| FREQUENCY ELECTRONICS INC Item 1A Risk Factors In addition to the other information contained in this Form 10-K and the exhibits hereto, the following risk factors should be considered carefully in evaluating the Companyapstas business |
| Additional risks not presently known to the Company or that the Company currently deems immaterial may also adversely affect its business, financial condition, or results of operations |
| A variety of factors may cause the price of the Companyapstas stock to be volatile |
| In recent years, the stock market in general, and the market for shares of technology companies in particular, including Frequency Electronics, have experienced price fluctuations |
| For example, for fiscal year 2006, the price of the Companyapstas Common Stock ranged from a closing high of dlra14dtta20 to a closing low of dlra10dtta00 |
| The market price of the Companyapstas Common Stock is likely to continue to fluctuate significantly in the future, including fluctuations unrelated to its performance |
| The Company believes that fluctuations of its stock price may be caused by a variety of factors, including: o fluctuations in the Companyapstas operating results; o announcements of technological innovations, new commercial products or other developments by the Company or its competitors; 12 o published reports by securities analysts; o general market conditions, general economic conditions; o announcements by the Company or its competitors of significant acquisitions, strategic partnerships or joint ventures; o the Companyapstas cash position and cash commitments; o additions or departures of key personnel; o sales or purchases of the Companyapstas Common Stock in the marketplace; o an outbreak of hostilities, diseases, natural disasters or terrorism; o developments in patents or other intellectual property rights; and o developments in the Companyapstas relationships with customers and suppliers |
| If the Company fails to keep pace with rapid technological change and evolving industry standards, its products could become less competitive or obsolete |
| The markets for the Companyapstas products are characterized by technological change, new product introductions, changes in customer requirements and evolving industry standards |
| The Company may cease to be competitive if it fails to timely introduce new products or product enhancements that address these factors |
| To continue to introduce new products and product enhancements on a timely basis, the Company must: o identify emerging technological trends in the Companyapstas target markets; o accurately define and design new products or product enhancements to meet market needs; o develop or license the underlying core technologies necessary to create new products and product enhancements; and o respond effectively to technological changes and product introductions by the Companyapstas competitors |
| If the Company fails to timely identify, develop, manufacture, market or support new or enhanced products successfully, its competitors could gain market share or its new or enhanced products might not gain market acceptance |
| Delays in the development of new or enhanced products could harm the Companyapstas operating results and its competitive position |
| The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation, highly skilled engineering and development personnel and accurate anticipation of technological and market trends |
| Consequently, product development delays are typical in the Companyapstas industry |
| If the Company fails to timely introduce a product for an emerging standard or customers defer or cancel orders expecting the release of a new or enhanced product, its operating results could suffer |
| Product development delays may result from numerous factors, including: o changing product specifications and customer requirements; o unanticipated engineering complexities; o difficulties with or delays by contract manufacturers or suppliers of key components or technologies; o difficulties in allocating engineering resources and overcoming resource limitations; and o difficulties in hiring and retaining necessary technical personnel |
| The Company faces uncertainty relating to economic conditions affecting its customers |
| The Company faces uncertainty in the degree to which the current global economic climate will affect the rate of growth for its existing and potential customers |
| In particular, the timing and magnitude of capital spending by international telecommunications companies, including those in China, will materially impact the Companyapstas business |
| Frequency Electronics may experience instances of customers delaying or deferring orders and longer lead times to close sales |
| Similarly, spending on US Government programs is determined by the annual defense department budget |
| To the extent that support for the liberation and rebuilding of Iraq takes precedence, funding for certain Department of Defense programs may be delayed or significantly reduced 13 in the near term |
| Such delays can have a materially negative impact on the Companyapstas business, its operating results and financial condition |
| The Company faces competition |
| Its inability to remain competitive in the industry would adversely affect the Companyapstas ability to maintain its current sales and growth |
| The Company experiences competition in all areas of its business |
| Frequency Electronics competes primarily on the basis of the accuracy, performance and reliability of its products, the ability of its products to function under severe conditions, such as in space or other extreme hostile environments, prompt and responsive contract performance, technical competence and price |
| The Company has a unique and broad product line which includes all three frequency standards - quartz, rubidium, and cesium |
| For its high precision products, the Company has few competitors, but for lower precision components, the Company faces significant competition from a number of suppliers |
| Certain of the Companyapstas competitors are larger, have greater financial resources and have larger research and development and marketing staffs |
| If its competitors develop more accurate or reliable products, or otherwise improve their products, Frequency Electronics could experience a decline in its sales or loss of market acceptance of its products |
| With respect to the Companyapstas instruments and systems, it competes with Hewlett-Packard Company, Symmetricom, Inc, E G and G, Inc |
| Systems for the wireline industry produced by the Gillam-FEI segment compete with Symmetricom, Inc |
| Frequency Electronics &apos principal competition for space products is the in-house capability of its major customers |
