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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 July 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 September 9, 1997 - 5,094,363.
Page 1 of 12
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
July 31, 1997 and April 30, 1997 3-4
Consolidated Condensed Statements of Operations
Three Months Ended July 31, 1997 and 1996 5
Consolidated Condensed Statements of Cash Flows
Three Months Ended July 31, 1997 and 1996 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Part II. Other Information:
Item 1 - Legal Proceedings 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
July 31, April 30,
1997 1997
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 4,188 $ 3,448
Marketable Securities 22,812 21,112
Accounts receivable, net (NOTE B) 13,439 14,797
Inventories (NOTE C) 11,067 11,060
Prepaid and other 1,462 1,233
------- -------
Total current assets 52,968 51,650
Property, plant and equipment, net 9,105 9,059
Investment in direct finance lease 9,717 9,702
Other assets 4,445 4,455
------- -------
Total assets $76,235 $74,866
======= =======
See accompanying notes to consolidated condensed
financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets (Continued)
July 31, April 30,
1997 1997
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt $ 9,750 $ 9,718
Accounts payable - trade 708 882
Accrued liabilities and other 2,898 3,740
-------- -------
Total current liabilities 13,356 14,340
Long term debt net of current maturities 1,500 1,687
Other 3,891 3,773
-------- -------
Total liabilities 18,747 19,800
-------- -------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 6,006 6,006
Additional paid - in capital 35,139 35,190
Retained earnings 21,812 20,414
62,957 61,610
Common stock reacquired and held in treasury
- at cost, 950,337 shares at July 31
and 1,032,812 shares at April 30, 1997 (4,018) (4,612)
Unamortized ESOP debt (1,375) (1,500)
Notes receivable - common stock (303) (435)
Unearned compensation (65) (77)
Unrealized holding gain 292 80
------- -------
Total stockholders' equity 57,488 55,066
------- -------
Total liabilities and stockholders' equity $76,235 $74,866
======= =======
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 July 31,
(Unaudited)
1997 1996
(In thousands except per share data)
Net Sales $ 7,301 $ 6,124
-------- --------
Cost of sales 4,820 3,887
Selling and administrative expenses 1,343 1,306
Research and development expense 293 360
-------- -------
Total operating expenses 6,456 5,553
-------- -------
Operating profit 845 571
Other income (expense):
Interest income 441 337
Interest expense (233) (223)
Other income, net 395 319
-------- -------
Earnings before provision for
income taxes 1,448 1,004
Income tax provision 50 65
-------- -------
Net earnings $ 1,398 $ 939
======== =======
Net earnings per common share $ 0.27 $ 0.20
======= =======
Weighted average common and common
equivalent shares outstanding 5,093,515 4,669,175
========= =========
See accompanying notes to consolidated condensed
financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Three Months Ended July 31,
(Unaudited)
1997 1996
---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 1,398 $ 939
Non-cash charges to earnings 592 408
Net changes in assets and liabilities 941 (1,619)
-------- -------
Net cash provided by (used in)
operating activities 2,931 (272)
Cash flows from investing activities:
Purchase of marketable securities -net (1,476) (15,053)
Other - net (282) (22)
-------- -------
Net cash used in investing activities (1,758) (15,075)
Cash flows from financing activities:
Dividends paid (746) -
Other - net 313 (188)
-------- -------
Net cash used in financing activities (433) (188)
-------- -------
Net increase (decrease) in cash 740 (15,535)
Cash at beginning of period 3,448 15,915
-------- -------
Cash at end of period $ 4,188 $ 380
======== =======
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 July 31, 1997 and the results of its operations and cash
flows for the three months ended July 31, 1997 and 1996. The April 30, 1997
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, 1997 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 July 31, 1997 and April 30, 1997 include costs and
estimated earnings in excess of billings on uncompleted contracts accounted
for on the percentage of completion basis of approximately $8,667,000 and
$7,722,000, 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 $350,000 at July 31,1997
and April 30, 1997, consist of the following:
July 31, 1997 April 30, 1997
------------- --------------
(In thousands)
Raw materials and Component parts $ 3,041 $ 2,797
Work in progress 8,026 8,263
------- -------
$11,067 $11,060
======= =======
NOTE D - EARNINGS PER SHARE
Primary earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock and, when dilutive,common
stock equivalents outstanding.
NOTE E - CONTINGENCIES
Reference is made to Note 9 of the Company's Annual Report on Form 10K for the
year ended April 30, 1997 for information regarding legal proceedings. See also
Part II, Item 1 of this Form 10Q.
NOTE D - RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 128, "Earnings
per Share," SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which are
effective for the Company in future periods. The Company is in the process of
assessing the effect these pronouncement will have on its financial statements
and related disclosures.
