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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of September 7, 2001 - 8,308,701
Page 1 of 13
Frequency Electronics, Inc. and Subsidiaries
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
July 31, 2001 and April 30, 2001 3-4
Condensed Consolidated Statements of Operations
Three Months Ended July 31, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
Part II. Other Information:
Item 1 - Legal Proceedings 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
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Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 31, April 30,
2001 2001
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 3,043 $ 2,121
Marketable securities 31,288 33,407
Accounts receivable, net of allowance for
doubtful accounts of $190 13,267 15,160
Inventories 19,986 20,471
Deferred income taxes 4,767 4,313
Prepaid expenses and other 1,595 4,662
------- --------
Total current assets 73,946 80,134
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 12,132 11,997
Deferred income taxes 115 69
Intangible assets 5,259 4,987
Other assets 4,651 4,852
------- --------
Total assets $96,103 $102,039
======= ========
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,
2001 2001
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable - trade $ 2,016 $ 2,408
Accrued liabilities and other 5,651 11,126
--------- --------
Total current liabilities 7,667 13,534
Deferred compensation 5,815 5,726
Other liabilities 12,069 12,348
--------- --------
Total liabilities 25,551 31,608
--------- --------
Minority interest in subsidiary 217 226
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,164 9,164
Additional paid-in capital 42,767 42,860
Retained earnings 22,046 21,226
-------- --------
73,977 73,250
Common stock reacquired and held in treasury
-at cost, 863,489 shares at July 31, 2001
and 872,669 shares at April 30, 2001 (2,913) (3,127)
Other stockholders' equity (120) (122)
Accumulated other comprehensive (loss) income (609) 204
-------- --------
Total stockholders' equity 70,335 70,205
-------- --------
Total liabilities and stockholders' equity $ 96,103 $102,039
======== ========
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)
2001 2000
---- ----
(In thousands except per share data)
Net Sales $11,070 $ 8,893
Cost of sales 7,000 4,981
------- -------
Gross Margin 4,070 3,912
Selling and administrative expenses 2,215 2,129
Research and development expense 1,113 1,204
------- -------
Operating profit 742 579
Other income (expense):
Investment income 517 743
Interest expense (78) (69)
Other income (expense), net 1 (56)
------- -------
Income before minority interest and
provision for income taxes 1,182 1,197
Minority Interest in loss
of consolidated subsidiary (8) -
------- -------
Income before provision for income taxes 1,190 1,197
Provision for income tax 370 390
------- -------
Net income $ 820 $ 807
======= =======
Net earnings per common share
Basic $ 0.10 $ 0.10
======= =======
Diluted $ 0.10 $ 0.10
======= =======
Average shares outstanding
Basic 8,332,557 8,031,530
========= =========
Diluted 8,551,214 8,488,530
========= =========
See accompanying notes to condensed consolidated
financial statements.
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Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31,
(Unaudited)
2001 2000
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 820 $ 807
Non-cash charges to earnings 323 642
Insurance reimbursement 3,000 -
Litigation settlement - 245
Net changes in assets and liabilities (2,516) (889)
------- -------
Net cash provided by operating activities 1,627 805
Cash flows from investing activities:
Sale (Purchase) of marketable securities -net 1,448 (360)
Other - net (741) (357)
------- -------
Net cash provided by (used in) investing activities 707 (717)
Cash flows from financing activities:
Dividends paid (829) (799)
Other - net (543) 231
------- -------
Net cash used in financing activities (1,372) (568)
------- -------
Net increase (decrease) in cash and
cash equivalents before effect of
exchange rate changes 962 (480)
Effect of exchange rate changes on cash
and cash equivalents (40) -
------- -------
Net increase (decrease) in cash
and cash equivalents 922 (480)
Cash at beginning of period 2,121 4,994
------- -------
Cash at end of period $ 3,043 $ 4,514
======= =======
See accompanying notes to condensed consolidated
financial statements.
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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, 2001 and the results of its operations and cash flows for the three
months ended July 31, 2001 and 2000. The April 30, 2001 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, 2001 Annual Report to Stockholders. The results of
operations for such interim periods are not necessarily indicative of the
operating results for the full year.
