracts with the Company and it may not be able to enforce its
rights in the event of these breaches.
Monitoring
unauthorized use of the Company’s products is difficult and may be expensive,
and the Company cannot be certain that the steps it has taken will prevent
unauthorized use of its intellectual property, particularly in foreign countries
where the laws may not protect the Company’s proprietary rights as fully as in
the United States of America. The Company may be required to spend significant
resources to protect its intellectual property rights, including pursuing
remedies in court. Frequency Electronics may become involved in legal
proceedings against other parties, which may also cause other parties to assert
claims against it. In the future the Company may not be able to detect
infringements and may lose its competitive position in its markets before it
does so. In addition, competitors may design around the Company’s technologies
or develop competing technologies. The laws of other countries in which the
Company markets its products might offer little or no effective protection
of
its proprietary technology. Reverse engineering, unauthorized copying or other
misappropriation of the Company’s proprietary technology could enable third
parties to benefit from its technology without payment, which could
significantly harm the Company’s business. The Company’s failure to enforce and
protect its intellectual property rights or any adverse change in the laws
protecting intellectual property rights could harm its business. Furthermore,
the Company may become involved in legal proceedings against other parties,
which may also cause other parties to assert claims against it.
Future
sales of substantial amounts of the Company’s common stock by it or by its
existing stockholders could cause the Company’s stock price to
fall.
Additional
equity financings or other share issuances by the Company could adversely affect
the market price of its Common Stock. Sales by existing stockholders of a large
number of shares of Frequency Electronics’ Common Stock in the public trading
market (or in private transactions) such as offerings by Selling Stockholders
under the Form S-8 filed in February 2007, or the perception that such
additional sales could occur, could cause the market price of the Company’s
common stock to drop.
Some
of the Company’s revenue is generated from a limited number of key customers and
the loss of a key customer could substantially reduce its
revenues.
A
large
portion of the Company’s sales are generated from a small number of key
customers at each of the Company’s segments, including, without limitation,
three customers of the FEI-NY segment, Space Systems/Loral, Lucent Technologies
and Motorola Corp., which together accounted for 43% of consolidated sales
for
fiscal 2007. In fiscal year 2007, France Telecom and Belgacom were significant
customers of the Company’s Gillam-FEI segment; and Computer Sciences Corporation
and SI International were significant customers of the FEI-Zyfer segment. The
Company’s top 10 customers accounted for 69% of its consolidated sales for
fiscal year 2007. The Company expects that its top 10 customers in the aggregate
will continue to account for a large portion of its consolidated sales in the
foreseeable future, and the loss of one or more of these customers would
materially harm the Company’s business and operating results. The loss of a key
customer could also be perceived as a loss of momentum in the Company’s business
and an adverse impact on its financial results, and this may cause the market
price of the Company’s common stock to fall.
16
The
Company is subject to anti-takeover provisions that could delay or prevent
an
acquisition of the Company
The
Company is subject to the anti-takeover provisions of the Delaware General
Corporation Law, which could have the effect of delaying or preventing a change
of control of Frequency Electronics. These factors could materially adversely
affect the price of the Company’s common stock.
Item
1B. Unresolved Staff Comments
None
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
|
20,885
|
Lease
|
|||||
|
Liege,
Belgium
|
34,000
|
Own
|
|||||
|
5,000
|
Lease
|
||||||
|
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. Subsequent to the end of fiscal
year
2007, the Company notified Reckson that it would renew the lease for the first
5-year renewal period which will end in January 2014. The leased space is
adequate to meet the Company’s domestic operational needs which encompass the
principal operations of the FEI-NY
segment
and also serves as the Company’s world-wide corporate headquarters.
The
sale
of its building to Reckson, a real estate investment trust (“REIT”) whose shares
were then 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. 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 which ends in January
2009. (See Note 6 to the accompanying financial statements.)
When
the
Company completed the acquisition of Gillam-FEI it also acquired the property
located in Belgium as well as a manufacturing facility in France. During fiscal
year 2006, the Company sold the French building at an appraised value of
$975,000 and recognized a gain of approximately $680,000. The France sales
office is now housed in a leased facility. These facilities are adequate to
meet
the present and future operational requirements of Gillam-FEI.
17
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
Free-Trade Zone. The lease is renewable annually with rent of $15,000 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 June 2007, requires monthly payments of $22,600. In
July
2007, FEI-Zyfer expects to move into newly leased space encompassing 27,850
square feet. Monthly rental payments will be $23,700 for the first year and
will
increase each year over the 125 month lease term.
Item
3. Legal Proceedings
From
time
to time, the Company is a defendant in litigation arising out of the ordinary
course of business. The Company is not a party to any material, pending legal
proceeding other than routine litigation incidental to its
business.
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 year 2007.
PART
II
Item
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Effective
August 1, 2006, the Common Stock of the Company was listed on The
Nasdaq Global Market (“NASDAQ”) under
the
ticker symbol “FEIM.” Prior to that date, the Company’s shares were traded 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 through
July 31, 2006 and on the NASDAQ from August 1, 2006 through April 30,
2007.
|
FISCAL
QUARTER
|
HIGH
SALE
|
LOW
SALE
|
|||||
|
2007
-
|
|||||||
|
FIRST
QUARTER
|
$
|
15.00
|
$
|
11.20
|
|||
|
SECOND
QUARTER
|
14.00
|
10.04
|
|||||
|
THIRD
QUARTER
|
13.60
|
11.01
|
|||||
|
FOURTH
QUARTER
|
12.47
|
9.86
|
|||||
|
2006
-
|
|||||||
|
FIRST
QUARTER
|
$
|
13.75
|
$
|
10.56
|
|||
|
SECOND
QUARTER
|
12.95
|
10.14
|
|||||
|
12.60
|
9.90
|
||||||
|
FOURTH
QUARTER
|
14.35
|
11.00
|
|||||
As
of
July 23, 2007, the approximate number of holders of record of common stock
was
600. The closing share price of the Company’s stock on April 30, 2007 was
$10.83. The closing share price of the Company’s stock on July 23, 2007 was
$11.11.
18
PERFORMANCE
GRAPH
The
following graph compares the cumulative total shareholder return on the Common
Stock of the Company with the cumulative total return of the companies listed
in
the Standards & Poors' Small Cap 600 Stock Index (the "S&P 600 Small Cap
Index") and an industry peer group index (the "New Peer Group Index"). The
New
Peer Group Index includes all of the same companies that were included in the
“Old Peer Group” except for Scientific Atlanta, Inc., which was acquired by
another company, and includes four additional peer companies: ComDev
International, Ltd., Endwave Corporation, Giga-Tronics, Inc. and Herley
Industries, Inc. For this fiscal year, the performance graph includes values
for
the Old Peer Group as well. The graph assumes that $100 was invested on May
1,
2002 in each of the Common Stock of the Company, the stock of the companies
comprising the S&P 600 Small Cap Index and the common stock of the companies
comprising the Old and New Peer Group Indices, including the reinvestment of
dividends, through April 30, 2007. The New Peer Group Index consists of Aeroflex
Inc., Anaren Inc., Ball Corp., *ComDev International, Ltd., Comtech
Telecommunications Corp., EDO Corp., *Endwave Corporation, *Giga-Tronics, Inc.,
*Herley Industries, Inc., Iteris Holdings, Inc., Merrimac Industries, Inc.,
,
Skyworks Solutions, Inc., Symmetricom Inc. and Trimble Navigation, Ltd. (“*”
indicates new member of Peer Group.)
Cumulative
Total Shareholder Return for
Five-year
Period Ended April 30, 2007
Performance
Graph Data Table:
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||
|
Frequency
Electronics
|
$
|
100.00
|
$
|
81.13
|
$
|
111.07
|
$
|
95.33
|
$
|
116.93
|
$
|
92.12
|
|||||||
|
S&P
600 Small Cap
|
100.00
|
79.05
|
110.63
|
122.17
|
160.52
|
172.80
|
|||||||||||||
|
New
Peer Group
|
100.00
|
90.20
|
127.68
|
145.32
|
164.03
|
190.62
|
|||||||||||||
|
Old
Peer Group
|
100.00
|
91.80
|
128.82
|
145.17
|
164.95
|
195.48
|
|||||||||||||
DIVIDEND
POLICY
Since
1997, the Company has adhered to a policy of distributing a semi-annual cash
dividend to its shareholders. The Board of Directors will determine dividend
amounts prior to each declaration based on the Company’s financial condition and
financial performance. For fiscal years 2007 and 2006, the Company declared
semi-annual cash dividends of $0.10 per share of common stock to shareholders
of
record as of April 30 and October 31, payable on June 1 and December 1, of
the
respective fiscal year.
19
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. No shares were
repurchased during fiscal years 2007 and 2006.
EQUITY
COMPENSATION PLAN INFORMATION
|
Plan
Category
|
Number
of Securities to
be
Issued upon exercise
of
Outstanding Options
Warrants
and Rights
(a)
|
Weighted-Average
Exercise
Price of
Outstanding
Options
Warrants
and Rights
(b)
|
Number
of Securities
Remaining
available for
Future
Issuance under
Equity
Compensation Plans
(Excluding
Securities
Reflected
in Column (a))
(c)
|
|||||||
|
Equity
Compensation Plans
|
||||||||||
|
Approved
by Security Holders
|
631,900
|
$
|
10.33
|
226,500
|
||||||
|
Equity
Compensation Plans Not
|
||||||||||
|
797,237
|
$
|
12.94
|
-
|
|||||||
|
TOTAL
|
1,429,137
|
$
|
11.79
|
226,500
|
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, 2007. 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,
|
||||||||||||||||
|
|
|
|
2007
|
|
|
2006
|
2005
|
2004
|
2003
|
|||||||
|
(in
thousands, except share and dividend data)
|
||||||||||||||||
|
Net
Sales
|
||||||||||||||||
|
FEI-NY
|
$
|
40,184
|
$
|
35,801
|
$
|
37,067
|
$
|
35,288
|
$
|
23,957
|
||||||
|
Gillam-FEI
|
11,382
|
(1)
|
9,170
|
(1)
|
12,599
|
(1)
|
12,197
|
(1)
|
8,137
|
|||||||
|
FEI-Zyfer
|
7,542
|
10,055
|
8,803
|
6,560
|
-
|
|||||||||||
|
less
intersegment sales
|
(2,902)
|
(1)
|
(2,216)
|
(1)
|
(3,296)
|
(1)
|
(3,939)
|
(1)
|
(567
|
)
|
||||||
|
Total
Net Sales
|
$
|
56,206
|
$
|
52,810
|
$
|
55,173
|
$
|
50,106
|
$
|
31,527
|
||||||
|
$
|
(3,721
|
)
|
$
|
1,710
|
$
|
(1,269
|
)
|
$
|
(1,646
|
)
|
($12,490)(6
|
)
|
||||
|
Net
(Loss) Income
|
$
|
(257
|
)
|
$
|
4,798
|
(2)
|
$
|
5,037(3
|
)
|
$
|
320(4,5
|
)
|
($
8,811)(5
|
)
|
||
|
Average
Common Shares Outstanding
|
||||||||||||||||
|
Basic
|
8,620,776
|
8,537,427
|
8,484,682
|
8,374,399
|
8,331,785
|
|||||||||||
|
Diluted
|
8,620,776
|
8,690,617
|
8,684,758
|
8,542,575
|
8,331,785
|
|||||||||||
|
Earnings
(Loss) per Common Share
|
||||||||||||||||
|
($
0.03
|
)
|
$
|
0.56
|
$
|
0.59
|
$
|
0.04(5
|
)
|
($
1.06
|
)
|
||||||
|
Diluted
|
($
0.03
|
)
|
$
|
0.55
|
$
|
0.58
|
$
|
0.04(5
|
)
|
($
1.06
|
)
|
CONSOLIDATED
BALANCE SHEET DATA
|
Total
Assets
|
$
|
93,826
|
$
|
86,741
|
$
|
88,374
|
$
|
92,867(7
|
)
|
$
|
85,778(7
|
)
|
||||
|
Long-Term
Obligations
|
||||||||||||||||
|
and
Deferred Items
|
$
|
9,311
|
$
|
9,120
|
$
|
9,337
|
$
|
17,609
|
$
|
17,903
|
||||||
|
per
common share
|
$
|
0.20
|
$
|
0.20
|
$
|
0.20
|
$
|
0.20
|
$
|
0.20
|
20
Notes
to Selected Financial Data
|
(1)
|
Includes
intercompany sales to FEI-NY
segment
of
$0.5 million, $0.9 million, $2.4 million and $3.5 million in fiscal
years
2007, 2006, 2005 and 2004, respectively, for development of US5G
product.
|
|
(2)
|
Includes
$2.1 million from gain on the sale of REIT common shares and $680,000
from
gain on the sale of a European subsidiary’s former manufacturing
facility.
|
|
(3)
|
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.
|
|
(4)
|
Includes
$400,000 reversal of tax liabilities established in prior
years.
|
|
(5)
|
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.
|
|
(6)
|
Includes
goodwill impairment of $6.2 million and adjustments to inventory
of $3.6
million.
|
|
(7)
|
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 which generally require billings based on
achievement of milestones rather than delivery of product, are reported in
operating results using the percentage of completion method. On fixed-price
contracts, which are typical for commercial and U.S. Government satellite
programs and other long-term U.S. Government projects, and which require initial
design and development of the product, revenue is recognized on the cost-to-cost
method. Under this method, revenue is recorded based upon the ratio that
incurred costs bear to total estimated contract costs with related cost of
sales
recorded as the costs are incurred. Each month management reviews estimated
contract costs. The effect of any change in the estimated gross margin
percentage for a contract is reflected in revenues in the period in which the
change is known. Provisions for anticipated losses on contracts are made in
the
period in which they become determinable.
On
production-type orders, revenue is recorded as units are delivered with the
related cost of sales recognized on each shipment based upon a percentage of
estimated final program 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
customer orders are made in the period in which they become
determinable.
21
For
customer orders in the Company’s Gillam-FEI and FEI-Zyfer segments or smaller
contracts or orders in the other business segments, sales of products and
services to customers are reported in operating results based upon (i) shipment
of the product or (ii) performance of the services pursuant to terms of the
customer order. 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
Effective
May 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”
(“FAS 123(R)”), using the modified prospective transition method. Under the
modified prospective transition method, compensation cost of $559,000 was
recognized during the year ended April 30, 2007, and includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested as of
May
1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of FAS 123, and (b) compensation cost for all share-based
payments granted subsequent to May 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of FAS 123(R). Results for prior
periods have not been restated.
Upon
adoption of FAS 123(R), the Company elected to continue to value its share-based
payment transactions using the Black-Scholes valuation model, which was
previously used by the Company for purposes of preparing the pro forma
disclosures under FAS 123. Such value is recognized as expense on a
straight-line basis over the service period of the awards, which is generally
the vesting period, net of estimated forfeitures. This is the same attribution
method that was used by the Company for purposes of its pro forma disclosures
under FAS 123.
At
April
30, 2007, unrecognized compensation cost for all the Company’s stock-based
compensation awards was approximately $1.0 million which is expected to be
recognized over a weighted average period of 2.7 years.
In
addition, the Company applied the provisions of Staff Accounting Bulletin No.
107 (“SAB 107”), issued by the Securities and Exchange Commission in March 2005
in its adoption of FAS 123(R). SAB 107 requires stock-based compensation to
be
classified in the same expense line items as cash compensation. Accordingly,
during the year ended April 30, 2007, stock-based compensation expense was
$285,000 in cost of sales and $274,000 in selling, general and administrative
expense.
Prior
to
the adoption of FAS 123(R), the Company presented all tax benefits resulting
from tax deductions associated with the exercise of stock options by employees
as cash flows from operating activities in the Consolidated Statements of Cash
Flows. Under FAS 123(R) “excess tax benefits” are to be classified as cash flows
from financing activities in the Consolidated Statement of Cash Flows. For
this
purpose, the excess tax benefits are tax benefits related to the difference
between the total tax deduction associated with the exercise of stock options
by
employees and the amount of compensation cost recognized for those options.
For
the year ended April 30, 2007, there were no excess tax benefits to be included
within Other Financing Activities of the Cash Flows from Financing Activities
pursuant to this requirement of FAS 123(R).
Effect
of Adoption of FAS 123(R)
The
application of FAS 123(R) had the following effect on the reported amounts
for
the year ended April 30, 2007, relative to amounts that would have been reported
using the intrinsic value method under previous accounting (in thousands, except
for per share amounts).