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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 months ended July 31:
(Dollar amounts in thousands)
Three months ended
July 31 %
1997 1996 change
---- ---- ------
Net Sales
Commercial $6,157 $3,429 80%
US Government 1,144 2,695 (58%)
------ ------
7,301 6,124 19%
Cost of Sales 4,820 3,887 24%
Selling and administrative expenses: 1,343 1,306 3%
Research and development expenses 293 360 (19%)
------ ------
Operating income 845 571 48%
Nonoperating income- net 603 433 39%
Net earnings $ 1,398 $ 939 49%
======= ======
For the three months ended July 31, 1997, operating income improved by $274,000
over the comparable period of fiscal year 1997 and net earnings increased by
$459,000. These results were achieved through a 19% increase in sales coupled
with reduced costs relative to sales over the first quarter of fiscal year 1997.
As illustrated in the table above, commercial sales continue to grow, increasing
by 80% over the first quarter of 1997. As a percentage of total sales,
commercial sales have increased to 84% in the three months ended July 31, 1997
from 56% in the comparable 1997 quarter. The Company expects 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 months ended July 31, 1997 have decreased to 34% as
compared to 37% for the quarter ended July 31, 1996. The lower margins resulted
principally from reductions in margins to be realized on two long-term contracts
Excluding these two contracts, margins on the balance of the Company's revenues
were approximately 40%. Although the Company does not anticipate losses on other
current contracts, with the present mix of commercial versus government projects
and recent contract bookings, the Company expects to realize improved profit
margins for the remainder of fiscal 1998.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Selling and administrative costs increased by $37,000 or 3% for the quarter
ended July 31, 1997, over the three months ended July 31, 1996. These cost
increases result from increased accruals for incentive bonuses as a result of
the Company's increased profitability, offset in part by reduced health
insurance costs.
Research and development costs in the fiscal 1998 period decreased by $67,000
over the comparable three month period ended July 31, 1996. This decrease is the
result of more focused efforts on those new products and enhancing the
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
fiscal 1998 and for the foreseeable future.
Net nonoperating income and expense increased by $170,000 in the three months
ended July 31, 1997 from the comparable fiscal 1997 quarter. Interest income
increased by $104,000 (31%) in the 1998 quarter over the comparable 1997
quarter. This is the result of an 10% increase in interest-earning assets from
July 31, 1996 to July 31, 1997 coupled with an increase in interest rates from
the levels of the fiscal 1997 quarter. Interest expense increased by $10,000
(4%) during the fiscal 1998 quarter compared to the period ended July 31, 1996.
This increase is also the result of higher interest rates during the 1998
quarter offset by 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 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 $76,000 for the three-month period ended July 31, 1997 compared to
the comparable fiscal 1997 quarter. This increase resulted from an increase in
lease income which is tied to interest rates. Net rental income is expected to
continue at present levels for the balance of fiscal 1998 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 $39.6 million at July 31, 1997 compared to working capital at April
30, 1997 of $37.3 million. Included in working capital at July 31, 1997 is $22.8
million of cash, cash equivalents and marketable securities which are readily
convertible to cash. Also included in working capital is a real estate
construction loan of $9 million which is due on January 30, 1998.
Net cash provided by operating activities for the three months ended July 31,
1997, was $2.9 million compared to a net cash outflow of $272,000 in the
comparable fiscal 1997 quarter. The increase in net inflow of cash from
operating activities in the fiscal 1998 period occured principally through
significant cash collections on accounts receivable. Accounts receivable
decreased by $1,358,000 despite an increase in costs and estimated earnings in
excess of billings on uncompleted contracts of $945,000. The Company anticipates
that operating activities for all of fiscal 1998 will generate positive cash
flow.
Net cash used in investing activities for the three months ended July 31, 1997,
was $1,758,000. Of this amount, $1,476,000 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. In the first
quarter, the Company acquired capital equipment for approximately $282,000. At
July 31, 1997, the Company had no material commitments for additional capital
expenditures. In addition, the Company believes it has sufficient resources to
acquire capital equipment as needs are identified.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Net cash used in financing activities for the three months ended July 31, 1997,
was $433,000 compared to $188,000 for the comparable fiscal 1997 quarter.
Included in the fiscal 1998 amount is $155,000 (net) used to make regularly
scheduled long-term debt payments and payment of the Company's initial
semiannual dividend in the aggregate amount of $746,000. These outflows were
partially offset by transactions related to the Company's common stock and
involving certain officers and other employees who exercised stock option rights
($336,000) or repaid notes receivable for common stock acquired in a prior year
($132,000). On January 30, 1998, 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 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 July 31, 1997, the Company's backlog amounted to approximately $22 million
compared to the approximately $14 million backlog at April 30, 1997. The backlog
of commercial and foreign customers approximates $19 million at July 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 district
court to obtain an injunction against continuance of the government
contract suspension. On March 14, 1997, the court dismissed the Company's
action and refused to grant the Company's motion for an injunction. The
Company has appealed the district court's decision to the United States
Court of Appeals. No opinion can be offered as to the outcome of the
appeal.
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, 1997 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 July 31,
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: September 15, 1997 BY /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chief Executive Officer and
Chief Financial Officer
Date: September 15, 1997 BY /s/ Alan Miller
---------------
Alan Miller
Controller
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