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, 2000
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 8, 2000 - 8,085,971
Page 1 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
July 31, 2000 and April 30, 2000 3-4
Condensed Consolidated Statements of Operations
Three Months Ended July 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Part II. Other Information:
Item 1 - Legal Proceedings 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
2 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 31, April 30,
2000 2000
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 4,514 $ 4,994
Marketable securities 38,949 36,013
Accounts receivable, net 8,408 9,590
Inventories 15,279 13,307
Deferred income taxes 909 1,940
Prepaid and other 866 1,329
------- -------
Total current assets 68,925 67,173
Property, plant and equipment, net 9,150 9,040
Deferred income taxes 700 600
Other assets 4,071 4,034
------- -------
Total assets $82,846 $80,847
======= =======
See accompanying notes to condensed consolidated
financial statements.
3 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
July 31, April 30,
2000 2000
---- ----
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable - trade $ 919 $ 1,019
Accrued liabilities and other 3,103 3,989
------- -------
Total current liabilities 4,022 5,008
Deferred compensation 5,388 5,276
Deposit liability and other 11,516 11,573
------- -------
Total liabilities 20,926 21,857
------- -------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,009 9,009
Additional paid - in capital 38,342 37,929
Retained earnings 18,046 17,239
------- -------
65,397 64,177
Common stock reacquired and held
in treasury - at cost, 948,841 shares
at July 31, 2000 and 1,016,552 shares
at April 30, 2000 (3,483) (3,644)
Notes receivable - common stock (115) (115)
Unearned compensation (16) (20)
Accumulated other comprehensive income (loss) 137 (1,408)
------- -------
Total stockholders' equity 61,920 58,990
------- -------
Total liabilities and stockholders' equity $82,846 $80,847
======= =======
See accompanying notes to condensed consolidated
financial statements.
4 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended July 31,
(Unaudited)
2000 1999
---- ----
(In thousands except per share data)
Net Sales $8,893 $5,464
------ ------
Cost of sales 4,981 3,072
Selling and administrative expenses 2,129 1,212
Research and development expense 1,204 1,250
------ ------
Total operating expenses 8,314 5,534
------ ------
Operating profit (loss) 579 (70)
Other income (expense):
Investment income 743 740
Interest expense (69) (83)
Other income (expense), net (56) 87
------ ------
Earnings before provision for
income taxes 1,197 674
Provision for income tax 390 230
------ ------
Net earnings $ 807 $ 444
====== ======
Net earnings per common share
Basic $ 0.10 $ 0.06
====== ======
Diluted $ 0.10 $ 0.06
====== ======
Average shares outstanding
Basic 8,031,530 7,556,129
========= =========
Diluted 8,488,530 7,887,877
========= =========
See accompanying notes to condensed consolidated
financial statements.
5 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31,
(Unaudited)
2000 1999
---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 807 $ 444
Non-cash charges to earnings 642 666
Litigation settlement 245 -
Net changes in assets and liabilities (889) 1,442
------ ------
Net cash provided by operating activities 805 2,552
Cash flows from investing activities:
(Purchase) Sale of marketable securities-net (360) 463
Other - net (357) (260)
------ ------
Net cash (used in) provided by
investing activities (717) 203
Cash flows from financing activities:
Dividends paid (799) (766)
Other - net 231 (172)
------ ------
Net cash used in financing activities (568) (938)
------ ------
Net (decrease) increase in cash (480) 1,817
Cash at beginning of period 4,994 567
------ ------
Cash at end of period $4,514 $2,384
====== ======
See accompanying notes to condensed consolidated
financial statements.
6 of 12
<PAGE>
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, 2000 and the results of its operations and cash flows for the three
months ended July 31, 2000 and 1999. The April 30, 2000 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, 2000 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,
2000 1999
---- ----
Basic EPS Shares outstanding
(weighted average) 8,031,530 7,556,129
Effect of Dilutive Securities 457,000 331,748
---------- ----------
Diluted EPS Shares outstanding 8,488,530 7,887,877
========= =========
For the three months ended July 31, 2000, all exercisable options were
included in the computation of diluted earnings per share. Options to purchase
258,375 shares of common stock were outstanding during the three months ended
July 31, 1999, 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 period. Since the
inclusion of such options would have been antidilutive they are excluded from
the computation.
