Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
one)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Fiscal Year ended April 30, 2009
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from __________ to __________
Commission
File No. 1-8061
FREQUENCY
ELECTRONICS, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
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11-1986657
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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55
CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y.
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11553
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: 516-794-4500
Securities
registered pursuant to Section 12 (b) of the Act:
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Name of each exchange on
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Title of each class
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which registered
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Common
Stock (par value $1.00 per share)
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NASDAQ
Global Market
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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 ¨ 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 ¨ 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 ¨
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 has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (para 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ¨ No
x
(the Registrant is not yet required to submit Interactive Data).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “accelerated filer,” “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller Reporting Company x
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Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨ No x
The
aggregate market value of voting stock held by non-affiliates of the Registrant
as of October 31, 2008 - $26,100,000
APPLICABLE
ONLY TO CORPORATE ISSUERS:
The
number of shares outstanding of Registrant's Common Stock, par value $1.00 as of
July 24, 2009 – 8,142,841
DOCUMENTS
INCORPORATED BY REFERENCE: PART III incorporates information by reference from
the definitive proxy statement for the Annual Meeting of Stockholders to be held
on or about October 6, 2009.
(Cover
page 1 of 63 pages)
Exhibit
Index at Page 53
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 generations 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 multiple
geostationary satellites used for communication, TV and video broadcasting, and
data transmission. These satellites go through replacement and
augmentation cycles which last for many years.
(2)
Satellites for the U.S. 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 over 1,100 additional and replacement satellites will be built
over the next decade. (See SPACENEWS,
June 15, 2009, citing a Euroconsult study.)
TELECOMMUNICATION
NETWORKS
(3)
Wireless communications- Cellular telephone infrastructure requires precise
signal synchronization. In the architecture of many 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 to maintain quality of
service.
(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. For mobile WiMax,
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 and
inter-connectivity.
U.S. GOVERNMENT & DOD
(non-space)
(6) U.S.
Government applications- In addition to 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 timing 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.
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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.
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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.
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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.
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3.
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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.
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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 ownership of 8.0% of the
outstanding shares of Morion’s common stock 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. The Morion investment is accounted for under the cost method.
(See Note 9 to the Consolidated Financial Statements)
In
December 2006, the Company acquired a 25% interest (20% on a fully-diluted
basis) in Elcom Technologies, Inc. (“Elcom”), a domestic U.S., 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. The Company accounts for its Elcom investment
on the equity basis and the Company’s statement of operations includes its
proportionate share of Elcom’s operating results. (See Note 11 to the
Consolidated Financial Statements)
FISCAL 2009 SIGNIFICANT
MATTERS
Treasury
Stock Transactions
On
September 11, 2008, the Company announced that it had acquired 615,000 shares of
its outstanding common stock in a block transaction with what had been its
largest institutional shareholder. The Company paid approximately
$2.6 million for these shares. Coupled with other purchases of common
stock during the fiscal year ended April 30, 2009, the Company acquired a total
of 724,632 shares at an average price per share of $4.29. With these
purchases, the Company has acquired approximately $4 million of its common stock
out of the total authorization to repurchase up to $5 million of stock as
approved by the Company’s Board of Directors in March 2005.
Wireless
Telecommunication Inventory
Cost of
sales and operating results for fiscal year 2009 were impacted by an increase in
the allowance for inventory obsolescence by $3.4 million as a result of recent
deterioration in the Company’s wireless telecommunications
market. The present outlook for future revenues in the wireless
telecommunications infrastructure market is unclear, which also creates doubt
that the Company will be able to realize the full value of its inventory of
parts and subassemblies for this market.
Tax
Asset Valuation Allowance
The
Company recorded an operating loss in the recently completed fiscal year which,
along with the current challenging economic environment, has reduced the
likelihood that the Company will be able to realize the benefits of its deferred
tax assets. Based on the restrictive accounting measurement
criterion, the Company recorded a valuation allowance in the amount of $7.6
million during the year ended April 30, 2009. If in future periods
the Company records pre-tax profits and is able to assess the realizability of
its deferred tax assets as “more likely than not”, the need for all or some of
such valuation allowance could be overcome based on a careful consideration of
all available evidence. Such valuation allowance reductions would
reduce future income tax provisions.
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. 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 appropriately
reflects the way the Company’s management views the business.
The
Company reports its segment information on an essentially geographic
basis. The FEI-NY segment, which operates out of the Company’s New
York headquarters facility also includes the operations of the Company’s
wholly-owned subsidiary, FEI-Asia. FEI-Asia functions primarily as a
manufacturing facility for the FEI-NY segment.
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 now provides sales and
support for the Company’s wireline telecommunications family of products
including US5G. 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 2009 and 2008 approximately 68% and 72%, respectively, of the
Company’s consolidated revenues were from products sold by the FEI-NY
segment. Sales by Gillam-FEI were approximately 22% and 18% of fiscal
years 2009 and 2008 consolidated revenues, respectively. In fiscal
years 2009 and 2008, sales for the FEI-Zyfer segment were 18% and 14% of
consolidated revenues, respectively. (The sum of annual sales
percentages exceed 100% due to intersegment sales.)
Consolidated
revenues include sales to end-users in countries located outside of the United
States. During fiscal years 2009 and 2008, foreign sales comprised
34% and 31%, respectively, of consolidated revenues. Segment
information regarding revenues, including foreign sales, operating profits,
depreciation and assets is more fully disclosed in Note 15 to the accompanying
financial statements.
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.
Terrestrial
Communications
The
development of new and enhanced technologies 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 to new 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.
Over the
past six 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. After completing the validation phase
in fiscal year 2008 at two of the Regional Bell Operating Companies (“RBOC”),
during fiscal year 2009, the Company recorded meaningful sales of its US5G
products in the United States. The Company expects to realize
increasing sales of this product line and derivative products during fiscal year
2010 and beyond.
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 and frequency generation
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 assemblies 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 ICO, TerreStar, Intelsat, ANIK, Eutelsat, Inmarsat
and Worldstar have utilized the Company’s space-qualified products.
In the
years ahead, the U.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 for both space and non-space
applications 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.
Recently
the Company has also received several cost plus fee contracts. Under
these contracts, the Company may be able to recover all of its direct and
indirect costs related to the programs plus a pre-determined fee. In
the event of substantial cost overruns, the fee may be reduced.
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
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.
Gillam-FEI’s
specialized test equipment is mainly targeted for the telecommunications
industry.
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. In
addition, FEI-Zyfer provides sales and support for the Company’s family of
wireline telecommunications US5G and derivative products.
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, assemblies, 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.
Assemblies
- The Company's assemblies consist of three basic time and frequency generating
standards: quartz frequency standard, rubidium atomic standard and cesium beam
atomic standard. The Company also supplies specialized RF microwave
assemblies primarily for satellite applications.
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 product
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 and assemblies 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.
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, 2009, the Company's consolidated backlog amounted to approximately $36
million as compared to approximately $39 million at the beginning of the fiscal
year. (See Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations). Approximately 75% of this
backlog is expected to be filled during the Company’s fiscal year ending April
30, 2010. Included in the backlog at April 30, 2009 is approximately
$11 million under cost plus fee contracts which the Company believes represent
firm commitments from its customers for which the Company has not received full
funding to date. The backlog 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. end-users, including the revenues
of its overseas subsidiaries, totaled approximately 34% and 31% of net revenues
in fiscal years 2009 and 2008, respectively.
The
Company's products are sold to both commercial and governmental
customers. For the years ended April 30, 2009 and 2008, approximately
44% and 27%, respectively, of the Company's sales were made under contracts to
the U.S. Government or subcontracts for U.S. Government end-use.
During
fiscal year 2009, none of the Company’s customers accounted for more than 10% of
consolidated revenues. In fiscal year 2008, none of the customers in
the Gillam-FEI or FEI-Zyfer segments accounted for more than 10% of consolidated
revenues.
Motorola
Corp. (“Motorola”), Boeing Corporation (“Boeing”), Lockheed Martin Corporation
(“Lockheed”) and Northrop Grumman Corporation (“Northrop”) were major customers
of the FEI-NY segment, accounting for an aggregate of 48% of that segment’s
revenues for the year ended April 30, 2009. The Company’s
consolidated revenues for the year ended April 30, 2008 included sales to
Boeing, Motorola, and Space Systems/Loral (“SS/L”), each of which accounted for
greater than 10% of consolidated sales. In the aggregate, for fiscal
year 2008 these three customers accounted for 37% of consolidated sales and 52%
of the revenues of the Company’s FEI-NY segment.
During
fiscal years 2009 and 2008, France Telecom and Belgacom were major customers of
the Gillam-FEI segment. These European telecommunication companies
accounted for an aggregate of 34% and 39%, respectively, of the segment’s
revenues in those fiscal years.
In the
FEI-Zyfer segment, during fiscal year 2009, Northrop and Raytheon Company
accounted for an aggregate of 27% of the segment’s revenue, while in fiscal year
2008, the Orange County Sheriff’s Department accounted for 12% of the segment’s
revenue.
The loss
by the Company of any one of these customers could 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 2009 and 2008, the
Company expended $4.7 million and $7.1 million of its own funds, respectively,
on such research and development activity. (See also Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.) During fiscal year 2009, many of the Company’s
development resources were applied to certain cost-plus-fee satellite payload
programs. As a result, some of the Company’s development efforts were
customer-funded and the costs appear in cost of revenues resulting in reduced
internal research and development spending. The customer-funded
programs will continue into fiscal year 2010, thus the Company is targeting to
spend between $4.0 million and $5.0 million on internal research and development
projects. The actual amount spent in fiscal year 2010 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
quartz, rubidium, and cesium based timing references and specialized RF
microwave technology. Because of the very high precision of certain
of its products, the Company has few competitors. For lower precision
components there is significant competition from a number of
suppliers.
In recent
years, the Company has successfully outsourced certain component manufacturing
processes to third parties and more recently to its wholly-owned subsidiary,
FEI-Asia in Tianjin, China and to Russian-based Morion, Inc., in which the
Company is a minority shareholder. The Company expects this
outsourcing to enhance its competitive position on cost while maintaining its
high quality standards. The Company believes its ability to obtain
raw materials, manufacture finished products, integrate them into systems and
sub-systems and interface these systems with end-user applications provides a
strong competitive advantage.
Certain
of the Company's competitors are larger, have greater financial resources and
have larger research and development and marketing staffs. The
Company has a strong history of competing successfully in this environment due
to the quality, reliability and outstanding record of performance its products
have achieved.
With
respect to its instruments and systems 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 400 full-time persons worldwide. None
of the U.S. employees are represented by labor unions; 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
|
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
|
Alan
Miller
|
-
|
Treasurer
and Chief Financial Officer
|
Harry
Newman
|
-
|
Secretary
|
Robert
Klomp
|
-
|
Assistant
Secretary
|
|
None
of the officers and directors is
related.
|
Joseph P.
Franklin, age 75, 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 73, has been a Director of the Company and of its predecessor since
1961. Mr. Bloch is the Company’s President and Chief Executive
Officer and has held such positions since inception of the Company, except for
the period from December 1993 through October 1998 when General Franklin held
the CEO position. Previous to forming the Company, Mr. Bloch served
as chief electronics engineer of the Electronics Division of Bulova Watch
Company.
Markus
Hechler, age 63, 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 45, 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.
Leonard
Martire, age 72, 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 60, 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 54, joined the Company as an engineer in 1984 and was elected
Vice President, Commercial Products in March 1999.
Adrian
Lalicata, age 62, 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 60, 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 62, 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.
Robert
Klomp, age 65, Assistant Secretary, has been employed by the Company since 1989
as its Director of Human Resources. Prior to joining the Company Mr.
Klomp served as Director of Personnel at several technology companies including
a division of GEC Marconi Company, Deutsch Relays, Inc. and Lafayette Radio
Electronics. Mr. Klomp was elected Assistant Secretary to the Company
during fiscal year 2009.
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
|
|
Garden
Grove, CA
|
|
27,850
|
|
Lease
|
|
Liege,
Belgium
|
|
34,000
|
|
Own
|
|
Chalon
Sur Saone, France
|
|
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 leased its manufacturing and office space from Reckson under an initial
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. During fiscal year 2009, the Company renewed the lease
with Reckson for the first 5-year renewal period at an annual rental of
$600,000. The lease will end in January 2014 unless the Company
exercises its option to continue the lease for a second 5-year renewal period
with annual rental of $800,000. 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 was recognized into income over the remaining
term of the initial leaseback period which ended in January
2009. (See Note 6 to the accompanying financial
statements.)
