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 OctoberJanuary 31, 19992000
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
December 7, 1999March 9, 2000 - 7,689,0247,957,782
Page 1 of 15
FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
OctoberJanuary 31, 19992000 and April 30, 1999 3-4
Consolidated Condensed Statements of Operations
SixNine Months Ended OctoberJanuary 31, 19992000 and 19981999 5
Consolidated Condensed Statements of Operations
Three Months Ended OctoberJanuary 31, 19992000 and 19981999 6
Consolidated Condensed Statements of Cash Flows
SixNine Months Ended OctoberJanuary 31, 19992000 and 19981999 7
Notes to Consolidated Condensed Financial Statements 8-10
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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FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
Consolidated Condensed Balance Sheets
OctoberJanuary 31, April 30,
19992000 1999
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 1,5405,593 $ 567
Marketable securities 37,38235,076 38,720
Accounts receivable, net 9,7069,889 12,190
Inventories 10,17710,789 9,696
Deferred income taxes 2,9862,956 2,336
Prepaid and other 823967 1,182
------- -------
Total current assets 62,61465,270 64,691
Property, plant and equipment, net 9,3919,273 9,489
Deferred income taxes 545 500
Other assets 3,7703,734 3,675
------- -------
Total assets $76,320$78,822 $78,355
======= =======
See accompanying notes to consolidated condensed financial
statements.
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FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
Consolidated Condensed Balance Sheets (Continued)
OctoberJanuary 31, April 30,
19992000 1999
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt $ 239114 $ 489
Accounts payable - trade 406411 837
Dividend payable 769- 766
Accrued liabilities and other 2,2143,481 2,797
------- -------
Total current liabilities 3,6284,006 4,889
Deferred compensation 5,1885,248 5,165
Deposit liability and other 11,68511,630 11,794
------- -------
Total liabilities 20,50120,884 21,848
------- -------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,009 9,009
Additional paid - in capital 37,25137,418 36,940
Retained earnings 15,81717,020 15,653
------- -------
62,077------ ------
63,447 61,602
Common stock reacquired and held in
treasury - at cost, 1,320,2341,285,384 shares
at OctoberJanuary 31, 19992000 and 1,346,850
shares at April 30, 1999 (3,984)(3,879) (4,058)
Unamortized ESOP debt (250)(125) (500)
Notes receivable - common stock (280)(116) (287)
Unearned compensation (33)(26) (47)
Accumulated other comprehensive loss (1,711)(1,363) (203)
------- -------
Total stockholders' equity 55,81957,938 56,507
------- -------
Total liabilities and stockholders' equity $76,320$78,822 $78,355
======= =======
See accompanying notes to consolidated condensed financial
statements.
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FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
Consolidated Condensed Statements of Operations
SixNine Months Ended OctoberJanuary 31,
(Unaudited)
2000 1999 1998
(In thousands except per share data)
Net Sales $11,500 $13,195$18,617 $16,255
------- -------
Cost of sales 6,427 8,78110,400 10,953
Insurance reimbursement - (4,500)
Selling and administrative expenses 2,324 2,3203,822 3,597
Research and development expenses 2,490 1,9663,625 3,640
------- -------
Total operating expenses 11,241 8,56717,847 13,690
------- -------
Operating profit 259 4,628770 2,565
Other income (expense):
Investment income 1,310 1,0912,891 1,608
Interest expense (161) (174)(235) (254)
Other income (expense), net 24 (18)(191) (49)
------- -------
Earnings before provision for
income taxes 1,432 5,5273,235 3,870
Income tax provision
Current 200 1,4001,000 1,100
Deferred 310110 400
------- -------
510 1,8001,110 1,500
------- -------
Net earnings $ 9222,125 $ 3,7272,370
======= =======
Net earnings per common share
Basic $ 0.120.28 $ 0.500.32
======= =======
Diluted $ 0.120.27 $ 0.470.30
======= =======
Average shares outstanding
Basic 7,566,569 7,507,3837,583,586 7,488,435
========= =========
Diluted 7,933,654 7,847,1017,950,670 7,831,931
========= =========
See accompanying notes to consolidated condensed financial
statements.
