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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, 1998
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, 1998 - 7,729,971
Page 1 of 13
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
July 31, 1998 and April 30, 1998 3-4
Consolidated Condensed Statements of Operations
Three Months Ended July 31, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows
Three Months Ended July 31, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Part II. Other Information:
Item 1 - Legal Proceedings 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
July 31, April 30,
1998 1998
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 2,193 $ 8,725
Marketable securities 33,636 36,661
Accounts receivable, net 19,060 18,640
Inventories 7,304 6,475
Deferred income taxes 4,740 5,000
Prepaid and other 826 986
------- -------
Total current assets 67,759 76,487
Property, plant and equipment, net 9,127 9,159
Other assets 3,177 3,134
------- -------
Total assets $80,063 $88,780
======= =======
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,
1998 1998
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt $ 479 $ 479
Accounts payable - trade 955 1,283
Accrued liabilities and other 2,577 11,770
-------- -------
Total current liabilities 4,011 13,532
Long term debt net of current maturities 375 500
Deferred expenses 6,381 6,305
Deposit liability and other 11,983 12,036
-------- -------
Total liabilities 22,750 32,373
-------- -------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,009 9,009
Additional paid - in capital 36,637 36,306
Retained earnings 16,501 15,983
------- ------
62,147 61,298
Common stock reacquired and held in treasury -
at cost, 1,279,288 shares at July 31, 1988
and 1,296,913 shares at April 30, 1998 (3,578) (3,632)
Unamortized ESOP debt (875) (1,000)
Notes receivable - common stock (287) (287)
Unearned compensation (78) (89)
Accumulated other comprehensive (loss) income (16) 117
------- -------
Total stockholders' equity 57,313 56,407
------- -------
Total liabilities and stockholders' equity $80,063 $88,780
======= =======
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)
1998 1997
(In thousands except per share data)
Net Sales $ 7,015 $ 7,301
-------- -------
Cost of sales 4,626 4,820
Selling and administrative expenses 1,194 1,343
Research and development expense 795 293
-------- -------
Total operating expenses 6,615 6,456
-------- -------
Operating profit 400 845
Other income (expense):
Investment income 649 441
Interest expense (89) (233)
Other (expense) income, net (42) 395
-------- -------
Earnings before provision for
income taxes 918 1,448
Income tax provision
Current 50 50
Deferred 350 -
-------- -------
400 50
-------- -------
Net earnings $ 518 $ 1,398
======== =======
Net earnings per common share
Basic $ 0.07 $ 0.19
======= =======
Diluted $ 0.07 $ 0.18
======= =======
Average shares outstanding
Basic 7,514,841 7,208,678
========= =========
Diluted 7,917,734 7,640,273
========= =========
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)
1998 1997
---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 518 $ 1,398
Non-cash charges to earnings 1,196 592
Litigation settlement (8,000) -
Net changes in assets and liabilities (2,012) 941
------- -------
Net cash (used in) provided by operating activities (8,298) 2,931
Cash flows from investing activities:
Sale (purchase) of marketable securities -net 2,866 (1,476)
Other - net (221) (282)
------- -------
Net cash provided by (used in) investing activities 2,645 (1,758)
Cash flows from financing activities:
Dividends paid (771) (746)
Other - net (108) 313
------- -------
Net cash used in financing activities (879) (433)
------- -------
Net (decrease) increase in cash (6,532) 740
Cash at beginning of period 8,725 3,448
------- -------
Cash at end of period $ 2,193 $ 4,188
======= =======
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, 1998 and the results of its operations and cash
flows for the three months ended July 31, 1998 and 1997. The April 30, 1998
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, 1998 Annual Report to Stockholders. The results of operations for
such interim periods are not necessarily indicative of the operating
results for the full year.
NOTE B - EARNINGS PER SHARE
Reconciliation of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Three months ended July 31,
1998 1997
Basic EPS Shares outstanding
(weighted average) 7,514,841 7,208,678
Effect of Dilutive Securities 402,893 431,595
--------- ---------
Diluted EPS Shares outstanding 7,917,734 7,640,273
========= =========
Options to purchase 118,500 shares of common stock were outstanding during
the three months ended July 31, 1998 but were not included in the
computation of diluted earnings per share because the exercise price of the
options was greater than the average market price of the Company's common
shares during the period and, therefore, the inclusion of such options
would have been antidilutive.
NOTE C - DEFERRED INCOME TAXES
As a result of continued operating profits, the recent litigation
settlement and the 1998 real estate transactions, the Company expects to
fully utilize its tax net operating loss carryforward. As a consequence,
beginning in the third quarter of fiscal 1998, 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 the
litigation settlement, certain employee benefits, accounting for long-term
contracts and depreciation of property, plant and equipment.
