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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, 2004
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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes No X
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of September 9, 2004 - 8,442,831
Page 1 of 20
Frequency Electronics, Inc. and Subsidiaries
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
July 31, 2004 and April 30, 2004 3-4
Condensed Consolidated Statements of Operations
Three Months Ended July 31, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
Item 3- Quantitative and Qualitative Disclosures about Market Risk 14-15
Item 4- Controls and Procedures 15
Part II. Other Information:
Items 1 through 5 are omitted because they are not applicable
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibits 17-20
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Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 31, April 30,
2004 2004
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 3,422 $ 5,699
Marketable securities 28,879 25,690
Accounts receivable, net of allowance
for doubtful accounts of $140 14,099 15,036
Inventories 21,394 21,925
Deferred income taxes 2,628 2,585
Income taxes receivable - 242
Prepaid expenses and other 1,568 1,658
------- -------
Total current assets 71,990 72,835
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,227 11,486
Deferred income taxes 95 593
Cash surrender value of life insurance 5,460 5,355
Goodwill and other Intangible assets, net 590 616
Other assets 1,772 1,775
------- -------
Total assets $91,134 $92,660
======= =======
See accompanying notes to condensed consolidated
financial statements.
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Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
July 31, April 30,
2004 2004
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term credit obligations $ 2,075 $ 3,408
Accounts payable - trade 2,749 3,470
Accrued liabilities and other 2,964 4,106
Dividend payable - 843
Income taxes payable 550 -
------- -------
Total current liabilities 8,338 11,827
Deferred compensation 6,870 6,854
REIT liability and other liabilities 10,543 10,755
------- -------
Total liabilities 25,751 29,436
------- -------
Minority interest in subsidiary 67 48
------- -------
Stockholders' equity:
Preferred stock - $1.00 par value - -
Common stock - $1.00 par value 9,164 9,164
Additional paid-in capital 44,554 44,442
Retained earnings 9,873 8,897
------- -------
63,591 62,503
Common stock reacquired and held in treasury
-at cost, 723,108 shares at July 31, 2004
and 738,428 shares at April 30, 2004 (2,748) (2,797)
Other stockholders' equity (17) (17)
Accumulated other comprehensive income 4,490 3,487
------- -------
Total stockholders' equity 65,316 63,176
------- -------
Total liabilities and stockholders' equity $91,134 $92,660
======= =======
See accompanying notes to condensed consolidated
financial statements.
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Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended July 31,
(Unaudited)
2004 2003
---- ----
(In thousands except
per share data)
Net Sales $17,683 $ 8,754
Cost of sales 11,905 6,187
------- -------
Gross Margin 5,778 2,567
Selling and administrative expenses 3,293 2,536
Research and development expense 1,236 1,668
------- -------
Operating profit (loss) 1,249 (1,637)
Other income (expense):
Investment income 415 746
Interest expense (78) (59)
Other income, net 58 13
------- -------
Income (loss) before minority interest and
provision for income taxes 1,644 (937)
Minority interest in income (loss)
of consolidated subsidiary 19 (55)
------- -------
Income (loss) before provision for income taxes 1,625 (882)
Provision (benefit) for income taxes 648 (140)
------- -------
Net income (loss) $ 977 $ (742)
======= =======
Net earnings (loss) per common share
Basic $ 0.12 $(0.09)
====== ======
Diluted $ 0.11 $(0.09)
====== ======
Average shares outstanding
Basic 8,434,618 8,348,133
========= =========
Diluted 8,646,358 8,348,133
========= =========
See accompanying notes to condensed consolidated
financial statements.