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FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
Consolidated Condensed Statements of Operations
Three Months Ended OctoberJanuary 31,
(Unaudited)
2000 1999 1998
(In thousands except per share data)
Net Sales $ 6,0367,117 $ 6,1803,060
------- -------
Cost of sales 3,355 4,155
Insurance reimbursement - (4,500)3,973 2,172
Selling and administrative expenses 1,112 1,1261,498 1,277
Research and development expenses 1,240 1,1711,135 1,674
------- -------
Total operating expenses 5,707 1,9526,606 5,123
------- -------
Operating profit 329 4,228(loss) 511 (2,063)
Other income (expense)
Investment income 570 4421,581 517
Interest expense (78) (85)(74) (80)
Other income (expense), net (63) 24(215) (31)
------- -------
Earnings (loss) before provision (benefit)
for income taxes 758 4,6091,803 (1,657)
Income tax provision (benefit)
Current 150 1,350800 (300)
Deferred 130 50(200) -
------- -------
280 1,400600 (300)
------- -------
Net earnings (loss) $ 478 $ 3,2091,203 ($ 1,357)
======= =======
Net earnings (loss) per common share
Basic $ 0.06 $ 0.43
=======0.16 ($ 0.18)
====== ======
Diluted $ 0.06 $ 0.41
=======0.15 ($ 0.18)
====== ======
Average shares outstanding
Basic 7,577,010 7,499,9247,543,659 7,502,916
========= =========
Diluted 7,979,270 7,776,4787,945,919 7,502,916
========= =========
See accompanying notes to consolidated condensed financial
statements.
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FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
Consolidated Condensed Statements of Cash Flows
SixNine Months Ended OctoberJanuary 31,
(Unaudited)
2000 1999 1998
---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 9222,125 $ 3,7272,370
Gain on sale of marketable securities (1,273) -
Non-cash charges to earnings 1,496 1,8112,192 2,086
Litigation settlement - reserve (payment) 200 (8,000)
Insurance reimbursement accrual - (4,500)
Net changes in other assets and liabilities 987 (209)
--------639 1,691
------- -------
Net cash provided by (used in) operating activities 3,405 (7,171)3,883 (1,853)
Cash flows from investing activities:
(Purchase)Proceeds from sale of marketable securities (978) 2,3176,717 -
Purchase of marketable securities (3,303) (2,853)
Other - net (438) (610)
--------(592) (946)
------- -------
Net cash provided by (used in) provided by investing activities (1,416) 1,7072,822 (3,799)
Cash flows from financing activities:
Payment of cash dividend (766) (771)
Other(1,532) (1,539)
Principal payments of long-term debt
and deposit liability (529) (486)
Purchase of treasury stock - net (250) (607)
--------(349)
Payments from employees for exercise
of stock options or notes receivable 382 72
------- -------
Net cash used in financing activities (1,016) (1,378)
--------(1,679) (2,302)
------- -------
Net increase (decrease) in cash 973 (6,842)5,026 (7,954)
Cash at beginning of period 567 8,725
--------------- -------
Cash at end of period $ 1,5405,593 $ 1,883
========771
======= =======
See accompanying notes to consolidated condensed financial
statements.
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FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
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 Company's consolidated financial
position, of
the Company as of October 31, 1999 and the results of its operations and cash flows for each of the three and six months ended October 31, 1999 and 1998.periods
presented. The April 30, 1999 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, 1999 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 OctoberJanuary 31,
SixNine months Three months
--------------------- ------------
2000 1999 19982000 1999 1998
---- ---- ---- ----
Basic EPS Shares outstanding
(weighted average) 7,566,569 7,507,383 7,577,010 7,499,9247,583,586 7,488,435 7,543,659 7,502,916
Effect of Dilutive Securities 367,085 339,718367,084 343,496 402,260 276,554
----------**
--------- ---------- ------------------- --------- ---------
Diluted EPS Shares outstanding 7,933,654 7,847,101 7,979,270 7,776,4787,950,670 7,831,931 7,945,919 7,502,916
========= ========= ========= =========
**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 258,375 shares of common stock that were outstanding
during both the sixnine and three months ended OctoberJanuary 31, 1999, compared to 265,5002000, and 118,500265,000
shares for the comparable periods in fiscal year 1999. These
shares1999 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.
Sincesince the inclusion of such
options would have been antidilutive they are
excluded from the computation.antidilutive.
NOTE C - DEFERRED INCOME TAXES
The Company records 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 certain employee benefits, inventory
reserves, depreciation of property, plant and equipment, the deferred gain
on the building sale, research and development tax credit carryforwards and
the net operating loss carryforward. As a result of continued profitability
and a deferred gain from the 1998 real estate transactions, the Company
expects to fully utilize its tax net operating loss carryforward.