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable at July 31, 1998 and April 30, 1998 include costs and
estimated earnings in excess of billings on uncompleted contracts accounted
for on the percentage of completion basis of approximately $13,735,000 and
$13,618,000, 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. and SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE E - INVENTORIES
Inventories, which are reported net of reserves of $1,400,000 at July 31,
1998 and April 30, 1998, consist of the following:
July 31, 1998 April 30, 1998
------------- --------------
(In thousands)
Raw materials and Component parts $ 2,432 $ 2,857
Work in progress 4,872 3,618
------- -------
$ 7,304 $ 6,475
======= =======
NOTE F - ADOPTION OF SFAS 130, "REPORTING COMPREHENSIVE INCOME"
As of May 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS NO. 130"). SFAS
No. 130 establishes new standards for reporting and displaying
comprehensive income and its components within the Company's financial
statements; however, the adoption of SFAS No. 130 has no impact on the
Company's net income or stockholders' equity. SFAS No. 130 requires
unrealized gains and losses on the Company's marketable securities to be
reported in comprehensive income. Prior to adoption of this statement, such
gains and losses were reported separately in stockholders' equity. Prior
year financial statements have been reclassified to conform to the
requirements of SFAS No.
130.
During the first quarter of 1999 and 1998, total comprehensive income
amounted to $324,000 and $1,597,000, respectively.
NOTE G - RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which is effective for the Company in future periods. This pronouncement
deals with disclosure matters and, upon adoption, will not have any effect
on the Company's financial position, results of operations or cash flows.
NOTE H - CONTINGENCIES
Reference is made to Notes 9 and 10 of the Company's Annual Report on Form
10K for the year ended April 30, 1998 for information regarding the
litigation settlement and other legal proceedings. See also Part II, Item 1
of this Form 10Q.
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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
The table below sets forth for the respective first quarters of fiscal years
1999 and 1998 the percentage of consolidated net sales represented by certain
items in the Company's consolidated statements of operations:
Three months ended
July 31
1998 1997
---- ----
Net Sales
Commercial 82.5% 84.3%
US Government 17.5 15.7
----- -----
100.0 100.0
Cost of Sales 65.9 66.0
Selling and administrative expenses: 17.0 18.4
Research and development expenses 11.3 4.0
----- -----
Operating profit 5.7 11.6
Other income (expense)- net 7.4 8.2
----- -----
Pretax Income 13.1 19.8
Provision for income taxes 5.7 0.7
----- -----
Net earnings 7.4% 19.1%
===== =====
For the three months ended July 31, 1998, operating profit decreased by $445,000
(53%) over the comparable period of fiscal year 1998 and net earnings decreased
by $880,000 (63%). These outcomes were the result of a modest decline in sales
for the first quarter of fiscal 1999 coupled with a significant increase in
research and development spending and the recognition of deferred income taxes
compared to the comparable period of fiscal 1998.
As illustrated in the table above, the Company has made a successful
transformation into a non-U.S. government provider of specialty timing devices
for commercial space and terrestrial wireless applications. Commercial sales
comprise 82% and 84% of total sales for the three months ended July 31, 1998 and
1997, respectively. Overall, sales have declined 4% as the Company focuses more
of its internal resources on developing additional products to fulfill expected
demand for commercial space hardware.
Gross margins for the three months ended July 31, 1998 and 1997 have remained
constant at 34%. Margins on its commercial revenues were 37% as compared to 20%
for US government programs. During the quarter ended July 31, 1997, gross
margins on commercial sales were 38% while margins on US government programs
were 12%. The improvement in US government margins in the fiscal 1999 period is
attributable to the near conclusion of certain unprofitable contracts for which
loss reserves were recorded in the prior fiscal year. 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 1999.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Selling and administrative costs decreased by $149,000 (11%) for the quarter
ended July 31, 1998, over the three months ended July 31, 1997. This decrease is
largely attributable to the decline in legal expenses related to the Company's
litigation with the U.S. government which was settled in June 1998. All costs
related to the settlement were accrued as of April 30, 1998. As a consequence,
the Company anticipates that selling and administrative expenses will be lower
in the first part of fiscal 1999 as compared to the prior fiscal year. Spending
will likely increase in the latter half of the year as the Company intensifies
its marketing efforts for its commercial space hardware products.