5 of 30
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31,
(Unaudited)
2004 2003
---- ----
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 977 $ (742)
Non-cash charges to earnings 587 387
Net changes in other assets and liabilities 389 (2,962)
------- -------
Net cash provided by (used in) operating activities 1,953 (3,317)
------- -------
Cash flows from investing activities:
Payment for acquisition - (2,697)
Proceeds from sale of marketable securities 500 5,180
Purchase of marketable securities (2,240) (2,364)
Other - net (257) (223)
------- -------
Net cash used in investing activities (1,997) (104)
------- -------
Cash flows from financing activities:
Proceeds from short-term credit obligations - 1,506
Payment of cash dividend (843) (834)
Payment on long-term obligations (1,442) (156)
Other - net 60 (45)
------- -------
Net cash (used in) provided by financing activities (2,225) 471
------- -------
Net decrease in cash and cash equivalents
before effect of exchange rate changes (2,269) (2,950)
Effect of exchange rate changes
on cash and cash equivalents (8) 126
------- -------
Net decrease in cash (2,277) (2,824)
Cash at beginning of period 5,699 5,952
------- -------
Cash at end of period $ 3,422 $ 3,128
======= =======
See accompanying notes to condensed consolidated
financial statements.
6 of 20
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, 2004 and the results of its operations and cash flows for the three
months ended July 31, 2004 and 2003. The April 30, 2004 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, 2004 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 July 31,
Three months
2004 2003
---- ----
Basic EPS Shares outstanding
(weighted average) 8,434,618 8,348,133
Effect of Dilutive Securities 211,740 ***
--------- ---------
Diluted EPS Shares outstanding 8,646,358 8,348,133
========= =========
*** Dilutive securities are excluded for the three month period ended July
31, 2004 since the inclusion of such shares would be antidilutive due to
the net loss for the period then ended.
Options to purchase 231,750 and 312,800 shares of common stock were
outstanding during the three months ended July 31, 2004 and 2003, respectively,
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 periods, 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 July 31 and April 30, 2004 include costs and
estimated earnings in excess of billings on uncompleted contracts accounted for
on the percentage of completion basis of approximately $2,913,000 and
$2,428,000, 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 $3,520,000 and
$3,495,000 at July 31 and April 30, 2004, respectively, consist of the
following:
July 31, 2004 April 30, 2004
------------- --------------
(In thousands)
Raw materials and Component parts $10,096 $ 8,608
Work in progress and Finished goods 11,298 13,317
------- -------
$21,394 $21,925
======= =======
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Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E - -COMPREHENSIVE INCOME
For the three months ended July 31, 2004 and 2003, total comprehensive
income was $1,980,000 and $287,000, 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 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,
2004 2003
---- ----
Net sales:
Commercial Communications $11,350 $ 4,869
U.S. Government 1,741 1,644
Gillam-FEI 2,740 1,347
FEI-Zyfer 2,034 912
less intercompany sales (182) (18)
------- -------
Consolidated Sales $17,683 $ 8,754
======= =======
Operating profit (loss):
Commercial Communications $ 1,964 $(274)
U.S. Government (80) 72
Gillam-FEI (497) (859)
FEI-Zyfer (38) (478)
Corporate (100) (98)
------- -------
Consolidated Operating Profit (Loss) $ 1,249 $(1,637)
======= =======
July 31, 2004 April 30, 2004
Identifiable assets:
Commercial Communications $20,944 $22,988
U.S. Government 7,770 5,189
Gillam-FEI 13,056 14,904
FEI-Zyfer 4,992 5,541
less intercompany balances (5,195) (5,673)
Corporate 49,567 49,711
------- -------
Consolidated Identifiable Assets $91,134 $92,660
======= =======
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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 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 of
approximately $400,000. According to the terms of the purchase agreement, the
Company is required to 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 allocated to net assets acquired of approximately $1.8
million. The purchase price in excess of net assets acquired, approximately
$900,000, has been allocated to fixed assets ($300,000) and to customer lists
($600,000) which will be amortized over the next 3 to 5 years. Amortization
expense for the three months ended July 31, 2004 was $26,000. No amortization
expense was recorded during the first quarter of fiscal year 2004 since the
Company had not yet completed the process of determining the appropriate
allocation of the purchase price.
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, adjusted to
give effect to the acquisition of FEI-Zyfer as of the beginning of the period.
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, 2003, nor does it purport to
represent the results of operations for future periods.