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable at OctoberJanuary 31, 19992000 and April 30, 1999 include costs
and estimated earnings in excess of billings on uncompleted contracts
accounted for on the percentage of completion basis of approximately
$5,490,000$3,817,000 and $6,657,000, 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.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE E - INVENTORIES
Inventories, which are reported net of reserves of $1,054,000 at OctoberJanuary
31, 19992000 and April 30, 1999, respectively, consist of the following:
OctoberJanuary 31, 19992000 April 30, 1999
(In thousands)
Raw materials and Component parts $ 2,9513,531 $ 3,028
Work in progress 7,2267,258 6,668
------- -------
$10,177$10,789 $ 9,696
======= =======
NOTE F -COMPREHENSIVE INCOME
For the six months ended October 31, 1999 and 1998, total comprehensive
income (loss) was ($586,000) and $3,253,000, respectively. For the second
quarter of fiscal years 2000 and 1999, comprehensive income (loss) was
($853,000) and $2,929,000, respectively.
NOTE G - SEGMENT INFORMATION
The Company operates under two reportable segments:
1. Commercial wireless 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):
SixNine months ended OctoberJanuary 31,
2000 1999
1998---- ----
Net sales:
Wireless Communications $ 9,868 $11,104$15,837 $13,274
U.S. Government 1,632 2,0912,780 2,981
------- -------
Consolidated Sales $11,500 $13,195$18,617 $16,255
======= =======
Operating profit (loss) profit::
Wireless Communications $ 189 $ 179657 $(1,558)
U.S. Government 290 (3)689 (146)
Corporate (220) 4,452(576) 4,269
------- -------
Consolidated Operating Profit $ 259770 $ 4,6282,565
======= =======
OctoberJanuary 31, 19992000 April 30, 1999
---------------- --------------
Identifiable assets:
Wireless Communications $14,709$16,271 $16,968
U.S. Government 5,1744,406 4,918
Corporate 56,43758,145 56,469
------- -------
Consolidated Identifiable Assets $76,320$78,822 $78,355
======= =======
NOTE G - COMPREHENSIVE INCOME
During the nine-month periods ended January 31, 2000 and 1999,
comprehensive income was $965,000 and $2,054,000, respectively. For the
third quarter of fiscal years 2000 and 1999, comprehensive income (loss)
was $1,551,000 and ($1,198,000), respectively.
9 of 15
FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
Notes to Consolidated Condensed Financial Statements
(Unaudited)
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 Note 9 of the Company's Annual Report on Form 10K
for the year ended April 30, 1999 for information regarding the litigation
settlement and other legal proceedings.
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 six-nine- and three-month periods of fiscal years 2000 and 1999:
SixNine months Three months
Periods ended OctoberJanuary 31,
2000 1999 19982000 1999 1998
---- ---- ---- ----
Net Sales
Wireless Communications 85.8% 84.2% 87.0% 6.1%85.1% 81.7% 83.9% 70.9%
US Government 14.2 15.8 13.0 13.914.9 18.3 16.1 29.1
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of Sales 55.9 66.5 55.6 67.267.4 55.8 71.0
Insurance reimbursement - (34.1)(27.7) - (72.8)-
Selling and administrative expenses: 20.2 17.6 18.4 18.2expenses 20.5 22.1 21.1 41.7
Research and development expenses 21.7 14.9 20.6 19.019.5 22.4 15.9 54.7
----- ----- ----- -----
Operating profit 2.2 35.1 5.4 68.4(loss) 4.1 15.8 7.2 (67.4)
Other income (expense)- net 10.2 6.8 7.1 6.213.2 8.0 18.1 13.3
----- ----- ----- -----
Pretax Income 12.4 41.9 12.5 74.6(loss) 17.3 23.8 25.3 (54.1)
Provision (benefit) for income taxes 4.4 13.6 4.6 22.75.9 9.2 8.4 (9.8)
----- ----- ----- -----------
Net earnings 8.0% 28.3% 7.9% 51.9%(loss) 11.4% 14.6% 16.9% (44.3%)
===== ===== ===== =====
On November 17, 1998, the Company received $4.5 million representing
reimbursement of prior year litigation costs under the Company's Directors' and
Officers' liability insurance policies. (See Part II, ITEM 1 - Legal
Proceedings) This amount was reported as a reduction of operating expenses for
the six- and three-month periods of the 1999 fiscal year.nine-month period ended January 31, 1999. Excluding this one-time item, for
the six-nine- and three-month periods ended January 31, 2000, operating profits
increased by $2.7 million and $2.6 million, respectively, over the operating
10 of 15
FREQUENCY ELECTRONICS, INC.Frequency Electronics, Inc. and SUBSIDIARIESSubsidiaries
(Continued)
periods ended October 31, 1999, operating profit increased by $131,000 (102%)
and $601,000 (NM), respectively, overlosses incurred in the comparable periods of fiscal year 1999
while net1999. Net earnings
increased by $230,000 (33%) and $402,000 (529%),
respectively.$2.63 million in each of the fiscal 2000 periods over the net
losses of fiscal 1999. These positive outcomes were principally the result of
improvementssignificant increases in net sales, improved gross margin rates as discussed below. The higher gross margin
was partially offset by increasedand lower
research and development spending during the fiscal year 2000 periods, a continuation of the development programs which were
initiated during fiscal 1999.periods.
