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 October 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 December 8, 2003 - 8,370,956
Page 1 of 22
Frequency Electronics, Inc. and Subsidiaries
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
October 31, 2003 and April 30, 2003 3-4
Consolidated Condensed Statements of Operations
Six Months Ended October 31, 2003 and 2002 5
Condensed Consolidated Statements of Operations
Three Months Ended October 31, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended October 31, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-15
Item 3- Quantitative and Qualitative Disclosures about Market Risk 16
Item 4- Disclosures Controls and Procedures 16
Part II. Other Information:
Item 1 - Legal Proceedings 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits 19-22
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 31, April 30,
2003 2003
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 1,831 $ 5,952
Marketable securities 26,983 27,829
Accounts receivable, net of allowance for
doubtful accounts of $124 12,357 9,565
Inventories 20,581 17,734
Deferred income taxes 3,962 4,435
Income taxes receivable 787 1,223
Prepaid expenses and other 1,529 1,198
-------- --------
Total current assets 68,030 67,936
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,116 11,105
Deferred income taxes 402 436
Cash surrender value of life insurance 5,020 4,869
Intangible assets, net 807 -
Other assets 1,239 1,383
-------- --------
Total assets $ 86,614 $ 85,729
======== ========
See accompanying notes to condensed consolidated
financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
October 31, April 30,
2003 2003
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term credit obligations $ 1,202 $ 179
Accounts payable - trade 2,040 1,294
Dividend payable 837 834
Accrued liabilities and other 3,378 3,615
-------- --------
Total current liabilities 7,457 5,922
Deferred compensation 6,923 6,752
REIT liability and other liabilities 10,856 11,151
-------- --------
Total liabilities 25,236 23,825
-------- --------
Minority interest in subsidiary 88 195
-------- --------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,164 9,164
Additional paid-in capital 43,947 43,806
Retained earnings 8,601 10,415
-------- --------
61,712 63,385
Common stock reacquired and held in treasury
-at cost, 792,984 shares at October 31, 2003
and 824,739 shares at April 30, 2003 (2,965) (3,062)
Other stockholders' equity (116) (116)
Accumulated other comprehensive income 2,659 1,502
-------- --------
Total stockholders' equity 61,290 61,709
-------- --------
Total liabilities and stockholders' equity $ 86,614 $ 85,729
======== ========
See accompanying notes to condensed consolidated
financial statements.
Frequency Electronics, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
Six Months Ended October 31,
(Unaudited)
2003 2002
---- ----
(In thousands except per share data)
Net Sales $18,779 $15,128
Cost of sales 12,892 10,452
------- -------
Gross margin 5,887 4,676
Selling and administrative expenses 5,315 3,942
Research and development expenses 2,915 1,672
------- -------
Operating loss (2,343) (938)
Other income (expense):
Investment income 1,343 782
Interest expense (124) (117)
Other income (expense), net (38) (84)
------- -------
Loss before minority interest and
provision for income taxes (1,162) (357)
Minority Interest in loss of
consolidated subsidiary (107) (22)
------- -------
Loss before benefit/provision for income taxes (1,055) (335)
Benefit for income taxes (78) (97)
-------- -------
Net loss $ (977) $ (238)
======== ========
Net loss per common share
Basic $ (0.12) $ (0.03)
======= =======
Diluted $ (0.12) $ (0.03)
======= =======
Average shares outstanding
Basic 8,357,568 8,336,310
========= =========
Diluted 8,357,568 8,336,310
========= =========
See accompanying notes to consolidated condensed
financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended October 31,
(Unaudited)
2003 2002
---- ----
(In thousands except per share data)
Net Sales $10,025 $ 8,300
Cost of sales 6,705 5,679
------- -------
Gross Margin 3,320 2,621
Selling and administrative expenses 2,778 1,889
Research and development expense 1,247 689
------- -------