The
Company’s subsidiary, Gillam-FEI, owns a manufacturing and office facility in
Liege, Belgium. Gillam-FEI’s French operation leases space in Chalon
Sur Saone, France. These facilities are adequate to meet the present
and future operational requirements of Gillam-FEI.
The
Tianjin, China facility is the location of the Company’s 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 monthly
rent of $6,200 through February 2010. The facility is adequate for
the near-term manufacturing expectations for the Company.
The
Garden Grove, 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 August 2017,
currently requires monthly payments of $25,350 and will increase each year over
the remaining 113 months of the 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 2009.
PART II
Item
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
The
Common Stock of the Company is listed on The
Nasdaq Global Market (“NASDAQ”) under the
ticker symbol “FEIM.” (Prior to August 1, 2006, 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 on the NASDAQ.
FISCAL QUARTER
|
|
HIGH SALE
|
|
|
LOW SALE
|
|
2009–
|
|
|
|
|
|
|
FIRST
QUARTER
|
|
$ |
9.18 |
|
|
$ |
5.23 |
|
SECOND
QUARTER
|
|
|
5.72 |
|
|
|
3.90 |
|
THIRD
QUARTER
|
|
|
4.31 |
|
|
|
2.16 |
|
FOURTH
QUARTER
|
|
|
4.12 |
|
|
|
2.18 |
|
2008
–
|
|
|
|
|
|
|
|
|
FIRST
QUARTER
|
|
$ |
11.66 |
|
|
$ |
9.75 |
|
SECOND
QUARTER
|
|
|
11.49 |
|
|
|
9.61 |
|
THIRD
QUARTER
|
|
|
10.35 |
|
|
|
8.46 |
|
FOURTH
QUARTER
|
|
|
9.23 |
|
|
|
6.50 |
|
As of
July 24, 2009, the approximate number of holders of record of common stock was
470. The closing share price of the Company’s stock on April 30, 2009
was $3.32. The closing share price of the Company’s stock on July 24,
2009 was $3.55.
DIVIDEND
POLICY
In 1997,
the Company initiated a policy of paying a cash dividend to stockholders of
record as of April 30 and October 31 of each year subject to prevailing
financial conditions. The Board of Directors determines dividend
amounts prior to each declaration. For fiscal year 2008, the Company
declared a dividend of $0.10 per share of common stock to shareholders of record
as of October 31, 2007 and payable on December 1, 2007. In March
2008, in the context of extraordinary uncertainties in credit and capital
markets and the importance of preserving capital, the Board determined that no
cash dividend would be paid in June 2008. The Board of Directors did
not declare a dividend during fiscal year 2009. The Board of
Directors indicated it would review dividend policy at subsequent
meetings.
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
2009, the Company repurchased 724,632 shares under the buyback program,
including a block purchase of 615,000 shares from its former largest
institutional shareholder. The average purchase price was $4.29 per
share or an aggregate amount of approximately $3.1 million. During
fiscal year 2008, the Company repurchased 32,312 shares under the buyback
program, paying an average of $9.63 per share or an aggregate amount of
approximately $311,000. With these purchases, the Company has
acquired approximately $4 million of its common stock out of the total
authorization of $5 million.
EQUITY COMPENSATION PLAN
INFORMATION
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
remaining available for
|
|
|
|
Number of securities to
|
|
|
Weighted-average
|
|
|
future issuance under
|
|
|
|
be issued upon exercise
|
|
|
exercise price of
|
|
|
equity compensation plans
|
|
|
|
of outstanding options
|
|
|
outstanding options
|
|
|
(excluding securities
|
|
Plan Category
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
reflected in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
Compensation Plans Approved by Security Holders
|
|
|
883,775 |
|
|
$ |
9.56 |
|
|
|
113,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Plans Not Approved by Security Holders
|
|
|
522,050 |
|
|
$ |
13.26 |
|
|
|
- |
|
TOTAL
|
|
|
1,405,825 |
|
|
$ |
10.93 |
|
|
|
113,292 |
|
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. The factors listed above are not
exhaustive. Other sections of this 10-K include additional factors
that could materially and adversely impact the Company’s business, financial
condition and results of operations. Moreover, the Company operates
in a very competitive and rapidly changing environment. New factors
emerge from time to time and it is not possible for management to predict the
impact of all these factors on the Company’s business, financial condition or
results of operations or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. Given these risks and uncertainties,
investors should not rely on forward-looking statements as a prediction of
actual results. Any or all of the forward-looking statements
contained in this 10-K and any other public statement made by the Company or its
management may turn out to be incorrect. The Company expressly
disclaims any obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
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 through a process of aggregating
actual costs incurred and estimating additional costs to completion based upon
the current available information and status of the contract. 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. (See Significant Matters
below)
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.
For
customer orders in the Company’s Gillam-FEI and FEI-Zyfer segments or smaller
contracts or orders in the FEI-NY segment, 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.
RESULTS OF
OPERATIONS
The table
below sets forth for the fiscal years ended April 30, 2009 and 2008, the
percentage of consolidated net sales represented by certain items in the
Company’s consolidated statements of operations:
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
|
|
|
|
|
FEI-NY
|
|
|
67.9 |
% |
|
|
71.8 |
% |
Gillam-FEI
|
|
|
21.5 |
|
|
|
17.8 |
|
FEI-Zyfer
|
|
|
17.7 |
|
|
|
14.1 |
|
Less
intersegment revenues
|
|
|
(7.1 |
) |
|
|
(3.7 |
) |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost
of Revenues
|
|
|
80.7 |
|
|
|
72.6 |
|
Gross Margin
|
|
|
19.3 |
|
|
|
27.4 |
|
Selling
and Administrative expenses
|
|
|
21.7 |
|
|
|
20.4 |
|
Research
and Development expenses
|
|
|
8.8 |
|
|
|
11.0 |
|
Operating Loss
|
|
|
(11.2 |
) |
|
|
(4.0 |
) |
Other
Income, net
|
|
|
0.3 |
|
|
|
6.3 |
|
Provision
for Income Taxes
|
|
|
10.0 |
|
|
|
0.9 |
|
Net (Loss)
Income
|
|
|
(20.9 |
)% |
|
|
1.4 |
% |
Significant
Matters
Cost of
sales and operating results for fiscal year 2009 were impacted by an increase in
the allowance for inventory obsolescence by $3.4 million as a result of recent
deterioration in the Company’s wireless telecommunications
market. The present outlook for future revenues in the wireless
telecommunications infrastructure market is unclear, which also creates doubt
that the Company will be able to realize the full value of its inventory of
parts and subassemblies for this market.
Operating
results for the first half of fiscal year 2009 and fiscal year 2008 were
impacted by activities on several major satellite payload
programs. Higher than anticipated engineering and manufacturing costs
incurred as a result of testing failures encountered in the fourth quarter of
fiscal year 2008 resulted in lower gross margin on certain
contracts. Such costs continued to be incurred in early fiscal year
2009 resulting in operating losses.
The
combination of higher manufacturing costs and inventory reserves yielded a low
gross margin rate of 19% and an operating loss of $5.9 million. Since
the fiscal year 2009 operating loss follows two previous fiscal years of
operating losses, in accordance with authoritative accounting guidance, the
Company recorded a $7.6 million valuation allowance against its deferred tax
assets. This non-cash valuation allowance is added to the Company’s
provision for income taxes and increased the net loss by the same
amount.
During
the first quarter of fiscal year 2008, the Company completed the sale of 28.6%
of the outstanding shares of Morion, reducing its interest in Morion from 36.6%
to 8% of Morion’s outstanding shares. The Company received
approximately $5.6 million from the sale and recognized a pre-tax gain of
approximately $3.0 million.
Revenues
|
|
Fiscal years ended April 30,
|
|
|
|
(in millions)
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
FEI-NY
|
|
$ |
35.8 |
|
|
$ |
46.3 |
|
|
$ |
(10.5 |
) |
|
|
(23 |
)% |
Gillam-FEI
|
|
|
11.3 |
|
|
|
11.4 |
|
|
|
(0.1 |
) |
|
|
(1 |
)% |
FEI-Zyfer
|
|
|
9.4 |
|
|
|
9.1 |
|
|
|
0.3 |
|
|
|
3 |
% |
Intersegment
sales
|
|
|
(3.8 |
) |
|
|
(2.4 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
$ |
52.7 |
|
|
$ |
64.4 |
|
|
$ |
(11.7 |
) |
|
|
(18 |
)% |
Revenues
in fiscal year 2009 were 18% less than fiscal year 2008. Revenues in
the Company’s two major business areas, telecommunications infrastructure and
satellite payloads, declined year over year by 22% and 26%,
respectively. These revenue declines affected results primarily for
the FEI-NY segment. As indicated previously, future revenues for
wireless telecommunications products are uncertain as OEMs slow installation of
new network equipment or migrate to different technologies supporting shorter
independent timing capabilities or reduced quality of service which do not
require the precision timing devices that the Company
supplies. Satellite payload revenue was particularly impacted by a
decline in commercial satellite projects reflecting current economic conditions
which were partially offset by a rise in U.S. Government satellite
revenues. Revenues for the FEI-Zyfer segment increased by 3% over the
prior year due to sales of the Company’s new wireline telecommunication
synchronization equipment. Revenues from non-satellite U.S.
Government customers, which are recorded in both the FEI-NY and FEI-Zyfer
segments, were 3% lower in fiscal year 2009 compared to fiscal year
2008.
For the
year ended April 30, 2008, revenue increased in the FEI-NY segment by 15% and by
21% in the FEI-Zyfer segment as a result of increased business levels in two
primary market areas: satellite payloads (both commercial and U.S. Government
programs) and other U.S. Government, non-space programs. Revenues
from these sources each increased by over 40% from year ago
levels. Satellite payload programs are managed by the FEI-NY segment
and both FEI-NY and FEI-Zyfer provide products to non-space U.S. Government
programs. Telecommunication network revenues, generated by all three
segments, was lower by less than 10% from the fiscal year 2007 levels as
customer demand softened. Gillam-FEI revenues also benefited from the
increased value of the Euro compared to the U.S. dollar. In
Euro-denominated terms and excluding intersegment sales, Gillam-FEI fiscal year
2008 revenues declined by 4% from the prior year.
During
fiscal year 2010, based on current backlog and prospects for future bookings,
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 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. U.S. Government spending during fiscal year 2010 is expected
to benefit the Company’s FEI-NY and FEI-Zyfer segments. During fiscal
year 2010, the Company expects to see increased bookings and revenues for its
new, state-of-the-art wireline synchronization systems which would benefit both
the FEI-Zyfer and Gillam-FEI segments.
Gross Margin
Rates
|
|
Fiscal years ended April 30,
|
|
|
|
(in thousands)
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
$ |
10,180 |
|
|
$ |
17,662 |
|
|
$ |
(7,482 |
) |
|
|
(42 |
)% |
GM
Rate
|
|
|
19.3 |
% |
|
|
27.4 |
% |
|
|
|
|
|
|
|
|
For the
year ended April 30, 2009, gross margin declined both in total and as a
percentage of revenues as compared to the prior year. The 18%
decrease in revenues also reduced gross margin but the gross margin rate was
mostly impacted by higher costs. During fiscal year 2009, the Company
continued to incur higher levels of engineering and manufacturing costs on
certain satellite payload programs that it began to experience in late fiscal
year 2008. Also as noted above, the Company increased by $3.4 million
its reserves against certain of its inventory for the wireless telecommunication
market, which reduced the gross margin rate for the year by 6.4%. The
challenging satellite programs were completed in the first half of the year and
gross margin rates, exclusive of inventory reserves, began to improve in the
last half of the year. With the current mix of programs and orders in
its backlog, the Company expects to realize gross margin rates in excess of 30%
during fiscal year 2010.
For the
year ended April 30, 2008, total gross margin increased as a result of the 15%
increase in revenues but declined as a percentage of revenues. The
rate decrease is primarily the result of higher than anticipated engineering and
manufacturing costs on certain satellite payload programs. Throughout
fiscal year 2008, the Company’s satellite-payload business continued to
reconfigure its manufacturing processes to provide increased production capacity
for the higher demand for space-related assemblies. Late in the year,
the Company also experienced higher than expected costs on two late-stage
programs in final assembly and test of flight hardware. These
expenses not only increased cost of sales but also delayed the recognition of
revenue on the contracts, which are accounted for on the percentage of
completion method, further reducing gross margins. The two late-stage
programs were completed in the first half of fiscal year 2009. The
gross margin rates in the telecommunications and non-space U.S. Government
business areas met the Company’s targets for these areas, which range from 35%
to 45%.