Net sales declined $1.7increased by $2.4 million (13%(15%) and $144,000 (2%$4.1 million (133%), respectively,
during the six-nine- and three-month periods ended OctoberJanuary 31, 19992000 as compared to
the same periods of fiscal 1999. These results reflect increased demand for the
Company's terrestrial wireless communications products. Moreover, sales in the
third quarter of fiscal year 1999 announcement and execution ofwere disproportionately low because, as announced
previously, the Company fully implemented its plan to apply internal resources
toward development of additional products to fulfill expected future demand for
commercial space hardware as well as next-generation terrestrial wireless
communications products. As those resources were applied during fiscal 1999,
sales began to trend downward. Sales in the first half of fiscal year 2000 are now rebounding from
the low levels of the latter half of fiscal 1999 as demand
increases for the Company's terrestrial wireless communications products.1999. This trend is expected to
continue forinto fiscal 2001 and beyond.
Fiscal 2000 gross margins improved significantly over fiscal 1999, increasing to
44% in each of the fiscal 2000 periods compared to 33% and beyond.
Gross margins29% for the six-nine- and
three-month periods ended OctoberJanuary 31, 1999, improved significantly over the fiscal 1999 periods, increasing to 44% from 33%.respectively. The fiscal year 2000 margins on wireless communications revenues were 45% and
44%, respectively, as compared to 39% and 48%, respectively, for U.S. Government
programs. During the six- and three-month periods ended October 31, 1998,table below
reflects gross margins on wireless communications sales were 36% andfor the Company's business segments during the indicated
fiscal periods:
Gross Margins for
Nine months Three months
Periods ended January 31,
2000 1999 2000 1999
---- ---- ---- ----
Wireless Communications 45% 35%, respectively, while
margins on U.S. 44% 32%
US Government programs were 20%.41 21 44 20
The increase in wireless communications margins is due to significant
improvements in the manufacturing processes for these products. The improvement
in U.S. Government margins in the fiscal 2000 periodperiods is attributable to the
conclusion of certain unprofitable contracts for which loss reserves were
recorded in prior years. With the present mix of wireless communications versus
U.S. Government projects and recent contract bookings, the Company expects to
maintain this improved profit margin level forinto fiscal 2001 and beyond.
During the remainderthird quarter of fiscal 2000.
Selling2000, the Company recorded $280,000 in
reserves and related expenses in connection with certain litigation matters.
(See Part II, ITEM 1 - Legal Proceedings) Excluding these expenses, selling and
administrative costs decreased by $55,000 (2%) and $59,000 (5%) for the six-nine-
and three-month periods ended OctoberJanuary 31, 1999, were approximately2000, over the same as the comparable periods of fiscal year
1999. The Company anticipates that fiscal year 2000 selling and administrative
expenses, excluding litigation-related matters, will be comparable to that
incurred in fiscal 1999 although, as a percentage of sales, the ratio should
decrease.
Research and development costs infor the nine-months ended January 31, 2000 were
comparable to fiscal 2000 periods increased1999 spending. For the three-months then ended, spending
decreased by $524,000
(27%$539,000 (32%) and $69,000 (6%) overfrom the comparable six- and three-month periodsperiod ended OctoberJanuary
31, 1998. As indicated previously,1999 reflecting completion of some of the development efforts which were
initiated in fiscal 1999. The Company continuedcontinues to devote significant resources
to develop a line of genericthird generation (3G) products to be used asmeet the building blocks foremerging synchronization
requirements of the commercial satellite transponder market as well
developing new products and enhancing existing products for the terrestrial wireless communications market.industry. The Company anticipates that althoughis targeting
future research and development spending will continue at a high level for the remainderapproximately 10% of fiscal 2000, the rate will be less than that incurred in fiscal 1999. Total
research and development spending in fiscal 2000 is expected to be approximately
$4 million.sales.
