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, 2002
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 9, 2002 - 8,320,216
Page 1 of 19
Frequency Electronics, Inc. and Subsidiaries
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
October 31, 2002 and April 30, 2002 3-4
Consolidated Condensed Statements of Operations
Six Months Ended October 31, 2002 and 2001 5
Condensed Consolidated Statements of Operations
Three Months Ended October 31, 2002 and 2001 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended October 31, 2002 and 2001 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Item 3- Quantitative and Qualitative Disclosures
about Market Risk 14
Item 4- Controls and Procedures 14
Part II. Other Information:
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibits 17-19
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 31, April 30,
2002 2002
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 3,850 $ 5,383
Marketable securities 27,573 30,848
Accounts receivable, net of allowance for
doubtful accounts of $124 11,430 11,725
Inventories 21,293 19,601
Deferred income taxes 4,400 3,645
Prepaid expenses and other 2,052 2,678
------- -------
Total current assets 70,598 73,880
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,582 11,361
Deferred income taxes 369 280
Goodwill 6,315 4,938
Other assets 5,706 5,552
------- -------
Total assets $94,570 $96,011
======= =======
See accompanying notes to condensed consolidated
financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
October 31, April 30,
2002 2002
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable - trade $ 1,402 $ 2,359
Accrued liabilities and other 3,163 4,457
Dividend payable 831 833
------- -------
Total current liabilities 5,396 7,649
Deferred compensation 6,747 6,496
REIT liability and other liabilities 11,614 11,300
------- -------
Total liabilities 23,757 25,445
------- -------
Minority interest in subsidiary 204 224
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,164 9,164
Additional paid-in capital 43,660 43,077
Retained earnings 19,870 20,939
------- -------
72,694 73,180
Common stock reacquired and held in treasury
-at cost, 856,427 shares at October 31, 2002
and 830,074 shares at April 30, 2002 (3,156) (2,806)
Other stockholders' equity (116) (116)
Accumulated other comprehensive income 1,187 84
------- -------
Total stockholders' equity 70,609 70,342
------- -------
Total liabilities and stockholders' equity $94,570 $96,011
======= =======
See accompanying notes to condensed consolidated
financial statements.
Frequency Electronics, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
Six Months Ended October 31,
(Unaudited)
2002 2001
---- ----
(In thousands except per share data)
Net Sales $15,128 $22,535
Cost of sales 10,452 14,024
------- -------
Gross margin 4,676 8,511
Selling and administrative expenses 3,942 4,241
Research and development expenses 1,672 2,870
------- -------
Operating (loss) profit (938) 1,400
Other income (expense):
Investment income 782 1,177
Interest expense (117) (154)
Other income (expense), net (84) (29)
------- -------
(Loss) Income before minority interest
and provision for income taxes (357) 2,394
Minority Interest in loss of
consolidated subsidiary (22) (8)
------- -------
(Loss) Income before benefit/provision
for income taxes (335) 2,402
(Benefit) Provision for income taxes (97) 770
------- -------
Net (loss) income $ (238) $ 1,632
======= =======
Net (loss) earnings per common share
Basic $ (0.03) $ 0.20
======== =======
Diluted $ (0.03) $ 0.19
======== =======
Average shares outstanding
Basic 8,336,310 8,339,458
========= =========
Diluted 8,336,310 8,512,718
========= =========
See accompanying notes to consolidated condensed
financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended October 31,
(Unaudited)
2002 2001
---- ----
(In thousands except per share data)
Net Sales $ 8,300 $11,465
Cost of sales 5,679 7,024
------- -------
Gross Margin 2,621 4,441
Selling and administrative expenses 1,889 2,026
Research and development expense 689 1,757
------- -------
Operating profit 43 658
Other income (expense):
Investment income 427 660
Interest expense (45) (76)
Other income (expense), net (91) (30)
------- -------
Income before minority interest and
provision for income taxes 334 1,212
Minority Interest in loss of
consolidated subsidiary (12) -
------- -------
Income before provision for income taxes 346 1,212
Provision for income taxes 95 400
------- -------
Net income $ 251 $ 812
======= =======
Net earnings per common share
Basic $ 0.03 $ 0.10
======= ======
Diluted $ 0.03 $ 0.10
======= ======
Average shares outstanding
Basic 8,334,053 8,346,359
========= =========
Diluted 8,364,409 8,470,162
========= =========
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)
2002 2001
---- ----
(In thousands)
Cash flows from operating activities:
Net (loss) income $ (238) $ 1,632
Non-cash charges to earnings 1,766 978
Net changes in other assets and liabilities (2,381) (134)
------- -------
Net cash (used in) provided by operating activities (853) 2,476
Cash flows from investing activities:
Sale of marketable securities- net 1,329 8,482
Other - net (380) (1,013)
------- -------
Net cash provided by investing activities 949 7,469
Cash flows from financing activities:
Payment of cash dividend (833) (829)
Payment of debt, net (499) (573)
Repurchase of stock for treasury (501) -
Other - net - (110)
------- -------
Net cash used in financing activities (1,833) (1,512)
Net (decrease) increase in cash and cash
equivalents before effect of exchange
rate changes (1,737) 8,433
Effect of exchange rate changes
on cash and cash equivalents 204 21
------- -------
Net (decrease) increase in cash (1,533) 8,454
Cash at beginning of period 5,383 2,121
------- -------
Cash at end of period $ 3,850 $10,575
======= =======
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, 2002 and the results of its operations for the six and three
months and cash flows for the six months ended October 31, 2002 and 2001. The
April 30, 2002 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, 2002
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
---------- ------------
2002 2001 2002 2001
---- ---- ---- ----
Basic EPS Shares outstanding
(weighted average) 8,336,310 8,339,458 8,334,053 8,346,359
Effect of Dilutive Securities *** 173,260 30,356 123,803
--------- --------- --------- ---------
Diluted EPS Shares outstanding 8,336,310 8,512,718 8,364,409 8,470,162
========= ========= ========= =========
*** Dilutive securities are excluded for the six month period ended
October 31, 2002 since the inclusion of such shares would be antidilutive
due to the net loss for the quarter then ended.
Options to purchase 993,287 shares of common stock were outstanding during
the three months ended October 31, 2002, and options for 423,250 shares were
outstanding during the six and three months ended October 31, 2001, 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 respective 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 October 31, 2002 and April 30, 2002 include costs
and estimated earnings in excess of billings on uncompleted contracts accounted
for on the percentage of completion basis of approximately $2,428,000 and
$2,027,000, 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 $3,201,000 and
$2,941,000 at October 31, 2002 and April 30, 2002, respectively, consist of the
following:
October 31, 2002 April 30, 2002
(In thousands)
Raw materials and Component parts $ 8,144 $ 8,946
Work in progress and Finished goods 13,149 10,655
------- -------
$21,293 $19,601
======= =======
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E - -COMPREHENSIVE INCOME
For the six months ended October 31, 2002 and 2001, total comprehensive
income was $865,000 and $1,759,000, 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 three reportable segments:
1. Commercial communications - consists principally of time and
frequency control products used in two principal markets-
commercial communication satellites and terrestrial cellular
telephone or other ground-based telecommunication stations.
2. U.S. Government - consists of time and frequency control products
used for national defense or space-related programs.
3. Gillam-FEI - the products of the Company's Belgian subsidiary
consist primarily of wireline synchronization and network
monitoring systems.
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 ended October 31,
2002 2001
---- ----
Net sales:
Commercial Communications $ 7,088 $16,432
U.S. Government 4,285 1,746
Gillam-FEI 4,052 4,856
less intercompany sales (297) (499)
------- -------
Consolidated Sales $15,128 $22,535
======= =======
Operating profit (loss):
Commercial Communications $(1,323) $1,661
U.S. Government 953 484
Gillam-FEI (270) (239)
less intercompany transactions (17) (107)
Corporate (281) (399)
------- ------
Consolidated Operating (Loss)Profit $ (938) $1,400
======= ======
October 31, 2002 April 30, 2002
Identifiable assets:
Commercial Communications $21,059 $21,101
U.S. Government 4,867 3,176
Gillam-FEI 18,858 17,956
less intercompany balances (784) (1,575)
Corporate 50,570 55,353
------- -------
Consolidated Identifiable Assets $94,570 $96,011
======= =======
NOTE G. Recently Issued Accounting Pronouncements
In July 2002, the FASB issued Statement No. 146 ("SFAS 146), "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 revises the accounting for certain lease termination
costs and employee termination benefits, which are generally recognized in
connection with restructuring activities. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not anticipate that the adoption of SFAS 146 will have a
material impact on its consolidated financial statements.