NOTE C - ACCOUNTS RECEIVABLE
Accounts receivable at July 31, 2000 and April 30, 2000 include costs
and estimated earnings in excess of billings on uncompleted contracts accounted
for on the percentage of completion basis of approximately $2,854,000 and
$2,584,000, 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 $1,240,000 and
$1,188,000 at July 31, 2000 and April 30, 2000, respectively, consist of the
following:
July 31, 2000 April 30, 2000
------------- --------------
(In thousands)
Raw materials and Component parts $ 7,101 $ 6,188
Work in progress 8,178 7,119
-------- --------
$15,279 $13,307
======= =======
7 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE E - -COMPREHENSIVE INCOME
For the three months ended July 31, 2000 and 1999, total comprehensive
income was $2,352,000 and $267,000, respectively.
NOTE F - SEGMENT INFORMATION
The Company operates under two 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.
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,
2000 1999
---- ----
Net sales:
Commercial Communications $8,195 $4,615
U.S. Government 698 849
------ ------
Consolidated Sales $8,893 $5,464
====== ======
Operating profit (loss):
Commercial Communications $1,038 $ 9
U.S. Government 134 20
Corporate (593) (99)
------ ------
Consolidated Operating Profit (Loss) $ 579 ($ 70)
====== ======
July 31, 2000 April 30, 2000
------------- --------------
Identifiable assets:
Commercial Communications $19,681 $18,447
U.S. Government 4,006 4,450
Corporate 59,159 57,950
------- -------
Consolidated Identifiable Assets $82,846 $80,847
======= =======
NOTE G - SUBSEQUENT EVENTS
Proposed settlement of outstanding litigation- In August 2000, the
Company agreed to settle derivative stockholder litigation which had been
brought against the Company in fiscal 1994. The terms of the proposed settlement
require the Company to pay an aggregate of $245,000 in attorneys' fees and
related costs. The proposed settlement is subject to notice to shareholders and
Court approval. Such amount has been reflected in the operating results of the
Company for the three-month period ended July 31, 2000. (see Part II- Item 1-
Legal Proceedings.)
Acquisition of Gillam, S.A.- On August 30, 2000, the Company announced
the signing of a definitive agreement to acquire Gillam, S.A., a privately-held
Belgian company which develops and manufactures wireline telcom synchronization,
network monitoring, and power supply products. The Company will pay
approximately $8.5 million in cash and 200,000 shares of Company stock for the
stock of Gillam. Closing of the transaction is expected to take place in
mid-September 2000.
8 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 2000 the percentage of consolidated net sales represented by certain
items in the Company's consolidated statements of operations:
Three months ended
July 31,
2000 1999
---- ----
Net Sales
Commercial Communications 92.2% 84.5%
U.S. Government 7.8 15.5
----- -----
100.0 100.0
Cost of Sales 56.0 56.2
Selling and administrative expenses 23.9 22.2
Research and development expenses 13.5 22.9
----- -----
Operating profit (loss) 6.6 (1.3)
Other income (expense)- net 6.9 13.6
----- -----
Pretax Income 13.5 12.3
Provision for income taxes 4.4 4.2
----- -----
Net earnings 9.1% 8.1%
===== =====
For the three months ended July 31, 2000, operating profit increased by $649,000
over the loss incurred in the comparable period of fiscal year 2000 and net
earnings increased by $363,000 (82%). These outcomes were principally the result
of a 63% increase in sales for the first quarter of fiscal 2001 over the first
quarter of last fiscal year. Results for the fiscal 2001 quarter were impacted
by certain one-time legal and final settlement costs of approximately $300,000
relative to litigation initiated in fiscal 1994 and by costs incurred in
connection with the Company's recently announced acquisition of Gillam S.A.
Gross margins held steady at approximately 44% of sales for the three months
ended July 31, 2000 and 1999. Margins on commercial communications revenues were
45% as compared to 38% for U.S. Government programs. During the quarter ended
July 31, 1999, gross margins on commercial communications sales were 46% while
margins on U.S. Government programs were 31%. The improvement in U.S. Government
margins in the fiscal 2001 period is attributable to the conclusion of certain
unprofitable contracts for which loss reserves were recorded in prior years.
With the present mix of commercial communications versus U.S. Government
projects and recent contract bookings, the Company expects to maintain its
profit margins at or near the current level for the remainder of fiscal 2001.
Selling and administrative costs for the quarter ended July 31, 2000, increased
by $917,000 (76%) over the three months ended July 31, 1999. Of this increase,
approximately $300,000 was incurred in connection with the proposed settlement
of certain litigation (see Note G and Part II, Item 1- Legal Proceedings).