NOTE B - EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Three months ended July 31,
2001 2000
---- ----
Basic EPS Shares outstanding
(weighted average) 8,332,557 8,031,530
Effect of Dilutive Securities 218,657 457,000
--------- ---------
Diluted EPS Shares outstanding 8,551,214 8,488,530
========= =========
Options to purchase 85,000 shares of common stock were outstanding
during the three months ended July 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. For the three months ended July 31, 2000, all exercisable
options were included in the computation of diluted earnings per share.
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at July 31, 2001 and April 30, 2001 include costs
and estimated earnings in excess of billings on uncompleted contracts accounted
for on the percentage of completion basis of approximately $3,685,000 and
$3,814,000, 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 $3,949,000 and
$4,001,000 at July 31, 2001 and April 30, 2001, respectively, consist of the
following:
July 31, 2001 April 30, 2001
------------- --------------
(In thousands)
Raw materials and Component parts $ 9,271 $ 9,227
Work in progress and Finished goods 10,715 11,244
-------- --------
$19,986 $20,471
======= =======
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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, 2001 and 2000, total comprehensive
income was $7,000 and $2,352,000, respectively.
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):
Three months ended July 31,
2001 2000
---- ----
Net sales:
Commercial Communications $ 8,191 $ 8,195
U.S. Government 983 698
Gillam-FEI 2,100 -
less intercompany sales (204) -
------- -------
Consolidated Sales $11,070 $ 8,893
======= =======
Operating profit (loss):
Commercial Communications $ 1,258 $ 1,038
U.S. Government 213 134
Gillam-FEI (383) -
Corporate (346) (593)
------- -------
Consolidated Operating Profit $ 742 $ 579
======= =======
July 31, 2001 April 30, 2001
Identifiable assets:
Commercial Communications $24,737 $ 25,025
U.S. Government 2,050 1,580
Gillam-FEI 17,246 19,237
less intercompany balances (516) (234)
Corporate 52,586 56,431
------- --------
Consolidated Identifiable Assets $96,103 $102,039
======= ========
NOTE G - ACQUISITION OF GILLAM S.A.
On September 13, 2000, the Company completed its acquisition of
substantially all of the outstanding shares of Gillam S.A. ("Gillam"), a
privately-held company organized under the laws of Belgium. Gillam's
business is based in the telecommunications market and targeted to four
main areas:
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Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(i) "Wireline Network Synchronization"--managing timing and
interconnectivity for communication networks; (ii) "Remote
Control"--consisting of network monitoring systems; (iii) "Rural
Telephony"--equipment designed to connect isolated subscribers to a
telephone network via satellite and (iv) "Power Supplies" --produced
through a subsidiary, for telecom service providers. The acquired company
has been renamed Gillam-FEI.
The Gillam acquisition was consummated pursuant to the terms of a Share
Purchase Agreement dated as of August 29, 2000. Under terms of the agreement,
the Company paid $8,400,264 in cash and issued 154,681 shares of common stock
("FEI stock") to acquire the outstanding stock of Gillam. Based upon the market
value of FEI's stock on July 25, 2002, the Share Purchase Agreement may require
the Company to issue to the Gillam shareholders up to 35,000 additional shares
of FEI stock. In addition, the Company paid approximately $496,000 in direct
transaction costs. Thus, the total purchase price is approximately as follows:
(in thousands)
Cash paid for Gillam shares $ 8,400
Fair value of restricted shares issued 3,465
Direct transaction costs 496
-------
Total purchase price $12,361
=======
The Gillam acquisition is treated as a purchase. The purchase price is
allocated to net assets acquired of approximately $7,282,000 and to intangible
assets, principally goodwill, of approximately $5,079,000. On May 1, 2001, the
Company adopted Statement 142 of the Financial Accounting Standards Board ("SFAS
142"), "Goodwill and Other Intangible Assets", under which goodwill is no longer
amortized but is to be tested periodically for impairment. The adoption of SFAS
142 reduces general and administrative expenses by approximately $85,000 per
quarter.
