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, 1999
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 11, 1999 - 7,662,409
Page 1 of 15
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
January 31, 1999 and April 30, 1998 3-4
Consolidated Condensed Statements of Operations
Nine Months Ended January 31, 1999 and 1998 5
Consolidated Condensed Statements of Operations
Three Months Ended January 31, 1999 and 1998 6
Consolidated Condensed Statements of Cash Flows
Nine Months Ended January 31, 1999 and 1998 7
Notes to Consolidated Condensed Financial Statements 8-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Part II. Other Information:
Item 1 - Legal Proceedings 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
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<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
January 31, April 30,
1999 1998
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 771 $ 8,725
Marketable securities 39,062 36,661
Accounts receivable, net 14,977 18,640
Inventories 8,390 6,475
Deferred income taxes 4,933 5,000
Prepaid and other 736 986
------- -------
Total current assets 68,869 76,487
Property, plant and equipment, net 9,344 9,159
Other assets 3,263 3,134
------- -------
Total assets $81,476 $88,780
======= =======
See accompanying notes to consolidated condensed financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets (Continued)
January 31, April 30,
1999 1998
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt $ 500 $ 479
Accounts payable - trade 546 1,283
Accrued liabilities and other 3,396 11,770
------- -------
Total current liabilities 4,442 13,532
Long term debt net of current maturities 125 500
Deferred expenses 6,661 6,305
Deposit liability and other 11,882 12,036
------- -------
Total liabilities 23,110 32,373
------- -------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,009 9,009
Additional paid - in capital 36,943 36,306
Retained earnings 17,607 15,983
63,559 61,298
Common stock reacquired and held in treasury
- at cost, 1,327,413 shares at January 31, 1999
and 1,296,913 shares at April 30, 1998 (3,921) (3,632)
Unamortized ESOP debt (625) (1,000)
Notes receivable - common stock (287) (287)
Unearned compensation (57) (89)
Accumulated other comprehensive (loss) income (303) 117
------- -------
Total stockholders' equity 58,366 56,407
------- -------
Total liabilities and stockholders' equity $81,476 $88,780
======= =======
See accompanying notes to consolidated condensed financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
Nine Months Ended January 31,
(Unaudited)
1999 1998
(In thousands except per share data)
Net Sales $16,255 $23,350
------- -------
Cost of sales 10,953 17,564
Insurance reimbursement (4,500) -
Selling and administrative expenses 3,597 4,544
Research and development expenses 3,640 896
------- -------
Total operating expenses 13,690 23,004
------- -------
Operating profit 2,565 346
Other income (expense):
Investment income 1,608 1,528
Interest expense (254) (632)
Other (expense) income, net (49) 6,449
------- -------
Earnings before provision for
income taxes 3,870 7,691
Income tax provision
Current 1,100 980
Deferred 400 1,300
------- -------
1,500 2,280
------- -------
Net earnings $ 2,370 $ 5,411
======= =======
Net earnings per common share
Basic $ 0.32 $ 0.74
======= =======
Diluted $ 0.30 $ 0.70
======= =======
Average shares outstanding
Basic 7,488,435 7,325,974
========= =========
Diluted 7,831,931 7,691,498
========= =========
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
Three Months Ended January 31,
(Unaudited)
1999 1998
(In thousands except per share data)
Net Sales $ 3,060 $ 8,033
------- -------
Cost of sales 2,172 7,662
Selling and administrative expenses 1,277 1,713
Research and development expenses 1,674 288
------- -------
Total operating expenses 5,123 9,663
------- -------
Operating loss (2,063) (1,630)
Other income (expense)
Investment income 517 630
Interest expense (80) (173)
Other income, net (31) 5,653
------- -------
(Loss) earnings before (benefit) provision
for income taxes (1,657) 4,480
Income tax (benefit) provision
Current (300) 800
Deferred - 1,300
------- -------
(300) 2,100
------- -------
Net (loss) earnings ($ 1,357) $ 2,380
======= =======
Net (loss) earnings per common share
Basic ($ 0.18) $ 0.32
======= =======
Diluted ($ 0.18) $ 0.31
======= =======
Average shares outstanding
Basic 7,502,916 7,422,883
========= =========
Diluted 7,502,916 7,786,363
========= =========
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Nine Months Ended January 31,
(Unaudited)
1999 1998
---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 2,370 $ 5,411
Non-cash charges to earnings 2,086 58
Litigation settlement (8,000) -