Selling and Administrative
expenses
Fiscal years ended April 30,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
$ |
11,431 |
|
|
$ |
13,139 |
|
|
$ |
(1,708 |
) |
|
|
(13 |
)% |
For the
year ended April 30, 2009, selling and administrative costs declined due to
decreases in personnel costs including reduced incentive compensation, lower
deferred compensation expense and decreased employee benefits resulting from a
reduction in personnel. For the years ended April 30, 2009 and 2008,
selling and administrative expenses include stock compensation expense of
$238,400 and $236,400, respectively.
Fiscal
year 2008 selling and administrative costs increased over fiscal year 2007
principally from higher medical expenses, normal salary increases, higher
deferred compensation expense, increased marketing expenses for new products and
the cost of moving the Company’s California facility to larger leased space and
the related increased rent expense. Also, in euro-denominated terms,
selling and administrative expenses at Gillam-FEI were comparable to the prior
year but when denominated in U.S. dollars, increased by 10% in fiscal year 2008
due to the declining value of the dollar.
As a
percentage of sales, selling and administrative expenses were 21.7% and 20.4% in
fiscal years 2009 and 2008, respectively. The Company targets selling
and administrative expenses not to exceed 20% of consolidated
sales. For fiscal year 2010, the Company expects to incur selling and
administrative expenses at approximately the same rate as fiscal year
2009.
Research and Development
expenses
Fiscal years ended April 30,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
$ |
4,666 |
|
|
$ |
7,101 |
|
|
$ |
(2,435 |
) |
|
|
(34 |
)% |
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 fiscal year ended
April 30, 2009, R&D spending decreased as a result of many of the Company’s
development resources being applied to certain cost-plus-fee satellite payload
programs with an aggregate contract value exceeding $20 million. As a
consequence, some of the Company’s development expenditures will be
customer-funded and the costs will appear in cost of revenues, thus reducing the
level of internal research and development spending. In the prior
fiscal year ended April 30, 2008, the Company incurred exceptional levels of
engineering spending and development work on its satellite payload products, an
effort which began in fiscal year 2007. R&D spending was 8.8% and
11% of consolidated revenues in fiscal years 2009 and 2008, respectively,
approximately in line with the Company’s target of 10% of revenues for such
efforts.
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 2010, the Company will continue to make investments in improved satellite
payload products, develop and improve miniaturized rubidium atomic clocks,
develop new GPS-based synchronization products and further enhance the
capabilities of its line of “low-g” oscillators. The Company will
also be engaged in development efforts that are funded by its customers, the
results of which will enhance its own product offerings. Thus, the
Company’s target for fiscal year 2010 is to spend less than 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
Fiscal years ended April 30,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
$ |
(5,917
|
) |
|
$ |
(2,578 |
) |
|
$ |
(3,339 |
) |
|
|
(130 |
)
% |
As
discussed above, the operating loss incurred in fiscal year 2009 includes the
$3.4 million reserve for wireless telecommunications
inventory. Without this charge, the operating loss would have been
approximately $2.5 million and comparable to the operating loss of fiscal year
2008 but on lower revenues. Both fiscal years also experienced lower
gross margins due to higher than anticipated engineering and manufacturing costs
incurred in connection with the Company’s satellite payload products and
programs.
The
Company expects to realize substantially improved operating results in fiscal
year 2010 as the
higher cost satellite programs have been completed and current larger satellite
programs are performed under cost-plus contracts for which the Company receives
reimbursement of its direct and indirect costs plus a
fee. Based on recent and expected satellite and wireline
telecommunication bookings, the Company expects to report improved gross margins
while maintaining other operating expenses within their targeted
amounts.
Other Income
(Expense)
|
|
Fiscal
years ended April 30,
|
|
|
|
(in
thousands)
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Investment
income
|
|
$ |
613 |
|
|
$ |
4,106 |
|
|
$ |
(3,493 |
) |
|
|
(85 |
)% |
Equity
loss
|
|
|
(281 |
) |
|
|
(104 |
) |
|
|
(177 |
) |
|
|
(170 |
)% |
Interest
expense
|
|
|
(288 |
) |
|
|
(522 |
) |
|
|
234 |
|
|
|
45 |
% |
Other
income, net
|
|
|
146 |
|
|
|
545 |
|
|
|
(399 |
) |
|
|
(73 |
)% |
|
|
$ |
190 |
|
|
$ |
4,025 |
|
|
$ |
(3,835 |
) |
|
|
(95 |
)% |
During
the fiscal year ended April 30, 2008, the Company reduced its investment in
Morion, Inc. from 36.6% to 8% by selling shares to a Russian government
majority-owned bank. The Company received proceeds of approximately
$5.6 million and realized a book gain of approximately $3.0
million. Such gain was included in investment income in fiscal year
2008. In addition, investment income in fiscal year 2008 included net
gains on sales of other investments in the amount of approximately
$400,000. Comparable gains were not recorded during fiscal year
2009.
Investment
income also includes interest and dividend income on marketable securities and
such amounts were similar in both fiscal years. During fiscal year
2010, the Company will realize investment income primarily from interest on its
bond portfolio and anticipates that the amount earned will be approximately the
same as that earned in fiscal year 2009.
In fiscal
years 2009 and 2008, the Company recorded equity losses from its 25% interest in
Elcom.
In fiscal
years 2009 and 2008, interest expense was incurred on borrowings under
short-term credit obligations, on certain deferred compensation obligations and
a capital lease for equipment which was entered into in last fiscal year
2008. For the year ended April 30, 2009, interest expense decreased
from the prior year primarily due to the reduction of its bank line of credit
resulting from improved operating cash flow. The Company anticipates
that interest expense in fiscal year 2010 will decrease as a result of lower
interest rates, lower levels of debt and improved cash flow from operating
activities.
During
fiscal years 2009 and 2008, the Company recognized $235,000 and $353,000,
respectively, 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 income, net.” The deferred gain was
amortized over the remaining life of the original eleven-year
lease. Also, in fiscal years 2009 and 2008, other income included
realized gains of approximately $217,000 and $290,000, respectively, from the
excess of proceeds over the cash values of life insurance policies on the lives
of three former employees. Other income is partially offset by
certain nonrecurring expenses. The Company anticipates that in future
years other items in this category will not be significant to pretax
earnings.
Income
Taxes
The
Company recorded an operating loss in the fiscal year 2009 which, along with the
current challenging economic environment, has reduced the likelihood that the
Company will be able to realize the benefits of its deferred tax
assets. Based on the restrictive accounting measurement criterion,
the Company recorded a valuation allowance in the amount of $7.6 million during
the year ended April 30, 2009. If in future periods the Company
records pre-tax profits and is able to assess the realizability of its deferred
tax assets as “more likely than not”, the need for all or some of such valuation
allowance could be overcome based on a careful consideration of all available
evidence. Such valuation allowance reductions would reduce future
income tax provisions.
The
Company is subject to taxation in several countries. The statutory
federal rates are 34% in the United States, 33% in Europe and 25% in
China. In fiscal year 2009, the valuation allowance created a net tax
provision rather than a tax benefit from the year’s tax loss. The
fiscal year 2008 tax gain on the partial sale of the Morion investment is
greater than the gain recorded for financial reporting purposes, resulting in a
higher than expected effective tax rate of 39%. The effective rate is
also impacted by the income or loss of certain of the Company’s European and
Asian subsidiaries which are currently not taxed. The Company may
commence tax payments in China during calendar 2010 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 13 to the Consolidated Financial
Statements.)
The
Company’s European subsidiaries have available net operating loss carryforwards
of approximately $1.0 million to offset future taxable income. These
loss carryforwards have no expiration date. The fiscal year 2009
federal income tax operating loss carryforward of approximately $3.0 million for
the U.S. subsidiaries of the Company will be used to offset taxable income in
future years. These loss carryforwards and related tax credits begin
to expire in 2028. For state income tax purposes, the tax operating
loss carryforward is $7.3 million.
LIQUIDITY AND CAPITAL
RESOURCES
The
Company’s balance sheet continues to reflect a highly liquid position with
working capital of $48.0 million at April 30, 2009. Included in
working capital at April 30, 2009 is $14.9 million consisting of cash, cash
equivalents and short-term investments offset by $1.1 million in borrowings
under its bank line of credit. The Company’s current ratio at April
30, 2009 is 7 to 1 compared to 5.9 to 1 at the end of the prior fiscal
year.
Net cash
provided by operating activities for the year ended April 30, 2009, was $7.2
million compared to $1.8 million used in operations in fiscal year
2008. The primary source for the increased positive cash flow was the
billing and collection of unbilled receivables on certain long-term contracts
during fiscal year 2009. Such collections were partially offset by
the operating loss generated by higher operating expenses. Unbilled
receivables arise when the Company recognizes revenues at different intervals
than the related milestone billings under long-term contracts, primarily related
to satellite payload programs. The timing for such billings is
determined by the contract terms which the Company must meet in order to invoice
its customers. Under long-term contract accounting the Company
recognizes revenues on the percentage of completion basis as measured by the
ratio of actual costs to estimated program costs. Such revenue
recognition often results in recording receivables for costs and estimated
earnings in excess of billings or “unbilled receivables.” (See Note 3
to the accompanying financial statements.) In fiscal year 2010, the
Company anticipates that it will maintain positive cash flow from operations by
controlling its costs and realizing operating profits.
Net cash
used in investing activities was $6.4 million of which approximately $5.6 was
derived from the net cumulative purchase of marketable securities during the
year. During the year ended April 30, 2009, the Company acquired
capital equipment of $627,000 and provided a $220,000 working capital loan to
its equity investee, Elcom Technologies (See Note 11 to the Consolidated
Financial Statements). Net cash provided by investing activities for
the fiscal year ended April 30, 2008, was approximately $13.3 million which
included receipt of approximately $5.6 million upon the partial sale of the
Company’s investment in Morion and approximately $9.8 million from the sale or
redemption of certain marketable securities, net of purchases of other
marketable securities. In fiscal year 2008, the Company acquired
capital equipment of $3.3 million by paying cash of $2.1 million and entering
into a long-term capital lease for $1.2 million (non-cash
transaction). 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. The Company intends to spend approximately $1 million on
capital equipment during fiscal year 2010. Internally generated cash
will be adequate to acquire this capital equipment.
The
Company has a $7.4 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 its investments in marketable
securities which earn, on average, approximately a 5% annual
return. Rather than liquidate some of these investments to meet
short-term working capital requirements, the Company borrowed against the line
of credit at variable interest rates between 1.58% and 6.99%. The
highest level of borrowing was $9 million in early fiscal year 2008 (when the
available credit was higher) which was decreased to $4.5 million by the end of
that fiscal year. During fiscal year 2009, the peak borrowing was
$6.0 million but was subsequently reduced to $1.1 million by April 30,
2009. In addition, the Company’s European subsidiaries have available
approximately $2.5 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). The European
subsidiaries had no borrowings under these lines of credit during fiscal years
2009 and 2008.
During
the year ended April 30, 2009, cash used in financing activities was $7.4
million compared to cash used in financing activities of $2.0 million in fiscal
year 2008. The principal use of cash in fiscal year 2009, other than
transactions involving its line of credit as described above, was the purchase
of 725,000 shares of the Company’s stock for treasury for $3.1 million at an
average price of $4.29 per share. During fiscal year 2008 the Company
acquired approximately 32,000 shares of its common stock for the treasury,
paying approximately $311,000 or an average of about $9.63 per
share. In addition, during fiscal year 2008, the Company paid a
semi-annual dividend which aggregated $1.7 million. In the year ended
April 30, 2008 the Company received $158,000 upon the exercise of stock
options. 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. As
of the end of fiscal year 2009, the Company has repurchased approximately $4
million of its common stock out of the $5 million authorization.
The
Company will continue to expend resources to develop and improve products for
space applications, guidance and targeting systems, and communication systems
which management believes will result in future growth and continued
profitability. During fiscal year 2010, 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 less than 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.
As of
April 30, 2009, the Company's consolidated backlog amounted to approximately $36
million (see Item 1). Approximately 75% of this backlog is expected
to be filled during the Company’s fiscal year ending April 30,
2010. Included in the backlog at April 30, 2009 is approximately $11
million under cost-plus-fee contracts which the Company believes represent firm
commitments from its customers for which the Company has not received full
funding to date.
*******
The
Company’s liquidity is adequate to meet its operating and investment needs
through at least April 30, 2010.
