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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For
the Quarterly Period ended January 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of March 10, 1997 - 4,942,988.
Page 1 of 14
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
January 31, 1997 and April 30, 1996 3-4
Consolidated Condensed Statements of Operations
Nine Months Ended January 31, 1997 and 1996 5
Consolidated Condensed Statements of Operations
Three Months Ended January 31, 1997 and 1996 6
Consolidated Condensed Statements of Cash Flows
Nine Months Ended January 31, 1997 and 1996 7
Notes to Consolidated Condensed Financial Statements 8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-12
Part II. Other Information:
Item 1 - Legal Proceedings 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
See accompanying notes to consolidated condensed financial
statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
January 31, April 30,
1997 1996
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 2,892 $15,915
Marketable securities 20,869 5,632
Accounts receivable, net (NOTE B) 14,233 13,415
Inventories (NOTE C) 10,966 10,281
Prepaid and other 1,797 1,026
------- -------
Total current assets 50,757 46,269
Property, plant and equipment, net 8,633 8,839
Investment in direct finance lease 9,681 9,607
Other assets 4,114 4,055
------- -------
Total assets $73,185 $68,770
======= =======
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,
1997 1996
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt $ 9,750 $ 750
Accounts payable - trade 1,454 1,379
Accrued liabilities and other 2,377 2,341
-------- -------
Total current liabilities 13,581 4,470
Long term debt net of current maturities 1,875 11,438
Other 3,767 3,439
-------- -------
Total liabilities 19,223 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 35,149 35,024
Retained earnings 19,756 16,265
-------- -------
60,911 57,295
Common stock reacquired and held in
treasury -
at cost, 1,063,312 shares at
January 31, 1997 and 1,159,905
shares at April 30, 1996 (4,795) (5,075)
Unamortized ESOP debt (1,625) (2,000)
Notes receivable - common stock (583) (740)
Unrealized holding gain 150 56
Unearned compensation (96) (113)
------- -------
Total stockholders' equity 53,962 49,423
------- -------
Total liabilities and stockholders' equity $73,185 $68,770
======= =======
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)
1997 1996
(In thousands except per share data)
Net Sales $ 20,258 $ 17,427
--------- --------
Cost of sales 12,906 11,887
Selling and administrative expenses 4,251 4,449
Research and development expenses 1,189 610
--------- --------
Total operating expenses 18,346 16,946
--------- --------
Operating profit 1,912 481
Other income (expense):
Interest income 1,133 985
Interest expense (660) (749)
Other income, net 1,336 1,486
--------- --------
Earnings before provision for
income taxes 3,721 2,203
Income tax provision 230 63
--------- --------
Net earnings $ 3,491 $ 2,140
========== =========
Net earnings per common share $ 0.72 $ 0.43
======= =======
Weighted average common shares outstanding 4,831,209 5,003,256
========= =========
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 January 31,
(Unaudited)
1997 1996
(In thousands except per share data)
Net Sales $ 7,558 $ 6,513
-------- --------
Cost of sales 4,838 4,289
Selling and administrative expenses 1,459 1,545
Research and development expenses 548 309
--------- --------
Total operating expenses 6,845 6,143
--------- --------
Operating profit 713 370
Other income (expense)
Interest income 420 332
Interest expense (217) (260)
Other income, net 526 492
--------- --------
Earnings before provision for
income taxes 1,442 934
Income tax provision 100 21
--------- --------
Net earnings $ 1,342 $ 913
========= ========
Net earnings per common share $ 0.27 $ 0.19
======= =======
Weighted average common shares outstanding 4,908,290 4,928,711
========= =========
See accompanying notes to consolidated condensed financial
statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Nine Months Ended January 31,
(Unaudited)
1997 1996
---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 3,491 $ 2,140
Non-cash charges to earnings 1,333 1,248
Net changes in assets and liabilities (2,226) 535
-------- -------
Net cash provided by operating activities 2,598 3,923
Cash flows from investing activities:
(Purchase) sale of marketable securities (15,073) 5,851
Other - net (287) 464
-------- -------
Net cash provided by (used in) investing
