SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended July 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value
$1.00 as of September 8, 2003 - 8,360,100
Page 1 of 21
Frequency Electronics, Inc. and Subsidiaries
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
July 31, 2003 (unaudited) and April 30, 2003 3-4
Condensed Consolidated Statements of Operations
(unaudited) Three Months Ended July 31, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows
(unaudited)Three Months Ended July 31, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 15
Item 4 - Disclosure Controls and Procedures 16
Part II. Other Information:
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibits 18-21
2 of 21
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 31, April 30,
2003 2003
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 3,128 $ 5,952
Marketable securities 26,135 27,829
Accounts receivable, net of allowance
for doubtful accounts of $124 12,702 9,565
Inventories 19,506 17,734
Deferred income taxes 4,122 4,435
Income taxes receivable 987 1,223
Prepaid expenses and other 1,472 1,198
------- -------
Total current assets 68,052 67,936
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,473 11,105
Deferred income taxes 409 436
Cash surrender value of life insurance 4,965 4,869
Goodwill 937 -
Other assets 1,238 1,383
------- -------
Total assets $87,074 $85,729
======= =======
See accompanying notes to condensed consolidated financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
July 31, April 30,
2003 2003
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term credit obligations $ 1,539 $ 179
Accounts payable - trade 1,748 1,294
Accrued liabilities and other 3,685 4,449
------- -------
Total current liabilities 6,972 5,922
Deferred compensation 6,838 6,752
REIT liability and other liabilities 11,011 11,151
------- -------
Total liabilities 24,821 23,825
------- -------
Minority interest in subsidiary 142 195
------- -------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,164 9,164
Additional paid-in capital 43,869 43,806
Retained earnings 9,673 10,415
------- -------
62,706 63,385
Common stock reacquired and held
in treasury-at cost, 807,590 shares
at July 31, 2003 and 824,739 shares
at April 30, 2003 (3,010) (3,062)
Other stockholders' equity (116) (116)
Accumulated other comprehensive income 2,531 1,502
------- -------
Total stockholders' equity 62,111 61,709
------- -------
Total liabilities and stockholders' equity $87,074 $85,729
======= =======
See accompanying notes to condensed consolidated financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended July 31,
(Unaudited)
2003 2002
(In thousands except
per share data)
Net sales $ 8,754 $ 6,828
Cost of sales 6,187 4,773
------- -------
Gross margin 2,567 2,055
Selling and administrative expenses 2,536 2,053
Research and development expense 1,668 983
------- -------
Operating loss (1,637) (981)
Other income (expense):
Investment income 746 355
Interest expense (59) (72)
Other, net 13 7
------- -------
Loss before minority interest and
benefit for income taxes (937) (691)
Minority interest in loss of
consolidated subsidiary (55) (10)
------- -------
Loss before benefit for income taxes (882) (681)
Benefit for income taxes (140) (192)
------- -------
Net loss $ (742) $ (489)
======= =======
Net loss per common share
Basic $ (0.09) $ (0.06)
======= =======
Diluted $ (0.09) $ (0.06)
======= =======
Average shares outstanding
Basic 8,348,133 8,373,567
========= =========
Diluted 8,348,133 8,373,567
========= =========
See accompanying notes to condensed consolidated financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31,
(Unaudited)
2003 2002
(In thousands)
Cash flows from operating activities:
Net loss $ (742) $ (489)
Non-cash charges to earnings 387 827
Net changes in assets and liabilities (2,962) (635)
------- -------
Net cash used in operating activities (3,317) (297)
------- -------
Cash flows from investing activities:
Payment for acquisition (2,697) -
Proceeds from sale of marketable securities 5,180 -
Purchase of marketable securities (2,364) 463
Other - net (223) (239)
------- -------
Net cash (used in) provided by investing activities (104) 224
------- -------
Cash flows from financing activities:
Proceeds from short-term credit obligations 1,506 -
Dividends paid (834) (833)
Other - net (201) (306)
------- -------
Net cash provided by (used in) financing activities 471 (1,139)
------- -------
Net decrease in cash and cash equivalents
before effect of exchange rate changes (2,950) (1,212)
Effect of exchange rate changes on cash
and cash equivalents 126 163
------- -------
Net decrease in cash and cash equivalents (2,824) (1,049)
Cash at beginning of period 5,952 5,383
------- -------
Cash at end of period $ 3,128 $ 4,334
======= =======
See accompanying notes to condensed consolidated financial statements.