In October 2002, the FASB issued Statement No. 147 ("SFAS 147),
"Acquisitions of Certain Financial Institutions." SFAS 147 addresses financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for a transaction between two or more mutual enterprises.
SFAS 147 also provides guidance on the accounting for the impairment or disposal
of acquired long-term customer-relationship intangible assets of financial
institutions, including those acquired in transactions between two or more
mutual enterprises. The provisions of the statement will be effective for
acquisitions on or after October 1, 2002. Since SFAS 147 is not relevant to the
Company's business this statement will have no impact on the Company's financial
position or results of operations.
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 1 to the
consolidated financial statements included in the Company's April 30, 2002
Annual Report to Stockholders. The Company believes its most critical accounting
policies to be the recognition of revenue, costs on production contracts and the
valuation of inventory.
Revenue Recognition
Revenues under larger, long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method. For U.S. Government and other fixed-price contracts that
require initial design and development of the product, revenue is recognized on
the cost-to-cost method. Under this method, revenue is recorded based upon the
ratio that incurred costs bear to total estimated contract costs with related
cost of sales recorded as the costs are incurred. Each month management reviews
estimated contract costs. The effect of any change in the estimated gross margin
percentage for a contract is reflected in revenues in the period in which the
change is known. Provisions for anticipated losses on contracts are made in the
period in which they become determinable.
On production-type contracts, revenue is recorded as units are delivered with
the related cost of sales recognized on each shipment based upon a percentage of
estimated final contract costs. Changes in job performance may result in
revisions to costs and income and are recognized in the period in which
revisions are determined to be required. Provisions for anticipated losses on
contracts are made in the period in which they become determinable.
For contracts in the Company's Gillam-FEI segment, and smaller contracts or
orders in the other business segments, sales of products and services to
customers are reported in operating results based upon shipment of the product
or performance of the services pursuant to contractual terms. When payment is
contingent upon customer acceptance of the installed system, revenue is deferred
until such acceptance is received.
Contract Costs
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.
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.
Recently Issued Accounting Pronouncements
In July 2002, the FASB issued Statement No. 146 ("SFAS No. 146), "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No.146 revises the accounting for certain lease
termination costs and employee termination benefits, which are generally
recognized in connection with restructuring activities. The provisions of SFAS
No.146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not anticipate that the adoption of SFAS No.
146 will have a material impact on its consolidated financial statements.
In October 2002, the FASB issued Statement No. 147 ("SFAS 147), "Acquisitions of
Certain Financial Institutions." SFAS 147 addresses financial accounting and
reporting for the acquisition of all or part of a financial institution, except
for a transaction between two or more mutual enterprises. SFAS 147 also provides
guidance on the accounting for the impairment or disposal of acquired long-term
customer-relationship intangible assets of financial institutions, including
those acquired in transactions between two or more mutual enterprises. The
provisions of the statement will be effective for acquisitions on or after
October 1, 2002. Since SFAS 147 is not relevant to the Company's business this
statement will have no impact on the Company's financial position or results of
operations.