Operating (loss) profit (705) 43
Other income (expense):
Investment income 597 427
Interest expense (65) (45)
Other income (expense), net (51) (91)
------- -------
(Loss) Income before minority interest and
provision for income taxes (224) 334
Minority Interest in loss of
consolidated subsidiary (52) (12)
-------- -------
(Loss) Income before provision for income taxes (172) 346
Provision for income taxes 62 95
------- -------
Net (loss) income $ (234) $ 251
======= =======
Net (loss) earnings per common share
Basic $ (0.03) $ 0.03
======= =======
Diluted $ (0.03) $ 0.03
======= =======
Average shares outstanding
Basic 8,367,003 8,334,053
========= =========
Diluted 8,367,003 8,364,409
========= =========
See accompanying notes to condensed consolidated
financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended October 31,
(Unaudited)
2003 2002
---- ----
(In thousands)
Cash flows from operating activities:
Net loss $ (977) $ (238)
Non-cash charges to earnings 899 1,766
Net changes in other assets and liabilities (3,880) (2,381)
------- -------
Net cash used in operating activities (3,958) (853)
Cash flows from investing activities:
Payment for acquisition (2,643) -
Proceeds from sale of marketable securities 7,397 5,208
Purchase of marketable securities (4,879) (3,879)
Other - net (240) (380)
------- -------
Net cash (used in) provided by investing activities (365) 949
Cash flows from financing activities:
Proceeds from short-term credit obligations 1,183 -
Payment of cash dividend (834) (833)
Payment on long-term obligations (315) (499)
Repurchase of stock for treasury - (501)
Other - net 57 -
------- -------
Net cash provided by (used in) financing activities 91 (1,833)
------- -------
Net decrease in cash and cash equivalents
before effect of exchange rate changes (4,232) (1,737)
Effect of exchange rate changes
on cash and cash equivalents 111 204
------- -------
Net decrease in cash (4,121) (1,533)
Cash at beginning of period 5,952 5,383
------- -------
Cash at end of period $ 1,831 $ 3,850
======= =======
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 October 31, 2003 and the results of its operations for the six and three
months and cash flows for the six months ended October 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:
Periods ended October 31,
Six months Three months
---------- ------------
2003 2002 2003 2002
---- ---- ---- ----
Basic EPS Shares outstanding
(weighted average) 8,357,568 8,336,310 8,367,003 8,334,053
Effect of Dilutive Securities *** *** *** 30,356
--------- --------- --------- ---------
Diluted EPS Shares outstanding 8,357,568 8,336,310 8,367,003 8,364,409
========= ========= ========= =========
*** Dilutive securities are excluded for the six- and three month periods
ended October 31, 2003 and the three month period ended October 31, 2002
since the inclusion of such shares would be antidilutive due to the net
loss for the periods then ended.
Options to purchase 993,287 shares were outstanding during the three months
ended October 31, 2002, but were not included in the computation of diluted
earnings per share. Since the exercise price of these options was greater than
the average market price of the Company's common shares during the period, their
inclusion in the computation would have been antidilutive. Consequently, these
options are excluded from the computation of earnings per share.
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at October 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 $2,362,000 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 $3,885,000 and
$3,598,000 at October 31, 2003 and April 30, 2003, respectively, consist of the
following:
October 31, 2003 April 30, 2003
(In thousands)
Raw materials and Component parts $ 9,359 $ 7,349
Work in progress and Finished goods 11,222 10,385
------- -------
$20,581 $17,734
======= =======
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E - -COMPREHENSIVE INCOME
For the six months ended October 31, 2003 and 2002, total comprehensive
income was $180,000 and $865,000, respectively. Comprehensive income is composed
of net income or loss for the period plus the impact of foreign currency
translation adjustments and the change in the valuation allowance on marketable
securities.