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of the Company, the accompanying unaudited
condensed consolidated interim financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly,
in all material respects, the consolidated financial position of the Company as
of July 31, 2003 and the results of its operations and cash flows for the three
months ended July 31, 2003 and 2002. The April 30, 2003 condensed consolidated
balance sheet was derived from audited financial statements. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's April 30, 2003 Annual Report to Stockholders. The results of
operations for such interim periods are not necessarily indicative of the
operating results for the full year.
NOTE B - EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Three months ended July 31,
2003 2002
Basic EPS Shares outstanding
(weighted average) 8,348,133 8,373,567
Effect of Dilutive Securities *** ***
--------- ---------
Diluted EPS Shares outstanding 8,348,133 8,373,567
========= =========
*** Dilutive securities are excluded for the three month periods ended July
31, 2003 and 2002 since the inclusion of such shares would be antidilutive
due to the net loss for the quarters then ended. For the periods ended July
31, 2003 and 2002, options to purchase 312,800 and 204,500 shares of common
stock were outstanding but are antidilutive since the exercise price is
greater than the average market price of the Company's common shares during
the fiscal periods. The calculation of diluted earnings per share excludes
antidilutive securities.
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at July 31, 2003 and April 30, 2003 include costs and
estimated earnings in excess of billings on uncompleted contracts accounted for
on the percentage of completion basis of approximately $2,414,000 and
$3,023,000, respectively. Such amounts represent revenue recognized on long-term
contracts that had not been billed at the balance sheet dates. Such amounts are
billed pursuant to contract terms.
NOTE D - INVENTORIES
Inventories, which are reported net of reserves of $3,737,000 and
$3,598,000 at July 31, 2003 and April 30, 2003, respectively, consist of the
following:
July 31, 2003 April 30, 2003
(In thousands)
Raw materials and Component parts $ 8,606 $ 7,349
Work in progress and Finished goods 10,900 10,385
------- -------
$19,506 $17,734
======= =======
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E - COMPREHENSIVE INCOME
For the three months ended July 31, 2003 and 2002, total comprehensive
income was $287,000 and $1,001,000, respectively.
NOTE F - SEGMENT INFORMATION
The Company operates under four reportable segments:
1. Commercial communications - consists principally of time and frequency
control products used in commercial communication satellites and
terrestrial cellular telephone or other ground-based
telecommunications.
2. U.S. Government - consists of time and frequency control products used
in terrestrial and space applications by the Department of Defense and
other U.S. government agencies.
3. Gillam-FEI - the products of the Company's Belgian subsidiary consist
primarily of wireline synchronization and network monitoring systems.
4. FEI-Zyfer - the products of the Company's newly acquired subsidiary
incorporate Global Positioning System (GPS) technologies into systems
and subsystems for secure communications, both government and
commercial, and other locator applications.
The table below presents information about reported segments with
reconciliation of segment amounts to consolidated amounts as reported in the
statement of operations or the balance sheet for each of the periods (in
thousands):
Three months ended July 31,
2003 2002
Net sales:
Commercial Communications $ 4,869 $ 3,070
U.S. Government 1,644 1,922
Gillam-FEI 1,347 1,944
FEI-Zyfer 912 -
less intercompany sales (18) (108)
------- -------
Consolidated Sales $ 8,754 $ 6,828
======= =======
Operating (loss) profit:
Commercial Communications $ (274) $ (933)
U.S. Government 72 379
Gillam-FEI (859) (284)
FEI-Zyfer (478) -
Corporate (98) (143)
------- -------
Consolidated Operating Loss $ 1,637 $ (981)
======= =======
As of As of
July 31, 2003 April 30, 2003
Identifiable assets:
Commercial Communications $17,404 $14,733
U.S. Government 6,166 6,147
Gillam-FEI 12,142 12,305
FEI-Zyfer 4,056 -
less intercompany balances (964) (964)
Corporate 48,270 53,508
------- -------
Consolidated Identifiable Assets $87,074 $85,729
======= =======
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE G - ACQUISITION OF FEI-ZYFER
On May 9, 2003, the Company acquired the business and net assets of Zyfer,
Inc., a wholly-owned subsidiary of Odetics, Inc., in a cash transaction. The
business of the new subsidiary, FEI-Zyfer, Inc., is the design and manufacture
of products for precision time and frequency generation and synchronization,
primarily incorporating GPS technology.