RESULTS OF OPERATIONS
The table below sets forth the percentage of consolidated net sales represented
by certain items in the Company's consolidated statements of operations for the
respective six- and three-month periods of fiscal years 2003 and 2002:
Six months Three months
Periods ended October 31,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales
Commercial Communications 46.1% 71.7% 47.2% 71.2%
U.S. Government 28.3 7.7 28.5 6.7
Gillam-FEI 25.6 20.6 24.3 22.1
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of Sales 69.1 62.2 68.4 61.3
----- ----- ----- -----
Gross Margin 30.9 37.8 31.6 38.7
Selling and administrative expenses 26.1 18.8 22.8 17.7
Research and development expenses 11.0 12.8 8.3 15.3
----- ----- ----- -----
Operating (loss) profit (6.2) 6.2 0.5 5.7
Other income (expense)- net 3.8 4.4 3.5 4.8
----- ----- ----- -----
Pretax (Loss) Income (2.4) 10.6 4.0 10.6
(Benefit)Provision for income taxes (0.8) 3.4 1.0 3.5
----- ----- ----- -----
Net (loss) income (1.6)% 7.2% 3.0% 7.1%
===== ====== ===== =====
Frequency Electronics, Inc. and Subsidiaries
(Continued)
As illustrated in the table above, the mix of the Company's revenues has shifted
significantly during fiscal 2003 compared to the same periods of fiscal 2002.
For the six- and three-month periods ended October 31, 2002, overall Net Sales
have declined by $7.4 million (33%) and $3.2 million (28%), respectively, from
the same periods of fiscal 2002. Most of the decrease is attributable to the
slowdown in the telecommunications industry which has impacted both the
Commercial Communications segment and the Gillam-FEI segment. These declines
were partially offset by increased revenues in the U.S. Government segment as
the United States responded to terrorist threats by procuring new secure
communications systems and new sophisticated weaponry.
Revenues for the Commercial Communications segment declined by $9.3 million
(57%) and by $4.2 million (51%), respectively, for the six- and three-month
periods ended October 31, 2002 as compared to the same periods of the prior
fiscal year. These amounts reflect the reduced level of capital spending by the
telecommunication industry as well as the lack of new commercial satellite
orders. Similarly, for the six- and three-month periods of fiscal 2003,
Gillam-FEI revenues decreased by $800,000 (16%) and $600,000 (23%),
respectively, reflecting the decline in telecommunication spending in Europe.
Conversely, revenues in the Company's U.S. Government segment rose by $2.5
million (145%) and $1.6 million (210%), respectively, during fiscal 2003
compared to the same six- and three-month periods of fiscal 2002. The Company
expects that U.S. Government revenue will continue at comparable levels for the
foreseeable future although the rate of growth will likely moderate in future
quarters. The Company also believes that spending by telecommunication service
providers will increase in future periods from the current reduced levels. As
new services are provided, the need for improved infrastructure in both wireless
and wireline networks becomes more urgent. Likewise, many communication
satellites are nearing or have exceeded their life expectancy and must soon be
replaced.
For the six months ended October 31, 2002, the Commercial Communications segment
incurred an operating loss of $1.3 million compared to an operating profit of
$1.7 million in the same period of fiscal 2002. This loss is attributable
primarily to the reduced sales volume and related lower gross margins on sales.
In addition, self-funded research and development spending is primarily incurred
in this segment. Operating profit in the U.S. Government segment for the six
months ended October 31, 2002 were $953,000, an increase of $469,000 (97%) over
the same period in fiscal 2002. This increase is attributable to the increase in
revenues during the fiscal 2003 period offset by a small decline in gross
margins and the absorption of a greater share of allocated general and
administrative expenses. The Gillam-FEI segment recorded a loss of $270,000 for
the six month period ended October 31, 2002 which is $31,000 (13%) more than the
loss recorded in the same period of fiscal 2002. This increase is due to the 17%
decline in revenues offset by reduced research and development spending during
the fiscal 2003 period.
For the six- and three-month periods ended October 31, 2002, gross margin rates
were 31% and 32%, respectively, compared to 38% and 39% for the same periods of
fiscal 2002. The lower volume of business in the Commercial Communications
segment had a significant impact on fiscal 2003 gross margins. The increased
volume in U.S. Government business was insufficient to offset the Commercial
Communications decline. With the present mix of orders and recent contract
bookings, the Company expects to see improvement in gross profit margins during
the second half of fiscal 2003.