activities (15,360) 6,315
Net cash used in financing activities (261) (1,235)
-------- -------
Net increase (decrease) in cash (13,023) 9,003
Cash and cash equivalents at beginning of period 15,915 4,291
-------- -------
Cash and cash equivalents at end of period $ 2,892 $13,294
======== =======
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 January 31, 1997 and the results of its operations for
the three and nine months ended January 31, 1997 and 1996 and its cash
flows for the nine months ended January 31, 1997 and 1996. 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 January 31, 1997 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
$8,326,000 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 January 31,
1997 and April 30, 1996, consist of the following:
January 31, 1997 April 30, 1996
---------------- --------------
(In thousands)
Raw materials and Component parts $ 2,149 $ 1,998
Work in progress 8,817 8,283
------- -------
$10,966 $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 nine months ended
January 31:
(Dollar amounts in thousands)
Three months ended Nine months ended
January 31, % January 31, %
1997 1996 change 1997 1996 change
---- ---- ------ ---- ---- ------
Net Sales
Commercial ........... $ 5,694 $ 3,074 85% $14,161 $ 6,962 103%
US Government ........ 1,864 3,439 (46%) 6,097 10,465 (42%)
------- ------- ------- -------
7,558 6,513 16% 20,258 17,427 16%
Cost of Sales ............ 4,838 4,289 13% 12,906 11,887 9%
Selling and administrative
expenses: ................ 1,459 1,545 (6%) 4,251 4,449 (4%)
Research and development
expenses: ............ 548 309 77% 1,189 610 95%
----- ------- ------- ------
Operating income ......... 713 370 93% 1,912 481 298%
Nonoperating income- net . 729 564 29% 1,809 1,722 5%
Net earnings ............. $ 1,342 $ 913 47% $ 3,491 $ 2,140 63%
======= ======= ======= =======
For the nine months ended January 31, 1997, operating income improved by $1.43
million over the comparable period of fiscal 1996 and net earnings increased by
$1.35 million. Operating income for the fiscal quarter ended January 31, 1997
improved by $343,000 over the comparable period of fiscal 1996; net earnings
increased by $429,000. These results were achieved through increases in sales of
16%, 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 85% and 103%, respectively, in the 1997 periods over the comparable 1996
periods. As a percentage of total sales, commercial sales have increased to 75%
in the three months ended January 31, 1997 from 47% in the comparable 1996
quarter; and to 70% for the nine months ended January 31, 1997 from 40% 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 nine months ended January 31, 1997 have
increased to 36% as compared to 34% and 32% for the respective 1996 periods.
These results were obtained as a result of meaningful cost reductions which
became fully operative in the second quarter of fiscal 1996. Cost savings were
realized primarily in the areas of
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
RESULTS OF OPERATIONS (con't.)
personnel and compensation coupled with operational efficiencies and product
mix. With continuing strong commercial business based on recent contract
bookings, the Company expects to realize similar if not improved profit margins
for the remainder of fiscal 1997.
Selling and administrative costs decreased by $86,000 or 6% for the quarter
ended January 31, 1997, and by $198,000 (4%) for the nine month period then
ended over the comparable 1996 periods. This was due principally to the benefits
of the Company's cost reduction program which became fully operative in the
second quarter of the 1996 fiscal year and reduced legal fees related to the
Company's on-going litigation with the US government. Cost savings were
partially offset during the fiscal 1997 periods by accruals for incentive
bonuses which may result from the Company's increased profitability.
Research and development costs in the fiscal 1997 periods increased by $239,000
and $579,000, respectively, over the comparable three-month and nine-month
periods ended January 31, 1996. 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 1997 third quarter research and development expenses also reflects expensing
of certain residual materials and costs from the Company's successful commercial
rubidium development efforts. Without such expenses, research and development
expenses would have increased by 11% and 61%, respectively, over the comparable
fiscal 1996 periods. 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.