The Company paid $2.3 million at closing, plus acquisition costs estimated
at approximately $400,000. According to the terms of the purchase agreement, the
Company will make additional payments up to a maximum of $1 million in each of
fiscal years 2004 and 2005 if FEI-Zyfer achieves certain revenue levels in those
years. The contingent payments are based on a percentage of revenues in excess
of $6 million in fiscal year 2004 and as a percentage of revenues in excess of
$8 million in fiscal year 2005. The acquired business recorded revenue of $6.5
million for the year ended March 31, 2003 and $4.5 million in the prior fiscal
year.
The FEI-Zyfer acquisition is treated as a purchase acquisition. The
purchase price has been initially allocated to net assets acquired of
approximately $1.8 million. The purchase price in excess of net assets,
approximately $900,000, has been initially allocated to goodwill. The Company is
in the process of determining the fair value of acquired tangible and intangible
assets and, once identified, will reallocate the purchase price. Costs allocated
to any intangible assets will be amortized over an appropriate period.
The accompanying condensed consolidated statements of operations for the
three-month period ended July 31, 2003, includes the results of operations of
FEI-Zyfer from May 9, 2003 through July 31, 2003. The pro forma financial
information set forth below is based upon the Company's historical consolidated
statements of operations for the three months ended July 31, 2003 and 2002,
adjusted to give effect to the acquisition of FEI-Zyfer as of the beginning of
each of the periods presented. The fiscal 2002 financial information includes
the results of operations of FEI-Zyfer for the period April 1 to June 30, 2002.
The pro forma financial information is presented for informational purposes
only and may not be indicative of what actual results of operations would have
been had the acquisition occurred on May 1, 2002, nor does it purport to
represent the results of operations for future periods.
Pro forma
Three months ended July 31
2003 2002
(In thousands except per share data)
Net Sales $ 8,855 $ 9,087
------- -------
Operating Loss $(1,717) $(1,023)
------- -------
Loss from continuing operations $ (800) $ (579)
====== =======
Earnings per share- basic $ (0.10) $ (0.07)
======= =======
Earnings per share- diluted $ (0.10) $ (0.07)
======= =======
NOTE H - EQUITY-BASED COMPENSATION
The Company applies the disclosure-only provisions of FAS 123, "Accounting
for Stock-Based Compensation," as amended by FAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and continues to measure
compensation cost in accordance with Accounting Principles Board Opinion No. 25,
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
"Accounting for Stock Issued to Employees." Historically, this has not resulted
in compensation cost upon the grant of options under a qualified stock option
plan. However, in accordance with FAS 123, as amended by FAS 148, the Company
provides pro forma disclosures of net earnings (loss) and earnings (loss) per
share as if the fair value method had been applied beginning in fiscal 1996.
The following table illustrates the effect on the Company's consolidated
statements of operations had compensation cost for stock option awards under the
plans been determined based on the fair value at the grant dates consistent with
the provisions of FAS 123 as amended by FAS 148:
Three months ended
2003 2002
(in thousands, except per share data)
Net Loss, as reported $ (742) $ (489)
====== ======
Net Loss - pro forma $ (923) $ (703)
====== ======
Loss per share, as reported:
Basic $ (0.09) $ (0.06)
======= =======
Diluted $ (0.09) $ (0.06)
======= =======
Loss per share- pro forma
Basic $ (0.11) $ (0.08)
======= =======
Diluted $ (0.11) $ (0.08)
======= =======
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 2003 and 2002, respectively,
dividend yield of 1.83%; expected volatility of 63% and 65%; risk free interest
rate (ranging from 5.5% to 8.0%); and expected lives ranging from seven to ten
years.