| In recent years, the Company has outsourced certain component manufacturing processes to third parties and more recently to its wholly-owned subsidiary, FEI-Asia in Tianjin, China and to Russian-based Morion, Inc, in which the Company is a minority shareholder |
| The Company expects this outsourcing to enhance its competitive position on cost while maintaining its high quality standards |
| Any unanticipated changes in such third parties &apos ability to perform the component manufacturing processes or any delay in such manufacturing could materially adversely affect the Companyapstas business, financial condition and operating results |
| The Companyapstas executive officers and certain key personnel are critical to its business |
| The Companyapstas future success is dependent upon the contributions of its senior corporate management team, particularly Martin Bloch, President and Chief Executive Officer, who has been with the Company since 1961, Markus Hechler, Executive Vice President, who has been with the Company since 1967, Oleandro Mancini, Vice President of Business Development, who has been with the Company since 2001 and certain other key employees |
| Bloch, Hechler and Mancini no longer serve in their positions, the Companyapstas business, financial conditions and results of operation could be substantially adversely affected |
| The Companyapstas future operating results also depend in significant part upon its ability to attract and retain qualified management, manufacturing, technical, engineering, marketing, sales and support personnel |
| Competition for qualified personnel is intense, and the Company cannot ensure success in attracting or retaining qualified personnel |
| There may be only a limited number of persons with the requisite skills to serve in these positions and it may be increasingly difficult for the Company to hire personnel over time |
| The Companyapstas business, financial conditions and results of operation could be substantially adversely affected by its inability to attract and retain skilled employees |
| Economic, political and other risks associated with international sales and operations could adversely affect sales |
| Because the Company sells its products worldwide, its business is subject to risks associated with doing business internationally |
| The Company recognized 35prca of its revenue from sales to end-users in countries located outside of the United States in the fiscal year ended April 30, 2006 |
| The Company anticipates that revenue from international operations will continue to represent a substantial portion of its revenue |
| In addition, several of the Companyapstas manufacturers &apos facilities and suppliers are located outside the United States of America |
| Accordingly, the Companyapstas future results could be harmed by a variety of factors, including: o changes in a specific countryapstas or regionapstas political or economic conditions, particularly in emerging markets; o tariff and trade policies; o export license requirements and restrictions of the export of technology; 14 o import regulations; o domestic and foreign tax policies; o foreign governmental regulations; o difficulty in staffing and managing widespread operations; o ongoing health epidemics (eg, Bird Flu); o fluctuations in foreign currency exchange rates; o stability of international monetary conditions; o differing labor regulations; o political unrest, war, actual or threatened acts of terrorism, other international conflicts and the resulting military, economic and political responses (including, without limitation, war between sovereign nations) as well as heightened security measures which may cause significant disruption to commerce worldwide; o differing protection of intellectual property; and o unexpected changes in regulatory requirements |
| The Companyapstas products may contain defects that cause it to incur significant corrective costs, divert its attention from product development efforts and result in a loss of customers |
| Highly complex products such as the Companyapstas high-technology frequency, timing and synchronization products may contain defects when they are installed in its customers &apos systems |
| If any of the Companyapstas products contain defects or have reliability, quality or compatibility problems, its reputation may be damaged and customers may be reluctant to buy its products |
| In addition, these defects could interrupt or delay sales |
| The Company may have to invest significant capital and other resources to alleviate these problems |
| If any problem remains undiscovered until after the Company has commenced production of a new product, it may be required to incur additional development costs and product recall, repair or replacement costs |
| These problems may also result in claims against the Company by its customers or others |
| In addition, these problems may divert the Companyapstas technical and other resources from other development efforts |
| If the Company fails to manage its operations effectively, its business could suffer |
| The Companyapstas ability to offer products and implement its business plan successfully in a rapidly evolving market requires effective planning and management |
| Failure by the Companyapstas management or personnel to properly allocate resources to meet its current and existing needs as well as unforeseen complications and inefficiencies in planning its operations can adversely impact the morale of the Companyapstas personnel and lead to further complications and operational inefficiencies |
| If this were to occur, the Companyapstas profitability or financial position could be negatively impacted and its operating results could suffer |
| Claims that the Company infringed third-party intellectual property rights could result in significant expenses or restrictions on its ability to sell its products |
| Although the Companyapstas industry is not characterized by frequent claims or litigation regarding patent rights, the Company cannot be certain that its products do not or will not infringe issued patents or the intellectual property rights of others |
| Historically, patent applications in the United States of America have not been publicly disclosed until the patent is issued, and the Company may not be aware of filed patent applications that relate to its products or technology |
| If patents are later issued in connection with these applications, the Company may be liable for infringement |
| Periodically, other parties, including some of the Companyapstas competitors, may assert patent, copyright and other rights to technologies in various jurisdictions that are important to its business |