Research and development costs in the fiscal 1999 period increased by $502,000
(171%) over the comparable three month period ended July 31, 1997. As indicated
previously, the Company intends to devote significant resources to develop a
line of generic products to be used as the building blocks for the commercial
satellite transponder market. In prior years, the Company secured partial
customer funding for its development efforts. For the satellite transponder
development effort and other development projects during fiscal 1999, the
Company is willing to spend up to $6 million of its own funds in order to bring
such products to the market by the end of the fiscal year. Internally generated
cash and cash reserves will be adequate to fund this development effort.
Net nonoperating income and expense decreased by $85,000 (14%) in the three
months ended July 31, 1998 from the comparable fiscal 1998 quarter. Investment
income increased by $208,000 (47%) in the 1999 quarter over the comparable 1998
quarter. This is the result of a 50% increase in income-earning assets from July
31, 1997 to July 31, 1998. Interest expense decreased by $144,000 (62%) during
the fiscal 1999 quarter compared to the period ended July 31, 1997. This
decrease is the result of the repayment during the third quarter of fiscal 1998
of over $10 million of debt related to the Company's former real estate
holdings. Other income (expense), net, decreased by $437,000 (111%). In fiscal
1998, this category consisted principally of rental income under a long-term
lease. Since this lease was part of the real estate sales effected in January
1998, no further income will be derived from that source. During fiscal 1999,
this category contained costs related to the relocation of the Company's office
and manufacturing facility within its leased-back building. For the balance of
fiscal 1999, costs in Other income (expense), net, are expected to be nominal.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $64 million at July 31, 1998 compared to working capital at April
30, 1998, of $63 million. Included in working capital at July 31, 1998 is $36
million of cash, cash equivalents and marketable securities, including $12
million of REIT units which are convertible to Reckson Associates Realty Corp.
common stock after January 6, 1999.
Net cash used in operating activities for the three months ended July 31, 1998,
was $8.3 million compared to a net cash inflow of $2.9 million in the comparable
fiscal 1998 quarter. The fiscal 1999 net outflow is the result of the $8 million
litigation settlement coupled with larger research and development spending.
Without those two items, cash flows from operating activities would have been
posititve. 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 and cash
reserves will be adequate to fund development efforts in these markets. As a
result of this investment in its future during the remainder of fiscal 1999, the
Company does not anticipate that it will generate positive cash flow from
operating activities this fiscal year.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Net cash provided by investing activities for the three months ended July 31,
1998, was $2.6 million. This amount was generated through the sale of certain
U.S. government and agency securities aggregating $2.87 million which was
partially offset by the acquisition of capital equipment for approximately
$221,000. 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 may spend up to $2 million on capital
equipment related to the development and manufacture of new products. During the
second quarter of fiscal 1999, the Company intends to install the next upgrade
to its financial software, the cost of which is not expected to exceed $150,000.
The purchase of this financial software package two years ago, including the
upgrades, has satisfactorily addressed the issue of compliance with the year
2000 problem. The Company has determined that additional operational,
nonfinancial software must be obtained to resolve the year 2000 issue in certain
production and support areas, the cost of which will not exceed $50,000. The
Company has sufficient resources to acquire this and other capital equipment.
Net cash used in financing activities for the three months ended July 31, 1998,
was $879,000 compared to $433,000 for the comparable fiscal 1998 quarter.
Included in the fiscal 1999 amount is payment of the Company's semiannual
dividend in the aggregate amount of $771,000. An additional $177,000 was used to
make regularly scheduled long-term liability payments. 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
($69,000).
At July 31, 1998, the Company's backlog amounted to approximately $19 million
compared to the approximately $22 million backlog at April 30, 1998. Of this
backlog, approximately 50% is realizable during fiscal 1999.
"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 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 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 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 December 14, 1993, FEI was notified by the U.S. Department of the
Air Force that it had been suspended from contracting with any agency of
the government. On February 14, 1997, FEI 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
FEI's action and refused to grant FEI's motion for an injunction. FEI
appealed the district court's decision to the United States Court of
Appeals. On July 1, 1998, the Court of Appeals affirmed the district court
order.
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. FEI
does not believe that the debarment should be for an extended period of
time, although FEI is unable to predict the period of such debarment.
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, 1998 on file with the Securities and Exchange Commission.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) On June 19, 1998, the Company's report on Form 8-K, containing
disclosure under Item 5 thereof (litigation settlement), was filed with the
Securities and Exchange Commission.
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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 14, 1998 BY /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chief Executive Officer and
Chief Financial Officer
Date: September 14, 1998 BY /s/ Alan Miller
---------------
Alan Miller
Controller
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