RECENT ACCOUNTING
PRONOUNCEMENTS
In June
2009, the FASB approved the “FASB Accounting Standards Codification”
(“Codification”) as the single source of authoritative nongovernmental U.S. GAAP
to be launched on July 1, 2009. The Codification does not change
current U.S. GAAP, but is intended to simplify user access to all authoritative
U.S. GAAP by providing all the authoritative literature related to a particular
topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the
Codification will be considered nonauthoritative. The Codification is
effective for interim and annual periods ending after September 15,
2009. The Codification is effective for the Company during the
interim period ending October 31, 2009 and will not have an impact on the
financial condition or results of operations. The Company is
currently evaluating the impact to its financial reporting process of providing
Codification references in its public filings.
In June
2009, the FASB issued FAS No. 167, “Amendments to FASB Interpretation No. 46(R)”
(“FAS 167”), which modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. FAS 167 clarifies that the
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. FAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. FAS 167 also requires additional disclosures about a
company’s involvement in variable interest entities and any significant changes
in risk exposure due to that involvement. FAS 167 is effective for
fiscal years beginning after November 15, 2009 and is effective for the Company
on May 1, 2010. The Company is currently evaluating the impact that
the adoption of FAS 167 will have on the financial condition, results of
operations, and disclosures.
In June
2009, the FASB issued FAS No. 166, “Accounting for Transfers of Financial Assets
— an amendment of FASB Statement No. 140” (“FAS 166”), which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. FAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. FAS 166 is
effective for fiscal years beginning after November 15, 2009. FAS 166
is effective for the Company on May 1, 2010. The Company is currently
evaluating the impact that the adoption of FAS 166 will have on the financial
condition, results of operations, and disclosures.
In May
2009, the FASB issued FAS No. 165, “Subsequent Events” (“FAS 165”), which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. FAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was
selected. FAS 165 is effective for interim and annual periods ending
after June 15, 2009. FAS 165 is effective for the Company during the
quarter ending July 31, 2009. The adoption of FAS 165 is not expected to have a
material impact on the financial condition, results of operations, and
disclosures of the Company.
In April
2009, the FASB issued FASB Staff Position FAS 157-4, Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed, (“FSP
FAS 157-4”) FSP FAS 157-4 provides guidelines for making
fair value measurements more consistent with the principles presented in
FAS 157. FSP FAS 157-4 provides additional authoritative
guidance in determining whether a market is active or inactive, and whether a
transaction is distressed, is applicable to all assets and liabilities (i.e.
financial and nonfinancial) and will require enhanced
disclosures. This FASB Staff Position is effective for periods ending
after June 15, 2009. The Company is evaluating the impact that this
standard will have on its financial position, results of operation, or cash
flows.
In April
2009, the FASB issued FASB Staff Position FAS 115-2, and FAS 124-2,
Recognition and Presentation
of Other-Than-Temporary Impairments, (“FSP FAS 115-2 and
FAS 124-2”). FSP FAS 115-2 and FAS 124-2 provide additional
guidance to provide greater clarity about the credit and noncredit component of
an other-than-temporary impairment event and to more effectively communicate
when an other-than-temporary impairment event has occurred. This FSP
applies to debt securities. This FASB Staff Position is effective for
periods ending after June 15, 2009. The Company is evaluating
the impact that this standard will have on its financial position, results of
operation, or cash flows.
In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, (“FSP FAS 107-1 and APB
28-1”). FSP FAS 107-1 and APB 28-1, amends FASB Statement
No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about
fair value of financial instruments in interim as well as in annual financial
statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial
statements. This FASB Staff Position is effective for periods ending
after June 15, 2009. The Company is evaluating the impact that
this standard will have on its financial position, results of operation, or cash
flows.
In April
2009, the FASB issued FASB Staff Position FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies, (“FSP FAS 141(R)-1”). FSP
FAS 141(R)-1, amends FASB Statement No. 141 (R), Business Combinations, to
state a contingency acquired in a business combination should be measured at
fair value if the acquisition-date value of that asset or liability can be
determined during the measurement period. This FASB Staff Position is
effective as of May 1, 2009 for the Company.
During
calendar year 2008, the FASB issued FASB Staff Positions (“FSP FAS”) 157-1,
157-2, and 157-3. FSP FAS 157-1 amends FAS 157 to exclude FAS No. 13,
“Accounting for Leases”, and its related interpretive accounting pronouncements
that address leasing transactions, FSP FAS 157-2 delays the effective date of
the application of FAS 157 to fiscal years beginning after November 15, 2008 for
all nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis, and
FSP FAS 157-3 clarifies how the fair value of a financial asset is determined
when the market for that financial asset is inactive.
In
May 2008, the FASB issued Statement of Financial Accounting Standards No.
162 (“FAS 162”), “The Hierarchy of Generally Accepted Accounting
Principles.” FAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with U.S. GAAP. FAS 162 will become effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.” This statement is not
expected to change the Company’s current accounting practice.
In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing a renewal or extension
assumptions used for purposes of determining the useful life of a recognized
intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets (“FAS
142”). FSP FAS 142-3 is intended to improve the consistency
between the useful life of a recognized intangible asset under FAS 142 and
the period of expected cash flows used to measure the fair value of the asset
under FAS 141 (R) and other U.S. generally accepted accounting
principles. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. Earlier application is not
permitted. The Company will be assessing the potential effect of FSP
FAS 142-3 if applicable, if it enters into a business
combination.
In March
2008, the FASB issued Statement No.161, Disclosures about Derivative Instruments
and Hedging Activities - An Amendment of FASB Statement No. 133 (“FAS
161”). FAS 161 requires enhanced qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. FAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15,
2008. The Company is currently evaluating the impact of FAS 161 on
its consolidated financial statements although it does not anticipate that the
statement will have a material impact since the Company has not historically
engaged in hedging activities or acquired derivative instruments.
In
December 2007, the FASB issued Statements No. 141(R), “Business Combinations”,
and No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB 51.” Effective for fiscal years beginning after
December 15, 2008, these statements revise and converge internationally the
accounting for business combinations and the reporting of noncontrolling
interests in consolidated financial statements. The adoption of these
statements will change the Company’s accounting treatment for business
combinations on a prospective basis but will have no impact on the Company’s
current financial statements.
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 adoption of FAS 159 in fiscal
year 2009 had no impact on the Company’s financial statements since the Company
elected not to measure any financial assets or liabilities at fair value other
than those for which previous pronouncements required it to do so.
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 adopted FAS 157 in fiscal year 2009. Such adoption did not
have a material impact on the Company’s financial statements.
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 internal events that are likely to have a material adverse
effect on results from operations.
INFLATION
During
fiscal 2009, as in fiscal year 2008, the impact of inflation on the Company's
business has not been materially significant.
Item 8. Financial
Statements and Supplementary Data
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
Frequency
Electronics, Inc.
We have
audited the accompanying consolidated balance sheet of Frequency Electronics,
Inc. and subsidiaries (the "Company") as of April 30, 2009, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis of designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Frequency Electronics, Inc.
and subsidiaries as of April 30, 2009, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United
States.
/s/ Eisner LLP
|
|
|
EISNER
LLP
|
|
New
York, New York
|
July
28, 2009
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
Frequency
Electronics, Inc. and Subsidiaries
Mitchel
Field, New York
We have
audited the accompanying consolidated balance sheet of Frequency Electronics,
Inc. and Subsidiaries (the "Company") as of April 30, 2008 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Frequency
Electronics, Inc. and Subsidiaries at April 30, 2008 and the consolidated
results of its operations and its consolidated cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Holtz Rubenstein Reminick
LLP
|
|
|
Holtz
Rubenstein Reminick LLP
|
July
25, 2008
|
Melville,
New York
|
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Consolidated
Balance Sheets
April 30,
2009 and 2008
___________
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
ASSETS:
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
4,911 |
|
|
$ |
11,029 |
|
Marketable
securities
|
|
|
9,998 |
|
|
|
4,414 |
|
Accounts
receivable, net of allowance for doubtful accounts of $285 in 2009 and
$185 in 2008
|
|
|
10,775 |
|
|
|
10,271 |
|
Costs
and estimated earnings in excess of billings
|
|
|
2,193 |
|
|
|
9,556 |
|
Inventories,
net
|
|
|
26,051 |
|
|
|
30,218 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
3,674 |
|
Income
taxes refundable
|
|
|
886 |
|
|
|
1,071 |
|
Prepaid
expenses and other
|
|
|
1,257 |
|
|
|
1,371 |
|
Total
current assets
|
|
|
56,071 |
|
|
|
71,604 |
|
Property,
plant and equipment, at cost, less accumulated depreciation and
amortization
|
|
|
7,961 |
|
|
|
9,531 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
2,370 |
|
Goodwill
and other intangible assets
|
|
|
218 |
|
|
|
405 |
|
Cash
surrender value of life insurance and cash held in trust
|
|
|
8,423 |
|
|
|
7,671 |
|
Investment
in and loans receivable from affiliates
|
|
|
4,430 |
|
|
|
4,522 |
|
Other
assets
|
|
|
817 |
|
|
|
817 |
|
Total
assets
|
|
$ |
77,920 |
|
|
$ |
96,920 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
credit obligations
|
|
$ |
1,327 |
|
|
$ |
5,168 |
|
Accounts
payable - trade
|
|
|
2,305 |
|
|
|
2,215 |
|
Accrued
liabilities
|
|
|
4,408 |
|
|
|
4,694 |
|
Total
current liabilities
|
|
|
8,040 |
|
|
|
12,077 |
|
Lease
obligation- noncurrent
|
|
|
684 |
|
|
|
911 |
|
Deferred
compensation
|
|
|
9,546 |
|
|
|
9,467 |
|
Deferred
gain and other liabilities
|
|
|
484 |
|
|
|
855 |
|
Total
liabilities
|
|
|
18,754 |
|
|
|
23,310 |
|
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
|
|
|
48,997 |
|
|
|
48,213 |
|
Retained
earnings
|
|
|
2,522 |
|
|
|
13,558 |
|
|
|
|
60,683
|
|
|
|
70,935 |
|
Common
stock reacquired and held in treasury - at cost (1,021,159 shares in 2009
and 427,366 shares in 2008)
|
|
|
(4,972 |
) |
|
|
(2,175 |
) |
Accumulated
other comprehensive income
|
|
|
3,455 |
|
|
|
4,850 |
|
Total
stockholders' equity
|
|
|
59,166 |
|
|
|
73,610 |
|
Total
liabilities and stockholders' equity
|
|
$ |
77,920 |
|
|
$ |
96,920 |
|
The
accompanying notes are an integral part of these financial
statements.
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Consolidated
Statements of Operations
Years
ended April 30, 2009 and 2008
___________
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share data)
|
|
Revenues
|
|
$ |
52,740 |
|
|
$ |
64,397 |
|
Cost
of revenues
|
|
|
42,560 |
|
|
|
46,735 |
|
Gross
margin
|
|
|
10,180 |
|
|
|
17,662 |
|
Selling
and administrative expenses
|
|
|
11,431 |
|
|
|
13,139 |
|
Research
and development expenses
|
|
|
4,666 |
|
|
|
7,101 |
|
Operating
loss
|
|
|
(5,917 |
) |
|
|
(2,578 |
) |
Other
income (expense):
|
|
|
|
|
|
|
|
|
Investment
income
|
|
|
613 |
|
|
|
4,106 |
|
Equity
loss
|
|
|
(281 |
) |
|
|
(104 |
) |
Interest
expense
|
|
|
(288 |
) |
|
|
(522 |
) |
Other
income, net
|
|
|
146 |
|
|
|
545 |
|
(Loss)
Income before provision for income taxes
|
|
|
(5,727 |
) |
|
|
1,447 |
|
Provision
for income taxes
|
|
|
5,309 |
|
|
|
560 |
|
Net
(loss) income
|
|
$ |
(11,036 |
) |
|
$ |
887 |
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share:`
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(1.33 |
) |
|
$ |
0.10 |
|
Diluted
|
|
$ |
(1.33 |
) |
|
$ |
0.10 |
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,315,571 |
|
|
|
8,710,260 |
|
Diluted
|
|
|
8,315,571 |
|
|
|
8,778,059 |
|
The accompanying notes are an integral
part of these financial statements.
