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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 January 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value
$1.00 as of March 10, 2003 - 8,329,716
Page 1 of 20
Frequency Electronics, Inc. and Subsidiaries
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
January 31, 2003 and April 30, 2002 3-4
Condensed Consolidated Statements of Operations
Nine Months Ended January 31, 2003 and 2002 5
Condensed Consolidated Statements of Operations
Three Months Ended January 31, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Item 3- Quantitative and Qualitative Disclosures
about Market Risk 15
Item 4- Controls and Procedures 15
Part II. Other Information:
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibits 18-20
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
January 31, April 30,
2003 2002
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 4,742 $ 5,383
Marketable securities 27,963 30,848
Accounts receivable, net of allowance for
doubtful accounts of $124 10,477 11,725
Inventories 21,588 19,601
Deferred income taxes 4,188 3,645
Prepaid expenses and other 2,210 2,678
------- -------
Total current assets 71,168 73,880
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization 11,102 11,361
Deferred income taxes 267 280
Goodwill 6,494 4,938
Other assets 5,670 5,552
------- -------
Total assets $94,701 $96,011
======= =======
See accompanying notes to condensed consolidated financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
January 31, April 30,
2003 2002
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable - trade $ 1,003 $ 2,359
Accrued liabilities and other 3,484 4,457
Dividend payable - 833
------- -------
Total current liabilities 4,487 7,649
Deferred compensation 6,864 6,496
REIT liability and other liabilities 11,467 11,300
------- -------
Total liabilities 22,818 25,445
------- -------
Minority interest in subsidiary 190 224
------- -------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,164 9,164
Additional paid-in capital 43,727 43,077
Retained earnings 20,109 20,939
------- -------
73,000 73,180
Common stock reacquired and held in treasury
-at cost, 836,224 shares at January 31, 2003
and 830,074 shares at April 30, 2002 (3,101) (2,806)
Other stockholders' equity (116) (116)
Accumulated other comprehensive income 1,910 84
------- -------
Total stockholders' equity 71,693 70,342
------- -------
Total liabilities and stockholders' equity $94,701 $96,011
======= =======
See accompanying notes to condensed consolidated financial statements.
Frequency Electronics, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
Nine Months Ended January 31,
(Unaudited)
2003 2002
(In thousands except per share data)
Net sales $24,518 $32,100
Cost of sales 16,769 19,963
------- -------
Gross margin 7,749 12,137
Selling and administrative expenses 6,041 6,404
Research and development expenses 2,941 4,235
------- -------
Operating (loss) profit (1,233) 1,498
Other income (expense):
Investment income 1,341 1,659
Interest expense (190) (221)
Other income (expense), net 55 (56)
------- -------
(Loss) Income before minority interest
and provision for income taxes (27) 2,880
Minority Interest in (loss) income
of consolidated subsidiary (38) 2
------- -------
Income before provision for income taxes 11 2,878
Provision for income taxes 10 920
------- -------
Net income $ 1 $ 1,958
======= =======
Net earnings per common share
Basic $ 0.00 $ 0.23
======= =======
Diluted $ 0.00 $ 0.23
======= =======
Average shares outstanding
Basic 8,330,367 8,345,439
========= =========
Diluted 8,393,651 8,531,732
========= =========
See accompanying notes to condensed consolidated financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended January 31,
(Unaudited)
2003 2002
(In thousands except per share data)
Net sales $ 9,390 $ 9,565
Cost of sales 6,317 5,939
------- -------
Gross Margin 3,073 3,626
Selling and administrative expenses 2,099 2,163
Research and development expense 1,269 1,365
------- -------
Operating (loss) profit (295) 98
Other income (expense):
Investment income 559 482
Interest expense (74) (67)
Other income (expense), net 140 (27)
------- -------
Income before minority interest and
provision for income taxes 330 486
Minority Interest in (loss) income
of consolidated subsidiary (16) 10
------- -------
Income before provision for income taxes 346 476
Provision for income taxes 107 150
------- -------
Net income $ 239 $ 326
======= =======
Net earnings per common share
Basic $ 0.03 $ 0.04
======= =======
Diluted $ 0.03 $ 0.04
======= =======
Average shares outstanding
Basic 8,318,481 8,357,402
========= =========
Diluted 8,390,162 8,539,114
========= =========
See accompanying notes to condensed consolidated financial statements.