22
|
Using
Intrinsic
|
FAS
123(R)
|
As
|
||||||||
|
Value
Method
|
Adjustments
|
Reported
|
||||||||
|
Operating
Loss
|
($3,162
|
)
|
($559
|
)
|
($3,721
|
)
|
||||
|
Loss
before benefit
|
||||||||||
|
for
income taxes
|
($1,253
|
)
|
($559
|
)
|
($1,812
|
)
|
||||
|
Net
Income (Loss)
|
$
|
122
|
($379
|
)
|
($257
|
)
|
||||
|
$
|
0.01
|
($0.01
|
)
|
($0.03
|
)
|
|||||
|
Diluted
Earnings (Loss) per Share
|
$
|
0.01
|
($0.01
|
)
|
($0.03
|
)
|
||||
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 years ended April 30, 2007,
2006 and 2005: dividend yield of 1.3%, 1.4%, and 1.1%; expected volatility
of
59%; risk free interest rate of 5.0%, 4.1%, and 3.9%; and expected lives of
six
and one-half years, respectively.
The
expected life assumption was determined based on the Company’s historical
experience. For purposes of both FAS 123 and FAS 123(R), the expected volatility
assumption was based on the historical volatility of the Company’s common stock.
The dividend yield assumption was determined based upon the Company’s past
history of dividend payments and its intention to make future dividend payments.
The risk-free interest rate assumption was determined using the implied yield
currently available for zero-coupon U.S. government issues with a remaining
term
equal to the expected life of the stock options.
Fiscal
years 2006 and 2005
Through
fiscal year 2006, the Company applied the disclosure-only provisions of FAS
No.
148, “Accounting
for Stock-Based Compensation- Transition and Disclosure”
and
continued to measure compensation cost in accordance with APB Opinion No. 25,
“Accounting
for Stock Issued to Employees.”
Historically, this did not result in compensation cost upon the grant of options
under a qualified stock option plan. However, in accordance with FAS No. 148,
the Company provided 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)
|
|||||||
|
2006
|
2005
|
||||||
|
Net
Income, as reported
|
$
|
4,798
|
$
|
5,037
|
|||
|
Cost
of stock options, net of taxes
|
(309
|
)
|
(525
|
)
|
|||
|
Net
Income - pro forma
|
$
|
4,489
|
$
|
4,512
|
|||
|
Income
per share, as reported:
|
|||||||
|
Basic
|
$
|
0.56
|
$
|
0.59
|
|||
|
Diluted
|
$
|
0.55
|
$
|
0.58
|
|||
|
Income
per share- pro forma
|
|||||||
|
$
|
0.53
|
$
|
0.53
|
||||
|
Diluted
|
$
|
0.52
|
$
|
0.52
|
|||
The
weighted average fair value of each option was 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 two years ended April 30,
2006 and 2005; dividend yield of 1.4% and 1.1%; expected volatility of 59%;
risk
free interest rate of 4.1% and 3.9%; and expected lives of six and one-half
years, respectively.
23
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:
|
2007
|
2006
|
2005
|
||||||||
|
Net
Sales
|
||||||||||
|
FEI-NY
|
71.5
|
%
|
67.8
|
%
|
67.2
|
%
|
||||
|
Gillam-FEI
|
20.3
|
17.4
|
22.8
|
|||||||
|
FEI-Zyfer
|
13.4
|
19.0
|
16.0
|
|||||||
|
Less
intersegment sales
|
(5.2
|
)
|
(4.2
|
)
|
(6.0
|
)
|
||||
|
100.0
|
100.0
|
100.0
|
||||||||
|
Cost
of Sales
|
69.6
|
64.7
|
67.1
|
|||||||
|
Gross
Margin
|
30.4
|
35.3
|
32.9
|
|||||||
|
Selling
and Administrative expenses
|
20.2
|
20.1
|
21.2
|
|||||||
|
Compensation
Charges
|
0.0
|
0.0
|
1.6
|
|||||||
|
Research
and Development expenses
|
16.8
|
11.9
|
12.4
|
|||||||
|
Operating
(Loss) Profit
|
(6.6
|
)
|
3.2
|
(2.3
|
)
|
|||||
|
Other
Income, net & Minority Interest
|
3.4
|
9.3
|
15.2
|
|||||||
|
(Benefit)
Provision for Income Taxes
|
(2.8
|
)
|
3.4
|
3.8
|
||||||
|
Net
(Loss) Income
|
(0.4
|
)%
|
9.1
|
%
|
9.1
|
%
|
||||
Significant
Events
Operating
results for fiscal year 2007 have been impacted by several major satellite
payload programs. Revenues from space-related programs increased year over
year
but higher than anticipated engineering costs resulted in lower gross margin
and
in higher research and development spending, which yielded an operating loss
for
the year ended April 30, 2007.
As
described elsewhere in this Form 10-K and in the notes to the financial
statements, the Company’s fiscal year 2006 and 2005 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, Note 6 to the
accompanying consolidated financial statements and comments in the following
paragraph.) 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 2006, the Company recognized gains on the sale of certain assets:
$2.1 million from additional sales of shares of REIT stock and a gain of
$680,000 upon the sale of a manufacturing facility owned by one of its European
subsidiaries. (See Note 7 to the accompanying consolidated financial
statements.)
Without
these significant events, the Company’s operating profit (loss), pre-tax income
and net income would be materially different from that reported in the financial
statements.
24
Net
Sales
|
Fiscal
2007 to Fiscal 2006
|
Fiscal
2006 to Fiscal 2005
|
||||||||||||||||||||||||
|
Years
ended April 30,
|
|||||||||||||||||||||||||
|
(in
millions)
|
|||||||||||||||||||||||||
|
2007
|
2006
|
Change
|
2006
|
2005
|
Change
|
||||||||||||||||||||
|
FEI-NY
|
$
|
40.2
|
$
|
35.8
|
$
|
4.4
|
12%
|
|
$
|
35.8
|
$
|
37.1
|
($1.3
|
)
|
(3%)
|
|
|||||||||
|
Gillam-FEI
|
11.4
|
9.2
|
2.2
|
24%
|
|
9.2
|
12.6
|
(3.4
|
)
|
(27%)
|
|||||||||||||||
|
FEI-Zyfer
|
7.5
|
10.0
|
(2.5
|
)
|
(25%)
|
10.0
|
8.8
|
1.2
|
14%
|
|
|||||||||||||||
|
Intersegment
sales
|
(2.9
|
)
|
(2.2
|
)
|
(0.7
|
)
|
(2.2
|
)
|
(3.3
|
)
|
1.1
|
||||||||||||||
|
$
|
56.2
|
$
|
52.8
|
$
|
3.4
|
6%
|
|
$
|
52.8
|
$
|
55.2
|
($2.4
|
)
|
(4%)
|
|||||||||||
For
the
year ended April 30, 2007, the 12% revenue increase in the FEI-NY segment was
generated from all sources. Wireless telecommunications-related revenues,
revenues from satellite payloads for commercial and U.S. Government programs,
other U.S. Government, non-space programs and other commercial revenues all
increased as compared to the prior fiscal year. Gillam-FEI revenues in fiscal
2007 (exclusive of intercompany sales of $1.8 million in fiscal year 2007 and
$945,000 in fiscal year 2006 related to increased inventory for and development
efforts expended on the new wireline synchronization product line) increased
by
17%. Approximately one-fourth of the sales increase is attributable to the
increased value of the Euro compared to the U.S. dollar. Revenues for the
FEI-Zyfer segment during fiscal year 2007 declined by $2.5 million as many
orders were delayed compared to expectations.
For
the
year ended April 30, 2006, revenues of the FEI-NY segment declined 3% primarily
as a result of a 33% decrease in revenues related to wireless telecommunication
infrastructure spending. This decline was partially offset by a doubling in
revenues from commercial and U.S. Government satellite projects. Revenues for
Gillam-FEI (exclusive of intercompany sales of $945,000 in fiscal year 2006
and
$2.4 million in fiscal year 2005 related to a research and development program)
decreased by $2.0 million or 19%, as a number of wireline synchronization
projects were postponed by its customers. FEI-Zyfer continued to show
year-over-year improvement in revenues as the segment introduced new products
and continued to solidify its position with its customer base.
During
fiscal year 2008, based on current backlog and current proposal activity, the
Company expects to realize significant revenues from commercial and U.S.
Government satellite programs. In addition, the Company’s recent work on U.S.
Government-sponsored development contracts and current proposal activity should
generate increased revenues from U.S. Government programs such as secure radios,
unmanned aerial vehicles, weapons guidance systems and secure communications.
The timing and magnitude of revenues from these sources is dependent on the
U.S.
Government’s procurement and budgeting process. Increased U.S. Government
spending during fiscal year 2008 will benefit the Company’s FEI-NY and FEI-Zyfer
segment. Similarly, the Company’s development of state-of-the-art wireline
synchronization systems is expected to result in increased bookings and revenues
in fiscal year 2008 which will benefit both the FEI-NY and Gillam-FEI
segments.
Gross
Margin Rates
|
Fiscal
2007 to Fiscal 2006
|
Fiscal
2006 to Fiscal 2005
|
||||||||||||||||||||||||
|
Years
ended April 30,
|
|||||||||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||||
|
2007
|
2006
|
Change
|
2006
|
2005
|
Change
|
||||||||||||||||||||
|
$
|
17,076
|
$
|
18,617
|
($1,541
|
)
|
(8%)
|
$
|
18,617
|
$
|
18,160
|
$
|
457
|
3%
|
|
|||||||||||
|
GM
Rate
|
30.4 | % |
35.3
|
%
|
35.3
|
%
|
32.9
|
%
|
|||||||||||||||||
For
the
year ended April 30, 2007, gross margin declined both in total and as a
percentage of revenues. This is primarily the result of higher than anticipated
engineering costs on certain satellite payload programs. The Company has
encountered a significant learning curve in its efforts to increase its
production capacity of certain space-related assemblies by a factor of 10.
During fiscal year 2007, substantial resources were expended to redesign the
Company’s products to meet the specific requirements of two long-term contracts.
This process also delayed the completion of these contracts which is now
expected to occur in the first quarter of fiscal 2008.
25
For
the
year ended April 30, 2006, gross margin improved by 3% over the prior year
even
though the level of sales decreased by 4% from fiscal year 2005. This result
was
achieved through better utilization of resources and product mix which was
partially offset by developmental and technical issues that the Company
experienced during fiscal year 2006 with respect to the two long-term contracts
referred to in the preceding paragraph.
The
Company’s target is to achieve an overall gross margin rate of 40% or better
through greater sales volume, continued process improvements, better performance
on long-term contracts and utilization of lower cost manufacturing in Russia
and
China. During fiscal year 2008, if technical and engineering issues are resolved
and revenues increase as anticipated, the Company expects to realize gross
margin rates approaching its targeted rate.
Compensation
Charges
|
Fiscal
2007 to Fiscal 2006
|
Fiscal
2006 to Fiscal 2005
|
||||||||||||||||||||||
|
Years
ended April 30,
|
|||||||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||
|
2007
|
2006
|
Change
|
2006
|
2005
|
Change
|
||||||||||||||||||
|
$
|
0
|
$
|
0
|
$
|
0
|
NM
|
$
|
0
|
$
|
876
|
($876
|
)
|
NM
|
||||||||||
Under
the
caption “Compensation Charges,” the Company has recorded certain expenses which
are defined as operating expenses which are not expected to recur. There were
no
material non-recurring expenses in fiscal years 2007 and 2006.
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 12 to the accompanying
consolidated financial statements.) The Company’s Belgian subsidiary recorded an
accrual for $133,000 related to litigation with a former employee.
Selling
and Administrative expenses
|
Fiscal
2007 to Fiscal 2006
|
Fiscal
2006 to Fiscal 2005
|
|||||||||||||||||||||
|
Years
ended April 30,
|
||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||
|
2007
|
2006
|
Change
|
2006
|
2005
|
Change
|
|||||||||||||||||
|
$11,359
|
$
|
10,616
|
$
|
743
|
7%
|
|
$
|
10,616
|
$
|
11,719
|
($1,103
|
)
|
(9%)
|
|
||||||||
Fiscal
year 2007 selling and administrative costs increased over fiscal year 2006
principally from higher compensation expense related to an increase in
personnel, normal salary increases, higher deferred compensation expense and
partially offset by lower incentive compensation charges due to operating losses
recorded during the year. In addition, included in selling and administrative
expense for the year ended April 30, 2007, is $274,000 related to stock
compensation expense. Due to new accounting requirements, such a charge was
not
required to be recorded in the statement of operations in the prior years.
(See
Note 1 to the accompanying consolidated financial statements.)
For
the
year ended April 30, 2006, selling and administrative costs declined by 9%
compared to fiscal year 2005, as a result of lower compensation costs, including
incentive compensation charges, reduced deferred compensation expense, lower
sales commission expense and substantially reduced fees for professional and
consulting services as prior year projects were concluded. These cost reductions
were partially offset by increased recruiting and employee retention
expenses.
As
a
percentage of sales, selling and administrative expenses were 20.2%, 20.1%
and
21.2% in fiscal years 2007, 2006 and 2005, respectively. The Company targets
selling and administrative expenses not to exceed 20% of consolidated sales.
As
revenues increase as anticipated in fiscal year 2008, the Company expects to
achieve its targeted level of selling and administrative expenses.
26
Research
and Development expenses
|
Fiscal
2007 to Fiscal 2006
|
Fiscal
2006 to Fiscal 2005
|
|||||||||||||||||||||
|
Years
ended April 30,
|
||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||
|
2007
|
2006
|
Change
|
2006
|
2005
|
Change
|
|||||||||||||||||
|
$9,438
|
$
|
6,291
|
$
|
3,147
|
50%
|
|
$
|
6,291
|
$
|
6,834
|
($543
|
)
|
(8%)
|
|||||||||
Research
and development expenditures represent investments intended to keep the
Company’s products at the leading edge of time and frequency technology and
enhance competitiveness for future sales. For the year ended April 30, 2007,
the
substantial increase in R&D spending was a direct result of
internally-funded projects to enhance the Company’s product offerings for
satellite payloads and to design such products for more efficient
production.
For
the
year ended April 30, 2006, research and development expenditures decreased
by 8%
from the level of spending in fiscal year 2005. The decline resulted from
decreased spending on development of the new US5G wireline synchronization
product, which is near completion, but was offset by new initiatives in
developing a ruggedized rubidium clock for secure military communications,
enhancing and miniaturizing products for wireless communications, upgrading
its
GPS-based synchronization product line, and developing enhanced network
monitoring equipment and software.
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 2008,
the Company will continue to make investments in improved satellite payload
products, including manufacturing process improvements; invest in development
of
improved and miniaturized rubidium atomic clocks, develop new GPS-based
synchronization products and further enhance 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.
Operating
(Loss) Profit
|
Fiscal
2007 to Fiscal 2006
|
Fiscal
2006 to Fiscal 2005
|
||||||||||||||||||||||
|
Years
ended April 30,
|
|||||||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||
|
2007
|
2006
|
Change
|
2006
|
2005
|
Change
|
||||||||||||||||||
|
($3,721
|
) |
$
|
1,710
|
($5,431
|
)
|
NM
|
$
|
1,710
|
($1,269
|
)
|
$
|
2,979
|
NM
|
||||||||||
(NM
= Not
meaningful)
As
discussed above, the operating loss incurred in fiscal year 2007 is the result
of lower gross margin and higher research and development spending, both of
which are due to higher than anticipated engineering costs that were incurred
in
connection with the Company’s satellite payload products and programs.
For
the
fiscal year ended April 30, 2006, the Company realized an operating profit
of
$1.7 million compared to an operating loss of $1.3 million in fiscal year 2005.
This substantial improvement in operating results was the result of several
factors including improved gross margins, lower compensation related charges
and
lower discretionary spending on research and development.
The
Company expects to realize substantially improved operating profits in fiscal
year 2008 once the engineering issues on satellite programs have been resolved.
With its increasing backlog, the Company expects to report increasing revenues,
improve its gross margin and maintain selling and administrative expenses at
less than 20% of revenues.