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended April 30, 2009 and 2008
___________
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(11,036 |
) |
|
$ |
887 |
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Deferred
income tax (benefit)
|
|
|
6,077 |
|
|
|
100 |
|
Depreciation
and amortization
|
|
|
2,168 |
|
|
|
1,969 |
|
Deferred
lease obligation
|
|
|
111 |
|
|
|
287 |
|
Provision
for losses on accounts receivable and inventories
|
|
|
4,008 |
|
|
|
1,409 |
|
Gain
on REIT conversion
|
|
|
(235 |
) |
|
|
(353 |
) |
(Gain)
loss on marketable securities and other assets, net
|
|
|
(222 |
) |
|
|
(3,555 |
) |
Equity
loss
|
|
|
281 |
|
|
|
104 |
|
Stock
compensation expense
|
|
|
566 |
|
|
|
560 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
5,721 |
|
|
|
(2,703 |
) |
Inventories
|
|
|
(1,326 |
) |
|
|
709 |
|
Prepaid
expenses and other
|
|
|
102 |
|
|
|
146 |
|
Other
assets
|
|
|
(528 |
) |
|
|
(560 |
) |
Accounts
payable - trade
|
|
|
325 |
|
|
|
(2,388 |
) |
Accrued
liabilities
|
|
|
643 |
|
|
|
256 |
|
Liability
for employee benefit plans
|
|
|
965 |
|
|
|
1,713 |
|
Income
taxes refundable
|
|
|
185 |
|
|
|
(477 |
) |
Other
liabilities
|
|
|
(583 |
) |
|
|
50 |
|
Net
cash provided by (used in) operating activities
|
|
|
7,222 |
|
|
|
(1,846 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of Morion investment
|
|
|
- |
|
|
|
5,643 |
|
Loan
to affiliate
|
|
|
(220 |
) |
|
|
- |
|
Purchase
of marketable securities
|
|
|
(6,600 |
) |
|
|
(3,140 |
) |
Proceeds
from sale or redemption of marketable securities
|
|
|
1,036 |
|
|
|
12,923 |
|
Capital
expenditures
|
|
|
(627 |
) |
|
|
(2,106 |
) |
Net
cash (used in) provided by investing activities
|
|
|
(6,411 |
) |
|
|
13,320 |
|
Continued
FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended April 30, 2009 and 2008
(Continued)
___________
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Proceeds
from short-term credit obligations
|
|
|
2,500 |
|
|
|
9,000 |
|
Payment
of short-term credit and lease obligations
|
|
|
(6,788 |
) |
|
|
(9,151 |
) |
Payment
of cash dividend
|
|
|
- |
|
|
|
(1,739 |
) |
Repurchase
of stock for treasury
|
|
|
(3,107 |
) |
|
|
(311 |
) |
Exercise
of stock options
|
|
|
- |
|
|
|
158 |
|
Net
cash used in financing activities
|
|
|
(7,395 |
) |
|
|
(2,043 |
) |
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents before effect of exchange
rate changes
|
|
|
(6,584 |
) |
|
|
9,431 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
466 |
|
|
|
262 |
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(6,118 |
) |
|
|
9,693 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
11,029 |
|
|
|
1,336 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
4,911 |
|
|
$ |
11,029 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
200 |
|
|
$ |
476 |
|
Income
taxes
|
|
$ |
30 |
|
|
$ |
940 |
|
|
|
|
|
|
|
|
|
|
Other
activities which affect assets or liabilities but did not result in cash
flow during the fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
equipment acquired under capital lease
|
|
|
- |
|
|
$ |
1,193 |
|
The
accompanying notes are an integral part of these financial
statements.
FREQUENCY
ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders' Equity
Years
ended April 30, 2009 and 2008
(In
thousands, except share data)
|
|
|
|
|
Additional
|
|
|
|
|
|
Treasury
stock
|
|
|
Accumulated
other
|
|
|
|
|
|
|
Common
Stock
|
|
|
paid
in
|
|
|
Retained
|
|
|
(at
cost)
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
income
(loss)
|
|
|
Total
|
|
Balance
at April 30, 2007
|
|
|
9,163,940 |
|
|
$ |
9,164 |
|
|
$ |
47,138 |
|
|
$ |
13,541 |
|
|
|
474,693 |
|
|
$ |
(2,080 |
) |
|
$ |
3,121 |
|
|
$ |
70,884 |
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
(18,312 |
) |
|
|
49 |
|
|
|
|
|
|
|
158 |
|
Contribution
of stock to 401(k) plan
|
|
|
|
|
|
|
|
|
|
|
406 |
|
|
|
|
|
|
|
(61,327 |
) |
|
|
167 |
|
|
|
|
|
|
|
573 |
|
Cash
dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(870 |
) |
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
560 |
|
Purchase
of stock for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,312 |
|
|
|
(311 |
) |
|
|
|
|
|
|
(311 |
) |
Decrease
in market value of marketable securities, net of tax effect of
$174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(261 |
) |
|
|
(261 |
) |
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,990 |
|
|
|
1,990 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
887 |
|
Comprehensive
income- 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,616 |
|
Balance
at April 30, 2008
|
|
|
9,163,940 |
|
|
|
9,164 |
|
|
|
48,213 |
|
|
|
13,558 |
|
|
|
427,366 |
|
|
|
(2,175 |
) |
|
|
4,850 |
|
|
|
73,610 |
|
Contribution
of stock to 401(k) plan
|
|
|
|
|
|
|
|
|
|
|
218 |
|
|
|
|
|
|
|
(130,839 |
) |
|
|
310 |
|
|
|
|
|
|
|
528 |
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566 |
|
Purchase
of stock for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
724,632 |
|
|
|
(3,107 |
) |
|
|
|
|
|
|
(3,107 |
) |
Increase
in market value of marketable securities, net of tax effect of
$3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,398 |
) |
|
|
(1,398 |
) |
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,036 |
) |
Comprehensive
loss- 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,431 |
) |
Balance
at April 30, 2009
|
|
|
9,163,940 |
|
|
$ |
9,164 |
|
|
$ |
48,997 |
|
|
$ |
2,522 |
|
|
|
1,021,159 |
|
|
$ |
(4,972 |
) |
|
$ |
3,455 |
|
|
$ |
59,166 |
|
The
accompanying notes are an integral part of these financial
statements.
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 15 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, 2009 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.
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 and equipment acquired
under capital leases are amortized on the straight-line method over the shorter
of the term of the lease or the useful life of the related asset.
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
6 years.
Goodwill:
The
Company records goodwill as the excess of purchase price over the fair value of
identifiable net assets acquired. Goodwill is tested for impairment
on at least an annual basis at year end. 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. Costs and estimated
earnings in excess of billings on uncompleted contracts are included in current
assets.
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.
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.
The
Company analyzes its tax positions under FIN 48 which prescribes recognition
thresholds that must be met before a tax benefit is recognized in the financial
statements and provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. Under FIN 48, an entity may only recognize or continue to
recognize tax positions that meet a "more likely than not"
threshold.
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 short-term credit obligations 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. The
Company also has minority interests in two privately-held companies, Morion,
Inc. (“Morion”) and Elcom Technologies, Inc. (“Elcom”) The Company is
unable to reasonably estimate a fair value for these
investments. Accordingly, the Morion investment is carried at cost
and the Elcom investment is accounted for on the equity method, adjusting the
original cost for the Company’s share of Elcom’s net income or
loss.
Foreign
Operations and Foreign Currency Adjustments:
The
Company maintains manufacturing operations in Belgium and the People’s Republic
of China. The Company is vulnerable to currency risks in these
countries. 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 non-monetary items and equity accounts, which are
translated at historical rate, are translated into US dollars at the rates of
exchange in effect on the date of the balance sheet. As a result,
similar results in local currency can vary significantly upon translation into
US dollars if exchange rates fluctuate significantly from one period to the
next.
Equity-based
Compensation:
The
Company values its share-based payment transactions using the Black-Scholes
valuation model. 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.
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, 2009
and 2008: dividend yield of 0.0% and 1.5%; expected volatility of 40% and 38%;
risk free interest rate of 3.05% and 4.28%; and expected lives of seven years
and six and one-half years, respectively
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
The
expected life assumption was determined based on the Company’s historical
experience. 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 the Company’s current decision to suspend payment of
dividends. 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.
Concentration of Credit
Risk
Financial
instruments, which potentially subject the Company to concentration of credit
risk, consist principally of trade receivables. Concentration of
credit risk with respect to these receivables is generally diversified due to
the large number of entities comprising the Company’s customer base and their
dispersion across geographic areas principally within the United
States. The Company routinely addresses the financial strength of its
customers and, as a consequence, believes that its receivable credit risk
exposure is limited. The Company does not require customers to post
collateral.
New
Accounting Pronouncements:
In June
2009, the FASB approved the “FASB Accounting Standards Codification”
(“Codification”) as the single source of authoritative nongovernmental U.S. GAAP
to be launched on July 1, 2009. The Codification does not change
current U.S. GAAP, but is intended to simplify user access to all authoritative
U.S. GAAP by providing all the authoritative literature related to a particular
topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the
Codification will be considered nonauthoritative. The Codification is
effective for interim and annual periods ending after September 15,
2009. The Codification is effective for the Company during the
interim period ending October 31, 2009 and will not have an impact on the
financial condition or results of operations. The Company is
currently evaluating the impact to its financial reporting process of providing
Codification references in its public filings.
In June
2009, the FASB issued FAS No. 167, “Amendments to FASB Interpretation No. 46(R)”
(“FAS 167”), which modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. FAS 167 clarifies that the
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. FAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. FAS 167 also requires additional disclosures about a
company’s involvement in variable interest entities and any significant changes
in risk exposure due to that involvement. FAS 167 is effective for
fiscal years beginning after November 15, 2009 and is effective for the Company
on May 1, 2010. The Company is currently evaluating the impact that
the adoption of FAS 167 will have on the financial condition, results of
operations, and disclosures.
In June
2009, the FASB issued FAS No. 166, “Accounting for Transfers of Financial Assets
— an amendment of FASB Statement No. 140” (“FAS 166”), which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. FAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. FAS 166 is
effective for fiscal years beginning after November 15, 2009. FAS 166
is effective for the Company on May 1, 2010. The Company is currently
evaluating the impact that the adoption of FAS 166 will have on the financial
condition, results of operations, and disclosures.
In May
2009, the FASB issued FAS No. 165, “Subsequent Events” (“FAS 165”), which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. FAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was
selected. FAS 165 is effective for interim and annual periods ending
after June 15, 2009. FAS 165 is effective for the Company during the
quarter ending July 31, 2009.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
The
adoption of FAS 165 is not expected to have a material impact on the financial
condition, results of operations, and disclosures of the Company.
In April
2009, the FASB issued FASB Staff Position FAS 157-4, Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed, (“FSP
FAS 157-4”) FSP FAS 157-4 provides guidelines for making
fair value measurements more consistent with the principles presented in
FAS 157. FSP FAS 157-4 provides additional authoritative
guidance in determining whether a market is active or inactive, and whether a
transaction is distressed, is applicable to all assets and liabilities (i.e.
financial and nonfinancial) and will require enhanced
disclosures. This FASB Staff Position is effective for periods ending
after June 15, 2009. The Company is evaluating the impact that this
standard will have on its financial position, results of operation, or cash
flows.
In April
2009, the FASB issued FASB Staff Position FAS 115-2, and FAS 124-2,
Recognition and Presentation
of Other-Than-Temporary Impairments, (“FSP FAS 115-2 and
FAS 124-2”). FSP FAS 115-2 and FAS 124-2 provide additional
guidance to provide greater clarity about the credit and noncredit component of
an other-than-temporary impairment event and to more effectively communicate
when an other-than-temporary impairment event has occurred. This FSP
applies to debt securities. This FASB Staff Position is effective for
periods ending after June 15, 2009. The Company is evaluating
the impact that this standard will have on its financial position, results of
operation, or cash flows.
In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, (“FSP FAS 107-1 and APB
28-1”). FSP FAS 107-1 and APB 28-1, amends FASB Statement
No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about
fair value of financial instruments in interim as well as in annual financial
statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial
statements. This FASB Staff Position is effective for periods ending
after June 15, 2009. The Company is evaluating the impact that
this standard will have on its financial position, results of operation, or cash
flows.
In April
2009, the FASB issued FASB Staff Position FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies, (“FSP FAS 141(R)-1”). FSP
FAS 141(R)-1, amends FASB Statement No. 141 (R), Business Combinations, to
state a contingency acquired in a business combination should be measured at
fair value if the acquisition-date value of that asset or liability can be
determined during the measurement period. This FASB Staff Position is
effective as of May 1, 2009 for the Company.
During
calendar year 2008, the FASB issued FASB Staff Positions (“FSP FAS”) 157-1,
157-2, and 157-3. FSP FAS 157-1 amends FAS 157 to exclude FAS No. 13,
“Accounting for Leases”, and its related interpretive accounting pronouncements
that address leasing transactions, FSP FAS 157-2 delays the effective date of
the application of FAS 157 to fiscal years beginning after November 15, 2008 for
all nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis, and
FSP FAS 157-3 clarifies how the fair value of a financial asset is determined
when the market for that financial asset is inactive.