Net changes in other assets and liabilities 1,691 (2,601)
------- -------
Net cash (used in) provided by operating activities (1,853) 2,868
Cash flows from investing activities:
Net proceeds from sale of building - 6,587
Purchase of marketable securities (2,853) (3,098)
Other - net (946) (642)
------- -------
Net cash (used in) provided by investing activities (3,799) 2,847
Cash flows from financing activities:
Payment of cash dividend (1,539) (1,520)
Receipt on prepayment of note receivable - 1,879
Principal payments of long-term debt
and deposit liability (486) (1,237)
Purchase of treasury stock (349) -
Payments from employees for exercise
of stock options or notes receivable 72 998
------- -------
Net cash (used in) provided by financing activities (2,302) 120
------- -------
Net (decrease) increase in cash (7,954) 5,835
Cash at beginning of period 8,725 3,448
------- -------
Cash at end of period $ 771 $ 9,283
======= =======
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE A - CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of the Company, the accompanying unaudited
consolidated condensed 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, 1999 and the results of its operations and
cash flows for the three and nine months ended January 31, 1999 and 1998.
The April 30, 1998 consolidated condensed 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 consolidated condensed financial statements be read
in conjunction with the financial statements and notes thereto included in
the Company's April 30, 1998 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
----------- ------------
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- --------- ---------
Basic EPS Shares outstanding
(weighted average) ........... 7,488,435 7,325,974 7,502,916 7,422,883
Effect of Dilutive Securities .. 343,496 365,524 ** 363,480
--------- --------- --------- ---------
Diluted EPS Shares outstanding . 7,831,931 7,691,498 7,502,916 7,786,363
========= ========= ========= =========
</TABLE>
** Dilutive securities are excluded for the three month period ended
January 31, 1999 since the inclusion of such shares would be antidilutive
due to the net loss for the quarter then ended.
Options to purchase 265,000 shares of common stock were outstanding during
the nine and three months ended January 31, 1999, respectively, but were
not included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of
the Company's common shares during the respective periods. Since the
inclusion of such options would have been antidilutive they are excluded
from the computation.
NOTE C - DEFERRED INCOME TAXES
As a result of continued operating profits, the 1998 real estate
transactions, the litigation settlement and proceeds from directors' and
officers' insurance, the Company expects to fully utilize its tax net
operating loss carryforward. As a consequence, beginning in the third
quarter of fiscal 1998, the Company recorded deferred income taxes based
upon the differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The principal components of
deferred taxes relate to the timing of deductibility of the litigation
settlement, certain employee benefits, accounting for long-term contracts
and depreciation of property, plant and equipment.
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable at January 31, 1999 and April 30, 1998 include costs
and estimated earnings in excess of billings on uncompleted contracts
accounted for on the percentage of completion basis of approximately
$10,180,000 and $13,618,000, 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.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE E - INVENTORIES
Inventories, which are reported net of reserves of $904,000 and $1,400,000 at
January 31, 1999 and April 30, 1998, respectively, consist of the following:
January 31, 1999 April 30, 1998
(In thousands)
Raw materials and Component parts $ 2,602 $ 2,857
Work in progress 5,788 3,618
------- -------
$ 8,390 $ 6,475
======= =======
NOTE F - ADOPTION OF SFAS 130, "REPORTING COMPREHENSIVE INCOME"
As of May 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS NO. 130"). SFAS
No. 130 establishes new standards for reporting and displaying
comprehensive income and its components within the Company's financial
statements; however, the adoption of SFAS No. 130 has no impact on the
Company's net income or stockholders' equity. SFAS No. 130 requires
unrealized gains and losses on the Company's marketable securities to be
reported in comprehensive income. Prior to adoption of this statement, such
gains and losses were reported separately in stockholders' equity. Prior
year financial statements have been reclassified to conform to the
requirements of SFAS No.