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):
Six months Three months
Periods ended October 31,
2003 2002 2003 2002
---- ---- ---- ----
Net sales:
Commercial Communications $10,994 $ 7,088 $ 6,133 $4,018
U.S. Government 3,667 4,285 2,014 2,363
Gillam-FEI 2,527 4,052 1,180 2,108
FEI-Zyfer 1,968 - 1,056 -
less intercompany sales (377) (297) (358) (189)
------- ------- ------- ------
Consolidated Sales $18,779 $15,128 $10,025 $8,300
======= ======= ======= ======
Operating profit (loss):
Commercial Communications $ 273 $(1,323) $ 547 $ (390)
U.S. Government 328 953 257 574
Gillam-FEI (1,587) (270) (728) 14
FEI-Zyfer (1,009) - (531) -
less intercompany transactions (122) (17) (115) (17)
Corporate (226) (281) (135) (138)
------- ------- ------- ------
Consolidated Operating (Loss) Profit $(2,343) $ (938) $ (705) $ 43
======= ======== ======= ======
October 31, 2003 April 30, 2003
Identifiable assets:
Commercial Communications $19,709 $14,733
U.S. Government 5,515 6,147
Gillam-FEI 11,493 12,305
FEI-Zyfer 4,280 -
less intercompany balances (1,549) (964)
Corporate 47,166 53,508
------- -------
Consolidated Identifiable Assets $86,614 $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, is initially allocated to intangible assets. 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
six- and three-month periods ended October 31, 2003, includes the results of
operations of FEI-Zyfer from May 9, 2003 through October 31, 2003. The pro forma
financial information set forth below is based upon the Company's historical
consolidated statements of operations for the six and three months ended October
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 September 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 periods ended October 31
(unaudited)
Six months Three months
2003 2002 2003 2002
---- ---- ---- ----
(In thousands except per share data)
Net Sales $18,880 $19,779 $10,025 $10,692
------- ------- ------- -------
Operating Loss $(2,423) $(1,142) $ (705) $ (119)
------- ------- -------- -------
(Loss) income from
continuing operations $(1,036) $ (468) $ (236) $ 111
======= ======= ======= ======
(Loss) Earnings per share- basic $(0.12) $(0.06) $(0.03) $0.06
====== ====== ====== =====
(Loss) Earnings per share- diluted $(0.12) $(0.06) $(0.03) $0.01
====== ====== ====== =====
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
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Historically, this has not resulted in compensation cost upon the grant of
options under a qualified stock option plan. However, in accordance with FAS
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:
Periods ended October 31
Six months Three months
2003 2002 2003 2002
---- ---- ---- ----
(In thousands except per share data)
Net (Loss) Income, as reported $ (977) $ (238) $ (234) $ 251
====== ====== ====== =====
Net (Loss) Income - pro forma $(1,360) $ (653) $ (436) $ 50
======= ====== ====== =====
(Loss) Earnings per share, as reported:
Basic $(0.12) $(0.03) $(0.03) $ 0.03
====== ====== ====== ======
Diluted $(0.12) $(0.03) $(0.03) $ 0.03
====== ====== ====== ======
(Loss) Earnings per share- pro forma
Basic $(0.16) $(0.08) $(0.05) $ 0.01
====== ====== ====== ======
Diluted $(0.16) $(0.08) $(0.05) $ 0.01
====== ====== ====== ======
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 adoption of FAS 149 had no material
effect on the Company's 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 adoption of FAS 149 had no material effect on
the Company's financial position, results of operations or cash flows.
Item 2
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 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.