Note I - Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). This Interpretation changes the method of
determining whether certain entities should be included in the Company's
consolidated financial statements. An entity is subject to FIN 46 and is called
a variable interest entity ("VIE") if it has (1) equity that is insufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties, or (2) equity investors that cannot make
significant decisions about the entity's operations, or that do not absorb the
expected losses or receive the expected returns of the entity. All other
entities are evaluated for consolidation under FAS No. 94, Consolidation of All
Majority-Owned Subsidiaries. The provisions of FIN 46 are to be applied
immediately to VIEs created after January 31, 2003, and to VIEs in which an
enterprise obtains an interest after that date. For VIEs in which an enterprise
holds a variable interest that it acquired before February 1, 2003, FIN 46
applies in the first fiscal period beginning after June 15, 2003. The Company
does not expect the adoption of FIN 46 to have a material effect on its
financial position, results of operations or cash flows.
In April 2003, the FASB issued Statement No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149
amends FAS 133 for certain decisions made by the FASB as part of the Derivatives
Implementation Group process. FAS 149 also amends FAS 133 to incorporate
clarifications of the definition of a derivative. FAS 149 is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and requires prospective application. The Company does not expect the adoption
of FAS 149 to have a material effect on its financial position, results of
operations or cash flows.
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("FAS 150"). This statement establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. FAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of FAS
150 to have a material effect on its financial position, results of operations
or cash flows.
Item 2
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 1 to
the consolidated financial statements included in the Company's April 30, 2003
Annual Report to Stockholders. 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 reasoned estimates including estimating the cost to complete a contract, the
realizable value of its inventory or the market value of its products. Changes
in estimates can have a material impact on the Company's financial position and
results of operations.
Revenue Recognition
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred. Each month management reviews
estimated contract costs. The effect of any change in the estimated gross margin
percentage for a contract is reflected in revenues in the period in which the
change is known. Provisions for anticipated losses on contracts are made in the
period in which they become determinable.
On production-type contracts, revenue is recorded as units are delivered
with the related cost of sales recognized on each shipment based upon a
percentage of estimated final contract costs. Changes in job performance may
result in revisions to costs and income and are recognized in the period in
which revisions are determined to be required. Provisions for anticipated losses
on contracts are made in the period in which they become determinable.
For contracts in the Company's Gillam-FEI segment, and smaller contracts or
orders in the other business segments, sales of products and services to
customers are reported in operating results based upon shipment of the product
or performance of the services pursuant to contractual terms. When payment is
contingent upon customer acceptance of the installed system, revenue is deferred
until such acceptance is received.
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
Frequency Electronics, Inc. and Subsidiaries
(continued)
and expectations for future business. Any changes in reserves arising from
revised expectations are reflected in cost of sales in the period the revision
is made.
RESULTS OF OPERATIONS
The table below sets forth for the respective first quarters of fiscal years
2004 and 2003 the percentage of consolidated net sales represented by certain
items in the Company's consolidated statements of operations:
Three months ended
July 31,
2003 2002
Net sales
Commercial Communications 55.4% 46.2%
U.S. Government 18.8 26.6
Gillam-FEI 15.4 27.2
FEI-Zyfer 10.4 -
----- -----
100.0 100.0
Cost of sales 70.7 69.9
----- -----
Gross margin 29.3 30.1
Selling and administrative expenses 28.9 30.1
Research and development expenses 19.1 14.4
----- -----
Operating loss (18.7) (14.4)
Other income (expense)- net 8.6 4.2
----- -----
Pretax loss (10.1) (10.2)
Benefit for income taxes (1.6) (2.9)
----- -----
Net loss (8.5)% (7.3)%
===== =====
During the first quarter of fiscal 2004, the Company acquired the business
and net assets of Zyfer, Inc., a wholly-owned subsidiary of Odetics, Inc., in a
cash transaction. The results of operations for the three-month period ended
July 31, 2003, includes the results of operations of FEI-Zyfer from May 9, 2003
through July 31, 2003.
For the three months ended July 31, 2003, operating loss increased by
$656,000 (67%) and the net loss increased by $253,000 (52%) over the comparable
period of fiscal year 2003. During the fiscal year 2004 period, FEI-Zyfer
recorded an operating loss of $478,000 and a net loss of $335,000. The fiscal
year 2004 results also reflect the continuing impact of the slowdown in the
telecommunications industry over the past several quarters.
Fiscal year 2004 first quarter revenues, including $912,000 from FEI-Zyfer,
increased by $1.9 million (28%) from the first quarter of fiscal year 2003.