27
Other
Income (expense)
|
Fiscal
2007 to Fiscal 2006
|
Fiscal
2006 to Fiscal 2005
|
||||||||||||||||||||||||
|
Years
ended April 30,
|
|||||||||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||||
|
2007
|
2006
|
Change
|
2006
|
2005
|
Change
|
||||||||||||||||||||
|
Investment
income
|
$
|
1,024
|
$
|
3,280
|
($2,256
|
)
|
(69%)
|
|
$
|
3,280
|
$
|
3,850
|
($570
|
)
|
(15%)
|
||||||||||
|
Equity
income
|
708
|
634
|
74
|
12%
|
|
634
|
315
|
319
|
101%
|
|
|||||||||||||||
|
Interest
expense
|
(136
|
)
|
(118
|
)
|
(18
|
)
|
(15%)
|
(118
|
)
|
(298
|
)
|
180
|
60%
|
|
|||||||||||
|
Other,
net
|
313
|
1,121
|
(808
|
)
|
(72%)
|
1,121
|
4,548
|
(3,427
|
)
|
(75%)
|
|||||||||||||||
|
$
|
1,909
|
$
|
4,917
|
($3,008
|
)
|
(61%)
|
$
|
4,917
|
$
|
8,415
|
($3,498
|
)
|
(42%)
|
||||||||||||
With
respect to other income and expense, the principal difference between the three
fiscal years is the conversion of REIT units for REIT stock in fiscal year
2005
and the subsequent partial sale of these shares in fiscal years 2006 and 2005,
as described above under Significant Events. (See Item 2. Properties and Note
6
to the accompanying financial statements.)
Investment
income in both fiscal years 2006 and 2005 contained gains of $2.1 million and
$2.3 million, respectively, on the sale of REIT stock. By comparison, in fiscal
year 2007 the Company recorded a net loss of $44,000 on the sale of other
marketable securities. Investment income also includes interest and dividend
income on marketable securities. Income from this source was approximately
the
same in both fiscal years 2007 and 2006 but substantially lower than fiscal
year
2005 since the Company no longer receives dividend income from its former
investment in REIT stock. The Company anticipates that during fiscal year 2008
it will realize investment income comparable to fiscal year 2007. The primary
source of income for this category will be from interest income on its bond
portfolio.
The
Company records equity income or losses from its investments in Morion and
Elcom. The Company acquired a 25% interest (20% on a fully-diluted basis) in
Elcom during the third quarter of fiscal year 2007 and, during the 4th
quarter
of that year, the Company recorded its share of Elcom’s loss for that period.
This loss was offset by the equity income from Morion which continued to
increase year over year. The greater than 100% increase in equity income for
fiscal year 2006 over fiscal year 2005 is due to two factors: a) the increased
profitability of Morion during the year ended April 30, 2006 compared to the
previous year and b) in the sixth month of fiscal year 2005 the Company
increased its investment in Morion from 19% to 36% of Morion’s outstanding
shares and equity income was recorded at the lower rate for the first five
months of that year. In June 2007, the Company’s investment in Morion was
reduced from 36% to 8% of Morion’s outstanding shares and the Company will no
longer account for its investment in Morion on the equity method. (See Note
10
to the accompanying consolidated financial statements.)
In
fiscal
year 2007, interest expense was incurred on borrowings under short-term credit
obligations and on certain deferred compensation obligations. For the year
ended
April 30, 2007, interest expense increased over the prior year due to greater
utilization of its bank line of credit to cover working capital requirements.
Interest expense for the year ended April 30, 2006, decreased from fiscal year
2005 as a result of the gain realized on the conversion of REIT units to REIT
stock. Prior to the fiscal year 2005 conversion, the financing arrangement
for
the sale and leaseback of the U.S. manufacturing facility was considered as
debt
on which interest expense was recorded. In addition, with the proceeds from
the
REIT stock sale, the Company repaid the outstanding balance on its credit line.
The Company also recorded lower interest expense on deferred compensation
payments due to lower interest rates during fiscal year 2006 compared to fiscal
year 2005. The Company anticipates that interest expense in fiscal year 2008
will be approximately the same as that recorded in fiscal year 2007, depending
on the trend in interest rates.
During
both fiscal years 2007 and 2006, the Company recognized $353,000 of income
from
amortization of the deferred gain from the 1998 sale of its corporate
headquarters building in New York, which income is included in the caption
Other, net. The deferred gain is being amortized over the remaining life of
the
original eleven-year lease. During fiscal year 2006, the Company sold the
building formerly owned by its French subsidiary. Following the fiscal year
2004
staffing cutbacks in this entity, the building had been largely vacant and
available for sale. Upon receipt of an independent appraisal, the building
was
sold to the former president of the Company’s subsidiary, Gillam-FEI. The
Company realized a gain on the sale of the building of approximately $680,000
which is included in the caption Other, net. 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. (See Item 2. Properties and Note 6 to the accompanying consolidated
financial statements.) This gain was offset by certain recurring, non-operating
expenses. In future fiscal years, Other, net will include annual amortization
into income of the final $589,000 deferred gain on the 1998 sale of its
building. Using the straightline method over the remaining 20 months of the
initial leaseback period, the Company will recognize approximately $350,000
of
amortized income during fiscal year 2008. The Company anticipates that in future
years other items in this category will not be significant to pretax
earnings.
28
Income
Taxes
The
Company is subject to taxation in several countries. The statutory federal
rates
are 34% in the United States and 35% in Europe. Due to the tax benefit to be
derived from carrying forward the current year tax loss and unapplied tax
credits as well as the reversal of a portion of a reserve on foreign taxes,
the
effective tax benefit rate in fiscal year 2007 is greater than 85%. The
effective rate for the Company for the year ended April 30, 2006 was 28%,
compared to 30% in fiscal year 2005. The effective rate is also impacted by
the
income or loss of certain of the Company’s European and Asian subsidiaries as
well as the equity income from its investments which are currently not taxed.
The Company may commence tax payments in China during calendar 2008 based on
the
operating profits of its subsidiary, FEI-Asia. The Company utilizes the
availability of research and development tax credits in the United States to
lower its tax rate. (See Note 14 to the Consolidated Financial
Statements.)
The
Company’s European subsidiaries have available net operating loss carryforwards
of approximately $1.3 million to offset future taxable income. These loss
carryforwards have no expiration date. The operating loss carryforwards for
the
U.S. subsidiaries of the Company are approximately $700,000 and these expire
in
20 years.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company’s balance sheet continues to reflect a highly liquid position with
working capital of $54.0 million at April 30, 2007. Included in working capital
at April 30, 2007 is $15.6 million consisting of cash, cash equivalents and
short-term investments but offset by $5 million in borrowings under its bank
line of credit. The Company’s current ratio at April 30, 2007 is 5 to 1.
Net
cash
used in operating activities for the year ended April 30, 2007, was $6.6 million
compared to cash used in operations of $2.5 million in fiscal year 2006. The
primary causes for the decrease in cash was the operating loss generated by
higher operating expenses and a 36% increase in inventory to enable the Company
to respond to existing and anticipated customer orders. In fiscal year 2006,
the
primary cause for the decrease in cash was the payment of approximately $3
million in income taxes on non-operating gains recorded at the end of fiscal
year 2005. This payment was deferred in the prior year, contributing to positive
operating cash flow in fiscal year 2005. Also impacting operating cash flow
is
the timing of certain milestone billings under long-term contracts. In recent
years, a higher percentage of revenue has been recognized under long-term
contract accounting by which the Company recognizes revenues at different
intervals than the billings mandated by the respective contracts. Included
in
accounts receivable are amounts for costs and estimated earnings in excess
of
billings on uncompleted contracts accounted for on the percentage of completion
basis. (See Note 2 to the accompanying financial statements.) In fiscal year
2008, the Company anticipates that it will generate positive cash flow from
operations as certain long-term contracts are completed and higher engineering
costs abate.
Net
cash
provided by investing activities for the fiscal year ended April 30, 2007,
was
approximately $2.0 million. Approximately $8.1 million was generated by the
sale
or maturity of certain marketable securities, net of purchases of other
marketable securities. The Company acquired capital equipment of $2.7 million
and made an investment in Elcom, including a convertible note, in the aggregate
amount of $3.3 million. Net cash provided by investing activities for the fiscal
year ended April 30, 2006, was $317,000. Approximately $1.6 million was
generated by the sale or maturity of certain marketable securities, including
REIT stock, net of purchases of other marketable securities. An additional
$975,000 was received on the sale of the Company’s building in France. (See
Significant Events above and Note 7 to the accompanying financial statements.)
During fiscal year 2006, the Company made additional investments in FEI-Zyfer
and Morion, Inc. which aggregated $104,000 and acquired capital equipment of
$2.1 million. 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. 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 approximately
$4 million to $5 million on capital equipment during fiscal year 2008.
Internally generated cash will be adequate to acquire this capital
equipment.
29
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. In early fiscal year 2008, the Company increased
this
line to $11.5 million. The line is secured by the investments which earn, on
average, approximately a 5% annual return. Rather than liquidate some of these
investments to meet short-term working capital requirements, during fiscal
years
2007, 2006 and 2005, the Company borrowed $5.0 million, $1.0 million and $1.5
million, respectively against the line of credit at fixed and variable interest
rates between 2.61% and 6.65%. 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 $2.2 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). As of April 30,
2007, the Company had an outstanding balance of $5 million under the line of
credit secured by investments.
During
the year ended April 30, 2007, cash provided by financing activities was $3.6
million. The primary source of cash was the $5.0 million borrowed under the
line
of credit referred to in the preceding paragraph. An additional $293,000 was
received upon the exercise of stock options. Offsetting this cash inflow was
the
payment of the Company’s semi-annual dividend which aggregated $1.7 million. In
fiscal year 2006, the Company used cash in financing activities in the net
amount of $1.6 million, primarily for the payment of the semi-annual dividend
of
$1.7 million. As indicated above, during fiscal year 2006, the Company borrowed
and repaid $1.0 million under its line of credit while $144,000 was received
upon the exercise of stock options. 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 preceding paragraph and Note 8 to the financial statements.)
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
space applications, guidance and targeting systems, wireless networks and
wireline communication systems which management believes will result in future
growth and continued profitability. During fiscal year 2008, 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
telecommunications infrastructure 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 at least 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, 2007
|
Contractual
Obligations
|
Total
(in
thousands)
|
Less
than
1
Year
|
1
to 3 Years
|
3
to 5 Years
|
More
than
5
Years
|
||||||||||||
|
Long-Term
Debt Obligations
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||
|
Operating
Lease Obligations
|
7,193
|
588
|
2,558
|
2,670
|
1,377
|
||||||||||||
|
Deferred
Compensation
|
8,669
|
* |
340
|
294
|
172
|
7,863
|
|||||||||||
|
Total
|
$
|
15,862
|
$
|
928
|
$
|
2,852
|
$
|
2,842
|
$
|
9,240
|
|||||||
*Deferred
Compensation liability (See Note 13 in the accompanying financial statements)
reflects payments due to current retirees receiving benefits. The amount of
$7,863 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.
30
As
of
April 30, 2007, the Company's consolidated backlog amounted to approximately
$44
million (see Item 1). Approximately 80% of this backlog is expected to be filled
during the Company’s fiscal year ending April 30, 2008.
*******
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
June
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”
(“FIN 48”) This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements and prescribes
recognition thresholds and measurement attributes for tax positions taken in
a
tax return. FIN 48 is effective for the Company beginning in fiscal year 2008.
The Company will comply with the provisions of FIN 48 but the impact of such
adoption is not expected to have a material impact on the Company’s financial
statements.
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
(“FAS 157”) This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (“GAAP”) and
expands disclosures about fair value measurements. FAS 157 does not require
any
new fair value measurements but simplifies and codifies related guidance. The
Company will comply with the provisions of FAS 157 when it becomes effective
in
fiscal year 2009. The impact of such adoption is not expected to have a material
impact on the Company’s financial statements since the Company utilizes fair
value measures wherever required by current GAAP.
The
SEC
issued Staff Accounting Bulletin No. 108 (“SAB 108”) in September 2006. SAB 108
expresses the views of the SEC staff regarding the process of quantifying the
materiality of financial misstatements. SAB 108 requires both the balance sheet
(iron curtain) and income statement (rollover) approaches be used when
quantifying the materiality of misstatement amounts. In addition, SAB 108
contains guidance on correcting errors under the dual approach and provides
transition guidance for correcting errors existing in prior years. SAB 108
is
now effective for the Company and, for the fiscal year ended April 30, 2007,
there was no impact on the Company’s consolidated financial statements from
application of this bulletin.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of SFAS No.
115” (“FAS 159”). The new statement allows entities to choose, at specified
election dates, to measure eligible financial assets and liabilities at fair
value that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item’s fair
value in subsequent reporting periods must be recognized in current earnings.
FAS 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the potential impact of FAS 159 on its financial
position and results 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 2007, as in the two prior fiscal years, the impact of inflation on the
Company's business has not been materially significant.
31
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 $13.9 million and $325,000, respectively, at April 30,
2007. 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, 2007, 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 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 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, 2007, the amount related to foreign currency exchange rates is a
$3,232,000 unrealized gain.
The
results of operations of foreign subsidiaries, when translated into US dollars,
will reflect the average rates of exchange for the periods presented. As a
result, similar results in local currency can vary significantly upon
translation into US dollars if exchange rates fluctuate significantly from
one
period to the next.
32
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 sheets of Frequency Electronics,
Inc. and Subsidiaries as of April 30, 2007 and 2006 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years ended April 30, 2007. We have also audited the consolidated schedule
listed in Item 15(a)(2) of this Form 10-K for the years ended April 30, 2007,
2006 and 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
audits.
We
conducted our audits 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 audits provide 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, 2007 and 2006 and the results
of
their operations and their cash flows for the years 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 years ended April 30, 2007, 2006 and 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.
As
discussed in Note 1 to the financial statements, the Company adopted Financial
Accounting Standard 123(R), “Share-Based Payment,” effective May 1,
2006.
|
/s/
Holtz Rubenstein Reminick LLP
|
|||
|
Holtz
Rubenstein Reminick LLP
Melville,
New York
July
13, 2007
|
33
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Consolidated
Balance Sheets
April
30,
2007 and 2006
|
2007
|
2006
|
||||||
|
(In
thousands)
|
|||||||
|
ASSETS:
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,336
|
$
|
2,639
|
|||
|
Marketable
securities
|
14,268
|
21,836
|
|||||
|
Accounts
receivable, net of allowance for
|
|||||||
|
doubtful
accounts of $276
|
15,626
|
15,868
|
|||||
|
Inventories,
net
|
31,201
|
22,971
|
|||||
|
Deferred
income taxes
|
3,075
|
2,135
|
|||||
|
Income
taxes receivable
|
596
|
68
|
|||||
|
Prepaid
expenses and other
|
1,501
|
1,246
|
|||||
|
Total
current assets
|
67,603
|
66,763
|
|||||
|
Property,
plant and equipment, at cost,
|
|||||||
|
less
accumulated depreciation and amortization
|
7,839
|
6,663
|
|||||
|
Deferred
income taxes
|
2,945
|
2,842
|
|||||
|
Goodwill
and other intangible assets
|
453
|
513
|
|||||
|
Cash
surrender value of life insurance
|
6,815
|
6,318
|
|||||
|
Investment
in and loans receivable from affiliates
|
7,354
|
2,825
|
|||||
|
Other
assets
|
817
|
817
|
|||||
|
Total
assets
|
$
|
93,826
|
$
|
86,741
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
|||||||
|
Current
liabilities:
|
|||||||
|
Short-term
credit obligations
|
$
|
5,011
|
$
|
8
|
|||
|
Accounts
payable - trade
|
3,771
|
2,202
|
|||||
|
Accrued
liabilities
|
3,980
|
3,921
|
|||||
|
Dividend
payable
|
869
|
857
|
|||||
|
Total
current liabilities
|
13,631
|
6,988
|
|||||
|
Deferred
compensation
|
8,669
|
8,122
|
|||||
|
Deferred
gain and other liabilities
|
642
|
998
|
|||||
|
Total
liabilities
|
22,942
|
16,108
|
|||||
|
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
|
47,138
|
45,688
|
|||||
|
Retained
earnings
|
13,541
|
15,527
|
|||||
|
69,843
|
70,379
|
||||||
|
Common
stock reacquired and held in treasury -
|
|||||||
|
at
cost (474,693 shares in 2007 and
|
|||||||
|
592,194
shares in 2006)
|
(2,080
|
)
|
(2,437
|
)
|
|||
|
Accumulated
other comprehensive income
|
3,121
|
2,691
|
|||||
|
Total
stockholders' equity
|
70,884
|
70,633
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
93,826
|
$
|
86,741
|
|||
The
accompanying notes are an integral part of these financial
statements.