In
May 2008, the FASB issued Statement of Financial Accounting Standards No.
162 (“FAS 162”), “The Hierarchy of Generally Accepted Accounting
Principles.” FAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with U.S. GAAP.
FAS 162
will become effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting
Principles.” This statement is not expected to change the Company’s
current accounting practice.
In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing a renewal or extension
assumptions used for purposes of determining the useful life of a recognized
intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets (“FAS
142”). FSP FAS 142-3 is intended to improve the consistency
between the useful life of a recognized intangible asset under FAS 142 and
the period of expected cash flows used to measure the fair value of the asset
under FAS 141 (R) and other U.S. generally accepted accounting
principles. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. Earlier application is not
permitted. The Company will be assessing the potential effect of FSP
FAS 142-3 if applicable, if it enters into a business
combination.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
In March
2008, the FASB issued Statement No.161, Disclosures about Derivative Instruments
and Hedging Activities - An Amendment of FASB Statement No. 133 (“FAS
161”). FAS 161 requires enhanced qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. FAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15,
2008. The Company is currently evaluating the impact of FAS 161 on
its consolidated financial statements although it does not anticipate that the
statement will have a material impact since the Company has not historically
engaged in hedging activities or acquired derivative instruments.
In
December 2007, the FASB issued Statements No. 141(R), “Business Combinations”,
and No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB 51.” Effective for fiscal years beginning after
December 15, 2008, these statements revise and converge internationally the
accounting for business combinations and the reporting of noncontrolling
interests in consolidated financial statements. The adoption of these
statements will change the Company’s accounting treatment for business
combinations on a prospective basis but will have no impact on the Company’s
current financial statements.
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 adoption of FAS 159 in fiscal
year 2009 had no impact on the Company’s financial statements since the Company
elected not to measure any financial assets or liabilities at fair value other
than those for which previous pronouncements required it to do so.
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 adopted FAS 157 in fiscal year 2009. Such adoption did not
have a material impact on the Company’s financial statements.
2. Earnings Per
Share
Reconciliations
of the weighted average shares outstanding for basic and diluted Earnings Per
Share are as follows:
|
|
Years ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
Basic
EPS Shares outstanding
|
|
|
|
|
|
|
(weighted
average)
|
|
|
8,315,571 |
|
|
|
8,710,260 |
|
Effect
of Dilutive Securities***
|
|
|
- |
|
|
|
67,799 |
|
Diluted
EPS Shares outstanding
|
|
|
8,315,571 |
|
|
|
8,778,059 |
|
***
Dilutive securities are excluded for fiscal year 2009 since the inclusion of
such shares would be antidilutive due to the net loss for that
year. These dilutive securities represent options or rights to
acquire 1,428,325 shares of the Company’s common stock. Options to
purchase 820,000 shares of common stock were outstanding during the year ended
April 30, 2008, 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.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
3.
Costs and Estimated
Earnings in Excess of Billings
Costs and
estimated earnings in excess of billings on uncompleted contracts accounted for
on the percentage of completion basis were approximately $2,193,000 at April 30,
2009 and $9,556,000 at April 30, 2008. 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.
4.
Inventories
Inventories,
which are reported net of writedowns of $4,596,000 and $6,020,000 (including
fourth quarter adjustments to increase writedowns by approximately $3 million
and $1 million, respectively) at April 30, 2009 and 2008, respectively,
consisted of the following (in thousands):
|
|
2009
|
|
|
2008
|
|
Raw
Materials and Component Parts
|
|
$ |
12,542 |
|
|
$ |
12,523 |
|
Work
in Progress
|
|
|
10,613 |
|
|
|
13,938 |
|
Finished
Goods
|
|
|
2,896 |
|
|
|
3,757 |
|
|
|
$ |
26,051 |
|
|
$ |
30,218 |
|
As of
April 30, 2009 and 2008, approximately $18.0 million and $22.9 million,
respectively, of total inventory is located in the United States, approximately
$6.8 million and $5.8 million, respectively, is located in Belgium and
approximately $1.2 million and $1.5 million, respectively, is located in
China.
During the years ended April 30, 2009 and 2008, the Company
acquired component parts with a value of approximately $27,000 and $176,000,
respectively, from a company in which one of the Company’s independent directors
had an ownership interest. At April 30, 2009, no amounts were owed to this
company and the director had sold his interest in the business.
5.
Marketable
Securities
The cost,
gross unrealized gains, gross unrealized losses and fair market value of
available-for-sale securities at April 30, 2009 and 2008 are as follows (in
thousands):
|
|
April 30, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Fixed
income securities
|
|
$ |
10,165 |
|
|
$ |
278 |
|
|
$ |
(803 |
) |
|
$ |
9,640 |
|
Equity
securities
|
|
|
450 |
|
|
|
- |
|
|
|
(92 |
) |
|
|
358 |
|
|
|
$ |
10,615 |
|
|
$ |
278 |
|
|
$ |
(895 |
) |
|
$ |
9,998 |
|
|
|
April 30, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Fixed
income securities
|
|
$ |
4,593 |
|
|
$ |
- |
|
|
$ |
(526 |
) |
|
$ |
4,067 |
|
Equity
securities
|
|
|
444 |
|
|
|
7 |
|
|
|
(104 |
) |
|
|
347 |
|
|
|
$ |
5,037 |
|
|
$ |
7 |
|
|
$ |
(630 |
) |
|
$ |
4,414 |
|
The
following table presents the fair value and unrealized losses, aggregated by
investment type and length of time that individual securities have been in a
continuous unrealized loss position:
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
April 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Income Securities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,268 |
|
|
$ |
(803 |
) |
|
$ |
2,268 |
|
|
$ |
(803 |
) |
Equity
Securities
|
|
|
- |
|
|
|
- |
|
|
|
358 |
|
|
|
(92 |
) |
|
|
358 |
|
|
|
(92 |
) |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,626 |
|
|
$ |
(895 |
) |
|
$ |
2,626 |
|
|
$ |
(895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Income Securities
|
|
$ |
2,513 |
|
|
$ |
(28 |
) |
|
$ |
1,554 |
|
|
$ |
(497 |
) |
|
$ |
4,067 |
|
|
$ |
(526 |
) |
Equity
Securities
|
|
|
341 |
|
|
|
(104 |
) |
|
|
- |
|
|
|
- |
|
|
|
341 |
|
|
|
(104 |
) |
|
|
$ |
2,854 |
|
|
$ |
(132 |
) |
|
$ |
1,554 |
|
|
$ |
(497 |
) |
|
$ |
4,408 |
|
|
$ |
(630 |
) |
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
The
Company regularly reviews its investment portfolio to identify and evaluate
investments that have indications of possible impairment. The Company
does not believe that its investments in marketable securities with unrealized
losses at April 30, 2009 are other-than-temporary due to market volatility of
the security’s fair value, analysts’ expectations and the Company’s ability to
hold the securities for a period of time sufficient to allow for any anticipated
recoveries in market value.
Proceeds
from the sale or redemption of available-for-sale securities and the resulting
gross realized gains and losses included in the determination of net income
(loss) are as follows (in thousands):
|
|
For the years ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
Proceeds
|
|
$ |
1,036 |
|
|
$ |
12,923 |
|
Gross
realized gains
|
|
$ |
22 |
|
|
$ |
392 |
|
Gross
realized losses
|
|
$ |
- |
|
|
$ |
(27 |
) |
Maturities
of fixed income securities classified as available-for-sale at April 30, 2009
are as follows (in thousands):
Current
|
|
$ |
- |
|
Due
after one year through five years
|
|
|
7,632 |
|
Due
after five years through ten years
|
|
|
2,533 |
|
|
|
$ |
10,165 |
|
FAS 157
establishes a framework for measuring fair value. That framework
provides a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the
fair value hierarchy under FAS 157 are described below:
|
Level
1
|
Inputs
to the valuation methodology are unadjusted quoted prices for identical
assets or liabilities in active markets that the Company has the ability
to access.
|
|
Level
2
|
Inputs
to the valuation methodology
include:
|
|
-
Quoted prices for similar assets or liabilities in active
markets;
|
|
-
Quoted prices for identical or similar assets or liabilities in inactive
markets
|
|
-
Inputs other than quoted prices that are observable for the asset or
liability;
|
|
-
Inputs that are derived principally from or corroborated by observable
market data by
correlation or other means.
|
|
Level
3
|
Inputs
to the valuation methodology are unobservable and significant to the fair
value measurement.
|
The
asset’s or liability’s fair value measurement level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. Valuation techniques used need to maximize
the use of observable inputs and minimize the use of unobservable
inputs. All of the Company’s investments in marketable securities are
Level 1 assets.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. Property, Plant and
Equipment
Property,
plant and equipment at April 30, 2009 and 2008, consists of the following (in
thousands):
|
|
2009
|
|
|
2008
|
|
Buildings
and building improvements
|
|
$ |
4,128 |
|
|
$ |
4,700 |
|
Machinery,
equipment and furniture
|
|
|
37,828 |
|
|
|
38,096 |
|
|
|
|
41,956 |
|
|
|
42,796 |
|
Less,
accumulated depreciation
|
|
|
33,995 |
|
|
|
33,265 |
|
|
|
$ |
7,961 |
|
|
$ |
9,531 |
|
Depreciation
expense for the years ended April 30, 2009 and 2008 was $1,975,000 and
$1,920,000, respectively.
Maintenance
and repairs charged to operations for the years ended April 30, 2009 and 2008
was approximately $583,000 and $886,000, 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 was recognized into income over the remaining
term of the initial leaseback period with $235,000 and $353,000, respectively,
recognized in income during the years ended April 30, 2009 and
2008. Annual rental payments were $400,000 for the initial 11-year
term which ended 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, in February 2009, began paying 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 monthly rent of $6,200 through February
2010. In July 2007, FEI-Zyfer moved into newly leased space
encompassing 27,850 square feet. Monthly rental payments are
currently $25,350 and increase each year over the remaining 100 months of the
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.
Rent
expense under operating leases for the fiscal years ended April 30, 2009 and
2008 was approximately $1.0 million each year. The Company records
rent expense on its New York building and FEI-Zyfer facility on the straightline
method over the lives of the respective leases. As a result, as of
April 30, 2009 and 2008, the Company’s balance sheet includes deferred rent of
approximately $549,000 and $439,000, respectively, which will be amortized over
the respective rental periods.
During
fiscal year 2008, the Company acquired manufacturing equipment of approximately
$1.2 million. This acquisition was financed by entering into a 5-year
capital lease payable in monthly installments of approximately $24,000,
including interest at 6.57%. At the end of the lease term, the
Company may retain the equipment for a nominal charge.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
Future
minimum lease payments required by the leases are as follows (in
thousands):
Years
ending
|
|
|
|
|
|
|
April 30,
|
|
Operating Leases
|
|
|
Capital Lease
|
|
2010
|
|
$ |
994 |
|
|
$ |
281 |
|
2011
|
|
|
942 |
|
|
|
281 |
|
2012
|
|
|
952 |
|
|
|
281 |
|
2013
|
|
|
962 |
|
|
|
186 |
|
2014
|
|
|
822 |
|
|
|
- |
|
Thereafter
|
|
|
1,247 |
|
|
|
- |
|
Less
amounts representing interest
|
|
|
- |
|
|
|
(118 |
) |
Present
value of future minimum lease payments
|
|
$ |
5,919 |
|
|
$ |
911 |
|
7.
|
Short-Term Debt
Obligations
|
The
Company has an $7.4 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 and has no
maturity date so long as the Company maintains its investments with the
financial institution. During fiscal year 2009, the Company had
borrowings under the line which varied between $1.1 million and $6
million. During the 2008 fiscal year, the Company had borrowings
between $4.5 million and $9 million under this line of credit. During
fiscal year 2009, advances against the line of credit bore interest at variable
interest rates between 1.58% and 5.84%.
The
Company’s European subsidiaries have available approximately 1.9 million Euros
(approximately $2.5 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, 2009, no amount was outstanding under
such lines of credit. Borrowings under the bank credit lines, if any,
must be repaid within one year of receipt of funds. Interest on these
credit lines varies from 0.5% to 1.5% over the EURO Interbank Offered rate
(EURIBOR). At April 30, 2009 and 2008, the rate was 0.944% and
4.295%, respectively, based on the 1 month EURIBOR.