Selling and administrative costs decreased by $299,000 (7%) and by $137,000 (7%)
for the six- and three-month periods ended October 31, 2002, respectively,
compared to the same periods of fiscal 2002. These decreases are primarily due
to reduced personnel costs for fewer selling and administrative personnel and
lower accruals for employee incentive plans due to lower profits. The Company
anticipates that fiscal 2003 selling and administrative expenses will continue
to be less than that incurred in fiscal 2002 as the Company focuses on reducing
its overall cost structure. The Company expects that the ratio of selling and
administrative expenses to net sales will also decline from the 26% rate for the
first half of the year to an amount closer to the Company's target of 20%.
Research and development costs in the fiscal 2003 periods decreased by $1.2
million (42%) and $1.1 million (61%), respectively, over the comparable six- and
three-month periods ended October 31, 2001. The level of development spending in
the second quarter of fiscal 2003 is not indicative of a full year rate nor of
the actual development efforts being expended by the Company. Rather, the
Company has
Frequency Electronics, Inc. and Subsidiaries
(Continued)
recently been successful in procuring funding for some of its development
activities including non-recurring engineering on production contracts and
obtaining government-sourced subsidies in Europe. The Company will continue to
devote its own resources to develop new products and enhance existing products
for the commercial communications market. During calendar year 2003, the Company
intends to introduce Gillam-FEI's wireline synchronization product to the U.S
market as well as to the rest of the world. In addition, the Company continues
to improve its manufacturing processes and is developing next-generation
products in support of the cellular network infrastructure markets. Internally
generated cash and cash reserves are adequate to fund this development effort.
Net nonoperating income and expense decreased by $413,000 (42%) and by $263,000
(47%), respectively, in the six- and three-month periods ended October 31, 2002
as compared to the fiscal 2002 periods. Investment income declined by $395,000
(34%) and $233,000 (35%), respectively, as a result of lower interest rates on
marketable securities and net realized losses of $160,000 and $40,000,
respectively, on certain marketable securities compared to net realized gains of
$169,000 and $150,000, respectively, in the same periods of fiscal 2002.
Interest expense has decreased by $37,000 (24%) and $31,000 (41%), respectively,
reflecting both reduced interest rates and declining debt balances in fiscal
2003 compared to fiscal 2002. Other income (expense), net, consists principally
of certain non-recurring transactions and is generally not significant to net
income. For the six- and three-month periods ended October 31, 2002 the Company
incurred net expenses of $84,000 and $91,000, respectively, compared to net
expenses of $29,000 and $30,000 in the same periods of fiscal 2002. The
principal difference between the two fiscal years is due to the recognition of
$34,000 of income by Gillam-FEI for the recovery of certain assets during the
second quarter of fiscal 2002.
The Company is subject to income taxes in both the United States and Europe. The
federal statutory rates vary from 34% to 40%. The Company's effective tax rate
is lower than the statutory rates primarily due to the availability of Research
and Development Tax Credits in the United States.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $65 million at October 31, 2002 which is comparable to working
capital at April 30, 2002. Included in working capital at October 31, 2002 is
$31.4 million of cash, cash equivalents and marketable securities, including
$10.4 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, 2002,
was $853,000 compared to positive cash flow of $2.5 million in the same period
of fiscal 2002. Shortly after the end of the fiscal 2003 quarter, the Company
collected a receivable from a customer in the amount of $1.4 million. Had that
amount been received within the expected time period, the Company would have
been cash flow positive for the first six months of fiscal 2003. In the fiscal
2002 period, the Company received $3.0 million for reimbursement of certain
legal expenses covered under directors' and officers' liability insurance. This
inflow was partially offset by payments against certain accrued expenses,
including income taxes payable of $2.0 million and the payment of cash bonuses
under incentive compensation plans. During the fiscal 2003 period, cash was also
absorbed by increases to work-in-process inventory and the paydown of accrued
expenses and accounts payable. The Company anticipates that it will generate
positive cash flow from operating activities for the full fiscal year.
Net cash provided by investing activities for the six months ended October 31,
2002, was $949,000. Approximately $1.3 million was obtained from the sale or
redemption of certain marketable securities, most of which was reinvested in
shorter term cash equivalents. These inflows were offset by the acquisition of
capital equipment for approximately $380,000. 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 2003. Internally generated cash will
be adequate to acquire this capital equipment.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
Net cash used in financing activities for the six months ended October 31, 2002,
was $1.8 million compared to $1.5 million for the comparable fiscal 2002 period.
