Frequency Electronics (FEIM)

 

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.

 

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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.

 

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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.

 

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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.

 

 

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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.

 

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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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

25

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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

 

26

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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

 

27

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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.

 

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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.

 

29

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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

 

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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.

 

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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.

 

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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.

 

33

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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.

 

34

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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

 

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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.

 

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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.

 

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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.

 

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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	)