34
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Consolidated
Statements of Operations
Years
ended April 30, 2007, 2006 and 2005
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands, except share data)
|
||||||||||
|
Net
sales
|
$
|
56,206
|
$
|
52,810
|
$
|
55,173
|
||||
|
Cost
of sales
|
39,130
|
34,193
|
37,013
|
|||||||
|
Gross
margin
|
17,076
|
18,617
|
18,160
|
|||||||
|
Selling
and administrative expenses
|
11,359
|
10,616
|
11,719
|
|||||||
|
Compensation
charges
|
-
|
-
|
876
|
|||||||
|
Research
and development expenses
|
9,438
|
6,291
|
6,834
|
|||||||
|
Operating
(loss) profit
|
(3,721
|
)
|
1,710
|
(1,269
|
)
|
|||||
|
Other
income (expense):
|
||||||||||
|
Investment
income
|
1,024
|
3,280
|
3,850
|
|||||||
|
Equity
income
|
708
|
634
|
315
|
|||||||
|
Interest
expense
|
(136
|
)
|
(118
|
)
|
(298
|
)
|
||||
|
Other,
net
|
313
|
1,121
|
4,548
|
|||||||
|
(Loss)
Income before minority interest and
|
||||||||||
|
(benefit)
provision for income taxes
|
(1,812
|
)
|
6,627
|
7,146
|
||||||
|
Minority
interest in loss of consolidated subsidiary
|
-
|
-
|
(1
|
)
|
||||||
|
(Loss)
Income before (benefit) provision for income taxes
|
(1,812
|
)
|
6,627
|
7,147
|
||||||
|
(Benefit)
Provision for income taxes
|
(1,555
|
)
|
1,829
|
2,110
|
||||||
|
Net
(loss) income
|
$
|
(257
|
)
|
$
|
4,798
|
$
|
5,037
|
|||
|
Net
(loss) income per common share:
|
||||||||||
|
Basic
|
$
|
(0.03
|
)
|
$
|
0.56
|
$
|
0.59
|
|||
|
Diluted
|
$
|
(0.03
|
)
|
$
|
0.55
|
$
|
0.58
|
|||
|
Average
shares outstanding:
|
||||||||||
|
Basic
|
8,620,776
|
8,537,427
|
8,484,682
|
|||||||
|
Diluted
|
8,620,776
|
8,690,617
|
8,684,758
|
|||||||
The accompanying notes are an integral part of these financial statements.
35
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended April 30, 2007, 2006 and 2005
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
(loss) income
|
$
|
(257
|
)
|
$
|
4,798
|
$
|
5,037
|
|||
|
Adjustments
to reconcile net (loss) income
|
||||||||||
|
to
net cash (used in) provided by operating activities:
|
||||||||||
|
Deferred
tax (benefit) expense
|
(1,305
|
)
|
886
|
(2,610
|
)
|
|||||
|
Depreciation
and amortization
|
1,725
|
1,870
|
2,014
|
|||||||
|
Provision
for losses on accounts
|
||||||||||
|
receivable
and inventories
|
1,946
|
797
|
771
|
|||||||
|
Gain
on REIT conversion
|
(353
|
)
|
(353
|
)
|
(4,629
|
)
|
||||
|
Loss
(gain) on marketable securities and other assets, net
|
77
|
(2,815
|
)
|
(2,169
|
)
|
|||||
|
Minority
interest in loss of consolidated subsidiary
|
-
|
-
|
(1
|
)
|
||||||
|
Equity
income
|
(708
|
)
|
(634
|
)
|
(315
|
)
|
||||
|
Stock
compensation expense
|
559
|
-
|
-
|
|||||||
|
Changes
in assets and liabilities, exclusive of
|
||||||||||
|
assets
and liabilities acquired:
|
||||||||||
|
Accounts
receivable
|
(260
|
)
|
(3,667
|
)
|
2,868
|
|||||
|
Inventories
|
(9,012
|
)
|
(904
|
)
|
(1,526
|
)
|
||||
|
Prepaid
expenses and other
|
(189
|
)
|
62
|
364
|
||||||
|
Other
assets
|
(559
|
)
|
(455
|
)
|
(526
|
)
|
||||
|
Accounts
payable - trade
|
1,272
|
388
|
(1,729
|
)
|
||||||
|
Accrued
liabilities
|
118
|
189
|
(118
|
)
|
||||||
|
Liability
for employee benefit plans
|
1,330
|
1,052
|
1,655
|
|||||||
|
Income
taxes
|
(525
|
)
|
(3,253
|
)
|
3,517
|
|||||
|
Other
liabilities
|
(505
|
)
|
(465
|
)
|
(67
|
)
|
||||
|
Net
cash (used in) provided by operating activities
|
(6,646
|
)
|
(2,504
|
)
|
2,536
|
|||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchase
of minority interest in technology partners
|
(1,817
|
)
|
(20
|
)
|
(835
|
)
|
||||
|
Loan
to investee technology partner
|
(1,500
|
)
|
-
|
-
|
||||||
|
Payment
for acquisition
|
-
|
(84
|
)
|
(135
|
)
|
|||||
|
Purchase
of marketable securities
|
(1,490
|
)
|
(11,518
|
)
|
(6,393
|
)
|
||||
|
Proceeds
from sale or redemption of marketable
|
||||||||||
|
securities
|
9,568
|
13,068
|
12,514
|
|||||||
|
Proceeds
from sale of real property
|
-
|
975
|
-
|
|||||||
|
Capital
expenditures
|
(2,712
|
)
|
(2,104
|
)
|
(1,640
|
)
|
||||
|
Other-
net
|
-
|
-
|
72
|
|||||||
|
Net
cash provided by investing activities
|
2,049
|
317
|
3,583
|
|||||||
Continued
36
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended April 30, 2007, 2006 and 2005
(Continued)
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from short-term debt
|
5,000
|
1,000
|
1,548
|
|||||||
|
Payment
of short-term credit and
|
||||||||||
|
other
long-term obligations
|
-
|
(1,009
|
)
|
(5,264
|
)
|
|||||
|
Payment
of cash dividend
|
(1,717
|
)
|
(1,706
|
)
|
(1,692
|
)
|
||||
|
Repurchase
of stock for treasury
|
-
|
-
|
(66
|
)
|
||||||
|
Repayment
of officer loan
|
-
|
-
|
17
|
|||||||
|
Exercise
of stock options
|
293
|
144
|
177
|
|||||||
|
Net
cash provided by (used in) financing activities
|
3,576
|
(1,571
|
)
|
(5,280
|
)
|
|||||
|
Net
(decrease) increase in cash and cash equivalents
|
||||||||||
|
before
effect of exchange rate changes
|
(1,021
|
)
|
(3,758
|
)
|
839
|
|||||
|
Effect
of exchange rate changes on cash and
|
||||||||||
|
cash
equivalents
|
(282
|
)
|
(304
|
)
|
163
|
|||||
|
Net
(decrease) increase in cash and cash equivalents
|
(1,303
|
)
|
(4,062
|
)
|
1,002
|
|||||
|
Cash
and cash equivalents at beginning of year
|
2,639
|
6,701
|
5,699
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
1,336
|
$
|
2,639
|
$
|
6,701
|
||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Interest
|
$
|
92
|
$
|
118
|
$
|
303
|
||||
|
Income
taxes
|
$
|
319
|
$
|
4,204
|
$
|
1,200
|
||||
|
Other
activities which affect assets or liabilities but
|
||||||||||
|
did
not result in cash flow during the fiscal years:
|
||||||||||
|
Declaration
of cash dividend, not paid
|
$
|
869
|
$
|
857
|
$
|
852
|
||||
The
accompanying notes are an integral part of these financial
statements.
37
FREQUENCY
ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders' Equity
Years
ended April 30, 2007, 2006 and 2005
(In
thousands, except share data)
|
Additional
|
Treasury
stock
|
Other
|
Accumulated
other
|
|||||||||||||||||||||||||
|
Common
Stock
|
paid
in
|
Retained
|
(at
cost)
|
Stockholders’
|
comprehensive
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
capital
|
earnings
|
Shares
|
Amount
|
equity
|
income
(loss)
|
Total
|
||||||||||||||||||||
|
Balance
at May 1, 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 common stock
|
17
|
17
|
||||||||||||||||||||||||||
|
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
|
||||||||||||||||||
|
Exercise
of stock options
|
84
|
(19,792
|
)
|
60
|
144
|
|||||||||||||||||||||||
|
Contribution
of stock to 401(k) plan
|
315
|
(34,723
|
)
|
104
|
419
|
|||||||||||||||||||||||
|
Cash
dividend
|
(1,711
|
)
|
(1,711
|
)
|
||||||||||||||||||||||||
|
Decrease
in market
|
||||||||||||||||||||||||||||
|
value
of marketable securities
|
(1,390
|
)
|
(1,390
|
)
|
||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(820
|
)
|
(820
|
)
|
||||||||||||||||||||||||
|
Net
income
|
4,798
|
4,798
|
||||||||||||||||||||||||||
|
Comprehensive
income- 2006
|
|
|
2,588
|
|||||||||||||||||||||||||
|
Balance
at April 30, 2006
|
9,163,940
|
9,164
|
45,688
|
15,527
|
592,194
|
(2,437
|
)
|
-
|
2,691
|
70,633
|
||||||||||||||||||
|
Exercise
of stock options
|
171
|
(40,300
|
)
|
122
|
293
|
|||||||||||||||||||||||
|
Contribution
of stock to 401(k) plan
|
340
|
(37,550
|
)
|
115
|
455
|
|||||||||||||||||||||||
|
Cash
dividend
|
(1,729
|
)
|
(1,729
|
)
|
||||||||||||||||||||||||
|
Investment
in Elcom Technologies
|
380
|
(39,651
|
)
|
120
|
500
|
|||||||||||||||||||||||
|
Stock
compensation expense
|
559
|
559
|
||||||||||||||||||||||||||
|
Increase
in market value of
|
||||||||||||||||||||||||||||
|
marketable
securities
|
333
|
333
|
||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
97
|
97
|
||||||||||||||||||||||||||
|
Net
loss
|
(257
|
)
|
(257
|
)
|
||||||||||||||||||||||||
|
Comprehensive
income- 2007
|
|
|
|
|
|
|
|
173
|
||||||||||||||||||||
|
Balance
at April 30, 2007
|
9,163,940
|
$
|
9,164
|
$
|
47,138
|
$
|
13,541
|
474,693
|
($2,080
|
)
|
$
|
-
|
$
|
3,121
|
$
|
70,884
|
||||||||||||
The
accompanying notes are an integral part of these financial
statements.
38
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 FEI-NY (which includes the subsidiaries FEI Government
Systems, Inc., FEI Communications, Inc., and FEI-Asia, Inc.), Gillam-FEI, 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.
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, 2007 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.
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.
39
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, which generally require billings based on
achievement of milestones rather than delivery of product, 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 orders, revenue is recorded as units are delivered with the
related cost of sales recognized on each shipment based upon a percentage of
estimated final program 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
customer orders 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 terms of the customer order.
Contract
costs include all direct material, direct labor costs, manufacturing overhead
and other direct costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred.
In
accordance with industry practice, inventoried costs contain amounts relating
to
contracts and programs with long production cycles, a portion of which will
not
be realized within one year.
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.
40
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
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:
Effective
May 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”
(“FAS 123(R)”), using the modified prospective transition method. Under the
modified prospective transition method, compensation cost of $559,000 was
recognized during the year ended April 30, 2007, and includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested as of
May
1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of FAS 123, and (b) compensation cost for all share-based
payments granted subsequent to May 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of FAS 123(R). Results for prior
periods have not been restated.
Upon
adoption of FAS 123(R), the Company elected to continue to value its share-based
payment transactions using the Black-Scholes valuation model, which was
previously used by the Company for purposes of preparing the pro forma
disclosures under FAS 123. Such value is recognized as expense on a
straight-line basis over the service period of the awards, which is generally
the vesting period, net of estimated forfeitures. This is the same attribution
method that was used by the Company for purposes of its pro forma disclosures
under FAS 123.
41
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
At
April
30, 2007, unrecognized compensation cost for all the Company’s stock-based
compensation awards was approximately $1.0 million which is expected to be
recognized over a weighted average period of 2.7 years.
In
addition, the Company applied the provisions of Staff Accounting Bulletin No.
107 (“SAB 107”), issued by the Securities and Exchange Commission in March 2005
in its adoption of FAS 123(R). SAB 107 requires stock-based compensation to
be
classified in the same expense line items as cash compensation. Accordingly,
during the year ended April 30, 2007, stock-based compensation expense was
$285,000 in cost of sales and $274,000 in selling, general and administrative
expense.
Prior
to
the adoption of FAS 123(R), the Company presented all tax benefits resulting
from tax deductions associated with the exercise of stock options by employees
as cash flows from operating activities in the Consolidated Statements of Cash
Flows. Under FAS 123(R) “excess tax benefits” are to be classified as cash flows
from financing activities in the Consolidated Statement of Cash Flows. For
this
purpose, the excess tax benefits are tax benefits related to the difference
between the total tax deduction associated with the exercise of stock options
by
employees and the amount of compensation cost recognized for those options.
For
the year ended April 30, 2007, there were no excess tax benefits to be included
within Other Financing Activities of the Cash Flows from Financing Activities
pursuant to this requirement of FAS 123(R).
Effect
of Adoption of FAS 123(R)
The
application of FAS 123(R) had the following effect on the reported amounts
for
the year ended April 30, 2007, relative to amounts that would have been reported
using the intrinsic value method under previous accounting (in thousands, except
for per share amounts).
|
Using
Intrinsic
|
FAS
123(R)
|
As
|
||||||||
|
Value
Method
|
Adjustments
|
Reported
|
||||||||
|
Operating
Loss
|
($3,162
|
)
|
($559
|
)
|
($3,721
|
)
|
||||
|
Loss
before benefit
|
||||||||||
|
for
income taxes
|
($1,253
|
)
|
($559
|
)
|
($1,812
|
)
|
||||
|
Net
Income (Loss)
|
$
|
122
|
($379
|
)
|
($257
|
)
|
||||
|
Basic
Earnings (Loss) per Share
|
$
|
0.01
|
($0.01
|
)
|
($0.03
|
)
|
||||
|
Diluted
Earnings (Loss) per Share
|
$
|
0.01
|
($0.01
|
)
|
($0.03
|
)
|
||||
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 years ended April 30, 2007,
2006 and 2005: dividend yield of 1.3%, 1.4%, and 1.1%; expected volatility
of
59%; risk free interest rate of 5.0%, 4.1%, and 3.9%; and expected lives of
six
and one-half years, respectively.
The
expected life assumption was determined based on the Company’s historical
experience. For purposes of both FAS 123 and FAS 123(R), the expected volatility
assumption was based on the historical volatility of the Company’s common stock.
The dividend yield assumption was determined based upon the Company’s past
history of dividend payments and its intention to make future dividend payments.
The risk-free interest rate assumption was determined using the implied yield
currently available for zero-coupon U.S. government issues with a remaining
term
equal to the expected life of the stock options.
Fiscal
years 2006 and 2005
Through
fiscal year 2006, the Company applied 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 provided 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.
42
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)
|
|||||||
|
2006
|
2005
|
||||||
|
Net
Income, as reported
|
$
|
4,798
|
$
|
5,037
|
|||
|
Cost
of stock options, net of taxes
|
(309
|
)
|
(525
|
)
|
|||
|
Net
Income pro forma
|
$
|
4,489
|
$
|
4,512
|
|||
|
Income
per share, as reported:
|
|||||||
|
Basic
|
$
|
0.56
|
$
|
0.59
|
|||
|
Diluted
|
$
|
0.55
|
$
|
0.58
|
|||
|
Income
per share- pro forma
|
|||||||
|
Basic
|
$
|
0.53
|
$
|
0.53
|
|||
|
Diluted
|
$
|
0.52
|
$
|
0.52
|
|||
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,
2006 and 2005; dividend yield of 1.4% and 1.1%, expected volatility of 59%;
risk
free interest rate of 4.1% and 3.9%; and expected lives of six and one-half
years, respectively.
New
Accounting Pronouncements:
In
June
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”
(“FIN 48”) This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements and prescribes
recognition thresholds and measurement attributes for tax positions taken in
a
tax return. FIN 48 is effective for the Company beginning in fiscal year 2008.
The Company will comply with the provisions of FIN 48 but the impact of such
adoption is not expected to have a material impact on the Company’s financial
statements.
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
(“FAS 157”) This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (“GAAP”) and
expands disclosures about fair value measurements. FAS 157 does not require
any
new fair value measurements but simplifies and codifies related guidance. The
Company will comply with the provisions of FAS 157 when it becomes effective
in
fiscal year 2009. The impact of such adoption is not expected to have a material
impact on the Company’s financial statements since the Company utilizes fair
value measures wherever required by current GAAP.
