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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended October 31, 1996
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 December 9, 1996 - 4,926,856.
Page 1 of 13
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
October 31, 1996 and April 30, 1996 3-4
Consolidated Condensed Statements of Operations
Six Months Ended October 31, 1996 and 1995 5
Consolidated Condensed Statements of Operations
Three Months Ended October 31, 1996 and 1995 6
Consolidated Condensed Statements of Cash Flows
Six Months Ended October 31, 1996 and 1995 7
Notes to Consolidated Condensed Financial Statements 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 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
See accompanying notes to consolidated condensed
financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
October 31, April 30,
1996 1996
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents .................. $ 319 $15,915
Marketable Securities ...................... 21,742 5,632
Accounts receivable, net (NOTE B) .......... 13,726 13,415
Inventories (NOTE C) ....................... 10,879 10,281
Prepaid and other .......................... 1,506 1,026
------- -------
Total current assets ............. 48,172 46,269
Property, plant and equipment, net ................. 8,753 8,839
Investment in direct finance lease ................. 9,660 9,607
Other assets ....................................... 4,136 4,055
------- -------
Total assets ......................... $70,721 $68,770
======= =======
See accompanying notes to consolidated condensed
financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets (Continued)
October 31, April 30,
1996 1996
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt ........... $ 9,750 $ 750
Accounts payable - trade ....................... 1,177 1,379
Accrued liabilities and other .................. 1,796 2,341
------- -------
Total current liabilities ............ 12,723 4,470
Long term debt net of current maturities ............... 2,062 11,438
Other .................................................. 3,658 3,439
------- -------
Total liabilities .................... 18,443 19,347
------- -------
Stockholders' equity:
Preferred stock - $1.00 par value ............. -0- -0-
Common stock - $1.00 par value.................... 6,006 6,006
Additional paid - in capital ................... 35,018 35,024
Retained earnings .............................. 18,414 16,265
------- -------
59,438 57,295
Common stock reacquired and held in treasury
- at cost, 1,090,544 shares at October 31
and 1,159,905 shares at April 30, 1996 ...... (4,877) (5,075)
Unamortized ESOP debt .......................... (1,750) (2,000)
Notes receivable - common stock ............... (649) (740)
Unrealized holding gain ........................ 218 56
Unearned compensation .......................... (102) (113)
------- -------
Total stockholders' equity ........... 52,278 49,423
------- -------
Total liabilities and stockholders' equity $70,721 $68,770
======= =======
See accompanying notes to consolidated condensed
financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
Six Months Ended October 31,
(Unaudited)
1996 1995
(In thousands except
per share data)
Net Sales ...................................... $ 12,700 $ 10,914
--------- ---------
Cost of sales .................................. 8,068 7,598
Selling and administrative expenses ............. 2,792 2,904
Research and development expense ............... 641 301
--------- ---------
Total operating expenses ............... 11,501 10,803
--------- ---------
Operating profit .................. 1,199 111
Other income (expense)
Interest income ........................... 713 653
Interest expense .......................... (443) (489)
Other income, net ......................... 810 994
--------- ---------
Earnings before provision for
income taxes ........................... 2,279 1,269
Income tax provision ........................... 130 42
--------- ---------
Net earnings ................................... $ 2,149 $ 1,227
========= =========
Net earnings per common share .................. $ 0.45 $ 0.24
======= =======
Weighted average common shares outstanding ..... 4,792,638 5,040,529
========= =========
See accompanying notes to consolidated condensed
financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
Three Months Ended October 31,
(Unaudited)
1996 1995
(In thousands except
per share data)
Net Sales ...................................... $ 6,576 $ 5,576
--------- -------
Cost of sales .................................. 4,181 3,597
Selling and administrative expenses ............. 1,486 1,420
Research and development expense ............... 281 138
--------- -------
Total operating expenses ............... 5,948 5,155
--------- -------
Operating profit .................. 628 421
Other income (expense)
Interest income ........................... 376 331
Interest expense .......................... (220) (231)
Other income, net ......................... 491 471
--------- -------
Earnings before provision for
income taxes ........................... 1,275 992
Income tax provision ........................... 65 21
--------- -------
Net earnings ................................... $ 1,210 $ 971
========= =======
Net earnings per common share .................. $ 0.25 $ 0.19
======= =======
Weighted average common shares outstanding ..... 4,846,186 5,028,562
========= =========
See accompanying notes to consolidated condensed
financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Six Months Ended October 31,
(Unaudited)
1996 1995
(In thousands)
Cash flows from operating activities:
Net earnings ................................... $ 2,149 $ 1,227
Non-cash charges to earnings ................... 614 566
Net changes in assets and liabilities .......... (1,998) 1,131
-------- --------
Net cash provided by operating activities .............. 765 2,924
Cash flows from investing activities:
(Purchase) sale of marketable securities ....... (15,920) 4,853
Other - net .................................... (257) 513
-------- --------
Net cash provided by (used in) investing activities .... (16,177) 5,366
Net cash used in financing activities .................. (184) (388)
-------- --------
Net increase (decrease) in cash ............... (15,596) 7,902
Cash at beginning of period ................... 15,915 4,291
-------- --------
Cash at end of period ......................... $ 319 $ 12,193
======== ========
See accompanying notes to consolidated condensed
financial statements.