Nonoperating income, net of nonoperating expenses, increased by $165,000 and
$87,000, respectively, in the three months and nine months ended January 31,
1997 from the comparable fiscal 1996 periods. Interest income increased by
$88,000 (27%) in the fiscal 1997 quarter over the comparable fiscal 1996 quarter
and by $148,000 (15%) for the fiscal 1997 nine month period over the comparable
fiscal 1996 period. This is the result of a 24% increase in interest-earning
assets from January 31, 1996 to January 31, 1997 offset by a moderation in
interest rates from the levels of the fiscal 1996 three- and nine-month periods.
Interest expense decreased by $43,000 (17%) and $89,000 (12%) during the fiscal
1997 quarter and nine-month period ended January 31, 1997 compared to the
comparable fiscal 1996 periods. These decreases are also the result of lower
interest rates during fiscal 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 investment 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 $34,000 (7%) for the
three-month period and decreased by $150,000 (10%) for the nine-month period
ended January 31, 1997 compared to the comparable fiscal 1996 periods. The
decrease in the nine- month period is attributable to adjustments for property
taxes against rental property in the first quarter of fiscal 1997. 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.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $37.2 million at January 31, 1997 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 $4.4 million from
the level at the end of the last fiscal year. Included in working capital at
January 31, 1997 is $23.8 million of cash, cash equivalents and marketable
securities which are readily convertible to cash.
Net cash provided by operating activities for the nine months ended January 31,
1997, was $2.6 million compared to $3.9 million for the comparable 1996 period.
The decrease in net inflow of cash from operating activities in the fiscal 1997
period occurred largely as a result of changes in the balances of certain
current assets and liabilities. Accounts receivable increased by $818,000
principally due to an increase in costs and estimated earnings in excess of
billings on uncompleted contracts of $3 million offset by collections on billed
receivables. Inventory levels increased by $685,000 reflecting a higher level of
activity during fiscal 1997. Prepaid and Other increased by $771,000 reflecting
prepaid property taxes, increased accrued interest receivable on marketable
securities and a receivable from the Company's direct finance lease tenant for
reimbursement of property taxes. Payments were made against accounts payable for
purchases under a procurement contract which is winding down, offset by
increased accruals for incentive compensation. The Company anticipates that
operating activities for all of fiscal 1997 will generate positive cash flow.
Net cash used in investing activities for the nine months ended January 31,
1997, was $15.4 million. Of this amount, $15.1 million was used to acquire
certain U.S. government and agency securities. 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 was substantially completed by the end of the third quarter of fiscal 1997
at a total capitalized cost of less than $500,000. In the fourth quarter, the
Company intends to install new, cost-saving production equipment at a
capitalized cost of approximately $600,000. The Company has no other material
commitments for capital expenditures.
Net cash used in financing activities for the nine months ended January 31,
1997, was $261,000. During the period, the Company made regularly scheduled
long-term debt payments of $536,000. This cash outflow was offset by the sale of
the Company's common stock out of treasury for $280,000 as certain officers and
other employees exercised stock option rights. On July 31,1997, the Company is
obligated to repay the $9 million 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, especially digital wireless 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.
11 of 14
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (con't.)
At January 31, 1997, the Company's backlog amounted to approximately $16 million
of which approximately $14 million is funded. This is compared to the
approximately $15 million backlog at April 30, 1996. Backlog of commercial and
foreign customers approximates $11.5 million at January 31, 1997.
"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.
On February 14, 1997, the Company filed a petition in federal court to
obtain a preliminary injunction against the Air Force to lift its
suspension. The Company alleges that continuation of the suspension exceeds
the Air Force's authority under the Federal Acquisition Regulations and
denies the Company its rights to procedural due process and fundamental
fairness mandated by applicable regulations. Details of this filing are
contained in the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 21, 1997.
For all items noted above, except the preceding paragraph, 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 January
31, 1997, however, see the next-to-last paragraph of Item 1 above
regarding the Current Report on Form 8-K filed on February 21,
1997.
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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: March 14, 1997 BY /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chief Executive Officer and
Chief Financial Officer
Date: March 14, 1997 BY /s/ Alan Miller
---------------
Alan Miller
Controller
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