The
SEC
issued Staff Accounting Bulletin No. 108 (“SAB 108”) in September 2006. SAB 108
expresses the views of the SEC staff regarding the process of quantifying the
materiality of financial misstatements. SAB 108 requires both the balance sheet
(iron curtain) and income statement (rollover) approaches be used when
quantifying the materiality of misstatement amounts. In addition, SAB 108
contains guidance on correcting errors under the dual approach and provides
transition guidance for correcting errors existing in prior years. SAB 108
is
now effective for the Company and, for the fiscal year ended April 30, 2007,
there was no impact on the Company’s consolidated financial statements from
application of this bulletin.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of SFAS No.
115” (“FAS 159”). The new statement allows entities to choose, at specified
election dates, to measure eligible financial assets and liabilities at fair
value that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item’s fair
value in subsequent reporting periods must be recognized in current earnings.
FAS 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the potential impact of FAS 159 on its financial
position and results 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 $6,259,000 at April 30, 2007 and $4,857,000 at April 30, 2006.
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.
43
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
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,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Basic
EPS Shares outstanding
|
||||||||||
|
(weighted
average)
|
8,620,776
|
8,537,427
|
8,484,682
|
|||||||
|
Effect
of Dilutive Securities
|
***
|
153,190
|
200,076
|
|||||||
|
Diluted
EPS Shares outstanding
|
8,620,776
|
8,690,617
|
8,684,758
|
|||||||
***
Dilutive securities are excluded for fiscal year 2007 since the inclusion of
such shares would be antidilutive due to the net loss for that
year.
Options
to purchase 571,550, 571,550, and 505,550 shares of common stock were
outstanding during the years ended April 30, 2007, 2006 and 2005, 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 $5,028,000 (including a fourth quarter
adjustment to increase reserves by $800,000) and $3,923,000 at April 30, 2007
and 2006, respectively, consisted of the following (in thousands):
|
2007
|
2006
|
||||||
|
Raw
Materials and Component Parts
|
$
|
18,380
|
$
|
11,172
|
|||
|
Work
in Progress
|
12,821
|
11,799
|
|||||
|
$
|
31,201
|
$
|
22,971
|
||||
5. Marketable
Securities
Marketable
securities at April 30, 2007 and 2006 are summarized as follows (in
thousands):
|
April
30, 2007
|
||||||||||
|
Unrealized
|
||||||||||
|
Market
|
Holding
|
|||||||||
|
Cost
|
Value
|
(Loss)
Gain
|
||||||||
|
Fixed
income securities
|
$
|
14,172
|
$
|
13,943
|
$
|
(229
|
)
|
|||
|
Equity
securities
|
283
|
325
|
42
|
|||||||
|
$
|
14,455
|
$
|
14,268
|
$
|
(187
|
)
|
||||
|
April
30, 2006
|
||||||||||
|
Unrealized
|
||||||||||
|
Market
|
Holding
|
|||||||||
|
Cost
|
Value
|
(Loss)
|
||||||||
|
Fixed
income securities
|
$
|
22,531
|
$
|
21,799
|
$
|
(732
|
)
|
|||
|
Equity
securities
|
46
|
37
|
(9
|
)
|
||||||
|
$
|
22,577
|
$
|
21,836
|
$
|
(741
|
)
|
||||
Maturities
of fixed income securities classified as available-for-sale at April 30, 2007
are as follows (in thousands):
|
Current
|
$
|
-
|
||
|
Due
after one year through five years
|
11,792
|
|||
|
Due
after five years through ten years
|
2,380
|
|||
|
$
|
14,172
|
44
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. Property,
Plant and Equipment
Property,
plant and equipment at April 30, 2007 and 2006, consists of the following (in
thousands):
|
2007
|
2006
|
||||||
|
Buildings
and building improvements
|
$
|
3,046
|
$
|
2,649
|
|||
|
Machinery,
equipment and furniture
|
35,186
|
32,765
|
|||||
|
38,232
|
35,414
|
||||||
|
Less,
accumulated depreciation
|
30,393
|
28,751
|
|||||
|
$
|
7,839
|
$
|
6,663
|
||||
Depreciation
expense for the years ended April 30, 2007, 2006 and 2005 was $1,665,000,
$1,783,000, and $1,908,000, respectively.
Maintenance
and repairs charged to operations for the years ended April 30, 2007, 2006
and
2005 was approximately $912,000, $724,000 and $585,000,
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 were then 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 initially considered a financing
until the REIT units were converted to Reckson stock in March 2005. 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. Annual
rental payments are $400,000 for the initial 11-year term which ends in January
2009. The Reckson lease contains two five-year renewal periods at the option
of
the Company. On May 16, 2007, the Company exercised its option to renew the
lease for the first five year period and, commencing February 2009, will pay
annual rent of $600,000. 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, France and California lease their
office and manufacturing facilities. The lease for the FEI-Asia facility is
for
a one-year term with rent of $15,000 payable quarterly. The current lease for
the FEI-Zyfer facility expires in June 2007 and requires monthly payments of
$22,600. In July 2007, FEI-Zyfer expects to move into newly leased space
encompassing 27,850 square feet. Monthly rental payments will be $23,700 for
the
first year and will increase each year over the 125 month lease term. Satel-FEI,
a wholly-owned subsidiary of Gillam-FEI, occupies office space under a 9-year
lease, cancelable after three years, at an approximate rate of $2,000 per
month.
Future
minimum lease payments required by the leases are as follows (in
thousands):
|
Years
ending April
30,
|
||||
|
2008
|
$
|
588
|
||
|
2009
|
696
|
|||
|
2010
|
926
|
|||
|
2011
|
936
|
|||
|
2012
|
947
|
|||
|
Thereafter
|
3,100
|
|||
|
$
|
7,193
|
|||
|
7.
|
Related
Party Transaction
|
During
the year ended April 30, 2006, the Company sold the remaining building formerly
owned by its French subsidiary to the former president of Gillam-FEI. The sale
price of the building was approximately $975,000 and was based upon an
independent appraisal of the building. The Company recognized a gain of
approximately $680,000 on the sale.
45
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
|
8.
|
Debt
Obligations
|
The
Company has an $11.5 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 2007 fiscal year, the Company
borrowed $5 million under this line of credit. During fiscal year 2006, the
Company borrowed and repaid $1 million. No amount was outstanding as of April
30, 2006. During fiscal year 2007, advances against the line of credit bore
interest at variable interest rates between 6.34% and 6.65%.
The
Company’s European subsidiaries have available approximately 1.7 million Euros
(approximately $2.2 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, 2007, no amount was outstanding under such lines
of credit. Interest on these credit lines varies from 0.5% to 1.5% over the
EURO
Interbank Offered rate (EURIBOR). At April 30, 2007 and 2006, the rate was
4.361% and 3.166%, respectively, based on the 1 month EURIBOR.
|
9.
|
Accrued
Liabilities
|
Accrued
liabilities at April 30, 2007 and 2006 consist of the following (in
thousands):
|
2007
|
2006
|
||||||
|
Other
compensation including payroll taxes
|
$
|
2,104
|
$
|
2,161
|
|||
|
Due
customers
|
447
|
491
|
|||||
|
Vacation
accrual
|
839
|
593
|
|||||
|
Other
|
590
|
676
|
|||||
|
$
|
3,980
|
$
|
3,921
|
||||
10. Investment
in Morion, Inc.
In
fiscal
years 2007 and 2006, the Company’s investment in Morion, Inc., a privately-held
Russian company, was between 36.6% and 36.2% of Morion’s outstanding shares. The
Company reported its investment under the equity method and recorded its
proportionate share of the earnings of Morion.
At
April
30, 2007, 2006, and 2005, the Company’s share of the underlying net assets of
Morion exceeded the investment by $359,000, $471,000 and $549,000, 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, 2007, 2006 and 2005, the Company acquired
product from Morion in the aggregate amount of approximately $454,000, $467,000
and $659,000, respectively, and the Company sold product to Morion in the
aggregate amount of approximately $269,000, $462,000 and $181,000,
respectively.
In
June
2007, the Company reduced its investment in Morion from 36.6% to 8% of its
outstanding shares. Based upon a determination by the Russian Federation that
Morion was in a “strategic industry,” Gazprombank, a Russian government
majority-owned joint stock bank, acquired the majority interest
in Morion previously held by the European Bank for Reconstruction and
Development and a portion of the shares previously held by the Company, both
at
the same price per share. Gazprombank, through its wholly-owned subsidiary,
Finproject, Ltd., paid the Company proceeds of approximately $5.8 million.
In
the first quarter of fiscal year 2008, which ends July 31, 2007, the Company
will recognize a pre-tax gain of approximately $3.0 million on the sale of
the
Morion shares. This is in addition to approximately $2.0 million in equity
income realized in prior periods from the Morion investment. In future periods,
the Company will account for its remaining investment in Morion on the cost
basis.
46
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
11. Acquisition
of Zyfer, Inc.
The
fiscal year 2004 acquisition of FEI-Zyfer, Inc. is treated as a purchase
acquisition. The $2.9 million purchase price, including contingent payments,
was
allocated to net assets acquired of approximately $1.8 million. The purchase
price in excess of net assets acquired, approximately $1.1 million, was
allocated to fixed assets ($300,000), to customer lists ($600,000) which will
be
amortized over
6
years, and to goodwill
($200,000). Amortization expense for the years ended April 30, 2007, 2006 and
2005 was approximately $60,000, $78,000 and $106,000, respectively. For the
fiscal year ending April 30, 2008, amortization expense will decline 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.
12. Investment
in Elcom Technologies, Inc.
In
December 2006, the Company acquired a 25% interest (20% on a fully-diluted
basis) in the outstanding shares of Elcom Technologies, Inc., a privately-held
company which designs and manufactures advanced RF microwave devices. The
Company and Elcom entered into a mutual business and facilities support
agreement and Frequency Electronics obtained an exclusive license to use Elcom’s
technology in space-borne applications. The Company received preferred stock,
a
$1.5 million convertible note and a 10-year warrant to purchase additional
stock
in exchange for cash and 39,651 shares of Frequency Electronics common stock.
The Company will account for this investment on the equity method.
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, 2007, 2006 and 2005, the Company contributed 37,550, 34,723, and
30,621 shares of common stock, respectively. The approximate value of these
shares at the date of issuance was $455,000 in fiscal year 2007, $419,000 in
fiscal year 2006 and $393,000 in fiscal year 2005.
Income
Incentive Pool:
The
Company maintains incentive bonus programs for certain employees which are
based
on operating profits of the individual subsidiaries to which the employees
are
assigned. The Company also adopted a plan for the President and Chief Executive
Officer of the Company, which formula is based on consolidated pre-tax profits.
The Company charged $30,000, $572,000 and $694,000 to operations under these
plans for the fiscal years ended April 30, 2007, 2006 and 2005,
respectively.
Independent
Contractor Stock Option Plan:
Through
early fiscal year 2006, the Company had an Independent Contractor Stock Option
Plan under which up to 350,000 shares could be granted. An Independent
Contractor Stock Option Committee determined 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 exercise
price of the grant was at the then fair market value of the Company’s common
stock, consequently, no compensation expense was recognized because the Company
applied 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, 2007, 2006 and 2005 as no other grants were made in those years
and previous grants have been fully expensed. As a result of the adoption by
the
stockholders of the 2005 Stock Award Plan, the Independent Contractor Stock
Option Plan was discontinued. No additional grants will be made under this
plan.
47
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
Transactions
under this plan, including the weighted average exercise prices of the options,
are as follows:
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Shares
|
Wtd
Avg
Price
|
|
Shares
|
Wtd
Avg
Price
|
Shares
|
Wtd
Avg
Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
141,050
|
$
|
15.33
|
141,050
|
$
|
15.33
|
111,050
|
$
|
15.49
|
||||||||||
|
Granted
|
-
|
-
|
-
|
-
|
30,000
|
$
|
14.76
|
||||||||||||
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Outstanding
at end of year
|
141,050
|
$
|
15.33
|
141,050
|
$
|
15.33
|
141,050
|
$
|
15.33
|
||||||||||
|
Exercisable
at end of year
|
131,050
|
$
|
15.38
|
121,050
|
$
|
15.43
|
111,050
|
$
|
15.49
|
||||||||||
|
Available
for grant at end of year
|
-
|
-
|
189,500
|
||||||||||||||||
|
Weighted
average fair value
|
|||||||||||||||||||
|
of
options granted during the year
|
$
|
-
|
$
|
-
|
$
|
7.81
|
|||||||||||||
Employee
Stock Plans:
The
Company has various stock plans for key management employees, including officers
and directors who are employees. The plans are Nonqualified Stock Option
(“NQSO”) plans, Incentive Stock Option ("ISO”) plans and Stock Appreciation
Rights (“SARS”). Under these plans, options or SARS 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 were exercisable one year after the date of grant. Under
the remaining plans the options and SARS are exercisable over a four-year period
beginning one year after the date of grant. The options and SARS 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, 2007,
eligible employees had been granted options to purchase 1,182,500 shares of
Company stock under ISO plans of which approximately 389,000 options are
outstanding and approximately 303,000 are exercisable. Through April 30, 2007,
eligible employees have been granted options to acquire 1,090,000 shares of
Company stock under NQSO plans. Of the NQSO options, approximately 704,000
are
both outstanding and exercisable (see tables below). As of April 30, 2007,
eligible employees have been granted SARS based on approximately 172,000 shares
of Company stock, of which all are outstanding but none are exercisable. When
the SARS become exercisable, the Company will settle the SARS by issuing to
exercising recipients the number of shares of stock equal to the appreciated
value of the Company’s stock between the grant date and exercise date. At the
time of exercise, the quantity of shares under the SARS grant equal to the
exercise value divided by the then market value of the shares will be returned
to the pool of available shares for future grant under the Company’s stock
plan.
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. In fiscal years 2006
and 2005, 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:
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Wtd
Avg
|
Wtd
Avg
|
Wtd
Avg
|
|||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
||||||||||||||
|
Outstanding
at beginning of year
|
1,133,387
|
$
|
11.32
|
1,109,987
|
$
|
11.26
|
1,081,437
|
$
|
11.00
|
||||||||||
|
Granted
|
172,500
|
$
|
11.93
|
39,000
|
$
|
11.32
|
59,500
|
$
|
14.40
|
||||||||||
|
Exercised
|
(40,300
|
)
|
$
|
7.28
|
(19,725
|
)
|
$
|
7.27
|
(24,950
|
)
|
$
|
7.06
|
|||||||
|
Expired
or canceled
|
-
|
-
|
-
|
(6,000
|
)
|
$
|
8.80
|
||||||||||||
|
Outstanding
at end of year
|
1,265,587
|
$
|
11.53
|
1,133,387
|
$
|
11.32
|
1,109,987
|
$
|
11.26
|
||||||||||
|
Exercisable
at end of year
|
1,007,212
|
$
|
11.45
|
972,337
|
$
|
11.39
|
895,587
|
$
|
11.46
|
||||||||||
|
Available
for grant at end of year
|
226,500
|
399,000
|
11,500
|
||||||||||||||||
|
Weighted
average fair value
|
|||||||||||||||||||
|
of
options granted during the year
|
$
|
6.53
|
$
|
6.08
|
$
|
7.60
|
|||||||||||||
48
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
The
following table summarizes information about stock options outstanding at April
30, 2007:
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|||||||||||||
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|||||
|
|
|
Number
|
|
Remaining
|
|
Average
|
|
Number
|
|
Average
|
|
|||||
|
Actual
Range of
|
|
Outstanding
|
|
Contractual
|
|
Exercise
|
|
Exercisable
|
|
Exercise
|
|
|||||
|
Exercise
Prices
|
|
at
4/30/07
|
|
Life
|
|
Price
|
|
at
4/30/07
|
|
Price
|
||||||
|
$6.615
- 9.970
|
448,400
|
3.5
|
$
|
7.67
|
417,775
|
$
|
7.56
|
|||||||||
|
10.167
- 16.625
|
735,187
|
5.1
|
12.52
|
507,437
|
12.67
|
|||||||||||
|
23.75
|
82,000
|
3.3
|
23.75
|
82,000
|
23.75
|
|||||||||||
Restricted
Stock Plan:
During
fiscal 1990, the Company adopted a Restricted Stock Plan which provided that
key
management employees could be granted rights to purchase an aggregate of 375,000
shares of the Company's common stock. The grants, transferability restrictions
and purchase price were determined at the discretion of a special committee
of
the board of directors. The purchase price could not be less than the par value
of the common stock. As a result of the adoption by the Company’s stockholders
of the 2005 Stock Award Plan, the Restricted Stock Plan was discontinued. No
additional grants will be made under this plan.
|
2007
|
|
2006
|
|
2005
|
|
||||||||||||||
|
|
|
|
|
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
|
22,500
|
$
|
4.00
|
||||||||||
|
Exercised
|
-
|
-
|
-
|
-
|
-
|
$
|
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
|
||||||||||||||||
Transferability
of shares is restricted for a four-year period, except in the event of a change
in control as defined.