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.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
For contracts in the Company's Gillam-FEI and FEI-Zyfer segments, smaller
contracts or orders in the other business segments, and 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
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 periods of fiscal years 2004
and 2003 the percentage of consolidated net sales represented by certain items
in the Company's consolidated statements of operations:
Six months Three months
Periods ended October 31,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales
Commercial Communications 56.6% 46.1% 57.8% 47.2%
U.S. Government 19.5 28.3 20.1 28.5
Gillam-FEI 13.4 25.6 11.6 24.3
FEI-Zyfer 10.5 - 10.5 -
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of Sales 68.7 69.1 66.9 68.4
----- ----- ----- -----
Gross Margin 31.3 30.9 33.1 31.6
Selling and administrative expenses 28.3 26.1 27.7 22.8
Research and development expenses 15.5 11.0 12.4 8.3
----- ----- ----- -----
Operating (loss) profit (12.5) (6.2) (7.0) 0.5
Other income (expense)- net 6.9 3.8 5.3 3.5
----- ----- ----- -----
Pretax (Loss) Income (5.6) (2.4) (1.7) 4.0
(Benefit) Provision for income taxes (0.4) (0.8) 0.6 1.0
------ ----- ----- -----
Net (loss) income (5.2)% (1.6)% (2.3)% 3.0%
===== ===== ===== =====
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 six- and three-month periods
ended October 31, 2003, include the results of operations of FEI-Zyfer from May
9, 2003 through October 31, 2003.
For the six months ended October 31, 2003, the operating loss increased by
$1.4 million (150%) over the same period ended October 31, 2002. The fiscal year
2004 second quarter operating loss of $705,000 is compared to an operating
profit of $43,000 in the second quarter of fiscal year 2003. The net loss for
the six months ended October 31, 2003 increased by $739,000 (310%) over the net
loss recorded for the first six months of fiscal year 2003, and the net loss of
$234,000 during the second quarter of fiscal year 2004 is compared to net income
of $251,000 in the second quarter of fiscal year 2003. These results
Frequency Electronics, Inc. and Subsidiaries
(Continued)
include those of newly acquired FEI-Zyfer, which recorded operating losses of
$1.0 million and $531,000, respectively, and net losses of $711,000 and
$376,000, respectively, during the six and three months ended October 31, 2003.
The fiscal year 2004 results also reflect the continuing impact of the slowdown
in the European telecommunications industry over the past several quarters.
Revenues for the six and three months ended October 31, 2003, increased by
$3.6 million (24%) and $1.7 million (21%), respectively, from the same periods
of fiscal year 2003. The fiscal 2004 periods include revenues for FEI-Zyfer of
$1.97 million and $1.06 million, respectively. Also, during the first quarter of
fiscal year 2004, 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 revenues increased by $778,000 (5%)
and $669,000 (8%), respectively, over the six and three month periods ended
October 31, 2002. On a segment by segment basis, for the six and three month
periods ended October 31, 2003, Commercial Communications revenues (excluding
seed stock revenues) increased by 42% and 53%, respectively; Gillam-FEI revenues
were lower by 38% and 44%, respectively; and US Government revenues decreased by
14% and 15%, respectively. The Commercial Communications revenues reflect growth
in capital spending in the wireless infrastructure industry as well as modest
increases in commercial communication satellite activity. Gillam-FEI revenues
continued at a lower rate due to the deferral or postponement of
telecommunications spending in Europe. US Government segment revenues declined
as the Company neared the end of certain long-term contracts.
Gross margin rates for the six and three months ended October 31, 2003,
improved slightly to 31.3% and 33.1% from 30.9% and 31.6% in the same periods of
fiscal year 2003. Gross margins for all segments are less than the Company's
target of 40% as sales volumes were 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 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 six and three months ended October
31, 2003, increased by $1.4 million (35%) and $889,000 (47%), respectively, over
the same periods of fiscal year 2003. Excluding the fiscal year 2004 results of
FEI-Zyfer, selling and administrative costs increased by $297,000 (8%) and
$310,000 (16%), respectively, from the six and three month periods of fiscal
year 2003. Most of these increases are attributable to expenses at Gillam-FEI
resulting from severance pay to certain employees of its French subsidiary
coupled with the significant year-over-year increase in the value of the euro to
the US dollar. 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 six and three months ended October
31, 2003 increased by $1.2 million (74%) and $558,000 (81%) over the comparable
periods ended October 31, 2002. The increase includes $610,000 and $325,000,
respectively, 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 before the end of fiscal year 2004. 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. Where possible, the Company
Frequency Electronics, Inc. and Subsidiaries
(Continued)
attempts to secure development contracts from its customers. For programs
without such funding, internally generated cash and cash reserves are adequate
to fund this development effort.