Internally generated cash and cash reserves will be adequate to fund this
development effort.
Net11 of 15
Frequency Electronics, Inc. and Subsidiaries
(Continued)
During the fiscal third quarter ended January 31, 2000, the Company recorded a
gain on the sale of the common stock of Datum Inc. These shares were acquired in
connection with the Company's November 1999 proposal to acquire or merge with
Datum. After the decision by Datum's board of directors to reject this offer and
its insertion of certain "poison pill" provisions in Datum's by-laws, the
Company decided to withdraw its merger offer and, subsequently, sold its Datum
shares. After deducting certain professional fees incurred in connection with
the proposed merger with Datum, the net gain realized in the third quarter of
fiscal 2000 was $947,000. Excluding the Datum-related transactions, net
nonoperating income and expense increased by $274,000 (30%) and $48,000
(13%$213,000 (16%) in the six-nine-month
period ended January 31, 2000 and decreased by $61,000 (15%) in the three-month
periodsperiod then ended October 31, 1999 from the comparable fiscal 1999 periods. Investment income increased by $219,000 (20%)
and $128,000 (29%), respectively,The Company will also
realize investment gains in the fiscal year 2000 periods over the
comparable 1999 periods. This is the result of realized gains on the sale of
certain marketable securities during the firstfourth quarter of fiscal 2000 resulting from
sales of additional Datum shares which were executed subsequent to the end of
the third quarter.
Investment income for the nine- and reducedthree-month periods ended January 31, 2000,
include total realized gains on marketable securities of $1.3 million and $1.1
million, respectively. Excluding these gains, investment income in tax-free municipal bonds which carry a lower nominal
interest rate.the fiscal
2000 periods is comparable to that realized during fiscal 1999.
Interest expense decreased by $13,000$19,000 (7%) and $7,000$6,000 (8%), respectively, during
the fiscal 2000 periods compared to the same periods ended OctoberJanuary 31, 19981999 as a
result of lesslower long-term debt.
Other income (expense), net, increased by $42,000includes certain professional fees incurred in
connection with the six-month period
11acquisition and subsequent sale of 15
FREQUENCY ELECTRONICS, INC.Datum shares as indicated
above. Also during the third quarter of fiscal 2000, the Company paid an
additional $90,000 in settlement of prior year property taxes related to its
former real estate holdings. Excluding these fees and SUBSIDIARIES
(Continued)charges, other income
(expense) for the nine- and three-month periods ended OctoberJanuary 31, 1999 and decreased by $87,000 in the three-month period then
ended compared2000 are
comparable to the same periods of fiscal 1999. This category consists
principally of certain non-recurring transactions. In fiscal 1999 this included
the costs of relocating the Company's operations to new office and production
space. In fiscal 2000, this category included a benefit from the recovery of
certain non-operating debts.periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $59$61 million at OctoberJanuary 31, 19992000 compared to working capital at April
30, 1999, of $60 million. Included in working capital at OctoberJanuary 31, 19992000 is $39$41
million of cash, cash equivalents and marketable securities, including $10
million of REIT units which are convertible to Reckson Associates Realty Corp.
common stock.
Net cash provided by operating activities for the sixnine months ended OctoberJanuary 31,
1999,2000, was $3.4$3.9 million compared to a net cash outflow of $7.2$1.9 million in the
comparable fiscal 1999 period. The improved fiscal 2000 cash flow is due to the
significant increases in sales and gross margin coupled with collections on
accounts receivable which were partially offset by increases in inventory. The
fiscal 1999 net outflow is the result of the $8 million litigation settlement. Excluding that payment,settlement,
offset by receipt of $4.5 million from insurance reimbursement of litigation
costs. Without those items, cash flows provided byfrom operating activities would have been
$829,000. The principle cause for the
improved cash flow in fiscal 2000 is due to collections on accounts receivable
coupled with operating profits during the period.$1.6 million. The Company anticipates that it will continue to generate positive
cash flow from operating activities for the balance of fiscal year 2000.2000 and in
fiscal 2001.