During the fiscal year 2004 quarter, the Company recorded a sale of
approximately $900,000 for seed stock units which, to accommodate certain
wireless infrastructure customers, had been provided to them during fiscal year
2003. Excluding revenues from FEI-Zyfer and the seed stock units, fiscal year
2004 first quarter revenues increased by $109,000 (2%). On a segment by segment
basis, Commercial Communications revenues (excluding seed stock revenues)
increased by 29%, Gillam-FEI revenues were lower by 31% and US Government
revenues decreased by 14%.
First quarter gross margin rates declined slightly from 30% in fiscal year
2003 to 29% in fiscal year 2004. Gross margins for all segments are less than
the Company's target of 40% as the sales volumes was unable to fully absorb
fixed costs. The US Government margins were also impacted by cost overruns on
certain larger programs in fiscal year 2004. The continuing delay in
infrastructure spending by European telecommunications companies drove down
Gillam-FEI sales volume and thus margins as well. With recent contract bookings,
the Company expects to realize a greater level of sales in
Frequency Electronics, Inc. and Subsidiaries
(Continued)
subsequent quarters of the fiscal year which should result in improved profit
margins during the remainder of fiscal year 2004.
Selling and administrative costs for the quarter ended July 31, 2003,
increased by $483,000 (24%) over the three months ended July 31, 2002. Excluding
the fiscal year 2004 results of FEI-Zyfer, selling and administrative costs
declined by 1% from fiscal year 2003. Compared to the first quarter of fiscal
year 2003, euro-denominated selling and administrative costs at Gillam-FEI
decreased by 13% in fiscal year 2004. Because of the 24% year-over-year increase
in the value of the euro to the US dollar, Gillam-FEI's selling and
administrative expenses, when denominated in dollars, were 8% ($50,000) higher
than the year ago period. Reduced costs in the United States were partially
offset by increased sales and marketing costs to support the Company's European
office and continued investment in the Company's China manufacturing facility.
The Company targets selling and administrative costs at 20% of revenues but has
not achieved that result in recent quarters due to reduced revenue levels. In
prior periods, the Company took steps to control and reduce its selling and
administrative expenses such that, on increased revenues in subsequent fiscal
quarters, it expects to achieve its targeted ratio of costs to sales.
Research and development costs in the fiscal year 2004 quarter increased by
$685,000 (70%) over the comparable three-month period ended July 31, 2002. The
increase includes $285,000 in development spending on GPS systems by FEI-Zyfer.
In addition, Gillam-FEI is working aggressively to complete the development of
its next generation wireline signal synchronization unit which it expects to
have ready for market within the next few months. The Company targets research
and development spending at approximately 10% of sales but the rate of spending
can increase or decrease from quarter to quarter as new projects are identified
and others are concluded. The Company will continue to devote significant
resources to develop new products, enhance existing products and implement
efficient manufacturing processes. During this fiscal year, in addition to
Gillam-FEI's wireline synchronization product and FEI-Zyfer's GPS systems, the
Company intends to develop a common platform for time and frequency generators
for commercial communications, further develop low-g (gravity) sensitivity
oscillators for defense and secure applications and seek to identify new
applications for its technologies. Internally generated cash and cash reserves
are adequate to fund this development effort.
Net nonoperating income and expense increased by $410,000 (141%) in the
three months ended July 31, 2003 from the comparable fiscal year 2003 quarter.
Investment income included realized gains of $304,000 on the sale or redemption
of certain marketable securities as compared to net realized losses of $121,000
in the same period of fiscal year 2003. Interest expense decreased by $13,000
(18%) while other, net, increased by $6,000 during the fiscal year 2004 quarter
compared to the same period of fiscal year 2003. Other, net, consists
principally of certain non-recurring transactions and is generally not
significant to net income.
The Company is subject to taxation in several countries. The statutory
federal rates vary from 34% in the United States to 35% in Europe. The Company's
effective rate is lower than the statutory rate primarily due to the
availability of Research and Development Tax Credits in the United States. In
the quarter ended July 31, 2003, the effective tax (benefit) rate is 15% due to
the exclusion of the losses at one of the European subsidiaries. In fiscal year
2003, the Company recorded a $600,000 valuation allowance against the deferred
tax asset of this foreign subsidiary. The Company's European subsidiaries have
available net operating loss carryforwards of approximately $2.0 million to
offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $61 million at July 31, 2003 which is comparable to working capital
at April 30, 2003. Included in working capital at July 31, 2003 is $29.3 million
of cash, cash equivalents and marketable securities, including $11.1 million of
REIT units which are convertible to Reckson Associates Realty Corp. common
stock.