130.
During the nine-month periods ended January 31, 1999 and 1998,
comprehensive income was $2,054,000 and $5,649,000, respectively. For the
third quarter of fiscal years 1999 and 1998, comprehensive (loss) income
was ($1,198,000) and $2,335,000, respectively.
NOTE G - RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which is effective for the Company in future periods. This pronouncement
deals with disclosure matters and, upon adoption, will not have any effect
on the Company's financial position, results of operations or cash flows.
NOTE H -INSURANCE REIMBURSEMENT AND CONTINGENCIES
On October 21, 1998, Frequency Electronics, Inc. ("FEI") settled its claim
with the Associated International Insurance Company under applicable
directors and officers coverage and, on November 17, 1998, received payment
in the amount of $4.5 million. The reimbursement was for legal fees
previously incurred in defense of criminal and civil suits brought against
FEI and certain of its officers by the U.S. Government and certain
individuals. On June 19, 1998, FEI and the U.S. Government entered into a
Plea Agreement, Civil Settlement Agreement and related documents thereby
concluding a global disposition of these previously reported pending
litigations and matters. See also Part II, Item 1 of this Form 10Q.
Reference is also made to Notes 9 and 10 of the Company's Annual Report on
Form 10K for the year ended April 30, 1998 for information regarding the
litigation settlement and other legal proceedings.
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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 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 1999 and 1998:
<TABLE>
<CAPTION>
Nine months Three months
Periods ended January 31,
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Net Sales
Commercial ....................... 81.7% 82.5% 70.9% 78.9%
US Government .................... 18.3 17.5 29.1 21.1
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of Sales ....................... 67.4 75.2 71.0 95.4
Insurance reimbursement ............. (27.7) -- -- --
Selling and administrative expenses . 22.1 19.5 41.7 21.3
Research and development expenses ... 22.4 3.8 54.7 3.6
----- ----- ----- -----
Operating profit (loss) .......... 15.8 1.5 (67.4) (20.3)
Other income (expense)- net ......... 8.0 31.5 13.3 76.1
----- ----- ----- -----
Pretax Income (loss) ................ 23.8 33.0 (54.1) 55.8
Provision (benefit) for income taxes 9.2 9.8 (9.8) 26.1
----- ----- ----- -----
Net earnings (loss)............... 14.6% 23.2% (44.3%) 29.7%
===== ===== ===== =====
</TABLE>
Significant Fiscal 1999 and 1998 Events
- ---------------------------------------
During the nine- and three-month periods ended January 31, 1999 and 1998, the
Company recorded several significant non-recurring events which had a material
impact on operating profits, pre-tax earnings and net earnings. The table below
compares the Company's operating results when these events are excluded:
Nine months Three months
Periods ended January 31,
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
----- ----- ----- -----
Operating Profit (Loss)- as reported .. $2,565 $ 346 ($2,063) ($1,630)
Less:
Insurance Reimbursement ............. (4,500) 0 0 0
Add back:
Inventory writedown ................. 0 2,296 0 2,296
------ ------ ------ ------
Adjusted Operating (Loss) Profit .. (1,935) 2,642 (2,063) 666
Interest and Other, Net - as reported . 1,305 7,345 406 6,110
Less:
Gain on Building Sale,
net of expenses ....... 0 (4,811) 0 (4,811)
------ ------ ------ ------
Adjusted Interest and Other, Net .. 1,305 2,534 406 1,299
------ ------ ------ ------
Adjusted Pretax (Loss) Earnings ....... ($ 630) $5,176 ($1,657) $1,965
====== ====== ====== ======
</TABLE>
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Excluding the significant events, operating results in fiscal 1999 are lower
than in fiscal 1998 principally due to substantially greater research and
development spending which has drawn resources away from customer projects. This
reallocation of resources as well as softness in the commercial satellite
industry has led to lower revenues in the fiscal 1999 periods.