Pro forma three months ended July 31, 2003
(unaudited)
(In thousands except per share data)
Net Sales $8,855
------
Operating Loss $(1,717)
-------
Loss from continuing operations $ (800)
======
Loss per share- basic $(0.10)
======
Loss per share- diluted $(0.10)
======
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,
"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.
9 of 20
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 July 31
2004 2003
---- ----
(In thousands except per share data)
Net Income (Loss), as reported $ 977 $ (742)
Cost of stock options, net of tax (195) (177)
------ ------
Net Income (Loss)- pro forma $ 782 $ (919)
====== ======
Earnings (Loss) per share, as reported:
Basic $ 0.12 $(0.09)
====== ======
Diluted $ 0.11 $(0.09)
====== ======
Earnings (Loss) per share- pro forma
Basic $ 0.09 $(0.11)
====== ======
Diluted $ 0.09 $(0.11)
====== ======
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 fiscal year 2004: dividend yield
of 1.83%; expected volatility of 63%; risk free interest rate of 5.5%; and
expected lives of ten years.
Note J - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has evaluated all recent accounting pronouncements and their
related effective dates. The adoption of these statements did not have a
material impact on the Company's financial position, results of operations or
cash flows.
10 of 20
Frequency Electronics, Inc. and Subsidiaries
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, 2004
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 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 and installation completed.
Costs and Expenses
Contract costs include all direct material, direct labor, manufacturing
overhead and other direct costs related to contract performance. Selling,
general and administrative costs are charged to expense as incurred.
11 of 20
Frequency Electronics, Inc. and Subsidiaries
(Continued)
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 2005
and 2004 the percentage of consolidated net sales represented by certain items
in the Company's consolidated statements of operations:
Three months ended July 31,
2004 2003
---- ----
Net Sales
Commercial Communications 64.2% 55.6%
U.S. Government 9.8 18.8
Gillam-FEI 15.5 15.4
FEI-Zyfer 11.5 10.4
less intercompany sales (1.0) (0.2)
----- -----
100.0 100.0
Cost of Sales 67.3 70.7
----- -----
Gross Margin 32.7 29.3
Selling and administrative expenses 18.6 28.9
Research and development expenses 7.0 19.1
----- -----
Operating Profit (Loss) 7.1 (18.7)
Other income, net & Minority interest 2.1 8.6
----- -----
Pretax Income (Loss) 9.2 (10.1)
Provision (benefit) for income taxes 3.7 (1.6)
----- -----
Net Income (Loss) 5.5% (8.5)%
===== =====
For the three months ended July 31, 2004, the operating profit of $1.2
million increased by $2.9 million over the loss of $1.6 million for the same
period ended July 31, 2003. Net income for the first quarter of fiscal year 2005
was $977,000, an increase of $1.7 million over the net loss of $742,000 reported
in the same period of fiscal year 2004. This substantial improvement in
operating results is due to the doubling of revenue in the first quarter of
fiscal year 2005 compared to the first quarter of fiscal year 2004 which
reflects the continuation of the improving telecommunications market that began
in the second half of last fiscal year.
Net sales for the three months ended July 31, 2004, increased by $8.9
million (102%) from the same period of fiscal year 2004. On a segment by segment
basis, the comparison of revenues for the fiscal quarter ended July 31, 2004 to
the first quarter of fiscal year 2004 were as follows: Commercial Communications
revenues increased by $6.5 million (133%); US Government revenues increased by
$97,000 (6%); Gillam-FEI revenues increased by $1.4 million (103%); and
FEI-Zyfer revenues increased by $1.1 million (123%). The Commercial
Communications revenues reflect growth in capital spending in the wireless
infrastructure industry as well as increases in commercial communication
satellite activity. US Government segment revenues were up slightly as the
Company continued work on several developmental, pre-production programs under
US Government contracts. Gillam-FEI revenues reflect the improvement in
telecommunications infrastructure spending in Europe. Revenues for the FEI-Zyfer
segment reflect the Company's efforts to stabilize that segment's poor financial
condition after it was acquired in May 2003. With parent-company support,
FEI-Zyfer was able to re-establish its credibility with its customers and was
able to develop new customers. The Company expects revenues to remain at
approximately the current level for the balance of the fiscal year although
actual quarterly results are dependent on the timing of the release of customer
orders and contracts.