Net cash used in operating activities for the three months ended July 31,
2003, was $3.3 million compared to $297,000 used in operations in the comparable
fiscal year 2003 quarter. Approximately $1.4 million was used to support the
Frequency Electronics, Inc. and Subsidiaries
(Continued)
operations of the Company's new subsidiary, FEI-Zyfer. The Company considers the
infusion of working capital into FEI-Zyfer as part of its investment in this
entity to enable it to achieve better results than the predecessor company
experienced in recent years.
The other major component of the use of cash during the fiscal year 2004
quarter was the growth in accounts receivable. This growth reflects the timing
of the billing and payment cycle. Shortly after the end of the quarter, the
Company collected significant amounts against outstanding balances and expects
to collect additional sums on several large billings which occurred at the end
of the quarter. The Company anticipates that it will generate positive cash flow
from operating activities for the full fiscal year.
Net cash used in investing activities for the three months ended July 31,
2003, was $104,000. The principal use of cash was to acquire the net assets of
FEI-Zyfer for approximately $2.7 million. This acquisition and the subsequent
financial support, as discussed in the preceding paragraph, was partially funded
by the redemption or sale of certain marketable securities. Approximately $2.8
million was obtained from the sale or redemption of certain marketable
securities net of purchases of other marketable securities. These inflows were
offset by the acquisition of capital equipment for approximately $238,000. The
Company may continue to acquire or sell marketable securities as dictated by its
investment strategies as well as by the cash requirements for its development
activities. The Company will continue to acquire more efficient equipment to
automate its production process and expand its capacity. The Company intends to
spend less than $2 million on capital equipment during fiscal year 2004.
Internally generated cash will be adequate to acquire this capital equipment.
Net cash provided by financing activities for the three months ended July
31, 2003, was $471,000 compared to the use of $1.1 million for the comparable
fiscal year 2003 quarter. Included in both fiscal quarters is payment of the
Company's semiannual dividend in the aggregate amount of $834,000 and $833,000,
respectively. During the fiscal year 2004 quarter, the Company took advantage of
the low interest rate environment and borrowed $1.5 million against a credit
line which is secured by a substantial portion of the Company's portfolio of
marketable securities. In addition, during the fiscal year 2004 quarter the
Company made scheduled payments against debt and other obligations of $226,000.
At July 31, 2003, the Company's backlog amounted to approximately $28
million compared to the approximately $31 million backlog at April 30, 2003. Of
this backlog, approximately 70% is realizable in the next twelve months.
Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). This Interpretation changes the method of
determining whether certain entities should be included in the Company's
consolidated financial statements. An entity is subject to FIN 46 and is called
a variable interest entity ("VIE") if it has (1) equity that is insufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties, or (2) equity investors that cannot make
significant decisions about the entity's operations, or that do not absorb the
expected losses or receive the expected returns of the entity. All other
entities are evaluated for consolidation under FAS No. 94, Consolidation of All
Majority-Owned Subsidiaries. The provisions of FIN 46 are to be applied
immediately to VIEs created after January 31, 2003, and to VIEs in which an
enterprise obtains an interest after that date. For VIEs in which an enterprise
holds a variable interest that it acquired before February 1, 2003, FIN 46
applies in the first fiscal period beginning after June 15, 2003. The Company
does not expect the adoption of FIN 46 to have a material effect on its
financial position, results of operations or cash flows.
In April 2003, the FASB issued Statement No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149
amends FAS 133 for certain decisions made by the FASB as part of the Derivatives
Implementation Group process. FAS 149 also amends FAS 133 to incorporate
clarifications of the definition of a derivative. FAS 149 is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and requires prospective application. The Company does not expect the adoption
of FAS 149 to have a material effect on its financial position, results of
operations or cash flows.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("FAS 150"). This statement establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. FAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of FAS
150 to have a material effect on its financial position, results of operations
or cash flows.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company is exposed to market risk related to changes in interest rates
and market values of securities, including participation units in the Reckson
Operating Partnership, L.P. The Company's investments in fixed income and equity
securities were $15.0 million and $11.1 million, respectively, at July 31, 2003.