| Any claims asserting that the Companyapstas products infringe or may infringe the rights of third parties, including claims arising through its contractual indemnification of its customers, regardless of their merit or resolution, would likely be costly and time-consuming, divert the efforts of the Companyapstas technical and management personnel, cause product shipment delays or require the Company to enter into royalty or licensing agreements |
| Royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all |
| At present, the Company does not believe that its products infringe any other partyapstas intellectual property rights in any way that would have a material adverse effect on the Companyapstas operations |
| However, if any material claims do arise and if these claims cannot be resolved through a license or similar arrangement, the Company could become a party to litigation |
| The results of any litigation are inherently uncertain |
| In the event of an adverse result in any litigation with third parties that could arise in the future, the Company could be 15 required to pay substantial damages, including treble damages if it is held to have willfully infringed, to cease the manufacture, use and sale of infringing products, to expend significant resources to develop non-infringing technology, or to obtain licenses to the infringing technology |
| In addition, lawsuits, regardless of their success, would likely be time consuming and expensive to resolve and would divert management time and attention from the Companyapstas business |
| Any failure to protect the Companyapstas intellectual property adequately may significantly harm its business |
| The Company protects its proprietary processes, software, know-how and other intellectual property and related rights through copyrights, patents, trademarks and the maintenance of trade secrets, including entering into confidentiality agreements |
| The Companyapstas success and ability to compete depends in part on its proprietary technology |
| However, the Company cannot provide any assurance that other companies will not develop technologies that are similar to its technology |
| Although the Company has patent applications pending, patents may not issue as a result of these or other patent applications |
| Any patents that ultimately issue may be successfully challenged or invalidated, or may not provide the Company with a significant competitive advantage |
| Despite the Companyapstas efforts to protect its intellectual property rights, existing laws in the United States of America and in differing international jurisdictions and its contractual arrangements provide only limited protection |
| Unauthorized parties may attempt to copy or otherwise obtain and use the Companyapstas products or technology |
| Third parties may breach confidentiality agreements or other protective contracts with the Company and it may not be able to enforce its rights in the event of these breaches |
| Monitoring unauthorized use of the Companyapstas products is difficult and may be expensive, and the Company cannot be certain that the steps it has taken will prevent unauthorized use of its intellectual property, particularly in foreign countries where the laws may not protect the Companyapstas proprietary rights as fully as in the United States of America |
| The Company may be required to spend significant resources to protect its intellectual property rights, including pursuing remedies in court |
| Frequency Electronics may become involved in legal proceedings against other parties, which may also cause other parties to assert claims against it |
| In the future the Company may not be able to detect infringements and may lose its competitive position in its markets before it does so |
| In addition, competitors may design around the Companyapstas technologies or develop competing technologies |
| The laws of other countries in which the Company markets its products might offer little or no effective protection of its proprietary technology |
| Reverse engineering, unauthorized copying or other misappropriation of the Companyapstas proprietary technology could enable third parties to benefit from its technology without payment, which could significantly harm the Companyapstas business |
| Furthermore, the Company may become involved in legal proceedings against other parties, which may also cause other parties to assert claims against it |
| Future sales of substantial amounts of the Companyapstas common stock by it or by its existing stockholders could cause the Companyapstas stock price to fall |
| Additional equity financings or other share issuances by the Company could adversely affect the market price of its Common Stock |
| Sales by existing stockholders of a large number of shares of Frequency Electronics &apos Common Stock in the public trading market (or in private transactions) such as this offering by the Selling Stockholders, or the perception that such additional sales could occur, could cause the market price of the Companyapstas common stock to drop |
| Some of the Companyapstas revenue is generated from a limited number of key customers and the loss of a key customer could substantially reduce its revenues |
| A large portion of the Companyapstas sales are generated from a small number of key customers at each of the Companyapstas segments, including, without limitation, three customers of the Commercial Communications segment, Space Systems/Loral, Lucent Technologies and Motorola Corp, which accounted for 16prca, 14prca and 13prca of consolidated sales for fiscal 2006, respectively |
| In fiscal year 2006, Northrop, Raytheon, BAE and the Air Force Space and Missile Center were significant customers of the Companyapstas US Government segment; France Telecom and Belgacom were significant customers of the Companyapstas Gillam-FEI segment; and Computer Sciences Corporation and L-3 Communications were significant customers of the FEI-Zyfer segment |
| The Companyapstas top 10 customers accounted for 63prca of its consolidated sales for fiscal year 2006 |
| The Company expects that its top 10 customers in the aggregate will continue to account for a large portion of its consolidated sales in the foreseeable future, and the loss of one or more of these customers would materially 16 harm the Companyapstas business and operating results |
| The loss of a key customer could also be perceived as a loss of momentum in the Companyapstas business and an adverse impact on its financial results, and this may cause the market price of the Companyapstas common stock to fall |
| The Company is subject to anti-takeover provisions that could delay or prevent an acquisition of the Company The Company is subject to the anti-takeover provisions of the Delaware General Corporation Law, which could have the effect of delaying or preventing a change of control of Frequency Electronics |
| These factors could materially adversely affect the price of the Companyapstas common stock |