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31,
(Unaudited)
2003 2002
(In thousands)
Cash flows from operating activities:
Net income $ 1 $ 1,958
Non-cash charges to earnings 1,781 1,081
Net changes in other assets and liabilities (1,403) (199)
------- -------
Net cash provided by operating activities 379 2,840
Cash flows from investing activities:
Proceeds from sale of marketable securities 8,067 10,641
Purchase of marketable securities (6,484) (7,855)
Proceeds from sale of fixed assets 268 -
Purchase of fixed assets (482) (1,132)
------- -------
Net cash provided by investing activities 1,369 1,654
Cash flows from financing activities:
Payment of cash dividend (1,664) (1,660)
Payment of debt, net (537) (509)
Repurchase of stock for treasury (501) -
Other - net 30 (89)
------- -------
Net cash used in financing activities (2,672) (2,258)
Net (decrease) increase in cash and cash equivalents
before effect of exchange rate changes (924) 2,236
Effect of exchange rate changes
on cash and cash equivalents 283 6
------- -------
Net (decrease) increase in cash (641) 2,242
Cash at beginning of period 5,383 2,121
------- -------
Cash at end of period $ 4,742 $ 4,363
======= =======
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 January 31, 2003 and the results of its operations for the nine and three
months and cash flows for the nine months ended January 31, 2003 and 2002. 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 January 31,
Nine months Three months
2003 2002 2003 2002
Basic EPS Shares outstanding
(weighted average) 8,330,367 8,345,439 8,318,481 8,357,402
Effect of Dilutive Securities 63,284 186,293 71,681 181,712
--------- --------- --------- ---------
Diluted EPS Shares outstanding 8,393,651 8,531,732 8,390,162 8,539,114
========= ========= ========= =========
Options to purchase 777,387 and 665,437 shares of common stock were
outstanding during the nine and three months ended January 31, 2003,
respectively, and 243,250 shares of common stock were outstanding during the
same periods ended January 31, 2002, but were not included in the computation of
diluted earnings per share. Since the exercise price of these options was
greater than the average market price of the Company's common shares during the
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 January 31, 2003 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 $3,115,000 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 $3,214,000 and
$2,941,000 at January 31, 2003 and April 30, 2002, respectively, consist of the
following:
January 31, 2003 April 30, 2002
(In thousands)
Raw materials and Component parts $ 8,106 $ 8,946
Work in progress and Finished goods 13,482 10,655
------- -------
$21,588 $19,601
======= =======
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E - -COMPREHENSIVE INCOME
For the nine months ended January 31, 2003 and 2002, total comprehensive
income was $1,827,000 and $1,660,000, 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):
Nine months Three months
Periods ended January 31,
2003 2002 2003 2002
Net sales:
Commercial Communications $12,032 $22,652 $4,944 $6,220
U.S. Government 6,857 2,894 2,572 1,148
Gillam-FEI 6,135 7,322 2,083 2,466
less intercompany sales (506) (768) (209) (269)
------- ------- ------ ------
Consolidated Sales $24,518 $32,100 $9,390 $9,565
======= ======= ====== ======
Operating profit (loss):
Commercial Communications $(2,205) $1,906 $ (882) $ 245
U.S. Government 1,772 709 819 225
Gillam-FEI (403) (359) (133) (120)
less intercompany transactions (32) (213) (15) (106)
Corporate (365) (545) (84) (146)
------- ------- ------ ------
Consolidated Operating (Loss) Profit $ (1,233) $1,498 $ (295) $ 98
======= ======= ====== ======
January 31, 2003 April 30, 2002
Identifiable assets:
Commercial Communications $19,250 $21,101
U.S. Government 6,433 3,176
Gillam-FEI 18,952 17,956
less intercompany balances (893) (1,575)
Corporate 50,959 55,353
------- -------
Consolidated Identifiable Assets $94,701 $96,011
======= =======
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
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 December 2002, the FASB issued Statement No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148
amends SFAS 123, "Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure provisions of this Standard are effective for interim
periods beginning after December 15, 2002. The Company will comply with SFAS 148
when it prepares its financial statements for the year ending April 30, 2003.
The adoption of this Statement will have no impact on the balance sheet,
statement of operations or statement of cash flows of the Company since the
Company will continue to apply the "disclosure only" provisions of SFAS 123.
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.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
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.
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 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
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 December 2002, the FASB issued Statement No. 148 ("SFAS 148"), "Accounting
for Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS
123, "Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure provisions of this Standard are effective for interim periods
beginning after December 15, 2002. The Company will comply with SFAS 148 when it
prepares its financial statements for the year ending April 30, 2003. The
adoption of this Statement will have no impact on the balance sheet, statement
of operations or statement of cash flows of the Company since the Company will
continue to apply the "disclosure only" provisions of SFAS 123.