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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 October 31, 1996 and the results of its operations and
cash flows for the three and six months ended October 31, 1996 and 1995.
The April 30, 1996 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, 1996 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 - ACCOUNTS RECEIVABLE
Accounts receivable at October 31, 1996 and April 30, 1996 include costs
and estimated earnings in excess of billings on uncompleted contracts
accounted for on the percentage of completion basis of approximately
$7,357,000 and $5,315,000, 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 C - INVENTORIES
Inventories, which are reported net of reserves of $940,000 at October 31
and April 30, 1996, consist of the following:
October 31, 1996 April 30, 1996
(In thousands)
Raw materials and Component parts $ 2,028 $ 1,998
Work in progress 8,851 8,283
-------- --------
$ 10,879 $ 10,281
======== ========
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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
Comparative details of results of operations for the three and six months ended
October 31:
(Dollar amounts in thousands)
Three months ended Six months ended
October 31, October 31,
% %
1996 1995 change 1996 1995 change
------- ------- ------- ------- ------- -------
Net Sales
US Government $ 1,534 $ 3,510 (56%) $ 4,233 $ 7,026 (40%)
Commercial 5,042 2,066 144% 8,467 3,888 118%
------- ------- ------- -------
6,576 5,576 18% 12,700 10,914 16%
Cost of Sales 4,181 3,597 16% 8,068 7,598 6%
Selling and admini-
strative expenses 1,486 1,420 5% 2,792 2,904 (4%)
Research and
development expense 281 138 104% 641 301 113%
------- ------- ------- -------
Operating income 628 421 49% 1,199 111 980%
Nonoperating
income- net 647 571 13% 1,080 1,158 (7%)
Net earnings $ 1,210 $ 971 25% $ 2,149 $ 1,227 75%
======= ======= ======= =======
For the six months ended October 31, 1996, operating income improved by $1,088
over the comparable period of fiscal 1996 and net earnings increased by $922.
Operating income for the fiscal quarter ended October 31, 1996 improved by $207
over the comparable period of fiscal 1996; net earnings increased by $239. These
results were achieved through increases in sales of 16% and 18%, respectively,
coupled with improved margins and reduced costs relative to sales over the
comparable fiscal 1996 periods.
As illustrated in the table above, commercial sales continue to grow, increasing
by 144% and 118%, respectively, in the 1997 periods over the comparable 1996
periods. As a percentage of total sales, commercial sales have increased to 77%
in the three months ended October 31, 1996 from 37% in the comparable 1996
quarter; and to 67% for the six months ended October 31, 1996 from 36% for the
comparable 1996 period. The Company anticipates that commercial sales will
continue to be the dominant portion of its business for the balance of the
fiscal year and for the foreseeable future.
Gross margins for the three and six months ended October 31, 1996 have increased
to 36% as compared to 35% and 30% for the respective 1996 periods. These results
were obtained as a result of meaningful cost reductions which became fully
effective in the second quarter of fiscal 1996. Cost savings were realized
primarily in the areas of personnel and compensation coupled with operational
efficiencies and product mix. With the current mix of commercial versus
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
government projects and recent contract bookings, the Company expects to realize
similar if not improved profit margins for the remainder of fiscal 1997.
Selling and administrative costs increased by $66 or 5% for the quarter ended
October 31, 1996, but decreased by $112 (4%) for the six month period then ended
over the comparable 1996 periods. Commencing in the second quarter of the 1996
fiscal year, the Company realized the full benefits of its cost reduction
program wherein the Company reduced the number of administrative personnel, cut
its insurance costs and improved its operating efficiencies. Selling and
administrative costs increased in the fiscal 1997 periods partially as a result
of accruals for incentive bonuses as a result of the Company's increased
profitability.
Research and development costs in the fiscal 1997 periods increased by $143 and
$340, respectively over the comparable three month and six month periods ended
October 31, 1995. These increases are the result of intensified efforts to
develop new products and to enhance functional capabilities of existing products
which will serve primarily the Company's commercial customers. The Company
expects to continue to invest in research and development at approximately the
same rate for the balance of 1997 and for the foreseeable future.