Net sales declined $7.1 million (30%) and $5.0 million (62%), respectively,
during the nine- and three-month periods ended January 31, 1999 as compared to
the same periods of fiscal 1998. Sales of commercial products during these nine-
and three-month periods decreased by $6.0 million (31%) and $3.3 million (66%),
respectively, from fiscal 1998 levels. As noted above, some of this decrease was
anticipated by the Company because of its allocation of internal resources
toward development of additional products to fulfill expected future demand for
commercial space hardware. Continued delays in certain world-wide satellite
manufacturing programs are providing a window of opportunity for the Company to
complete its development program during this fiscal year. During the quarter,
the Company also experienced unexpected delays in the receipt of additional
follow-on orders from a major customer for one of its terrestrial communication
products. Additionally, the Company encountered technical problems on another
significant communications product which slowed the release of product to its
customer. The Company anticipates that revenues will increase in the fourth
quarter of fiscal 1999 as a result of new purchase orders from its customers and
resolution of the technical problems.
Gross margin rates were 33% and 29% for the nine- and three-month periods ended
January 31, 1999, respectively, as compared to 35% and 33% for the comparable
fiscal 1998 periods, excluding the inventory writedowns. Margins in the fiscal
1999 periods are lower because US Government sales, with margins of
approximately 20%, comprise a greater percentage of total sales during these
periods and certain programs related to the Company's space segment are in the
final, less efficient phase. Margins on the Company's terrestrial wireless
communications products remained strong at over 40% during the fiscal 1999
periods as compared to 42% during fiscal 1998.
Selling and administrative costs decreased by $947,000 (21%) and $436,000 (26%)
for the nine- and three-month periods ended January 31, 1999, over the same
periods of fiscal 1998. This decrease is attributable to the Company's move last
fall into more efficient space within its leased building, reduced accruals for
bonuses and the decline in legal expenses related to the Company's litigation
with the U.S. Government. The US Government litigation was settled in June 1998
and all costs related to the settlement were accrued as of April 30, 1998. The
Company anticipates that selling and administrative expenses will increase in
the last quarter of fiscal 1999 and into the next fiscal year as the Company
intensifies its marketing efforts for its commercial space hardware products.
Research and development costs in the fiscal 1999 periods increased by $2.7
million (306%) and $1.4 million (481%), respectively, over the comparable nine-
and three-month periods ended January 31, 1998. As indicated previously, the
Company has devoted significant resources to develop a line of generic products
to be used as the building blocks for the commercial satellite transponder
market. In prior years, the Company secured partial customer funding for its
development efforts. For the satellite transponder development effort and other
development projects during fiscal 1999, the Company is targeting to spend up to
$6 million of its own funds in order to begin bringing such products to the
market by the fourth quarter of the current fiscal year. Internally generated
cash and cash reserves will be adequate to fund this development effort.
Excluding the net gain on the sale of its building, net non-operating income and
expense decreased by $1.2 million (49%) and $893,000 (69%) in the nine- and
three-month periods ended January 31, 1999 from the comparable fiscal 1998
periods. The third quarter of fiscal 1998 also included a property tax refund of
$585,000 and a $149,000 prepayment penalty from a former debtor to the Company,
which amount was credited to investment income. Without these two events, net
non-operating income and expense in the nine- and three-month periods of fiscal
1999 would have decreased by $495,000 (28%) and $159,000 (28%), respectively, as
compared to the same periods of fiscal 1998.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Investment income, excluding the 1998 prepayment penalty, increased by $229,000
(17%) and $36,000 (7%) in the fiscal 1999 nine month period and third quarter,
respectively, compared to the same fiscal 1998 periods. This is the result of a
40% increase in income-earning assets from January 1, 1998 to January 31, 1999
which was offset by lower interest rates, some of which was initiated by the
Company through a substantial investment in tax-free municipal bonds.