12 of 20
Frequency Electronics, Inc. and Subsidiaries
(Continued)
Gross margin rates for the three months ended July 31, 2004, improved to
32.7% from 29.3% in the same period of fiscal year 2004. The improvement is
attributable to increased sales which were able to absorb a greater amount of
fixed costs. Gross margin rates are lower than the Company's target of 40%
because margins on initial and early stage development US Government contracts
are generally lower than production orders and margins realized by Gillam-FEI
are historically lower due to higher labor and social service costs. With
continued strong sales, the Company expects to realize improving gross margin
rates in future periods.
Selling and administrative costs for the three months ended July 31, 2004,
increased by $757,000 (30%) over the same period of fiscal year 2004. Most of
the increase is attributable to increased personnel costs both in terms of
increased headcount as well as accruals for incentive compensation plans due to
improving profitability. Additional increases were experienced in selling and
marketing expenses, including higher sales commissions as a result of increased
sales. These cost increases were partially offset by a 6% decrease in selling
and administrative expenses at Gillam-FEI following the restructuring process
that was completed during the last fiscal year. The ratio of selling and
administrative costs to net sales for the first quarter of fiscal year 2005 was
18.6% which met the Company's target of a ratio which is less than 20% of
revenues. This is the second consecutive quarter in which the Company has
achieved its cost ratio target and is the result both of increased revenue
levels and cost containment activities. In future quarters of fiscal year 2005,
the Company expects to continue to achieve this targeted ratio of costs to
sales.
Research and development spending in the three months ended July 31, 2004
decreased by $432,000 (26%) over the comparable period ended July 31, 2003. This
lower level of spending continues to reflect the fact that certain developmental
resources are being applied to funded research contracts rather than internal
research and development efforts, the costs of which are borne by the Company.
The costs of those resources assigned to funded programs are reflected in cost
of sales rather than in research and development expense. During fiscal year
2005, the Company's efforts are focused on completing the final phase of the
development of Gillam-FEI's next generation wireline signal synchronization unit
(designated "US5G"), developing a digital rubidium oscillator, and further
improving the performance of crystal oscillators, including low-g (gravity)
sensitivity crystal oscillators which have broad applications in both commercial
and US Government systems. 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. Where possible, the Company attempts to obtain development contracts
from its customers. For programs without such funding, internally generated cash
and cash reserves are adequate to fund these development efforts.
Net nonoperating income and expense decreased by $305,000 (44%) in the
three month period ended July 31, 2004 compared to the same period of fiscal
year 2004. Investment income decreased by $331,000 (44%) during the first
quarter of fiscal year 2005 compared to the same period of fiscal year 2004. The
decline is principally due to the realized gain of approximately $304,000
recorded in the year-ago period compared to no gains or losses reported in the
fiscal year 2005 quarter. For the three month period ended July 31, 2004,
interest expense increased by $19,000 (32%) compared to the same period of
fiscal year 2004. This increase reflects increases in the short-term borrowing
requirements of the Company. Other expense, net, increased by $45,000 during the
fiscal year 2005 period compared to the three months ended July 31, 2003. This
increase is the result of a governmental grant received by the Company's French
subsidiary. 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 as well as the
states of New York and California. The statutory federal rates vary from 34% in
the United States to 35% in Europe. Tax losses originating at the Company's
European and Asian subsidiaries are not consolidated with US source income
which, when combined with US state taxes, contributes to a higher effective tax
rate. The availability of Research and Development tax credits partially offset
US-based taxes. The Company's European subsidiaries have available net operating
loss carryforwards of approximately $2.6 million to offset future taxable
income.