Accrued
liabilities at April 30, 2009 and 2008 consist of the following (in
thousands):
|
|
2009
|
|
|
2008
|
|
Other
compensation including payroll taxes
|
|
$ |
1,620 |
|
|
$ |
2,095 |
|
Vacation
accrual
|
|
|
952 |
|
|
|
1,175 |
|
Due
customers
|
|
|
1,131 |
|
|
|
299 |
|
Other
|
|
|
705 |
|
|
|
1,125 |
|
|
|
$ |
4,408 |
|
|
$ |
4,694 |
|
9. Investment in Morion,
Inc.
In fiscal
year 2007, the Company’s investment in Morion, Inc., a privately-held Russian
company, was 36.6% of Morion’s outstanding shares. The Company
reported its investment under the equity method and recorded its proportionate
share of the earnings of Morion. In June 2007, the Company completed
the sale of 28.6% of the outstanding shares of Morion, reducing 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 net
proceeds of approximately $5.6 million. As a result of the sale, the
Company recognized 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. Effective June 2007, the Company began accounting for its
remaining investment in Morion on the cost basis.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
During
the fiscal years ended April 30, 2009 and 2008, the Company acquired product
from Morion in the aggregate amount of approximately $1,016,000 and $710,000,
respectively, and the Company sold product to Morion in the aggregate amount of
approximately $106,000 and $248,000, respectively. At April 30, 2009,
accounts receivable included $8,000 due from Morion and accounts payable
included $38,000 due to Morion.
10. Goodwill and Other
Intangible Assets
During
fiscal year 2004 the Company acquired FEI-Zyfer, Inc.
(“FEI-Zyfer”). This acquisition resulted in the recording of
approximately $200,000 in goodwill. Management has determined that
this goodwill is not impaired as of April 30, 2009 and 2008.
In
addition, the Company acquired customer lists in the FEI-Zyfer acquisition with
a value of $600,000 which was amortized over 6 years. Amortization
expense related to these customer lists for the years ended April 30, 2009 and
2008 was approximately $186,000 and $48,000, respectively. As of
April 30, 2009, the customer lists have been fully amortized.
11. 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 five-year $1.5 million convertible note,
with interest payable at the prime rate, and a 10-year warrant to purchase
additional stock in exchange for cash and 39,651 shares of Frequency Electronics
common stock. The Company accounts for this investment on the equity
method.
The
Company reviewed Elcom’s financial condition at April 30, 2009 and concluded
that no impairment charge or valuation allowance related to its investment in
Elcom was required. At April 30, 2009, Elcom had total assets of
approximately $7.2 million, total liabilities of approximately $4.4 million and
stockholders’ equity of $2.7 million
During
the fiscal years ended April 30, 2009 and 2008, the Company acquired technical
services from Elcom in the aggregate amount of approximately $254,000 and
$622,000, respectively, sold product to Elcom in the amount of approximately
$72,000 and $9,000, respectively, and the Company recorded interest income on
Elcom’s convertible note in the amount of approximately $63,000 and $113,000,
respectively. At April 30, 2009, accounts receivable included $5,000
due from Elcom, prepaid expenses included advance royalties in the amount of
$67,000 and no amounts were payable to Elcom. In addition,
during fiscal year 2009, the Company, in coordination with two other major
investors, provided Elcom with a short-term working capital loan. The
Company’s share of the loan is $217,000, which is expected to be repaid in 2009
and bears interest at 21.8%.
12. Employee Benefit
Plans
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, 2009 and 2008, the Company
contributed 130,839 and 61,327 shares of common stock,
respectively. The approximate value of these shares at the date of
issuance was $528,000 in fiscal year 2009 and $573,000 in fiscal year
2008.
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 $80,000 and $182,000 to operations under
these plans for the fiscal years ended April 30, 2009 and 2008,
respectively.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
Independent
Contractor Stock Option Plan:
The
Company had an Independent Contractor Stock Option Plan under which up to
350,000 shares could be granted. This plan was terminated in fiscal
year 2006. 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 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. No
compensation expense was recorded during the years ended April 30, 2009 and 2008
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.
Transactions
under this plan, including the weighted average exercise prices of the options,
are as follows:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd
Avg
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at beginning of year
|
|
|
40,300 |
|
|
$ |
14.29 |
|
|
|
141,050 |
|
|
$ |
15.33 |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
(100,750 |
) |
|
|
15.75 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at end of year
|
|
|
40,300 |
|
|
$ |
14.29 |
|
|
|
40,300 |
|
|
$ |
14.29 |
|
Exercisable
at end of year
|
|
|
40,300 |
|
|
$ |
14.29 |
|
|
|
40,300 |
|
|
$ |
14.29 |
|
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, 2009, eligible employees had
been granted options to purchase 1,182,500 shares of Company stock under ISO
plans of which approximately 350,000 options are outstanding and approximately
345,000 are exercisable. Through April 30, 2009, eligible employees
have been granted options to acquire 1,090,000 shares of Company stock under
NQSO plans. Of the NQSO options, approximately 530,000 are both
outstanding and exercisable (see tables below). Included in the NQSO
options are options to acquire approximately 140,000 shares of common stock at
exercise prices ranging from $7.06 to $10.88 per share that did not specify the
expiration date. Subsequent to year end, the Company established that date. As
of April 30, 2009, eligible employees have been granted SARS based on
approximately 485,000 shares of Company stock, all are of which outstanding and
approximately 147,000 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.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
The
following table summarizes information about stock option activity for the years
ended April 30:
|
|
Stock Options and Stock Appreciation Rights
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
|
|
|
|
Average
|
|
Contractual
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Term
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– May 1, 2007
|
|
|
1,265,587 |
|
|
$ |
11.53 |
|
4.4
years
|
|
$ |
- |
|
Granted
|
|
|
225,875 |
|
|
|
9.73 |
|
|
|
|
|
|
Exercised
|
|
|
(18,312 |
) |
|
|
8.60 |
|
|
|
|
|
|
Expired
or Canceled
|
|
|
(46,375 |
) |
|
|
10.23 |
|
|
|
|
|
|
Outstanding
– April 30, 2008
|
|
|
1,426,775 |
|
|
$ |
11.33 |
|
4.5
years
|
|
$ |
- |
|
Granted
|
|
|
100,000 |
|
|
|
3.17 |
|
|
|
|
|
|
Expired
or Canceled
|
|
|
(161,250 |
) |
|
|
10.43 |
|
|
|
|
|
|
Outstanding
– April 30, 2009
|
|
|
1,365,525 |
|
|
$ |
10.83 |
|
4.1 years
|
|
$ |
- |
|
Exercisable
|
|
|
1,021,369 |
|
|
$ |
11.65 |
|
2.8 years
|
|
$ |
- |
|
Available
for future grants
|
|
|
113,292 |
|
|
|
|
|
|
|
|
|
|
As of
April 30, 2009, total unrecognized compensation cost related to nonvested
options and stock appreciation rights under the plans was approximately
$860,000. These costs are expected to be recognized over a weighted
average period of 2.1 years.
During
the year ended April 30, 2009, 140,469 shares vested the fair value of which was
approximately $680,000. There were no stock option exercises for the
year ended April 30, 2009.
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. As of April 30, 2009 and 2008, grants for
22,500 restricted shares are available to be purchased at a price of $4.00 per
share.
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 498,361 shares remain in the ESOP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. During the years ended April 30, 2009 and 2008, three
former employees who were receiving retirement benefits, died. The
Company received proceeds from the life insurance policies on these
participants. The amounts received exceeded the cash surrender value
of the policies and the Company recognized gains of approximately $217,000 and
$290,000, respectively, for the years ended April 30, 2009 and
2008. Deferred compensation expense charged to operations during the
years ended April 30, 2009 and 2008 was approximately $436,000 and $1.1 million,
respectively.
Life
Insurance Policies and Cash Held in Trust:
The
whole-life insurance policies on the lives of certain participants covered by
deferred compensation agreements have been placed in a trust. Upon
the death of any insured participant, cash received from life insurance policies
in excess of the Company’s deferred compensation obligations to the estate or
beneficiaries of the deceased, are also placed in the trust. These
assets belong to the Company until a change of control event, as defined in the
trust agreement, should occur. At that time, the Company is required
to add sufficient cash to the trust so as to match the deferred compensation
liability described above. Such funds will be used to continue the
deferred compensation arrangements following the change of control.
13. Income
Taxes
The
income (loss) before provision (benefit) for income taxes consisted of (in
thousands):
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
U.S.
|
|
$ |
(6,042 |
) |
|
$ |
1,614 |
|
Foreign
|
|
|
315 |
|
|
|
(167 |
) |
|
|
$ |
(5,727 |
) |
|
$ |
1,447 |
|
The
provision (benefit) for income taxes consists of the following (in
thousands):
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$ |
(1,620 |
) |
|
$ |
440 |
|
Foreign
|
|
|
- |
|
|
|
- |
|
State
|
|
|
(200 |
) |
|
|
20 |
|
Current
provision (benefit)
|
|
|
(1,820 |
) |
|
|
460 |
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(425 |
) |
|
|
190 |
|
Foreign
|
|
|
(45 |
) |
|
|
- |
|
State
|
|
|
(25 |
) |
|
|
(90 |
) |
Deferred
benefit
|
|
|
(495 |
) |
|
|
100 |
|
Valuation
allowance on deferred tax assets
|
|
|
7,624 |
|
|
|
- |
|
Total
provision
|
|
$ |
5,309 |
|
|
$ |
560 |
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
The
following table reconciles the reported income tax expense (benefit) with the
amount computed using the federal statutory income tax rate (in
thousands)
|
|
2009
|
|
|
2008
|
|
Computed
"expected" tax expense (benefit)
|
|
$ |
(1,947 |
) |
|
$ |
492 |
|
State
and local tax, net of federal benefit
|
|
|
(149 |
) |
|
|
13 |
|
Valuation
allowance on deferred tax assets
|
|
|
7,624 |
|
|
|
- |
|
Tax
basis gain on sale of Morion shares
|
|
|
- |
|
|
|
531 |
|
Nontaxable
loss (income) from foreign subsidiaries
|
|
|
(130 |
) |
|
|
207 |
|
Nondeductible
expenses
|
|
|
189 |
|
|
|
146 |
|
Nontaxable
life insurance cash value increase
|
|
|
(196 |
) |
|
|
(222 |
) |
Tax
credits
|
|
|
(111 |
) |
|
|
(480 |
) |
Other
items, net, none of which individually exceeds 5% of federal taxes at
statutory rates
|
|
|
29 |
|
|
|
(127 |
) |
|
|
$ |
5,309 |
|
|
$ |
560 |
|
The
components of deferred taxes are as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Employee
benefits
|
|
$ |
4,248 |
|
|
$ |
4,178 |
|
Inventory
|
|
|
1,470 |
|
|
|
1,849 |
|
Accounts
receivable
|
|
|
343 |
|
|
|
450 |
|
Marketable
securities
|
|
|
377 |
|
|
|
300 |
|
Research
& development
|
|
|
1,505 |
|
|
|
956 |
|
Other
liabilities
|
|
|
162 |
|
|
|
- |
|
Net
operating loss carryforwards
|
|
|
1,692 |
|
|
|
627 |
|
Miscellaneous
|
|
|
- |
|
|
|
75 |
|
Total
deferred tax asset
|
|
|
9,797 |
|
|
|
8,435 |
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
1,052 |
|
|
|
1,086 |
|
Net
deferred tax asset
|
|
|
8,745 |
|
|
|
7,349 |
|
Valuation
allowance
|
|
|
(8,745 |
) |
|
|
(1,305 |
) |
|
|
$ |
- |
|
|
$ |
6,044 |
|
The
change in the valuation allowance from April 30, 2008 to April 30, 2009,
includes a foreign currency translation adjustment of $184,000.
The total
valuation allowance relates to deferred tax assets of both domestic and foreign
subsidiaries. At April 30, 2009, the Company has available
approximately $1.1 million in net operating losses available to offset future
income of certain of its foreign subsidiaries. A portion of the
taxable loss for the year ended April 30, 2009 will be carried back to prior
profitable years and the balance will be carried forward to offset future
taxable income. The domestic U.S. tax loss carryforward, which
expires in 2028, is approximately $3.0 million and the tax loss carryforward for
state income tax purposes is approximately $7.3 million.
Deferred
tax assets at April 30, 2008, have been reduced by $920,000 to reflect the
impact of state income tax rate changes. Income taxes refundable at
April 30, 2008, have been increased by $920,000 due to the timing of certain tax
deductions reported on the Company’s tax returns filed for fiscal year
2008. As a consequence, the income tax provision for the year ended
April 30, 2008 and the components of deferred tax assets as of that date, have
been adjusted. These adjustments had no material impact on results of
operations or cash flows for the year ended April 30, 2008.