The accompanying condensed consolidated statements of operations for the
three-month period ended July 31, 2001, includes the results of operations of
Gillam-FEI. The three-month period ended July 31, 2000, does not include any
amounts from Gillam-FEI. 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, 2000, adjusted to give effect to the acquisition
of Gillam-FEI 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, 2000, nor does it purport to
represent the results of operations for future periods.
Pro forma
Three months ended
July 31, 2000
-------------
(In thousands except per share data)
Net Sales $11,178
-------
Operating Profit $ 391
------
Income from continuing operations $ 612
======
Earnings per share- basic $ 0.07
======
Earnings per share- diluted $ 0.07
======
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Frequency Electronics, Inc. and Subsidiaries
Item 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
The table below sets forth for the respective first quarters of fiscal
years 2001 and 2001 the percentage of consolidated net sales represented by
certain items in the Company's consolidated statements of operations:
Three months ended
July 31,
2001 2000
---- ----
Net Sales
Commercial Communications 72.1% 92.2%
U.S. Government 8.9 7.8
Gillam-FEI 19.0 -
----- -----
100.0 100.0
Cost of Sales 63.2 56.0
Selling and administrative expenses 20.0 23.9
Research and development expenses 10.1 13.5
----- -----
Operating profit 6.7 6.6
Other income (expense)- net 4.0 6.9
----- -----
Pretax Income 10.7 13.5
Provision for income taxes 3.3 4.4
----- -----
Net earnings 7.4% 9.1%
===== =====
For the three months ended July 31, 2001, operating profit increased by
$163,000 (28%) over the comparable period of fiscal year 2001 and net earnings
increased by $13,000 (2%). The Company's consolidated financial statements for
the first quarter of fiscal 2002 include the results from Gillam-FEI which was
acquired in September 2000. Including Gillam-FEI, sales increased by 24% for the
first quarter of fiscal 2002 over the first quarter of last fiscal year offset
by a decrease in gross margin rates from 44% to 37% and a reduction in
investment income. Results for the fiscal 2002 quarter were also impacted by the
termination of a contract for receive/transmit modules for the fiber optics
industry. No revenues or expenses were recognized under this contract during the
fiscal 2002 quarter. Results for the fiscal 2001 quarter were impacted by
certain one-time legal and final settlement costs of approximately $245,000
relative to litigation initiated in fiscal 1994.
Margins on commercial communications revenues were 41% as compared to 37%
for U.S. Government programs and 22% for Gillam-FEI. During the quarter ended
July 31, 2000, gross margins on commercial communications sales were 44% while
margins on U.S. Government programs were 38%. The commercial communications
margins are within the Company's expectations given the current mix of
production and long-term contracts. Margins on U.S. Government contracts and
Gillam-FEI orders are historically lower than that of commercial communications.
One of the goals of the Company is to introduce products and procedures which
will increase Gillam-FEI's margins to a level comparable to that of the other
segments. With the present mix of orders and recent contract bookings, the
Company expects to maintain its profit margins at or near the current level for
the remainder of fiscal 2001.
10 of 13
Frequency Electronics, Inc. and Subsidiaries
(Continued)
Selling and administrative costs for the quarter ended July 31, 2001,
increased by $86,000 (4%) over the three months ended July 31, 2000. Excluding
Gillam-FEI and the fiscal 2000 litigation settlement mentioned above, selling
and administrative expenses decreased by $210,000 (11%). The principle cause of
this decrease was the approximately $193,000 reduction in amortization of
certain non-employee stock options as the options became exercisable in the
prior year. The Company anticipates that selling and administrative expenses
will be greater in fiscal 2002 than that incurred in fiscal 2001, although, as a
percentage of sales, the ratio is expected to decrease.
Research and development costs in the fiscal 2002 period decreased by
$91,000 (8%) over the comparable three-month period ended July 31, 2000. The
apparent slowing of research and development spending is not indicative of a
decrease in the Company's development efforts. Some of the Company's development
spending was customer-funded, the costs of which are included in cost of sales
or in work-in-process inventory. The Company continues to devote significant
resources to develop new products and enhance existing products for the
commercial communications market. Approximately 23% of development spending in
the fiscal 2002 quarter was incurred by Gillam-FEI. The Company intends to
introduce Gillam-FEI's wireline synchronization product to the growing U.S
market as well as to the rest of the world. In addition, the Company is
continuing development of products in support of third generation (3G) wireless
infrastructure systems, products which increase the capability of existing TDMA
and GSM systems (2.5G or EDGE), as well as products for interconnectivity with
wireline and fiber optic networks. The Company targets research and development
spending at approximately 10% of sales but will spend additional amounts as
opportunities present themselves. Internally generated cash and cash reserves
are adequate to fund this development effort.