Net cash used inprovided by investing activities for the sixnine months ended OctoberJanuary 31,
1999,2000, was $1.4$2.8 million. ThisIncluded in this amount was comprised purchasesis $1.3 million resulting from
the acquisition and subsequent sale of certainshares of Datum Inc. Other sales and
investments in marketable securities, principally U.S. government and agency
securities, aggregating $1.0 million andgenerated cash of $2.1 million. Offsetting the acquisition ofcash derived from
marketable securities, the Company also acquired capital equipment for
approximately $438,000.$592,000. The Company 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 will continue to
acquire more efficient equipment to automate its production process and intends
to spend approximatelyless than $1 million on capital equipment during fiscal 2000.
Internally generated cash will be adequate to acquire this capital equipment.
12 of 15
Frequency Electronics, Inc. and Subsidiaries
(Continued)
Net cash used in financing activities for the sixnine months ended OctoberJanuary 31,
1999,2000, was $1.0 million compared to $1.4 million for the comparable fiscal 1999 period.$1.7 million. Included in the fiscal 2000this amount is payment of the Company's
semi-annual
dividendsemiannual dividends in the aggregate amount of $766,000. An additional $349,000 was$1.53 million and $529,000 used
to make regularly scheduled long-term liability payments. These outflows were
partially offset by payments of $99,000$382,000 received from certain employees in connection with transactions related to
the Company's common stock and involving certain officers and other employees
who exercised stock option exercises and payment against notes receivable for
subscribed common stock.rights.
Backlog
At OctoberJanuary 31, 1999,2000, the Company's backlog amounted to approximately $17$26 million
compared to the approximately $21 million backlog at April 30, 1999. Of this
backlog, approximately 60%65% is realizable in the next 12 months. The current
backlog is approximately 75% ofIn addition to
the backlog, at October 31, 1998, which is
indicative of the changing character of the backlog. In previous years, the
backlog of custom-built products could represent 12 to 18 months of production.
As the Company evolves into a more product-oriented manufacturer and seller of
generic wireless communication products, its cycle-time will be significantly
reduced. Consequently, the backlog will be less predictive of future results.
Concurrent with the change in backlog based on booked orders and contractual agreements, the
Company is partnering with its major customers to share production requirements
for rolling 12-month periods. These requirement schedules not only provide the
Company with confidence that its business will continue to grow but they also
enable the Company to operate its production floor in the most efficient manner.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Year 2000 Issue
During the first quarter of fiscal 2000, the Company completed installation of
newly acquired, integrated financial and manufacturing software, the cost of
which did not exceed $500,000. Final implementation and testing of the software
was concluded by the end of the second quarter of fiscal 2000. The purchase of
the financial software satisfactorily addressesaddressed the issue of compliance with the
year 2000 problem for financial transactions and reporting purposes. Beginning in the latter portion of fiscal 1998 and concluding during the second
quarter ofDuring
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 also
determined that operational, nonfinancial software and hardware was required to
resolve the year 2000 issue in certain production and support areas, the cost of
which did 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, theThe Company has received
assurances from its "critical" vendors that their systems arenot experienced any transactional or will be Y2K
compliant prioroperational problems due to
"Y2K" issues during the year 2000. Consequently, the Company does not anticipatemonth of January 2000 or in any interruption in services or supplies from vendors.
In the event its financial and manufacturing software fails to perform
appropriately 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 can be upgraded. In the event one
or more of its vendors suffers a "Y2K" failure, the Company will obtain its
component parts from other sources. Since the majority of the important
components used in the Company's products can be obtained from multiple sources,
the Company does not anticipate a problem in purchasing needed parts as a result
of Y2K issues. For those component parts which can be obtained from only a
limited number of sources, the Company will evaluate the need to increase its
on-hand inventory prior to the end of calendar 1999.subsequent periods.
"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, inability to execute operational strategies or other risks as
more fully described in the Company's Annual Report on Form 10K filed with
the Securities and Exchange Commission.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
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, 1999 on
file with the Securities and Exchange Commission.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) On October 20, 1999, the Company's reportNo reports on Form 8-K containing
disclosure under Item 5 thereof (change in chief executive officer and
declaration of semi-annual dividend), waswere filed with the Securities and Exchange
Commission.Commission during the quarter ended January 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
(Registrant)
Date: December 15, 1999March 16, 2000 BY /s/ Joseph P. Franklin
---------------------------------------------------
Joseph P. Franklin
Chief Executive OfficerChairman of the Board of Directors
Date: December 15, 1999March 16, 2000 BY /s/ Alan Miller
---------------------------------------
Alan Miller
Chief Financial Officer
and Treasurer
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