13 of 20
Frequency Electronics, Inc. and Subsidiaries
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $64 million at July 31, 2004, which is comparable to working capital
at April 30, 2004. Included in working capital at July 31, 2004 is $32.3 million
of cash, cash equivalents and marketable securities, including $13.5 million of
REIT units that are convertible to Reckson Associates Realty Corp. common stock.
Net cash provided by operating activities for the three months ended July
31, 2004, was $1.9 million compared to $3.3 million used in operations in the
comparable fiscal year 2004 period. This significant improvement in cash flows
is due to the return to profitability in fiscal year 2005 plus collections on
accounts receivable and reductions in inventory. In the first quarter of fiscal
year 2004, approximately $2.6 million was used to support the operations of the
Company's new subsidiary, FEI-Zyfer. In the first quarter of fiscal year 2005,
FEI-Zyfer generated positive cash flow from operations. The Company expects that
it will continue to generate positive cash flow from operating activities during
fiscal year 2005.
Net cash used in investing activities for the three months ended July 31,
2004, was $2.0 million compared to $104,000 for the same period of fiscal year
2004. The principal use of cash was to acquire certain marketable securities
aggregating $1.7 million, net of sales of other marketable securities. The
Company also acquired capital equipment for approximately $257,000. 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. Requirements for additional capital equipment are expected to be
less than $2.0 million during fiscal year 2005. Internally generated cash will
be adequate to acquire this capital equipment.
Net cash used in financing activities for the three months ended July 31,
2004, was $2.2 million compared to cash provided by financing activities in the
amount of $471,000 during the comparable fiscal year 2004 period. Included in
both fiscal periods is payment of the Company's semiannual dividend in the
amount of $843,000 and $834,000, respectively. During fiscal year 2004, 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. During the fiscal year 2005
quarter, the Company repaid $1.0 million of this credit line and made other
scheduled payments against debt and other obligations of $442,000.
At July 31, 2004, the Company's backlog amounted to approximately $28
million compared to the approximately $36 million backlog at April 30, 2004. 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 $15.4 million and $13.5 million, respectively, at July 31, 2004.
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, 2004, 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.
14 of 20
Frequency Electronics, Inc. and Subsidiaries
(Continued)
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, 2004, the amount
related to foreign currency exchange rates is a $3,696,000 unrealized gain. Note
that the value of the Chinese Yuan is "pegged" to the value of the US dollar.
Accordingly, no foreign currency gains or losses have been realized or are
included in the unrealized gain indicated above. If the Chinese government
decides to change its policy and permits the Yuan to "float" against other world
currencies, the Company would report the effect in other comprehensive income,
as appropriate. 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 of operations measured in local
currencies can vary significantly upon translation into US dollars if exchange
rates fluctuate significantly from one period to the next.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures.
-----------------------------------
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's chief executive officer and
chief financial officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting.
------------------------------------------
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the period to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II
ITEMS 1 through 5 are omitted because they are not applicable.
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-
No filings on Form 8-K were made during the three-month period ended
July 31, 2004.
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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 14, 2004 BY /s/ Alan Miller
---------------------------
Alan Miller
Chief Financial Officer
and Controller
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Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
I, Martin B. Bloch, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frequency
Electronics, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 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;
(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 (the registrant's fourth fiscal quarter in
the case of an annual report) 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(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control 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 control over financial reporting.
/s/ Martin Bloch September 14, 2004
-----------------------
Martin B. Bloch
Chief Executive Officer
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Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CFO
I, Alan L. Miller, Chief Financial Officer, certify that
1. I have reviewed this quarterly report on Form 10-Q of Frequency
Electronics, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 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;
(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 (the registrant's fourth fiscal quarter in
the case of an annual report) 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(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control 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 control over financial reporting.
/s/ Alan Miller September 14, 2004
----------------------
Alan L. Miller
Chief Financial Officer
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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, 2004 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) or 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 Bloch September 14, 2004
-------------------------
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.
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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, 2004 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) or 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 14, 2004
-------------------------
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.
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