Interest expense decreased by $378,000 (60%) and $93,000 (54%) during the fiscal
1999 nine- and three-month periods compared to the same periods ended January
31, 1998. This decrease is the result of the repayment during the third quarter
of fiscal 1998 of over $10 million of debt related to the Company's former real
estate holdings.
In fiscal 1998, Other income (expense), net, in addition to the gain on the sale
of the buildings and the property tax refund referred to above, also included
rental income under a long-term lease. Since this lease was part of the real
estate sales effected in January 1998, no further income will be derived from
that source. For the balance of fiscal 1999, Other income (expense), net, is
expected to be nominal.
Prior to fiscal 1999, income taxes consisted principally of state taxes on
capital and alternative minimum tax as a result of substantial tax net operating
loss carryforwards. Beginning in the third quarter of fiscal 1998, as a result
of the gain on the building sale and continuing operating profits, the Company
began to record provisions for income taxes, including provisions for deferred
taxes. The effective tax rate for fiscal 1999 is expected to be less than 40%.
This rate is lower than was initially anticipated at the beginning of the fiscal
year due to three factors- an investment in tax-free municipal bonds, reduced
amortization costs of the Employee Stock Ownership Plan as a result of the lower
market value of the Company's common stock and the availability of tax credits
for incremental research and development expenses, the provisions of which were
reinstated by Congress last fall.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $64 million at January 31, 1999 compared to working capital at April
30, 1998, of $63 million. Included in working capital at January 31, 1999 is $40
million of cash, cash equivalents and marketable securities, including $12
million of REIT units which are convertible to Reckson Associates Realty Corp.
common stock.
Net cash used in operating activities for the nine months ended January 31,
1999, was $1.9 million compared to a net cash inflow of $2.9 million in the
comparable fiscal 1998 period. The fiscal 1999 net outflow is the result of the
$8 million litigation settlement, offset by receipt of $4.5 million from
insurance reimbursement of litigation costs, coupled with larger research and
development spending. Without those items, cash flows from operating activities
would have been positive. The Company will continue to expend its resources and
efforts to develop hardware for commercial satellite programs and commercial
ground communication and navigation systems which management believes will
result in future growth and continued profitability. Internally generated cash
and cash reserves will be adequate to fund development efforts in these markets.
As a result of this investment in its future during the remainder of fiscal
1999, the Company does not anticipate that it will generate positive cash flow
from operating activities this fiscal year.
Net cash used in investing activities for the nine months ended January 31,
1999, was $3.8 million. Of this amount, $2.9 million was used to invest in
marketable securities, principally U.S. government and agency securities. The
Company also acquired capital equipment for approximately $946,000. The Company
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
may continue to acquire or redeem marketable securities as dictated by its
investment strategies as well as by the cash requirements for its development
activities. The Company may spend up to $2 million on capital equipment related
to the development and manufacture of new products. The Company has sufficient
resources to acquire such capital equipment.
Net cash used in financing activities for the nine months ended January 31,
1999, was $2.3 million compared to a $120,000 cash inflow for the comparable
fiscal 1998 period. Included in the fiscal 1999 amount is payment of the
Company's semiannual dividends in the aggregate amount of $1.54 million, the
acquisition of 50,000 shares of Company stock for treasury at a cost of $349,000
and $486,000 used to make regularly scheduled long-term liability payments.
These outflows were partially offset by transactions related to the Company's
common stock and involving certain officers and other employees who exercised
stock option rights ($72,000).
Year 2000 Issue
- ---------------
During the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000,
the Company intends to install newly acquired, integrated financial and
manufacturing software, the cost of which is not expected to exceed $500,000.
The purchase of the financial software will satisfactorily address the issue of
compliance with the year 2000 problem for financial transactions and reporting
purposes. The Company has sufficient resources to acquire, install and implement
such software.