RESULTS OF OPERATIONS
As illustrated in the following table, the mix of the Company's revenues has
shifted significantly during fiscal 2003 compared to the same periods of fiscal
2002. For the nine-month period ended January 31, 2003, overall Net Sales have
declined by $7.6 million (24%) from the same period 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 military is undertaking the development
of new secure communications systems and more technologically sophisticated
weaponry.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
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 nine- and three-month periods of fiscal years 2003 and 2002:
Nine months Three months
Periods ended January 31,
2003 2002 2003 2002
Net Sales
Commercial Communications 48.3% 68.9% 51.8% 62.4%
U.S. Government 28.0 9.0 27.4 12.0
Gillam-FEI 23.7 22.1 20.8 25.6
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of Sales 68.4 62.2 67.3 62.1
----- ----- ----- -----
Gross Margin 31.6 37.8 32.7 37.9
Selling and administrative expenses 24.6 19.9 22.3 22.6
Research and development expenses 12.0 13.2 13.5 14.3
----- ----- ----- -----
Operating (Loss) Profit (5.0) 4.7 (3.1) 1.0
Other income (expense)- net 4.9 4.3 6.7 4.1
----- ----- ----- -----
Pretax (Loss) Income (0.1) 9.0 3.6 5.1
Provision for income taxes 0.1 2.9 1.0 1.7
----- ----- ----- -----
Net Income 0.0% 6.1% 2.6% 3.4%
===== ===== ===== =====
Revenues for the Commercial Communications segment declined by $10.6 million
(47%) and by $1.3 million (21%), respectively, for the nine- and three-month
periods ended January 31, 2003 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 nine- and three-month periods of fiscal 2003,
Gillam-FEI revenues decreased by $1.2 million (16%) and $383,000 (16%),
respectively, reflecting the decline in telecommunication spending in Europe.
Conversely, revenues in the Company's U.S. Government segment rose by $4.0
million (137%) and $1.4 million (124%), respectively, during fiscal 2003
compared to the same nine- and three-month periods of fiscal 2002. The Company
expects that U.S. Government revenue will continue to grow but the rate of
growth will vary since the timing for the release of new contracts is
unpredictable. The Company also believes that spending by telecommunication
service providers will increase in future periods from the current reduced
levels. As service providers add new features, 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 nine and three months ended January 31, 2003, the Commercial
Communications segment incurred operating losses of $2.2 million and $882,000,
respectively, compared to operating profits of $1.9 million and $245,000 in the
same periods of fiscal 2002. These losses are attributable primarily to the
reduced sales volume and related higher absorption of fixed costs. In addition,
this segment continues to invest in research and development projects, the Asian
production facility and the European sales office. Operating profits in the U.S.
Government segment for the nine and three months ended January 31, 2003 were
$1.8 million and $819,000, respectively, increases of $1.1 million (150%) and
$594,000 (264%) over the same periods of fiscal 2002. These increases are
attributable to the increase in revenues during the fiscal 2003 periods offset
by the absorption of a greater share of allocated general and administrative
expenses. The Gillam-FEI segment recorded losses of $403,000 and $133,000,
respectively, for the nine and three month periods ended January 31, 2003 which
are $44,000 (12%) and $13,000 (11%) greater than the losses recorded in the same
periods of fiscal 2002. These increased losses are due to the 16% decline in
revenues and lower gross margins, particularly on several developmental projects
in the fiscal 2003 three-month period. These amounts are offset by reduced
research and development spending during the fiscal 2003 periods.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
For the nine- and three-month periods ended January 31, 2003, gross margin rates
were 32% and 33%, respectively, compared to 38% in each of 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 as did the
developmental projects at Gillam-FEI cited above. The increased volume in U.S.
Government business was insufficient to offset the declines in the other two
segments. With the present mix of orders and recent contract bookings, the
Company expects to realize similar to improved gross profit margins during the
balance of fiscal 2003.
Selling and administrative costs decreased by $363,000 (6%) and by $64,000 (3%)
for the nine- and three-month periods ended January 31, 2003, respectively,
compared to the same periods of fiscal 2002. During the fiscal 2003 periods, the
Company increased its investments in its Asian production and European sales
office subsidiaries. Excluding these costs, selling and administrative expenses
would have declined by $542,000 (9%) and by $228,000 (11%) for the nine- and
three-month periods ended January 31, 2003, respectively, compared to fiscal
2002. These decreases were achieved through reduced personnel costs due to fewer
selling and administrative employees, lower travel costs and no 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 targets selling and administrative expenses to be 20% of
revenues, excluding special costs, but in the current reduced sales environment,
that ratio will be higher.