Net nonoperating income and expense decreased by $178,000 (29%) in the
three months ended July 31, 2001 from the comparable fiscal 2001 quarter.
Investment income declined by $226,000 (30%) as a result of lower interest rates
on marketable securities and a 17% decrease in invested assets. The decrease in
the level of marketable securities in the first quarter of fiscal 2002 is due to
the investment in Gillam-FEI which was made in September 2000. Interest expense
increased by $9,000 (13%) while other income (expense) increased by $57,000
during the fiscal 2002 quarter compared to the period ended July 31, 2000. Other
income (expense), net, consists principally of certain non-recurring
transactions and is generally not significant to net income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $66 million at July 31, 2001 which is comparable to working capital
at April 30, 2001. Included in working capital at July 31, 2001 is $34.3 million
of cash, cash equivalents and marketable securities, including $11.5 million of
REIT units which are convertible to Reckson Associates Realty Corp. common
stock.
Net cash provided by operating activities for the three months ended July
31, 2001, was $1.6 million compared to $805,000 in the comparable fiscal 2001
quarter. 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. Cash
was also generated by collections on accounts receivable and reduced by
repayment of amounts due to customers. The Company anticipates that it will
continue to generate positive cash flow from operating activities this fiscal
year.
Net cash provided by investing activities for the three months ended July
31, 2001, was $707,000. Approximately $1.4 million was obtained from the sale or
redemption of certain marketable securities. These inflows were offset by the
acquisition of capital equipment for approximately $526,000 and additional
investment of approximately $176,000 in the Company's China subsidiary,
FEI-Asia. The Company may continue to acquire or sell marketable securities as
dictated by its investment strategies as
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Frequency Electronics, Inc. and Subsidiaries
(Continued)
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 approximately $2
million on capital equipment during fiscal 2002. Internally generated cash will
be adequate to acquire this capital equipment.
Net cash used in financing activities for the three months ended July 31,
2001, was $1.4 million compared to $568,000 for the comparable fiscal 2001
quarter. Included in both fiscal quarters is payment of the Company's semiannual
dividend in the aggregate amount of $829,000 and $799,000, respectively. In
addition, the Company made scheduled debt payments of $585,000. Offsetting the
fiscal 2001 cash outflow is approximately $288,000 received on the exercise of
stock options to acquire approximately 64,000 shares of Company stock.
At July 31, 2001, the Company's backlog amounted to approximately $35
million compared to the approximately $39 million backlog at April 30, 2001.
Approximately 71% of the backlog represents orders for the commercial
communications segment, 23% for the Gillam-FEI segment and 6% for the U.S.
Government segment. Of this backlog, approximately 90% is realizable during
fiscal 2002.
"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
On March 14, 2000, FEI commenced an action in the state court against
National Union Fire Insurance of Pittsburgh, PA ("National"). The complaint set
forth causes of action for declaratory judgment and breach of contract relating
to certain directors and officers' liability insurance policies in connection
with the Muller qui tam action and certain other litigations. Pursuant to a
Settlement Agreement dated April 18, 2001, the action against National was
settled, FEI was paid $3.0 million representing the full amount of the available
coverage under the applicable National policy, FEI released its claims and the
action was discontinued.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Registrant's Form 8-K, dated April 18, 2001, containing disclosure
under Item 5 thereof (settlement agreement with insurance carrier),
was filed with the Securities and Exchange Commission during the
quarter ended July 31, 2001.
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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, 2001 BY: /s/ Joseph P. Franklin
------------------------
Joseph P. Franklin
Chairman of the Board of Directors
Date: September 14, 2001 BY: /s/ Alan Miller
-----------------------
Alan Miller
Chief Financial Officer
and Controller
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