Beginning in the latter portion of fiscal 1998 and concluding during the second
quarter of fiscal 1999, the Company acquired new desktop computers of sufficient
size and speed to operate the new financial software. The cost of these
computers, included in capital equipment, was approximately $220,000. The
Company has determined that additional operational, nonfinancial software must
be obtained to resolve the year 2000 issue in certain production and support
areas, the cost of which will not exceed $50,000.
The Company's products do not contain imbedded microchips or other components
which are date sensitive. The same is generally true of the products which are
acquired from third-party vendors. Consequently, the Company's products are
already compliant with the year 2000. In addition, the Company has received
assurances from its "critical" vendors that their systems are or will be Y2K
compliant prior to the year 2000. Consequently, the Company does not anticipate
any interruption in services or supplies from vendors.
In the event its financial and manufacturing software is not timely installed
and the Company is unable to prepare appropriately dated invoices, payments or
other documentation, the Company will employ alternative strategies. This will
consist principally of hiring additional clerical personnel to assure that the
Company's records and documentation are properly and accurately maintained until
such time that the software implementation can be completed.
Backlog
- -------
At January 31, 1999, the Company's backlog amounted to approximately $23 million
compared to the approximately $22 million backlog at April 30, 1998. Of this
backlog, approximately 45% is realizable in the next twelve months.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
The statements contained in this release which are forward-looking
statements and not based on historical facts, are subject to risks and
uncertainties that could cause actual results to differ materially from
those set forth herein. Such risks include changes in contractual
agreements or a change in status under the US government-imposed suspension
and other risks as more fully described in the Company's Annual Report on
Form 10K filed with the Securities and Exchange Commission.
PART II
ITEM 1 - Legal Proceedings
On June 19, 1998, Frequency Electronics, Inc. ("FEI" or "Registrant")
and the U.S. Government entered into a Plea Agreement, Civil Settlement
Agreement and related documents ("Settlement Agreement") thereby concluding
a global disposition of certain previously reported pending litigations and
matters. All criminal charges brought by the U.S. Government against
certain officers, employees and former employees of FEI were dismissed,
with prejudice. The criminal charges brought by the U.S. Government against
FEI were dismissed, with prejudice, with the exception of a single charge
of submitting a false statement which failed to disclose the full
explanation of FEI's costs on a highly classified government project, as to
which FEI pled guilty and paid the U.S. Government a fine of $400,000 and
$1.1 million as reimbursement for costs of its investigation, with all
known criminal investigations of FEI having been resolved. As part of the
Settlement Agreement, the Fox Civil Case was dismissed, with prejudice, as
to all defendants and FEI paid the U.S. Government $1.5 million to settle
this case; and the Geldart qui tam action was dismissed, with prejudice, as
to all defendants and FEI paid the U.S. Government $5 million to settle
this case.
The Settlement Agreement does not affect other previously reported
pending litigations and matters including a second qui tam action and two
separate derivative shareholder actions which seek recovery on behalf of
the Company for any losses it incurs as a result of the U.S. Government
indictments.
On July 9, 1998, FEI was notified by the U.S. Department of the Air
Force of FEI's proposed debarment based upon FEI's guilty plea entered in
connection with the global disposition and the Settlement Agreement. On
December 12, 1998, the U.S. Department of the Air Force notified FEI that
its debarment was terminated, without condition.
On October 21, 1998, FEI settled its claim with the Associated
International Insurance Company ("Associated") under applicable directors
and officers coverage and, on November 17, 1998, FEI received payment in
the amount of $4.5 million.
For all items noted above, reference is made to Item 3 - Legal
Proceedings of Registrant's Annual Report on Form 10K for the year ended
April 30, 1998 on file with the Securities and Exchange Commission.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended January 31, 1999.
14 of 15
<PAGE>
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, 1999 BY /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chief Executive Officer
Date: March 17, 1999 BY /s/ Alan Miller
---------------
Alan Miller
Chief Financial Officer
and Treasurer
15 of 15
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