On May 1,
2007, the Company adopted the provisions of FASB 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. Tax
positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of FIN 48 and in subsequent
periods. As a result of the implementation of FIN 48, the Company has
evaluated its tax positions and has concluded that the tax positions meet the
more-likely-than-not recognition threshold. As such, there is no
impact on the Company’s financial position or results of operations. The
Company’s tax returns for April 30, 2006 and 2007 have been examined by the
Internal Revenue Service which resulted in no material adjustments. The
Company’s tax years from April 30, 2005 through April 30, 2009 remain open to
examination for most taxing authorities.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. 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,
|
|
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of year
|
|
$ |
395 |
|
|
$ |
350 |
|
Warranty
costs incurred
|
|
|
(150 |
) |
|
|
(354 |
) |
Product
warranty accrual
|
|
|
- |
|
|
|
399 |
|
Balance
at end of year
|
|
$ |
245 |
|
|
$ |
395 |
|
15. 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.
|
The
Company reports its segment information on primarily a geographic
basis. The FEI-NY segment, which operates out of the Company’s New
York headquarters facility, also includes the operations of the Company’s
wholly-owned subsidiary, FEI-Asia. FEI-Asia functions primarily as a
manufacturing facility for the FEI-NY segment.
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.
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.
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):
|
|
2009
|
|
|
2008
|
|
Net
revenues:
|
|
|
|
|
|
|
FEI-NY
|
|
$ |
35,793 |
|
|
$ |
46,258 |
|
Gillam-FEI
|
|
|
11,342 |
** |
|
|
11,459 |
** |
FEI-Zyfer
|
|
|
9,360 |
|
|
|
9,089 |
|
less
intersegment revenues
|
|
|
(3,755 |
)** |
|
|
(2,409 |
)** |
Consolidated
Revenues
|
|
$ |
52,740 |
|
|
$ |
64,397 |
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
|
|
2009
|
|
|
2008
|
|
Operating
(loss) profit:
|
|
|
|
|
|
|
FEI-NY
|
|
$ |
(5,361 |
) |
|
$ |
(2,889 |
) |
Gillam-FEI
|
|
|
101 |
** |
|
|
273 |
** |
FEI-Zyfer
|
|
|
(192 |
) |
|
|
496 |
|
Corporate
|
|
|
(465 |
) |
|
|
(458 |
) |
Consolidated
Operating Loss
|
|
$ |
( 5,917 |
) |
|
$ |
( 2,578 |
) |
|
**
|
For
the fiscal years ended April 30, 2009 and 2008, includes Gillam-FEI
intersegment sales of $1.8 million and $1.0 million, respectively, to the
FEI-NY and FEI-Zyfer segments. In fiscal years 2009 and 2008,
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 Gillam-FEI segment, these
transactions increased the operating profit in each of the fiscal
years.
|
|
|
2009
|
|
|
2008
|
|
Identifiable
assets:
|
|
|
|
|
|
|
FEI-NY
(approximately $2 million in China)
|
|
$ |
39,658 |
|
|
$ |
54,522 |
|
Gillam-FEI
(all in Belgium or France)
|
|
|
17,615 |
|
|
|
18,611 |
|
FEI-Zyfer
|
|
|
8,672 |
|
|
|
6,538 |
|
less
intersegment balances
|
|
|
(17,853 |
) |
|
|
(17,786 |
) |
Corporate
|
|
|
29,828 |
|
|
|
35,035 |
|
Consolidated
Identifiable Assets
|
|
$ |
77,920 |
|
|
$ |
96,920 |
|
Depreciation
and amortization (allocated):
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$ |
1,493 |
|
|
$ |
1,469 |
|
Gillam-FEI
|
|
|
202 |
|
|
|
203 |
|
FEI-Zyfer
|
|
|
454 |
|
|
|
278 |
|
Corporate
|
|
|
19 |
|
|
|
19 |
|
Consolidated
Depreciation and Amortization Expense
|
|
$ |
2,168 |
|
|
$ |
1,969 |
|
In fiscal
year 2009, sales to four customers of the FEI-NY segment aggregated $17.0
million or 48% of that segment’s total sales. During the year ended
April 30, 2009, in the Gillam-FEI segment, sales to two customers aggregated
$3.90 million or 41% of that segment’s revenues (exclusive of the $1.8 million
of intersegment sale). In the FEI-Zyfer segment, two customers
accounted for $2.5 million or 27% of that segment’s sales. None of
the customers in the FEI-NY, Gillam-FEI or FEI-Zyfer segments accounted for more
than 10% of consolidated revenues.
In fiscal
year 2008, sales to four customers of the FEI-NY segment aggregated $29.1
million or 63% of that segment’s total sales. Three of these
customers accounted for 15%, 12% and 11%, respectively, of the Company’s
consolidated sales for the year. In the Gillam-FEI segment, sales to
two customers aggregated $4.5 million or 39% of that segment’s
revenues. In the FEI-Zyfer segment, one customer accounted for $1.1
million or 12% 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.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
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)
|
|
|
|
2009
|
|
|
2008
|
|
China
|
|
$ |
5,746 |
|
|
$ |
5,038 |
|
Belgium
|
|
|
4,689 |
|
|
|
5,717 |
|
France
|
|
|
2,509 |
|
|
|
2,515 |
|
Other
|
|
|
4,731 |
|
|
|
6,437 |
|
|
|
$ |
17,675 |
|
|
$ |
19,707 |
|
16. Interim Results
(Unaudited)
Quarterly
results for fiscal years 2009 and 2008 are as follows:
|
|
(in
thousands, except per share data)
|
|
|
|
2009 Quarter
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
Net
revenues
|
|
$ |
13,063 |
|
|
$ |
14,026 |
|
|
$ |
13,208 |
|
|
$ |
12,443 |
|
Gross
margin
|
|
|
3,191 |
|
|
|
2,715 |
|
|
|
3,459 |
|
|
|
815 |
|
Net
income (loss)
|
|
|
(773 |
) |
|
|
(894 |
) |
|
|
99 |
|
|
|
(9,469 |
) |
*Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.09 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.01 |
|
|
$ |
(1.17 |
) |
Diluted
|
|
$ |
(0.09 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.01 |
|
|
$ |
(1.17 |
) |
*
|
Quarterly
earnings per share data do not equal the annual amount due to changes in
the average common equivalent shares
outstanding.
|
|
The
fourth quarter of fiscal year 2009 includes an increase to inventory
writedowns in the amount of $2.9 million primarily resulting from a
projected decrease in demand for wireless telecommunications product and
an increase of $7.6 million in the valuation allowance on deferred tax
assets.
|
|
|
(in
thousands, except per share data)
|
|
|
|
2008 Quarter
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
Net
revenues
|
|
$ |
15,557 |
|
|
$ |
17,494 |
|
|
$ |
17,055 |
|
|
$ |
14,291 |
|
Gross
margin
|
|
|
4,471 |
|
|
|
5,470 |
|
|
|
5,455 |
|
|
|
2,266 |
|
Net
income (loss)
|
|
|
1,380 |
|
|
|
409 |
|
|
|
758 |
|
|
|
(1,660 |
) |
*Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
$ |
0.09 |
|
|
$ |
(0.19 |
) |
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
$ |
0.09 |
|
|
$ |
(0.19 |
) |
*
|
Quarterly
earnings per share data do not equal the annual amount due to changes in
the average common equivalent shares
outstanding.
|
|
The
fourth quarter of fiscal year 2009 includes an increase to inventory
writedowns in the amount of $1.0
million.
|
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
NONE
Item 9A(T) Controls and
Procedures
Evaluation of 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. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based on their evaluation, the Company’s chief executive
officer and chief financial officer have concluded that, as of April 30, 2009,
the Company’s disclosure controls and procedures were not effective for the
reasons discussed below, to ensure that information relating to the Company,
including its consolidated subsidiaries, required to be included in its reports
that it filed or submitted under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Management’s Annual Report
on Internal Control over Financial Reporting
Management
of Frequency Electronics is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. The Company’s internal control
system is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. Because of inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of April 30, 2009. In making this assessment, management
used the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management has concluded
that the Company’s internal control over financial reporting was not effective
as of April 30, 2009. The Company’s chief executive officer and chief
financial officer have concluded that the Company has material weaknesses in its
internal control over financial reporting.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The
Company had inadequate resources and an insufficient number of personnel having
adequate knowledge, experience and training to provide effective oversight and
review of our internal controls within the prescribed timeframe. As a
result, as of April 30, 2009, there was a material weakness in the Company’s
internal control because management has not performed a self-assessment or
completed the necessary documentation and testing of the internal controls at
two of the Company’s subsidiaries, Gillam-FEI and FEI-Zyfer. The lack
of documentation and testing of these subsidiaries constitutes a material
weakness. In order to remediate this material weakness, management
will continue to establish policies and procedures to provide for the necessary
documentation and testing of such internal controls over the coming
year. During fiscal year 2010, the Company plans to fully document
and test the internal controls over financial reporting at its Gillam-FEI and
FEI-Zyfer subsidiaries. If this process identifies material
weaknesses or significant deficiencies over such internal controls, the Company
will implement appropriate remediation efforts.
In
addition, due to its small size and lack of resources and staffing, the Chief
Financial Officer is actively involved in the preparation of the financial
statements and therefore, cannot provide an independent review and quality
assurance function within the accounting and financial reporting
group. The limited number of accounting personnel results in an
inability to have independent review and approval by the Chief Financial Officer
of financial accounting entries. There is a risk that a material
misstatement of the financial statements could be caused, or at least not be
detected in a timely manner, due to this limitation. The Company addressed this
material weakness by engaging third-party tax accounting advisors who identified
the need to adjust the prior year deferred tax and income tax receivable
balances. The Company also hired a new controller and is creating
processes whereby personnel in its Accounting Department (other than the Chief
Financial Officer) will create analysis and original accounting entries, which
will subsequently be reviewed and approved by the Chief Financial
Officer. The Company expects that such measures will remediate this
material weakness.
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.
Changes in Internal Control
Over Financial Reporting.
There
were no 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 quarter ending April 30, 2009 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
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 October 6,
2009. 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 October
6, 2009.
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 October
6, 2009.
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 October
6, 2009.
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 October
6, 2009.
PART
IV
Item 15. Exhibits
and Financial Statement Schedules
(a)
|
Index to Financial
Statements and Exhibits
|
The
financial statements 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
|
|
|
26
- 27
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
April
30, 2009 and 2008
|
|
|
28
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
|
-years
ended April 30, 2009 and 2008
|
|
|
29
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
-
years ended April 30, 2009 and 2008
|
|
|
30-31
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity
|
|
|
|
|
-
years ended April 30, 2009 and 2008
|
|
|
32
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
33-50
|
|
(2)
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
|
The
exhibits listed on the accompanying Index to Exhibits beginning on page 51 are
filed as part of this annual report.
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
29, 2009
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Joseph P. Franklin
|
|
Chairman
of the Board
|
|
7/29/09
|
Joseph
P. Franklin
|
|
|
|
|
|
|
|
|
|
/s/ Joel Girsky
|
|
Director
|
|
7/29/09
|
Joel
Girsky
|
|
|
|
|
|
|
|
|
|
/s/ E. Donald Shapiro
|
|
Director
|
|
7/29/09
|
E.
Donald Shapiro
|
|
|
|
|
|
|
|
|
|
/s/ S. Robert Foley
|
|
Director
|
|
7/29/09
|
S.
Robert Foley
|
|
|
|
|
|
|
|
|
|
/s/ Richard Schwartz
|
|
Director
|
|
7/29/09
|
Richard
Schwartz
|
|
|
|
|
|
|
|
|
|
/s/ Martin B. Bloch
|
|
President
and CEO
|
|
7/29/09
|
Martin
B. Bloch
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/ Alan L. Miller
|
|
Chief
Financial Officer
|
|
7/29/09
|
Alan
L. Miller
|
|
and
Treasurer
|
|
|
|
|
(Principal
Financial and
|
|
|
|
|
Accounting
Officer)
|
|
|
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)
|
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 2009 audit report in Registrant’s Form S-8 Registration
Statement.
|
|
Filed
herewith
|
|
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
|
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
|
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
NOTES:
|
(1)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-29609, which
exhibit is incorporated herein by
reference.
|
|
(2)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-71727, which
exhibit is incorporated herein by
reference.
|
|
(3)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061 for the year ended
April 30, 1981, which exhibit is incorporated herein by
reference.
|
|
(4)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to the
registration statement of Registrant on Form S-1, File No. 2-69527, which
exhibit is incorporated herein by
reference.
|
|
(5)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to the annual
report of Registrant on Form 10-K, File No. 1-8061, for the year ended
April 30, 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.
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