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 556,785 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 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 or term 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,
2007, 2006 and 2005 was approximately $878,000, $636,000 and $1,266,000,
respectively. During fiscal year 2005, the Company recorded a change in
accounting estimate in the amount of $327,000 to reflect the use of a revised
actuarial mortality tables to determine its deferred compensation liability.
49
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
| 14. |
Income
Taxes
|
The
(loss) income before (benefit) provision for income taxes consisted of (in
thousands):
|
Year
Ended April 30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
U.S.
|
$
|
(1,944
|
)
|
$
|
5,446
|
$
|
6,977
|
|||
|
Foreign
|
132
|
1,181
|
170
|
|||||||
|
$
|
(1,812
|
)
|
$
|
6,627
|
$
|
7,147
|
||||
|
The
(benefit) provision for income taxes consists of
the following (in thousands):
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
(150
|
)
|
$
|
850
|
$
|
4,200
|
|||
|
Foreign
|
-
|
(7
|
)
|
70
|
||||||
|
State
|
(100
|
)
|
100
|
450
|
||||||
|
Current
(benefit) provision
|
(250
|
)
|
943
|
4,720
|
||||||
|
Deferred
|
||||||||||
|
Federal
|
(950
|
)
|
650
|
(2,250
|
)
|
|||||
|
Foreign
|
(205
|
)
|
136
|
40
|
||||||
|
State
|
(150
|
)
|
100
|
(400
|
)
|
|||||
|
Valuation
allowance- foreign
|
-
|
-
|
-
|
|||||||
|
Deferred
(benefit) provision
|
(1,305
|
)
|
886
|
(2,610
|
)
|
|||||
|
Total
(benefit) provision
|
$
|
(1,555
|
)
|
$
|
1,829
|
$
|
2,110
|
|||
The
following table reconciles the reported income tax (benefit)
expense with
the amount computed using the federal statutory income tax rate
(in
thousands).
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Computed
"expected" tax (benefit) expense
|
$
|
(616
|
)
|
$
|
2,253
|
$
|
2,430
|
|||
|
State
and local tax, net of federal benefit
|
(165
|
)
|
132
|
297
|
||||||
|
Nontaxable
income from foreign subsidiaries
|
(73
|
)
|
(255
|
)
|
(61
|
)
|
||||
|
Reserve
reversal on foreign deferred taxes
|
(405
|
)
|
-
|
-
|
||||||
|
Nondeductible
expenses
|
75
|
164
|
159
|
|||||||
|
Nontaxable
life insurance cash value increase
|
(102
|
)
|
(100
|
)
|
(96
|
)
|
||||
|
Tax
credits
|
(251
|
)
|
(217
|
)
|
(549
|
)
|
||||
|
Other
items, net, none of which individually exceeds 5% of federal
taxes at
statutory rates
|
(18
|
)
|
(148
|
)
|
(70
|
)
|
||||
|
$
|
(1,555
|
)
|
$
|
1,829
|
$
|
2,110
|
||||
|
The
components of deferred taxes are as follows (in
thousands):
|
||||||||||
|
2007
|
2006
|
|||||||||
|
Deferred
tax assets:
|
||||||||||
|
Employee
benefits
|
$
|
4,563
|
$
|
4,157
|
||||||
|
Inventory
|
1,650
|
1,450
|
||||||||
|
Accounts
receivable
|
350
|
200
|
||||||||
|
Marketable
securities
|
75
|
296
|
||||||||
|
Research
& development
|
1,149
|
632
|
||||||||
|
Other
liabilities
|
66
|
61
|
||||||||
|
Foreign
net operating loss carryforwards
|
425
|
116
|
||||||||
|
Miscellaneous
|
-
|
110
|
||||||||
|
Total
deferred tax asset
|
8,278
|
7,022
|
||||||||
|
Deferred
tax liabilities:
|
||||||||||
|
Property,
plant and equipment
|
1,156
|
1,048
|
||||||||
|
Net
deferred tax asset
|
7,122
|
5,974
|
||||||||
|
Valuation
allowance
|
(1,102
|
)
|
(997
|
)
|
||||||
|
$
|
6,020
|
$
|
4,977
|
|||||||
50
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
The
total
valuation allowance relates to deferred tax assets of foreign subsidiaries.
At
April 30, 2007, the Company has available approximately $1.3 million in net
operating losses available to offset future income of certain of its foreign
subsidiaries. The operating loss carryforwards for the U.S. subsidiaries of
the
Company are approximately $700,000 and these expire in 20 years.
| 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,
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Balance
at beginning of year
|
$
|
350
|
$
|
200
|
$
|
400
|
||||
|
Warranty
costs incurred
|
(596
|
)
|
(411
|
)
|
(319
|
)
|
||||
|
Product
warranty accrual
|
596
|
561
|
119
|
|||||||
|
Balance
at end of year
|
$
|
350
|
$
|
350
|
$
|
200
|
||||
| 16. |
Segment
Information
|
The
Company operates under three reportable segments:
(1)
FEI-NY
-
consists principally of precision time and frequency control products used
in
three principal markets- communication satellites (both commercial and U.S.
Government-funded); terrestrial cellular telephone or other ground-based
telecommunication stations and other components and systems for the U.S.
military.
(2)
Gillam-FEI
- the Company’s Belgian subsidiary primarily sells wireline synchronization and
network management systems.
(3)
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.
Beginning
with the first quarter of fiscal year 2007, the Company is reporting its segment
information on a geographic basis. The former Commercial Communications and
U.S.
Government segments, which operate out of the Company’s New York headquarters
facility, have been combined into the new segment, FEI-NY. This segment also
includes the operations of the Company’s wholly-owned subsidiary, FEI-Asia,
which functions primarily as a manufacturing facility for the FEI-NY
segment.
Previously,
the Company identified its New York-based U.S. Government business as a separate
segment even though that segment shared the same facility, equipment and
personnel with the Commercial Communications segment. With the acquisition
of
FEI-Zyfer in fiscal year 2004, the Company now does business on U.S. Government
programs out of two separate subsidiaries. The Company’s Chief Executive Officer
measures segment performance based on total revenues and profits generated
by
each geographic center rather than on the specific types of customers or
end-users. Consequently, the Company determined that limiting the number of
segments to the three indicated above more appropriately reflects the way the
Company’s management views the business.
Prior
year segment information has been reclassified to conform to the new segment
presentation. This includes reclassifying the property, plant and equipment
located in the New York facility to the FEI-NY segment and not to corporate
assets.
The
accounting policies of the three 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 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 two segments.
51
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
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):
|
2007
|
|
2006
|
|
2005
|
||||||
|
Net
sales:
|
||||||||||
|
FEI-NY
|
$
|
40,184
|
$
|
35,801
|
$
|
37,067
|
||||
|
Gillam-FEI
|
11,382
|
** |
9,169
|
** |
12,599
|
** | ||||
|
FEI-Zyfer
|
7,542
|
10,055
|
8,803
|
|||||||
|
less
intersegment sales
|
(2,902
|
)** |
(2,215
|
)** |
(3,296
|
)** | ||||
|
Consolidated
Sales
|
$
|
56,206
|
$
|
52,810
|
$
|
55,173
|
||||
|
Operating
(loss) profit:
|
||||||||||
|
FEI-NY
|
$
|
(3,336
|
)** |
$
|
1,864
|
** |
$
|
(616
|
)** | |
|
Gillam-FEI
|
412
|
** |
(525
|
)** |
200
|
** | ||||
|
FEI-Zyfer
|
(339
|
)
|
903
|
292
|
||||||
|
Corporate
|
(458
|
)
|
(532
|
)
|
(1,145
|
)
|
||||
|
Consolidated
Operating (Loss) Profit
|
($
3,721
|
)
|
$
|
1,710
|
($
1,269
|
)
|
||||
**
For the fiscal years ended April 30, 2007, 2006 and 2005, includes Gillam-FEI
intersegment sales of $1.8 million, $945,000 and $2.4 million, respectively,
to
the FEI-NY
segment.
In fiscal year 2007, such sales included final development costs and manufacture
of assemblies and units of a wireline synchronization product for ultimate
production and sale in the U.S. In the prior fiscal years, these amounts were
recorded as research and development expense of the FEI-NY
segment,
resulting in a lower operating profit in fiscal year 2006 and an operating
loss
in fiscal year 2005 at that segment. In the Gillam-FEI segment, these
transactions increased the operating profit in fiscal year 2007, reduced the
operating loss in fiscal year 2006 and produced an operating profit in fiscal
year 2005.
|
2007
|
|
2006
|
|
2005
|
||||||
|
Identifiable
assets:
|
||||||||||
|
FEI-NY
|
$
|
49,868
|
$
|
44,111
|
$
|
36,695
|
||||
|
Gillam-FEI
|
13,750
|
13,755
|
13,877
|
|||||||
|
FEI-Zyfer
|
5,366
|
5,356
|
4,796
|
|||||||
|
less
intersegment balances
|
(11,773
|
)
|
(14,585
|
)
|
(9,892
|
)
|
||||
|
Corporate
|
36,615
|
38,104
|
42,898
|
|||||||
|
Consolidated
Identifiable Assets
|
$
|
93,826
|
$
|
86,741
|
$
|
88,374
|
||||
|
Depreciation
and amortization (allocated):
|
||||||||||
|
FEI-NY
|
$
|
1,290
|
$
|
1,238
|
$
|
1,325
|
||||
|
Gillam-FEI
|
164
|
185
|
244
|
|||||||
|
FEI-Zyfer
|
252
|
428
|
426
|
|||||||
|
Corporate
|
19
|
19
|
19
|
|||||||
|
Consolidated
Depreciation and Amortization Expense
|
$
|
1,725
|
$
|
1,870
|
$
|
2,014
|
||||
Major
Customers
In
fiscal
year 2007, sales to three customers of the FEI-NY segment aggregated $24.4
million or 61% of that segment’s total sales. These customers accounted for 17%,
14% and 13%, respectively, of the Company’s consolidated sales for the year.
During the year ended April 30, 2007, in the Gillam-FEI
segment,
sales to two customers aggregated $4.0 million or 42% of that segment’s revenues
(exclusive of the $1.8 million of intersegment sale). In the FEI-Zyfer segment,
two customers accounted for $1.6 million or 21% of that segment’s sales. None of
the customers in the Gillam-FEI
or
FEI-Zyfer segments accounted for more than 10% of consolidated
revenues.
In
fiscal
year 2006, sales to three customers of the FEI-NY segment aggregated $22.5
million or 63% of that segment’s total sales. These customers accounted for 16%,
14% and 13%, respectively, of the Company’s consolidated sales for the year. In
the Gillam-FEI
segment,
sales to two customers aggregated $3.8 million or 46% of that segment’s revenues
(exclusive of the $945,000 intersegment sale). In the FEI-Zyfer segment, two
customers accounted for $1.9 million or 19% of that
segment’s sales. None of the customers in the Gillam-FEI
or
FEI-Zyfer segments accounted for more than 10% of consolidated
revenues.
52
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
During
fiscal year 2005, sales to two customers accounted for approximately $22.0
million of the FEI-NY segment’s total sales. This amount represents 59% of that
segment’s total revenues and 28% and 12%, respectively, of the Company’s
consolidated sales for that year. Sales to two customers, aggregating $6.0
million, accounted for
59%
of the revenues of the Gillam-FEI segment (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
Gillam-FEI
or
FEI-Zyfer segments 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 each of the Company’s 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)
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
China
|
$
|
5,799
|
$
|
5,301
|
$
|
11,422
|
||||
|
Belgium
|
5,612
|
4,198
|
5,171
|
|||||||
|
France
|
2,653
|
2,924
|
4,412
|
|||||||
|
Canada
|
953
|
2,447
|
1,021
|
|||||||
|
Other
|
2,899
|
3,748
|
5,385
|
|||||||
|
$
|
17,916
|
$
|
18,618
|
$
|
27,411
|
|||||
53
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
17. Interim
Results (Unaudited)
Quarterly
results for fiscal years 2007 and 2006 are as follows:
|
(in
thousands, except per share data)
|
|||||||||||||
|
2007
Quarter
|
|||||||||||||
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
||||||
|
Net
sales
|
$
|
14,314
|
$
|
14,320
|
$
|
12,117
|
$
|
15,455
|
|||||
|
Gross
margin
|
4,853
|
5,340
|
3,777
|
3,106
|
|||||||||
|
Net
income (loss)
|
898
|
187
|
(754
|
)
|
(588
|
)
|
|||||||
|
*Earnings
(loss) per share
|
|||||||||||||
|
Basic
|
$
|
0.10
|
$
|
0.02
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
|||
|
Diluted
|
$
|
0.10
|
$
|
0.02
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
|||
|
*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)
|
|||||||||||||
|
|
2006
Quarter
|
||||||||||||
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
||||
|
Net
sales
|
$
|
11,057
|
$
|
11,499
|
$
|
15,113
|
$
|
15,141
|
|||||
|
Gross
margin
|
4,097
|
4,098
|
5,462
|
4,960
|
|||||||||
|
Net
income
|
1,142
|
1,332
|
1,248
|
1,076
|
|||||||||
|
*Earnings
per share
|
|||||||||||||
|
Basic
|
$
|
0.13
|
$
|
0.16
|
$
|
0.15
|
$
|
0.13
|
|||||
|
Diluted
|
$
|
0.13
|
$
|
0.15
|
$
|
0.14
|
$
|
0.12
|
|||||
|
*Quarterly
earnings per share data do not equal the annual amount due to changes
in
the average common equivalent shares
outstanding.
|
|||||||||||||
54
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
|
(In
thousands)
|
||||||||||||||||
|
Column
A
|
|
Column
B
|
|
Column
C
Additions
|
|
Column
D
|
|
Column
E
|
|
|||||||
|
Description
|
|
Balance
at
beginning
of
period
|
|
Charged
to
costs
and
expenses
|
|
Charged
to
other
accounts-
describe
|
|
Deductions
-describe
|
|
Balance
at
end
of
period
|
||||||
|
Year
ended April 30, 2007
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
276
|
-
|
-
|
-
|
$
|
276
|
|||||||||
|
Inventory
reserves
|
$
|
3,923
|
$
|
1,328
|
$
|
73
|
(c)
|
$
|
296
|
(b)
|
$
|
5,028
|
||||
|
Year
ended April 30, 2006
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
172
|
$
|
117
|
-
|
$
|
13
|
(a)
|
$
|
276
|
||||||
|
Inventory
reserves
|
$
|
4,289
|
$
|
680
|
($52
|
)(c)
|
$
|
994
|
(b)
|
$
|
3,923
|
|||||
|
Year
ended April 30, 2005
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
140
|
$
|
45
|
$
|
13
|
(a)
|
$
|
172
|
|||||||
|
Inventory
reserves
|
$
|
3,495
|
$
|
726
|
$
|
68
|
(c,d)
|
-
|
$
|
4,289
|
||||||
| (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
|
55
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
NONE
Item
9A(T) 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.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
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 26,
2007. 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 26, 2007.
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 26, 2007.
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 26, 2007.
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 26, 2007.
56
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 Firm
|
33
|
|
|
|
|
Consolidated
Balance Sheets April
30, 2007 and 2006
|
34
|
|
Consolidated
Statements of Operations-years
ended April 30, 2007, 2006 and 2005
|
35
|
|
|
|
|
Consolidated
Statements of Cash Flows -
years ended April 30, 2007, 2006 and 2005
|
36-37
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity -
years ended April 30, 2007, 2006 and 2005
|
38
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
39-54
|
|
|
|
|
(2)
FINANCIAL STATEMENT SCHEDULE
|
|
|
Included
in Part II of this report:
|
|
|
Schedule
II - Valuation and Qualifying Accounts
|
55
|
|
|
|
|
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
21 List of Subsidiaries of Registrant
|
|
|
Exhibit
23.1 Consent of Independent Registered Public Accounting
Firm
|
|
|
Exhibit
31.1 Certification of the Chief Executive Officer pursuant to Section
302
of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Exhibit
31.2 Certification of the Chief Financial Officer pursuant to
Section 302
of the Sarbanes-Oxley
Act of 2002
|
|
|
Exhibit
32.1 Certification of the Chief Executive Officer pursuant to
Section 906
of the Sarbanes-Oxley
Act of 2002
|
|
|
Exhibit
32.2 Certification of the Chief Financial Officer pursuant to
Section 906
of the Sarbanes-Oxley
Act of 2002
|
|
|
Exhibit
99 Audited Financial Statements of Morion, Inc. for year ended
December
31, 2006
|
|
|
|
|
|
The
exhibits listed on the accompanying Index to Exhibits beginning
on page 59
are filed as part of
this annual report.
|
|
57
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
Treasurer
|
||
Dated:
July 27, 2007
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
Joseph
P. Franklin
|
Chairman
of the Board
|
7/27/07
|
||
|
/s/
Joel Girsky
Joel
Girsky
|
Director
|
7/27/07
|
||
|
/s/
E. Donald Shapiro
E.