Net nonoperating income and expense increased by $600,000 (103%) and
$190,000 (65%) in the six and three months ended October 31, 2003 from the
comparable fiscal year 2003 periods. Investment income in the fiscal year 2004
periods included realized gains of approximately $480,000 and $180,000,
respectively, on the sale or redemption of certain marketable securities as
compared to net realized losses of $160,000 and $40,000, respectively, in the
same periods of fiscal year 2003. Interest expense decreased by $7,000 (6%) and
$20,000 (44%), respectively, which fluctuates based on short-term borrowing
requirements of the Company, particularly in Europe. Other expense, net,
decreased by $46,000 and $40,000, respectively, during the fiscal year 2004
periods compared to the six and three months ended October 31, 2002. In the
fiscal year 2003 periods, the Company realized a $17,000 loss on disposal of
certain assets, which did not recur in fiscal year 2004. Other income (expense),
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 six months ended October 31, 2003, the effective tax (benefit) rate is 7%
while for the three month period then ended, the Company recorded a tax expense
despite realizing a consolidated pretax loss. This is due to the inability to
consolidate the tax losses originating 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 October 31, 2003, which is comparable to working
capital at April 30, 2003. Included in working capital at October 31, 2003 is
$28.8 million of cash, cash equivalents and marketable securities, including
$11.4 million of REIT units which are convertible to Reckson Associates Realty
Corp. common stock.
Net cash used in operating activities for the six months ended October 31,
2003, was $3.96 million compared to $853,000 used in operations in the
comparable fiscal year 2003 period. Approximately $1.8 million was used to
support the 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 components of
the use of cash during the fiscal year 2004 period are the growth in inventories
and accounts receivable. Both are reflective of the recent sales growth trend
and the need to acquire inventory to meet expected demand. The Company expects
that it will generate positive cash flow from operating activities during the
second half of fiscal year 2004, however, this inflow may not be sufficient to
exceed the investments made in the first half of the fiscal year. Consequently,
the Company may report a net use of cash from operating activities for the full
fiscal year.
Net cash used in investing activities for the six months ended October 31,
2003, was $365,000. The principal use of cash was to acquire the net assets of
FEI-Zyfer for approximately $2.6 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 $2.5
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 $320,000. 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 six months ended October
31, 2003, was $91,000 compared to the use of $1.8 million for the comparable
fiscal year 2003 period. Included in both fiscal periods is payment of the
Company's semiannual dividend in the aggregate amount of $834,000 and $833,000,
respectively. During fiscal year 2004, the Company took advantage of the low
interest rate environment and borrowed $1.0 million against a credit line which
is secured by a substantial portion of the Company's portfolio of marketable
securities. In addition, during fiscal year 2004 the Company made scheduled
payments against debt and other obligations of $315,000.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
At October 31, 2003, the Company's backlog amounted to approximately $41
million compared to the approximately $31 million backlog at April 30, 2003. Of
this backlog, approximately 80% is realizable in the next twelve months.
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 $15.6 million and $11.4 million, respectively, at October 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 October 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.
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 October 31, 2003, the amount
related to foreign currency exchange rates is a $3,012,000 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.
Item 4.
Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the period covered by
this quarterly report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were
effective as of the end of the period covered by this quarterly report.
As required by Rule 13a-15(d) of the Exchange Act, the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the Company's internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) to determine whether any
changes occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting. Based on that evaluation, there has been no such
change during quarter covered by this report.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
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-
Form 8-K, dated October 16, 2003, containing disclosure under Item 5
thereof (dividend declaration.), was filed with the Securities and
Exchange Commission on October 17, 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: December 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.
/s/ Martin B. Bloch December 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.
/s/ Alan L. Miller December 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 October 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
2003, 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 December 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 32.1
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 October 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 L. Miller December 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.