Research and development costs in the fiscal 2003 periods decreased by $1.3
million (31%) and $96,000 (7%), respectively, over the comparable nine- and
three-month periods ended January 31, 2002. During fiscal 2003 the Company was
successful in procuring funding for some of its development activities including
non-recurring engineering on production contracts and obtaining
government-sourced subsidies in Europe. This funding lowers research and
development costs to the Company without diminishing its ability to design and
develop new products. 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 $176,000 (13%) and increased by
$237,000 (61%), respectively, in the nine- and three-month periods ended January
31, 2003 as compared to the fiscal 2002 periods. For the nine-month periods,
fiscal 2003 investment income declined by $318,000 (19%) due to lower interest
rates on marketable securities and net realized losses on the sale of marketable
securities of $57,000 compared to net realized gains of $183,000 in the same
period of fiscal 2002. For the three-month periods, investment income increased
by $77,000 (16%) as lower interest income was offset by net realized gains on
certain marketable securities of $103,000 compared to gains of $14,000 in the
same period of fiscal 2002. Interest expense decreased by $31,000 (14%) for the
nine months and increased by $7,000 (10%) during the three-months ended January
31, 2003, compared to the same periods of fiscal 2002. These changes reflect
reduced interest rates and changes in debt balances during fiscal 2003 compared
to debt levels in fiscal 2002. Other income (expense), net, consists principally
of certain non-recurring transactions and is generally not significant to net
income. During the quarter ended January 31, 2003, the Company realized a gain
of $148,000 on the sale of a portion of a building owned by its French
subsidiary. Excluding that gain, for the nine- and three-month periods ended
January 31, 2003 the Company incurred net expenses of $93,000 and $8,000,
respectively, compared to net expenses of $56,000 and $27,000 in the same
periods 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. Effective in calendar 2003,
Belgium reduced its corporate income tax rate to 34%.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $67 million at January 31, 2003 which is comparable to working
capital at April 30, 2002. Included in working capital at January 31, 2003 is
$32.7 million of cash, cash equivalents and marketable securities, including
$10.5 million of REIT units which are convertible to Reckson Associates Realty
Corp. common stock.
Net cash provided by operating activities for the nine months ended January 31,
2003, was $379,000 compared to positive cash flow of $2.8 million in the same
period of fiscal 2002. 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 $2.6 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 nine months ended January 31,
2003, was $1.4 million. Approximately $1.6 million was obtained from the sale or
redemption of certain marketable securities, most of which was reinvested in
shorter term cash equivalents. The Company sold a portion of a building owned by
its French subsidiary receiving proceeds of $268,000 and recognizing a gain of
$148,000. These inflows were offset by the acquisition of capital equipment for
approximately $480,000. 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 $1 million on capital
equipment during fiscal 2003. Internally generated cash will be adequate to
acquire this capital equipment.
Net cash used in financing activities for the nine months ended January 31,
2003, was $2.7 million compared to $2.3 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 $1.7 million. In addition, the Company made
scheduled payments on debt and other long-term obligations of $645,000 in fiscal
2003 and $509,000 in fiscal 2002. In 2003, the Company also received $108,000 in
short-term borrowings. During fiscal 2003, the Company reacquired approximately
80,000 shares of its stock at a cost of $501,000.
BACKLOG
At January 31, 2003, the Company's backlog amounted to approximately $32
million, an increase of approximately $1 million from the April 30, 2002
backlog. Approximately 60% of the backlog represents orders for the Commercial
Communications segment, 22% for the Gillam-FEI segment and 18% for the U.S.
Government segment. Of this backlog, approximately 70% is realizable in the next
12 months.
Frequency Electronics, Inc. and Subsidiaries
(Continued)
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 $17.1 million and $10.9 million, respectively, at January 31,
2003. The investments are carried at fair value with changes in unrealized gains
and losses recorded as adjustments to stockholders' equity. The fair value of
investments in marketable securities is generally based on quoted market prices.
Typically, the fair market value of investments in fixed interest rate debt
securities will increase as interest rates fall and decrease as interest rates
rise. Based on the Company's overall interest rate exposure at January 31, 2003,
a 10% change in market interest rates would not have a material effect on the
fair value of the Company's fixed income securities or results of operations
(investment income).
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 January 31, 2003, the amount
related to foreign currency exchange rates is a $2,680,000 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 Rules 13a-14 and 15d-14. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic SEC reports. There have been
no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
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.
(c) No Current Reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended January 31,2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
(Registrant)
Date: March 17, 2003 BY: /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chairman of the Board of Directors
Date: March 17, 2003 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 March 17, 2003
--------------------
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 March 17, 2003
-------------------
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 January 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Martin
B. Bloch, Chief Executive Officer of the Company, certify, pursuant to Section
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Martin B. Bloch March 17, 2003
--------------------
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 January 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Alan L.
Miller, Chief Financial Officer of the Company, certify, pursuant to Section 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Alan L. Miller March 17, 2003
-------------------
Alan L. Miller
Chief Financial Officer