Amortization of certain non-employee stock options was approximately $190,000
greater than that recorded in the prior year as a result of the rising value of
the Company's common stock.
9 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
(Continued)
In addition, the Company incurred higher sales and marketing costs, recorded
accruals for incentive bonuses based on increased operating profits and incurred
certain costs in connection with its proposed acquisition of Gillam, S.A. (Note
G). The Company anticipates that selling and administrative expenses will be
greater in fiscal 2001 than those incurred in fiscal 2000, although, as a
percentage of sales, the ratio is expected to decrease.
Research and development costs in the fiscal 2001 period decreased by $46,000
(4%) over the comparable three month period ended July 31, 1999. The Company
continues to devote significant resources to develop new products and enhance
existing products for the commercial communications market. The Company is
developing products in support of third generation (3G) wireless infrastructure
systems, products which increase the capability of existing TDMA and GSM systems
(EDGE), as well as products for interconnectivity with wireline and fiber optic
networks. The Company anticipates that research and development spending will
continue at approximately the same level for the remainder of fiscal 2001 but,
as a percentage of sales, the ratio is expected to decline as sales increase.
Internally generated cash and cash reserves will be adequate to fund this
development effort.
Net nonoperating income and expense decreased by $126,000 (17%) in the three
months ended July 31, 2000 from the comparable fiscal 2000 quarter. Interest
expense decreased by $14,000 (17%) during the fiscal 2001 quarter compared to
the period ended July 31, 1999 as a result of lower long-term obligations. Other
income (expense), net, which consists principally of certain non-recurring
transactions, was a net expense of $56,000 in fiscal 2001 versus net income of
$87,000 in fiscal 2000, an earnings decrease of $143,000 (164%). In fiscal 2001,
the Company incurred certain non-operating costs as compared to the prior year
when this category included a benefit from the recovery of certain non-operating
debts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $65 million at July 31, 2000 which is 4% higher than the $62 million
in working capital at April 30, 2000. Included in working capital at July 31,
2000 is $43.5 million of cash, cash equivalents and marketable securities,
including $12.8 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,
2000, was $805,000 compared to $2.6 million in the comparable fiscal 2000
quarter. In the fiscal 2001 period, noncash charges to earnings were offset by
the net increase in assets and liabilities, principally growth in inventory less
collections on accounts receivable. The fiscal 2000 result was achieved
principally through collections on accounts receivable plus operating profits
during the quarter. With improving operating profits, the Company anticipates
that it will generate positive cash flow from operating activities this fiscal
year.
Net cash used in investing activities for the three months ended July 31, 2000,
was $717,000. Approximately $360,000 was used to make additional investments in
marketable securities, principally securities issued by the U.S. government and
its agencies. In addition, the Company acquired capital equipment for
approximately $357,000. 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 intends
to spend approximately $1 million on capital equipment during fiscal 2001.
Internally generated cash will be adequate to acquire this capital equipment. In
September 2000, the Company will acquire Gillam, S.A., a Belgian company,
through payment of approximately $8.5 million and 200,000 shares of its common
stock. The cash payment will be taken from the Company's cash and investment in
marketable securities.
10 of 12
<PAGE>
Frequency Electronics, Inc. and Subsidiaries
(Continued)
Net cash used in financing activities for the three months ended July 31, 2000,
was $568,000 compared to $938,000 for the comparable fiscal 2000 quarter.
Included in both fiscal quarters is payment of the Company's semiannual dividend
in the aggregate amount of $799,000 and $766,000, respectively. 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, 2000, the Company's backlog amounted to approximately $26 million
compared to the approximately $24 million backlog at April 30, 2000. Of this
backlog, approximately 90% is realizable during fiscal 2001.
"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, 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 August 2, 2000, a Stipulation of Settlement was executed by all parties
and filed with the Court in the action pending against FEI and others in the
Court of Chancery, State of Delaware, New Castle county, entitled In re
Frequency Electronics, Inc., Derivative Litigation, Civil Action No. 13266: the
proposed settlement calls for a total payment by FEI for legal fees and
disbursements not exceeding $245,000; the proposed settlement is subject to
notice to stockholders and Court approval.
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 July 31, 2000.
11 of 12
<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: September 14, 2000 BY: /s/ Joseph P. Franklin
---------------------------
Joseph P. Franklin
Chairman of the Board of Directors
Date: September 14, 2000 BY: /s/ Alan Miller
--------------------
Alan Miller
Chief Financial Officer
and Controller
12 of 12
<PAGE>