Donald Shapiro
|
Director
|
7/27/07
|
||
|
/s/
S. Robert Foley
S.
Robert Foley
|
Director
|
7/27/07
|
||
|
/s/
Richard Schwartz
Richard
Schwartz
|
Director
|
7/27/07
|
||
|
/s/
Martin B. Bloch
Martin
B. Bloch
|
President
and CEO
(Principal
Executive Officer)
|
7/27/07
|
||
|
/s/
Alan L. Miller
Alan
L. Miller
|
Chief
Financial Officer
and
Treasurer
(Principal
Financial Officer)
|
7/27/07
|
58
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
|
(5)
|
||
|
3.4
|
Amendment
to Certificate of Incorporation of the Registrant filed
with the Secretary of State of Delaware on October 22,
1986
|
(7)
|
||
|
|
||||
|
3.5
|
Amended
and Restated Certificate of Incorporation of the Registrant
filed with the Secretary of State of Delaware on October
26, 1987
|
(9)
|
||
|
3.6
|
Amended
Certificate of Incorporation of the Company filed with
the Secretary of State of Delaware on November 2,
1989
|
(9)
|
||
|
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
|
(10)
|
||
|
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
|
(8)
|
||
|
10.13
|
Lease
agreement between Registrant
and Reckson Operating
Partnership,
L.P. dated
January 6, 1998
|
(11)
|
||
|
10.16
|
Registrant’s
Cash or Deferral Profit Sharing Plan and Trust
under Internal Revenue Code Section 401, dated
April 1, 1985
|
(6)
|
||
|
10.21
|
Form
of Agreement concerning Executive Compensation
|
(2)
|
||
|
10.23
|
Registrant’s
Senior Executive Stock Option Plan
|
(8)
|
||
|
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
|
(8)
|
59
|
Exhibit
No. in this Form
10-K
|
|
Description
of Exhibit
|
|
NOTE
|
|
10.25
|
Executive
Incentive Compensation Plan between Registrant and
various employees
|
(8)
|
||
|
21
|
List
of Subsidiaries of Registrant
|
Filed
herewith
|
||
|
23
.1
|
Consent
of Independent Registered Public Accounting Firm to
incorporation by reference of 2007 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
|
||
|
99
|
Audited
financial statements of Morion, Inc. for the year ended
December 31, 2006, pursuant to Rule 3-09 of Regulation
S-X
|
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, 1985, which exhibit is incorporated herein by
reference.
|
| (6) |
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.
|
| (7) |
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.
|
| (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, 1989, 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, 1990, which exhibit is incorporated herein by
reference.
|
|
(10)
|
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.
|
|
(11)
|
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.
|
60
Exhibit
21
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
List
of
Subsidiaries of Registrant
|
Subsidiary
& Name under
|
||
|
which
business is performed
|
Jurisdiction
of Incorporation
|
|
|
Frequency
Electronics, Inc.
|
Delaware
|
|
|
FEI
Communications, Inc.
|
Delaware
|
|
|
FEI
Government Systems, Inc.
|
Delaware
|
|
|
FEI
Realty, Inc. (Inactive)
|
Delaware
|
|
|
Monitor
Corp. (Inactive)
|
Delaware
|
|
|
FEI
Zyfer, Inc.
|
Delaware
|
|
|
Gillam-FEI,
s.a.
|
Belgium
|
|
|
Satel-FEI,
s.a.
|
France
|
|
|
Frequency
Electronics, Inc. Asia
|
People’s
Republic of China
|
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
13,
2007 relating to the consolidated financial statements and financial statement
schedule, which appears in this Form 10-K.
| /s/ Holtz Rubenstein Reminick LLP | |||
|
Holtz
Rubenstein Reminick LLP
Melville,
New York
July
27, 2007
|
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 27, 2007
| 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 27, 2007
| By: | /s/ Alan L. Miller | |||
|
Alan
L. Miller
Chief
Financial Officer
|
Exhibit
32.1
CERTIFICATION
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, 2007 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 27, 2007 | ||
|
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
PURSUANT TO
SECTION
906 OF
THE
SARBANES-OXLEY ACT OF 2002
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, 2007 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 27, 2007 | ||
|
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.
Exhibit
99
OAO
Morion, Inc
Annual
Report 2006
1
OAO
Morion
Table
of Contents
|
Management’s
Discussion & Analysis
|
3
|
|||
|
Balance
Sheets
|
4
|
|||
|
Statements
of Income
|
5
|
|||
|
Statements
of Cash Flows
|
6
|
|||
|
Notes
to Financial Statements
|
7
- 16
|
|||
|
Report
of Management
|
17
|
|||
|
Report
of Auditors
|
18
|
2
OAO
Morion
Managements
Discussion
|
1.
|
Market
and operational situation for Morion, Inc. during year
2006:
|
|
a.
|
Significant
inflation rate in Russia (9 % in year
2006)
|
|
b.
|
Significant
reduction of USD value in general and in Russia in particular (8,5
% drop
in USD/RUR exchange rate). This made operation of Morion in USD oriented
countries (China, USA, etc.) more complicated if compared with year
2005.
|
|
c.
|
Visible
reduction of available qualified workforce and general increase in
cost of
workforce in St. Petersburg.
|
|
d.
|
Presence
of serious competition. Especially for foreign markets.
|
|
e.
|
Significantly
increased demand (if compared with year 2005) in all products (excluding
quartz blanks). Such demand was driven by overall growth of economy
in
Russia and successful development and implementation of new
telecommunication and broadcasting systems worldwide (3G mobile
communication standards: WCDMA, TD-SCDMA, CDMA 2000; mobile internet
systems: WiMAX, Wibro; digital TV broadcasting: fixed &
mobile).
|
|
2.
|
Technology
& production achievements:
|
|
a.
|
Significant
improvement of production yields for all production leading to reduced
costs and increased quantity of production
made.
|
|
b.
|
Volume
production of own precision crystals allowed to minimize supply of
this
critical components from other sources.
|
|
c.
|
A
wide range of new products was developed and introduced in production
in
year 2006.
|
|
d.
|
Significant
increase in production capacity for all products in year 2006 and
build up
of the basis for further increase in year
2007.
|
|
3.
|
Sales
& Marketing achievements:
|
|
a.
|
The
highest in history of Morion sales level of 14500 kUSD was achieved
in
year 2006 (~ 27% growth if compared with year
2005).
|
|
b.
|
Morion
became supplier No.1 for such key customers like Rohde & Schwarz
(Germany) and ZTE (China).
|
|
c.
|
Morion
started sales on such new markets like Japan & New
Zealand.
|
|
d.
|
Morion
remains No.1 supplier of precision quartz frequency control products
in
Russia and CIS.
|
|
4.
|
Resume:
|
Continuous
marketing, R&D, production effort combined with increased demands in
production developed and manufactured by Morion allowed Morion to achieve
unprecedented level of performance in very competitive market environment.
Strong orientation for highest level of products allowed Morion to go up to
3rd
or even 2nd
place in
the world in supply of precision oscillators with stability of E-9 level and
better. Again serious basis was prepared for further growth of sales in profits
in year 2007.
3
OAO
Morion
Balance
Sheets
As
at December 31, 2006 and December 31, 2005
(in
thousands of U.S. dollars)
|
Note
|
2006
|
2005
|
||||||||
|
ASSETS
|
||||||||||
|
Current
assets:
|
||||||||||
|
Cash
and cash equivalents
|
3
|
$
|
1,892
|
$
|
2,186
|
|||||
|
Trade
receivables net of allowance
|
4
|
2,234
|
1,327
|
|||||||
|
Other
receivables and prepayments, net of allowance
|
5
|
1,101
|
650
|
|||||||
|
VAT
receivable
|
6
|
868
|
390
|
|||||||
|
Due
from related parties
|
7
|
85
|
39
|
|||||||
|
Inventory
|
8
|
2,563
|
1876
|
|||||||
|
Taxes
receivable
|
9
|
177
|
0
|
|||||||
|
Total
current assets
|
8,920
|
6,468
|
||||||||
|
Non
current assets
|
||||||||||
|
Property,
plant and equipment, net of accumulated depreciation
|
10
|
4,798
|
3,892
|
|||||||
|
Intangible
assets, net of amortization
|
11
|
4
|
5
|
|||||||
|
Long
term investments
|
12
|
0
|
0
|
|||||||
|
Total
non current assets
|
4,802
|
3,897
|
||||||||
|
Total
assets
|
$
|
13,722
|
$
|
10,365
|
||||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||
|
Current
liabilities:
|
||||||||||
|
Loans
|
$
|
0
|
$
|
0
|
||||||
|
Accounts
payable
|
588
|
407
|
||||||||
|
Accounts
payable due to related parties
|
7
|
143
|
223
|
|||||||
|
Accrued
liabilities
|
13
|
15
|
5
|
|||||||
|
Customer
deposits and advances
|
1,883
|
501
|
||||||||
|
Accrued
payroll
|
14
|
502
|
346
|
|||||||
|
Other
taxes payable and withheld
|
15
|
412
|
416
|
|||||||
|
Other
payables
|
20
|
61
|
||||||||
|
Total
current liabilities
|
3,563
|
1,959
|
||||||||
|
Non
current liabilities
|
||||||||||
|
Long
term debt
|
0
|
0
|
||||||||
|
Total
non current liabilities
|
0
|
0
|
||||||||
|
Shareholders’
equity :
|
||||||||||
|
Capital
stock
|
16
|
29
|
29
|
|||||||
|
Contributed
surplus
|
16
|
2,314
|
2,314
|
|||||||
|
Retained
earnings
|
7,816
|
6,063
|
||||||||
|
Total
shareholders’ equity
|
10,159
|
8,406
|
||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
13,722
|
$
|
10,365
|
See
accompanying notes to financial statements
4
OAO
Morion
Statements
of Income and Comprehensive Income
For
the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars except Per Share information)
|
Note
|
2006
|
2005
|
||||||||
|
Sales
|
$
|
14,541
|
$
|
11,423
|
||||||
|
Direct
costs
|
5,903
|
4,997
|
||||||||
|
Manufacturing
costs
|
3,231
|
2,381
|
||||||||
|
Costs
of goods sold
|
9,134
|
7,378
|
||||||||
|
Gross
margin on sale
|
5,407
|
4,045
|
||||||||
|
Operating
expenses:
|
||||||||||
|
Administrative
expenses
|
2,008
|
1,519
|
||||||||
|
Selling
expenses
|
290
|
250
|
||||||||
|
Depreciation
of fixed assets
|
505
|
366
|
||||||||
|
Amortization
of intangible assets
|
1
|
1
|
||||||||
|
Taxes
other than income taxes
|
226
|
65
|
||||||||
|
Engineering
expenses
|
262
|
242
|
||||||||
|
Income
from Operating
|
2,115
|
1,602
|
||||||||
|
Others
revenues/gains (expenses/losses):
|
||||||||||
|
Loss
on disposal of property and equipment
|
(9
|
)
|
6
|
|||||||
|
Interest
and other income
|
(119
|
)
|
71
|
|||||||
|
Gain
on translation of foreign currency
|
(184
|
)
|
69
|
|||||||
|
Income
from GKO
|
0
|
0
|
||||||||
|
Income
before unusual or infrequent items
|
(312
|
)
|
146
|
|||||||
|
Unusual
or infrequent items
|
||||||||||
|
Gain
on Extraordinary items
|
0
|
0
|
||||||||
|
Income
from continuing operations
|
2,427
|
1,748
|
||||||||
|
Profit
tax expense
|
17,18
|
564
|
455
|
|||||||
|
Net
income
|
$
|
1,863
|
$
|
1,293
|
||||||
| Dividends accrued for the Year 2005 | $ | 110 | ||||||||
See
accompanying notes to financial statements
5
OAO
Morion
Statements
of Cash Flows
For
the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars)
|
2006
|
2005
|
||||||
|
Cash
flow from operating activities
|
|||||||
|
Net
income
|
$
|
1,863
|
$
|
1,293
|
|||
|
Adjustments
to reconcile net profit to net cash provided by operating
activities:
|
|||||||
|
Depreciation
and amortization
|
505
|
367
|
|||||
|
Financial
income
|
0
|
0
|
|||||
|
Foreign
currency translation adjustments
|
311
|
32
|
|||||
|
Loss
on disposals of property and equipment
|
(1
|
)
|
2
|
||||
|
Operating
profit before working capital changes
|
2,678
|
1,694
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Increase
in trade and other receivables
|
(1882
|
)
|
111
|
||||
|
Increase
in inventories
|
(687
|
)
|
(313
|
)
|
|||
|
Decrease
in payables
|
860
|
68
|
|||||
|
Net
cash provided by operating activities:
|
969
|
1,560
|
|||||
|
Cash
flows from investing activities
|
|||||||
|
Purchase
of property, plant and equipment
|
(1418
|
)
|
(1010
|
)
|
|||
|
Sale
of equipment
|
8
|
6
|
|||||
|
Sale
of GKO
|
0
|
0
|
|||||
|
Coupon
income received
|
0
|
0
|
|||||
|
Net
cash used in investing activities
|
(1,410
|
)
|
(1,004
|
)
|
|||
|
Cash
flows from financing activities
|
|||||||
|
Proceeds
from issuance of share capital
|
0
|
0
|
|||||
|
Dividends
paid
|
147
|
(1
|
)
|
||||
|
Long
and short term borrowings repayment
|
0
|
0
|
|||||
|
Net
cash used in financing activities
|
147
|
(1
|
)
|
||||
|
Net
(decrease) increase in cash and cash equivalents
|
(294
|
)
|
555
|
||||
|
Cash
and cash equivalents at beginning of year
|
2,186
|
1,631
|
|||||
|
Cash
and cash equivalents at end of year
|
$
|
1,892
|
$
|
2,186
|
|||
6
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Note
1 - Background
a)
Organization and Nature of the Business and Operations
The
Company is incorporated under the laws of the Russian Federation.
The
Company is a producer of industrial oscillators, crystal blanks, resonators
and
filters, which are being produced for Russian, CIS and foreign
markets.
b)
Russian Business Environment
The
Russian Federation has been experiencing political and economic change which
has
affected, and may continue to affect, the activities of enterprises operating
in
this environment. Consequently, operations in the Russian Federation involve
risks, which do not typically exist in other markets.
The
accompanying financial statements reflect management's assessment of the impact
of the Russian business environment on the operations and the financial position
of the Company. The future business environment may differ from management's
assessment. The impact of such differences on the operations and financial
position of the Company may be significant.
c)
Going concern
The
ultimate recoverability of the Company's investments is dependent upon its
ability to achieve and maintain profitability, which is dependent to a certain
extent on the stabilization of the economy of Russia and the Company's ability
to obtain adequate financing to meet capital commitments.
d)
Convertibility of the Rouble
The
Russian rouble is not a convertible currency outside the Russian Federation
and,
accordingly, any conversion of Russian rouble amounts to US dollars should
not
be construed as a representation that Russian rouble amounts have been, could
be, or will be in the future, convertible into US dollars.
e)
Taxation
Profit
tax on the profit for the year comprises current and deferred tax. Profit tax
is
recognized in the Statement of Operations except to the extent that it relates
to items recognized directly to equity, in which case it is recognized in
equity.
Current
tax is the expected tax payable on the taxable profit for the year, using tax
rates enacted or substantially enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
Deferred
tax is provided using the balance sheet liability method, providing for
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for taxation purposes.
A
deferred tax asset is recognized only to the extent that it is probable that
future taxable profits will be available against which the unused tax losses
and
credits can be utilized.
7
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Note
2 - Summary of Significant Accounting Policies
The
Company's significant accounting policies are summarized as
follows:
a)
Basis of Presentation
The
accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP).
