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, 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 December 8, 1997 - 7,709,787.
Page 1 of 14
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
October 31, 1997 and April 30, 1997 3-4
Consolidated Condensed Statements of Operations
Six Months Ended October 31, 1997 and 1996 5
Consolidated Condensed Statements of Operations
Three Months Ended October 31, 1997 and 1996 6
Consolidated Condensed Statements of Cash Flows
Six Months Ended October 31, 1997 and 1996 7
Notes to Consolidated Condensed Financial Statements 8-9
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
October 31, April 30,
1997 1997
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 2,348 $ 3,448
Marketable Securities 24,459 21,112
Accounts receivable, net (NOTE B) 15,150 14,797
Inventories (NOTE C) 11,798 11,060
Prepaid and other 1,297 1,233
------- -------
Total current assets 55,052 51,650
Property, plant and equipment, net 9,052 9,059
Investment in direct finance lease 9,717 9,702
Other assets 4,491 4,455
------- -------
Total assets $78,312 $74,866
======= =======
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,
1997 1997
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt $ 10,537 $ 9,718
Accounts payable - trade 1,150 882
Accrued liabilities and other 2,938 3,740
-------- -------
Total current liabilities 14,625 14,340
Long term debt net of current maturities 539 1,687
Other 3,930 3,773
-------- -------
Total liabilities 19,094 19,800
-------- -------
Stockholders' equity:
Preferred stock - $1.00 par value -0- -0-
Common stock - $1.00 par value 9,009 6,006
Additional paid - in capital 35,449 35,190
Retained earnings 19,699 20,414
64,157 61,610
Common stock reacquired and held in treasury
- at cost, 1,302,289 shares at October 31
and 1,549,218 shares at April 30, 1997 (3,648) (4,612)
Unamortized ESOP debt (1,250) (1,500)
Notes receivable - common stock (287) (435)
Unearned compensation (54) (77)
Unrealized holding gain 300 80
------- -------
Total stockholders' equity 59,218 55,066
------- -------
Total liabilities and stockholders' equity $78,312 $74,866
======= =======
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)
1997 1996
(In thousands except
per share data)
Net Sales $15,317 $12,700
------- -------
Cost of sales 9,902 8,068
Selling and administrative expenses 2,831 2,792
Research and development expenses 608 641
------- ------
Total operating expenses 13,341 11,501
------- ------
Operating profit 1,976 1,199
Other income (expense):
Interest income 899 713
Interest expense (459) (443)
Other income, net 795 810
------- -------
Earnings before provision for
income taxes 3,211 2,279
Income tax provision 180 130
------- -------
Net earnings $ 3,031 $ 2,149
======= =======
Net earnings per common share $ 0.39 $ 0.30
======= ======
Weighted average common shares outstanding 7,688,532 7,188,957
========= =========
NOTE: All shares and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31, 1997.
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)
1997 1996
(In thousands except
per share data)
Net Sales $ 8,016 $ 6,576
------- -------
Cost of sales 5,082 4,181
Selling and administrative expenses 1,488 1,486
Research and development expenses 315 281
------- -------
Total operating expenses 6,885 5,948
------- -------
Operating profit 1,131 628
Other income (expense)
Interest income 458 376
Interest expense (226) (220)
Other income, net 400 491
------- -------
Earnings before provision for
income taxes 1,763 1,275
Income tax provision 130 65
------- -------
Net earnings $ 1,633 $ 1,210
======= =======
Net earnings per common share $ 0.21 $ 0.17
====== ======
Weighted average common shares outstanding 7,736,792 7,269,279
========= =========
NOTE: All shares and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31, 1997.
See accompanying notes to consolidated
condensed financial statements.
6 of 14
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Six Months Ended October 31,
(Unaudited)
1997 1996
---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 3,031 $ 2,149
Non-cash charges to earnings 1,376 614
Net changes in assets and liabilities (1,913) (1,998)
------- -------
Net cash provided by operating activities 2,494 765
Cash flows from investing activities:
Purchase of marketable securities (3,038) (15,920)
Other - net (468) (257)
------- -------
Net cash used in investing activities (3,506) (16,177)
Cash flows from financing activities:
Payment of cash dividend (746) -
Principal payments of long-term debt (298) (376)
Payments from employees for exercise
of stock options or notes receivable 956 192
------- -------
Net cash used in financing activities (88) (184)
------- -------
Net decrease in cash (1,100) (15,596)
Cash at beginning of period 3,448 15,915
------- -------
Cash at end of period $ 2,348 $ 319
======= =======
See accompanying notes to consolidated
condensed financial statements.
7 of 14
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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, 1997; the results of its operations for the
three and six months ended October 31, 1997 and 1996, and its cash flows
for the six months ended October 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 October 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
$10,244,000 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 $500,000 at October 31
and $350,000 at April 30, 1997, consist of the following:
October 31, 1997 April 30, 1997
--------------- --------------
(In thousands)
Raw materials and Component parts $ 3,199 $ 2,797
Work in progress 8,599 8,263
------- -------
$11,798 $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.