Net nonoperating income and expense increased by $76 and decreased by $78,
respectively, in the three months and six months ended October 31, 1996 from the
comparable 1996 fiscal periods. Interest income increased by $45 (14%) in the
1997 quarter over the comparable 1996 quarter and by $60 (9%) for the 1997 six
month period over the comparable 1996 period. This is the result of a 15%
increase in interest-earning assets from October 31, 1995 to October 31, 1996
offset by a moderation in interest rates from the levels of the fiscal 1996
three- and six-month periods. Interest expense decreased by $11 (5%) and $46
(9%) during the fiscal 1997 quarter and six-month period ended October 31, 1996
compared to the comparable 1996 periods. These decreases are also the result of
lower interest rates during 1997 coupled with declining long-term debt balances
as the Company makes scheduled principal payments. Although the Company is
unable to predict the future levels of interest rates, at current rates the
Company anticipates that interest income will continue to increase and interest
expense will continue to decrease when compared to earlier fiscal periods. Other
income, which consists principally of rental income under a long-term lease, net
of related expenses, increased by $20 (4%) for the three-month period and
decreased by $184 (19%) for the six-month period ended October 31, 1996 compared
to the comparable fiscal 1996 periods. The decrease in the six-month period is
attributable to adjustments for property taxes against rental property in the
fiscal first quarter of 1997 and reduced rental income. Net rental income is
expected to continue at present levels for the balance of fiscal 1997 and into
the early part of the next fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $35.4 million at October 31, 1996 although this is a decrease from
the working capital level at April 30, 1996 of $41.8 million. This decline is
wholly attributable to the reclassification to current liabilities of the real
estate construction loan of $9 million which is due on July 31, 1997. Excluding
that reclassification, working capital would have increased by $2.6 million from
the level at the end of the last fiscal year. Included in working capital at
October 31, 1996 is $22 million of cash, cash equivalents and marketable
securities which are readily convertible to cash should the need arise.
Net cash provided by operating activities for the six months ended October 31,
1996, was $765 compared to $2,924 for the comparable 1996 period. The decrease
in net inflow of cash from operating activities in the fiscal 1997 period
occured largely as a result of changes in the balances of certain current assets
and liabilities. Accounts receivable increased by $311 principally due to an
increase in costs and estimated earnings in excess of billings on uncompleted
contracts of $2,041 offset by collections on billed receivables. Work-in-process
inventory levels increased by $568 reflecting a higher level of activity during
fiscal 1997. Prepaid and other increased by $480 reflecting increased accrued
interest receivable on marketable securities and a receivable from its direct
finance lease tenant for reimbursement of property taxes. Payments
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
were made against accounts payable for purchases under a procurement contract
which is winding down and cash payments were made against accrued vacation pay
to coincide with the Company's annual mid-summer plant shutdown. The Company
anticipates that operating activities for all of fiscal 1997 will generate
positive cash flow.
Net cash used in investing activities for the six months ended October 31, 1996,
was $16,177. Of this amount, $15,920 was used to acquire certain U.S. government
and agency securities. In the fiscal 1996 period, the Company had net cash
provided by investing activities of $5,366 of which $4,853 was due to the
conversion of U.S. government and agency securities to short-term money market
investments. The Company may continue to acquire or redeem marketable securities
as dictated by its investment strategies.
The Company is continuing the installation of new computer software which it
expects to complete during the third quarter of fiscal 1997 at a total
capitalized cost of less than $500. In the fourth quarter, the Company intends
to install new, cost-saving production equipment at a capitalized cost of
approximately $600. The Company has no other material commitments for capital
expenditures.
Net cash used in financing activities for the six months ended October 31, 1996,
was $184 compared to $388 for the comparable 1996 period. Of the fiscal 1997
amount, $376 was used to make regularly scheduled long-term debt payments. This
was partially offset by the sale of the Company's common stock out of treasury
for $198 as certain officers and other employees exercised stock option rights.
On July 31, 1997, the Company is obligated to repay the $9,000 real estate
construction loan which was used to finance the building which is leased to a
third party under a direct finance lease. The Company is evaluating its options
which may include paying the loan out of current assets, refinancing the loan or
some combination thereof.
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 will be adequate to fund
development efforts in these markets.
At October 31, 1996, the Company's backlog amounted to approximately $19 million
of which approximately $16 million is funded. This is compared to the
approximately $15 million backlog at April 30, 1996. Backlog of commercial and
foreign customers approximates $14 million at October 31, 1996.
"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.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
PART II
ITEM 1 - Legal Proceedings
On November 17, 1993, Registrant was indicted on criminal charges
alleging conspiracy and fraud in connection with six contracts for which
Registrant was a subcontractor. In addition, two derivative actions have
been filed against the Board of Directors essentially seeking recovery on
behalf of the Company for any losses it incurs as a result of the
indictment.
On December 14, 1993, Registrant was notified by the U.S. Department of
the Air Force that it had been suspended from contracting with any agency
of the government. Certain exceptions will apply if a compelling reason
exists. The suspension is temporary subject to the outcome of the legal
proceedings in connection with the indictment.
In March 1994, a qui tam action was filed against the Registrant and
its former chief executive officer and, in July 1995, a separate qui tam
action was served upon the Registrant and certain employees of Registrant.
The Company and the individual defendants have pleaded not guilty to
all actions and are vigorously contesting all charges.
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, 1996 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 during the quarter ended October
31, 1996.
12 of 13
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 13, 1996 BY /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chief Executive Officer and
Chief Financial Officer
Date: December 13, 1996 BY /s/ Alan L. Miller
------------------
Alan L. Miller
Controller
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