The investments are carried at fair value with changes in unrealized gains and
losses recorded as adjustments to stockholders' equity. The fair value of
investments in marketable securities is generally based on quoted market prices.
Typically, the fair market value of investments in fixed interest rate debt
securities will increase as interest rates fall and decrease as interest rates
rise. Based on the Company's overall interest rate exposure at July 31, 2003, a
10% change in market interest rates would not have a material effect on the fair
value of the Company's fixed income securities or results of operations
(investment income). The Company has also borrowed $1.5 million against a credit
line it established with a financial institution which manages a portion of the
Company's portfolio of marketable securities. The borrowings, which have a
one-year maturity, bear a fixed rate of interest. Renewal or increased
borrowings against the credit line will be predicated on the available interest
rate compared to yields on marketable securities. As a consequence, a 10% change
in market interest rates would not have a material effect on the fair value of
the Company's short-term credit obligations or results of operations (interest
expense).
Foreign Currency Risk
The Company is subject to foreign currency translation risk. The Company
does not have any near-term intentions to repatriate invested cash in any of its
foreign-based subsidiaries. For this reason, the Company does not intend to
initiate any exchange rate hedging strategies which could be used to mitigate
the effects of foreign currency fluctuations. The effects of foreign currency
rate fluctuations will be recorded in the equity section of the balance sheet as
a component of other comprehensive income. As of July 31, 2003, the amount
related to foreign currency exchange rates is a $3,105,000 unrealized gain.
The results of operations of foreign subsidiaries, when translated into US
dollars, will reflect the average rates of exchange for the periods presented.
As a result, similar results in local currency can vary significantly upon
translation into US dollars if exchange rates fluctuate significantly from one
period to the next.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
Item 4.
Disclosure Controls and Procedures
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its Chief
Executive Officer, Martin B. Bloch and Chief Financial Officer, Alan L. Miller,
of the effectiveness of disclosure controls and procedures pursuant to Exchange
Act Rules 13a-14 and 15d-14. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic SEC reports. There have been
no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995:
The statements in this quarterly report on Form 10Q 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, 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, changes in contractual terms, the
availability of capital, and other risks detailed in the Company's periodic
report filings with the Securities and Exchange Commission. By making these
forward-looking statements, the Company undertakes no obligation to update these
statements for revisions or changes after the date of this report.
PART II
ITEM 1 - Legal Proceedings
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 - Certification by the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification by the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 - Certification by the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 - Certification by the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K-
Registrant's Form 8-K, dated May 19, 2003, containing disclosure under
Item 2 thereof (acquisition of the net assets of Zyfer, Inc.), was
filed with the Securities and Exchange Commission on May 19, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
(Registrant)
Date: September 15, 2003 BY /s/Alan Miller
--------------
Alan Miller
Chief Financial Officer
and Controller
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
I, Martin B. Bloch, certify that
1. I have reviewed this quarterly report on Form 10-Q of Frequency
Electronics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting;
/s/ Martin B. Bloch September 15, 2003
-------------------
Martin B. Bloch
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CFO
I, Alan L. Miller, certify that
1. I have reviewed this quarterly report on Form 10-Q of Frequency
Electronics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting;
/s/ Alan Miller September 15, 2003
---------------
Alan L. Miller
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
In connection with the Quarterly Report of Frequency Electronics, Inc. (the
"Company") on Form 10-Q for the period ended July 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Martin
B. Bloch, Chief Executive Officer of the Company, certify, pursuant to Section
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Martin B. Bloch September 15, 2003
-------------------
Martin B. Bloch
Chief Executive Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to the Company
and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
This certification accompanies this Report on Form 10-Q pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such certification will not be deemed to be incorporated
by reference into any filing under the Securities Act of 1933, as amended,
or the Exchange Act, except to the extent that the Company specifically
incorporates it by reference.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of CFO
In connection with the Quarterly Report of Frequency Electronics, Inc. (the
"Company") on Form 10-Q for the period ended July 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Alan L.
Miller, Chief Financial Officer of the Company, certify, pursuant to Section 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Alan Miller September 15, 2003
---------------
Alan L. Miller
Chief Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to the Company
and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
This certification accompanies this Report on Form 10-Q pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent
required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such certification will not be deemed to be incorporated
by reference into any filing under the Securities Act of 1933, as amended,
or the Exchange Act, except to the extent that the Company specifically
incorporates it by reference.