The
accounting policies have been consistently applied.
b)
Reporting currency and Foreign Currency Translation
The
statutory accounts of the Company are maintained in accordance with Russian
accounting regulations and are stated in rubles.
Ruble
amounts are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ¹52 (SFAS 52), "Foreign Currency Translation".
Under
SFAS 52, the financial statements of entities in a highly inflationary economy
are measured in all cases using the U.S. dollar as the functional currency.
U.S.
dollar transactions are shown at their historical value. Monetary assets and
liabilities denominated in local currency are translated into U.S. dollars
at
the prevailing period-end exchange rate. All other assets and liabilities are
translated at historical exchange rates. Results of operations have been
translated using the exchange rates effective at the date of
transaction.
Translation
differences resulting from the use of these different rates are included in
the
accompanying Balance sheets and Statements of operations. In 2006 and 2005,
that
translation difference loss was completely expensed in the Statements of
Operations in the line 'Foreign Currency translation loss'.
c)
Revenue Recognition
The
Company records revenues as earned at the time goods are shipped.
The
same
principle was used for the tax purposes.
d)
Inventory
Raw
materials inventory is stated at the lower of cost or net realizable value.
Work-in-progress and finished goods are also stated at the lower of cost or
net
realizable value. The method of determining cost employed by the Company is
on
the first-in, first-out basis.
e)
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
provided using the straight-line
method over
the
estimated useful lives of the assets as follows:
| Land | not depreciated |
| Buildings | 25 years |
| Construction | 25 years |
| Equipment | 12.5 years |
| Office furniture and equipment | 5 years |
| Motor vehicles | 5 years |
8
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
f)
Comparative figures
Comparative
figures incorporated herein are based on the prior year's financial statements
but have been restated where necessary to accord with revised disclosures in
this year.
g)
Impairment of long-lived assets
Long-lived
assets and certain identifiable intangibles are reviewed by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to
be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the assets.
If
such assets are considered to be impaired, the impairment to be recognized
is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
h)
Comprehensive Income
For
the
years ended December 31, 2006 and 2005 comprehensive income was equal to net
income reported in the statements of operations.
i)
Financial Instruments
There
are
no items having impact under the application of FAS 133.
Note
3 - Cash and cash equivalents
The
Company's cash balances at December 31, 2006 and 2005 consist of the
following:
|
2006
|
2005
|
||||||
|
Russian
rouble bank accounts
|
1,238
|
1,329
|
|||||
|
Foreign
currency bank accounts
|
654
|
857
|
|||||
|
Bonds
|
0
|
0
|
|||||
|
$
|
1,892
|
2,186
|
|||||
Note
4 - Trade receivables
The
Company's trade accounts receivable at December 31, 2006 and 2005 consists
of
the following:
|
2006
|
2005
|
||||||
|
Trade
accounts receivable
|
2,259
|
1,519
|
|||||
|
Provision
for bad and doubtful receivables
|
(25
|
)
|
(192
|
)
|
|||
|
$
|
2,234
|
1,327
|
|||||
Provision
for doubtful accounts at the end of 2006 is set up at the rate 50% from the
base
k$50 for internal market (calculated on the base of analysis of the bad domestic
accounts).
9
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Note
5 - Other receivables and prepayments
The
Company’s other receivables and prepayments at December 31, 2006 and 2005
consist of the following:
|
2006
|
2005
|
||||||
|
Advances
given
|
647
|
356
|
|||||
|
Accountable
persons
|
1
|
8
|
|||||
|
Settlements
with personnel
|
86
|
-
|
|||||
|
Other
debtors
|
336
|
234
|
|||||
|
Prepaid
expenses
|
31
|
81
|
|||||
|
Total
other receivables and prepayments
|
1,101
|
679
|
|||||
|
Provision
for doubtful debtors
|
0
|
(29
|
)
|
||||
|
$
|
1,101
|
650
|
|||||
Note
6 - VAT receivable
The
increase up to k$868 of VAT receivable is explained by the complication of
ground procedure of VAT reimbursement, accounting to the prolongation of this
process in time.
Note
7 - Related Party Transactions
|
(a)
|
Amounts
due from related
parties
|
|
2006
|
2005
|
||||||
|
Frequency
Electronics, Inc
|
85
|
39
|
|||||
|
$
|
85
|
39
|
|||||
| (b) |
Amounts
due to related
parties
|
|
2006
|
2005
|
||||||
|
Frequency
Electronics, Inc
|
143
|
223
|
|||||
|
$
|
143
|
223
|
|||||
10
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Note
8 - Inventory
Inventory
carried at lowest of cost or by FIFO method at December 31, 2006 and 2005
consists of the following:
|
2006
|
2005
|
||||||
|
Finished
Goods
|
536
|
452
|
|||||
|
Work
in Progress
|
1,085
|
482
|
|||||
|
Raw
Materials
|
944
|
944
|
|||||
|
Total
inventory
|
2,565
|
1,878
|
|||||
|
Provision
for stock obsolescence
|
(2
|
)
|
(2
|
)
|
|||
|
$
|
2,563
|
1,876
|
|||||
Note
9 - Taxes
receivable
The
Company's taxes receivable balances at December 31, 2006 and 2005 consist
of
the following:
|
|
2006
|
2005
|
|||||
|
Current
profit tax receivable
|
176
|
0
|
|||||
|
Other
taxes receivable
|
1
|
0
|
|||||
|
$
|
177
|
0
|
|||||
Note
10 - Property, Plant and Equipment
Property,
plant and equipment at December 31, 2006 and 2005 consist of the
following:
|
2006
|
2005
|
||||||
|
Land
|
28
|
28
|
|||||
|
Buildings
|
515
|
491
|
|||||
|
Constructions
|
47
|
47
|
|||||
|
Machinery
and equipment
|
5,329
|
4,237
|
|||||
|
Office
equipment, furniture and fixtures
|
248
|
221
|
|||||
|
Motor
vehicles
|
113
|
83
|
|||||
|
Prepayments
for fixed assets
|
256
|
232
|
|||||
|
Total
property and equipment, at cost
|
6,536
|
5,339
|
|||||
|
Less
accumulated depreciation
|
(1,738
|
)
|
(1,447
|
)
|
|||
|
Net
book value
|
$ |
4,798
|
3,892
|
||||
11
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Note
11 - Intangible assets
Intangible
assets at December 31, 2006 and 2005 consist of the following:
|
2006
|
2005
|
||||||
|
Technical
documentation
|
43
|
43
|
|||||
|
Software
|
9
|
9
|
|||||
|
Total
intangible assets
|
52
|
52
|
|||||
|
Less
accumulated amortization
|
(48
|
)
|
(47
|
)
|
|||
|
$
|
4
|
5
|
|||||
Note
12 - Long term financial investments
The
Company’s long term financial investments at December 31, 2006 and 2005 consist
of the following:
|
2006
|
2005
|
||||||
|
Investments
in associates
|
4
|
4
|
|||||
|
GKO
(Russian Government obligation)
|
0
|
0
|
|||||
|
Others
|
0
|
0
|
|||||
|
Total
Long term financial investments
|
4
|
4
|
|||||
|
Provision
for loss on investments in associates
|
(4
|
)
|
(4
|
)
|
|||
|
$
|
0
|
0
|
|||||
The
associated companies, all registered in Russia, in which investments are held,
are as follows:
|
Name
|
Nature
of business
|
%
Equity held
|
2006
|
2005
|
|||||||||
|
MOST
- 1
|
Production
of quartz crystals
|
30
|
%
|
3
|
3
|
||||||||
|
MOST
- 2
|
Production
of quartz resonators
|
40
|
%
|
1
|
1
|
||||||||
|
$
|
4
|
4
|
|||||||||||
Activities
of the associates are to cease in 2006 and thus they are provided
for.
12
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Note
13 - Accrued
liabilities
The
Company's accrued liabilities balances at December 31, 2006 and 2005 consist
of
the following:
|
2006
|
2005
|
||||||
|
Accrued
materials and services
|
15
|
5
|
|||||
|
$
|
15
|
5
|
|||||
Auditors’
services.
Note
14 - Accrued
payroll
The
Company's accrued payroll balances at December 31, 2006 and 2005 consist of
the
following:
|
2006
|
2005
|
||||||
|
Accrued
payroll
|
399
|
275
|
|||||
|
Payroll
related taxes
|
103
|
71
|
|||||
|
$
|
502
|
346
|
|||||
Note
15 - Other
taxes payable and withheld
The
Company's taxes payable and withheld balances at December 31, 2006 and 2005
consist of the following:
|
|
2006
|
2005
|
|||||
|
Current
profit tax payable
|
0
|
101
|
|||||
|
Other
taxes payable
|
412
|
315
|
|||||
|
$
|
412
|
416
|
|||||
13
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Note
16 - Common
stock
At
December 31, 2006 the authorized capital stock of the Company consists of 53,130
common shares, of which 53,130 are issued, with par value 1 rouble per
share.
|
Common
Stock
|
Contributed
Surplus
|
Retained
earnings
|
Total
Stockholders
Equity
|
||||||||||
|
Balances
at December 31, 2004
|
$
|
29
|
$
|
2,314
|
$
|
4,770
|
$
|
7,113
|
|||||
|
Net
income
|
-
|
-
|
1,293
|
1,293
|
|||||||||
|
Balances
at December 31, 2005
|
29
|
2,314
|
6,063
|
8,406
|
|||||||||
|
Net
income
|
-
|
-
|
1,863
|
1,863
|
|||||||||
|
Dividends
declared:
|
-
|
-
|
(110
|
)
|
(110
|
)
|
|||||||
|
Balances
at December 31, 2006
|
$
|
29
|
$
|
2,314
|
$
|
7,816
|
$
|
10,159
|
|||||
Note
17 - Profit tax
In
2006
and in 2005, the Company’s operations resulted in a profit for Russian tax
purposes. Profit tax was charged as at December 31, 2006 and 2005. The statutory
profit tax rate was 24% in 2006 and 24% in 2005.
Major
components of tax expense included in the determination of net profit for the
period:
|
2006
|
2005
|
||||||
|
Current
profit tax expense
|
496
|
379
|
|||||
|
Deferred
profit tax expense
|
68
|
76
|
|||||
|
$
|
564
|
455
|
|||||
Profit
tax expense, which relates substantially to current profit tax, differs from
the
statutory profit tax as follows:
14
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Main
items making up Deferred profit tax are:
|
2006
|
2005
|
||||||
|
Property,
plant and equipment
|
(47
|
)
|
(47
|
)
|
|||
|
Intangible
assets
|
3
|
3
|
|||||
|
Inventory
|
122
|
2
|
|||||
|
Trade
receivables
|
26
|
46
|
|||||
|
Others
receivables and prepayments
|
0
|
12
|
|||||
|
Others
|
0
|
1
|
|||||
|
Accrued
liabilities
|
4
|
1
|
|||||
|
Accrued
payroll
|
76
|
50
|
|||||
|
Total
deferred tax assets (liabilities)
|
$ |
184
|
68
|
||||
Note
18 - Profit tax expense (continued)
The
Company is subject to profit tax at a statutory rate of 24%. Profit tax expense,
which relates substantially to current profit tax, differs from the statutory
profit tax as follows:
|
Profit
before profit tax expense
|
$
|
2,427
|
|||||
|
Profit
tax at statutory rates
|
582
|
||||||
|
Add
/ (deduct) :
|
|||||||
|
Foreign
currency translation loss
|
219
|
||||||
|
Depreciation
|
94
|
||||||
|
Materials
|
296
|
||||||
|
Changes
in disposals of FA
|
1
|
||||||
|
WIP
adjustment
|
(415
|
)
|
|||||
|
Expenses
|
(57
|
)
|
|||||
|
Finished
goods adjustment
|
17
|
||||||
|
Deferred
expenses
|
11
|
||||||
|
Tax
allowances
|
2
|
||||||
|
Change
in provisions
|
196
|
||||||
|
Total
adjustments
|
364
|
|
Financial
profit per statutory books
|
2,063
|
||||||
|
Income
tax at statutory rates
|
495
|
||||||
|
Foreign
currency translation adjustment
|
(1
|
)
|
|
|
|||
|
Actual
profit tax expense
|
$
|
496
|
|
15
OAO
Morion
Notes
to Financial Statements
As
at December 31, 2006 and 2005
And
for the Years ended December 31, 2006 and 2005
(in
thousands of U.S. dollars - where applicable)
Note
19 - Commitments and Contingencies
a)
Taxation
contingencies
The
Russian taxation system is often unclear and contradictory that is why it is
a
subject for interpretations and it is a base for tax risks in Russia.
Management
believes that it has adequately provided for tax liabilities based on its
interpretation of tax legislation. However, the relevant authorities may have
differing interpretations and the effects could be significant.
b)
Constructed contract commitment
We
suppose existence of possible financial risks related to realization of the
Regulation of the St. Petersburg Government of July 7, 2004 No. 1350 on
construction completion.
16
OAO
Morion
Report
of Management
The
Company’s management is responsible for the preparation and integrity of the
financial information contained in this annual report. Management is also
responsible for maintaining a system of internal financial controls designed
to
provide reasonable assurance that financial records are adequate and can be
relied upon to produce consolidated financial statements in accordance with
generally accepted accounting principles in United States of
America.
Management
has assessed its system and believes these financial statements have been
prepared in conformity with generally accepted accounting principles in the
United States of America appropriate in the circumstances and the other
financial information in this annual report is consistent with these statements.
In preparing the financial statements, management makes informed judgments
and
estimates where necessary to reflect the expected effects of events and
transactions that have not been completed.
The
system of internal financial controls is supported by written policies and
guidelines, by careful selection and training of financial management personnel,
and by an internal audit staff which coordinates its activities with the
Company’s independent auditors. To foster a strong ethical climate in the
conduct of the Company’s affairs, the Company has embodied a code of ethics in
its Corporate policies which are publicized throughout the Company. This code
of
ethics addresses, among other things, compliance with all laws and the accuracy
and integrity of books and records.
The
Company maintains a systematic program to assess compliance. The Audit and
Compliance Committee of the Board of Directors is composed entirely of outside
directors. The committee meets periodically with management, the internal
auditors and the independent auditors to discuss internal accounting controls,
the quality of financial reporting and other relevant matters. Financial
management, as well as the internal auditors and the independent auditors,
have
full and free access to the Audit and Compliance Committee.
|
St.
Petersburg, Russia
May
29, 2007
|
||
|
/s/
Yakov L. Vorokhovsky
|
/s/
Alex B. Gunin
|
|
|
Yakov
L. Vorokhovsky
General
Director
|
Alex
B. Gunin
Chief
Accountant
|
17
Independent
Auditors’ Report
To
the stockholders and Board of Directors of OAO Morion
We
have
audited the accompanying balance sheets of OAO Morion for the fiscal year 1
January-31-December 2006, and the related statements of income and cash flows
for each of the years then ended together with notes thereon.
These
financial statements, as set out on pages 3 to 17, are the responsibility
of
the Company’s Board of Directors and Executive Committee. Our responsibility is
to express an opinion on these financial statements based on our
audit.
Basis
of opinion
We
have
conducted our audit in accordance with standards generally accepted in the
United States of America. These standards require that we plan and perform
the
audit to obtain reasonable assurance that the financial statements are free
of
material misstatements. Our audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our audit
also includes assessing the accounting policies applied by Management and
significant estimates made by Management as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides
a
reasonable basis for our opinion.
Under
the
results of the audit we consider necessary to note the following:
The
company has a weakened internal control for the observance of methodology of
accounting of finished goods and correctness of data forming in the complex
computer informational system used for accounting and preparation of the
financial reporting.
Opinion
In
our
opinion, with the exception of affect, which the above mentioned aspects have
on
the financial reporting, the financial statements gives a true and fair view
of
the Company’s assets, liabilities and financial position at 31 December 2006 and
of the results of the Company’s operations for the fiscal year 1 January-31
December 2006 in accordance with accounting principles generally accepted in
the
United States of America.
|
|
|
|
|
Copenhagen,
Denmark
|
|
St.
Petersburg, Russia
|
|
June
4, 2007
|
|
June
4, 2007
|
|
ALSO
& BREINHOLT
|
|
ZAO
Petro-Bait-Audit
|
|
statsautoriseret
revisionsaktieselskab
|
|
|
|
|
|
|
|
/s/
Per Winther
|
|
/s/
Olga Ostrovskaya
|
|
Per
Winther
|
|
Olga
Ostrovskaya
|
|
State
Authorized Public Accountant
|
|
State
Authorized Public Accountant
|
18