Included in both fiscal periods is payment of the Company's semiannual dividend
in the aggregate amount of $833,000 and $829,000, respectively. In addition, the
Company made scheduled payments on debt and other long-term obligations of
$499,000 in fiscal 2003 and $573,000 in fiscal 2002. During fiscal 2003, the
Company reacquired approximately 80,000 shares of its stock at a cost of
$501,000.
At October 31, 2002, the Company's backlog amounted to approximately $35
million, an increase of approximately $4 million from the April 30, 2002
backlog. Approximately 57% of the backlog represents orders for the commercial
communications segment, 22% for the Gillam-FEI segment and 21% for the U.S.
Government segment. Of this backlog, approximately 70% is realizable in the next
12 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 $16.5 million and $11.1 million, respectively, at October 31,
2002. 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, 2002,
a 10% change in market interest rates would not have a material effect on the
fair value of the Company's fixed income securities or results of operations
(investment income).
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, 2002, the amount
related to foreign currency exchange rates is a $2,282,000 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
- -----------------------
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its Chief
Executive Officer, Martin B. Bloch and Chief Financial Officer, Alan L. Miller,
of the effectiveness of disclosure controls and procedures pursuant to Exchange
Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in the Company's periodic SEC reports. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
The statements in this quarterly report on Form 10Q regarding future earnings
and operations and other statements relating to the future constitute
"forward-looking" statements pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. Factors that would cause
or contribute to such differences include, but are not limited to, continued
acceptance of the Company's products in the marketplace, competitive factors,
new products and technological changes, product prices and raw material costs,
dependence upon third-party vendors, competitive developments, changes in
manufacturing and transportation costs, changes in contractual terms, the
availability of capital, and other risks detailed in the Company's periodic
report filings with the Securities and Exchange Commission. By making these
forward-looking statements, the Company undertakes no obligation to update these
statements for revisions or changes after the date of this report.
PART II
ITEM 1 - Legal Proceedings
A judgment dated September 3, 2002, has been entered by the United States
District Court for the Eastern District of New York in connection with its
dismissal of the Muller Qui Tam Action. With this action, the Court has
dismissed all remaining litigation against the Company and its President/CEO
originating approximately ten years ago.
The judgment is based on the Court's decision on the merits in favor of
Frequency Electronics, Inc. and its CEO, Martin B. Bloch, dated August 23, 2002.
The judgment preserves all of FEI's rights to recover costs and its causes of
action against the plaintiff and third party defendants.
For a further discussion of the Muller Qui Tam Action, reference is made to Form
10-K for the fiscal year ended April 30, 2002, filed by Registrant under Section
13 of the Securities Exchange Act of 1934, which is on file at the Securities
and Exchange Commission.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: 99.1 Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.2. Certifications Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Registrant's Form 8-K, dated August 22, 2002, containing
disclosure under Item 5 thereof (dismissal of qui tam action),
was filed with the Securities and Exchange Commission on
September 3, 2002.
(c) Registrant's Form 8-K, dated October 9, 2002, containing
disclosure under Item 5 thereof (declaration of cash dividend),
was filed with the Securities and Exchange Commission on October
15, 2002.
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 16, 2002 BY:/s/ Joseph P. Franklin
--------------------------
Joseph P. Franklin
Chairman of the Board of Directors
Date: December 16, 2002 BY:/s/ Alan Miller
-----------------
Alan Miller
Chief Financial Officer
and Controller
Exhibit 99.1
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 as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
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 in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; 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; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Martin B. Bloch December 16, 2002
--------------------
Martin B. Bloch
Chief Executive Officer
Exhibit 99.1
Page 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 as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
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 in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; 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; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Alan L. Miller December 16, 2002
-------------------
Alan L. Miller
Chief Financial Officer
Exhibit 99.2
CERTIFICATIONS 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, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Martin
B. Bloch, Chief Executive Officer of the Company, certify, pursuant to Section
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Martin B. Bloch December 16, 2002
--------------------
Martin B. Bloch
Chief Executive Officer
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, 2002 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 16, 2002
-------------------
Alan L. Miller
Chief Financial Officer