All shares and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31,
1997.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
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 F - 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 pronouncements will
have on its financial statements and related disclosures.
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, %
1997 1996 change 1997 1996 change
---- ---- ------ ---- ---- ------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Commercial $6,776 $5,042 34% $12,933 $8,467 53%
US Government 1,240 1,534 (19%) 2,384 4,233 (44%)
------ ------ ------- ------
8,016 6,576 22% 15,317 12,700 21%
Cost of Sales 5,082 4,181 22% 9,902 8,068 23%
Selling and
administrative expenses 1,488 1,486 0% 2,831 2,792 1%
Research and
development expenses 315 281 12% 608 641 (5%)
------ ----- ------ ------
Operating income 1,131 628 80% 1,976 1,199 65%
Nonoperating income- net 632 647 (2%) 1,235 1,080 14%
Net earnings $1,633 $1,210 35% $3,031 $2,149 41%
====== ====== ====== ======
</TABLE>
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
For the six months ended October 31, 1997, operating income improved by $777,000
over the comparable period of fiscal 1997 and net earnings increased by
$882,000. Operating income for the fiscal quarter ended October 31, 1997
improved by $503,000 over the comparable period of fiscal 1997; net earnings
increased by $423,000. These results were achieved through increases in sales of
21% and 22%, respectively, coupled with reduced costs relative to sales over the
comparable fiscal 1997 periods. Margins for the periods indicated above remained
relatively consistent at around 36%.
As illustrated in the table above, commercial sales continue to grow, increasing
by 34% and 53%, respectively, in the fiscal 1998 periods over the comparable
fiscal 1997 periods. As a percentage of total sales, commercial sales have
increased to 85% and 84%, respectively, in the three months and six months ended
October 31, 1997 as compared to 77% and 67% for the comparable fiscal 1997
quarters. 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.
While gross margins for each of the four fiscal periods remained relatively
consistent, the three and six month periods ended October 31, 1997 were
negatively impacted by reductions in margins to be realized on two long-term
contracts. Excluding those two contracts, margins on the balance of the
Company's revenues were approximately 40% for these periods reflecting the
Company's higher revenues which are available to absorb its fixed costs. 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.
Selling and administrative costs showed almost no increase for the quarter ended
October 31, 1997, and were up only 1% for the six month period then ended over
the comparable fiscal 1997 periods. Although comparable in aggregate amounts,
the fiscal 1998 periods' selling and administrative costs reflect increased
accruals for incentive bonuses as a result of the Company's increased
profitability and greater Employee Stock Ownership Plan ("ESOP") amortization
expense due to the rising value of the Company's common stock. These increases
have been offset in part by lower travel-related costs and reduced legal fees
related to the Company's on-going litigation with the US government.
Research and development costs in the three month period ended October 31, 1997
increased by $34,000 but in the six-month period then ended decreased by $33,000
over the comparable three and six month periods ended October 31, 1996. These
changes reflect the timing of the expensing of certain residual materials and
costs from the Company's development efforts on new commercial product lines.
The Company expects to maintain approximately the same rate of investment in
research and development of new products and enhancements in functional
capabilities of existing products which will serve primarily the Company's
commercial customers for the balance of fiscal 1998 and for the foreseeable
future.
Net nonoperating income and expense decreased by $15,000 in the fiscal 1998
quarter and increased by $155,000 in the six month period ended October 31, 1997
from the comparable fiscal 1997 periods. Interest income increased by $82,000
(22%) in the 1998 quarter over the comparable fiscal 1997 quarter and by
$186,000 (26%) for the fiscal 1998 six month period over the comparable fiscal
1997 period. This is the result of a 22% increase in interest-earning assets
from October 31, 1996 to October 31, 1997 offset or enhanced by variations in
interest rates from the levels of the fiscal 1997 three- and six-month periods.
Interest expense increased by $6,000
10 of 14
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
(3%) and $16,000 (4%) during the fiscal 1998 quarter and six-month period ended
October 31, 1997 compared to the comparable fiscal 1997 periods. These increases
are also the result of increased interest rates during fiscal 1998 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, decreased by
$91,000 (19%) and $15,000 (2%) for the three- and six-month periods ended
October 31, 1997, respectively, compared to the comparable fiscal 1997 periods.
The decrease in the three-month period is attributable to property tax
adjustments against rental property taken during the fiscal 1997 period. Net
rental income is expected to continue at present levels for the balance of
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $40.4 million at October 31, 1997 compared to working capital at
April 30, 1997 of $37.3 million. Included in working capital at October 31, 1997
is $26.8 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 six months ended October 31,
1997, was $2.5 million compared to $765,000 for the comparable fiscal 1997
period. The increase in net inflow of cash from operating activities in the
fiscal 1998 period was achieved through the 41% increase in net income coupled
with $1.4 million of noncash charges which included amortization of allocated
ESOP shares and depreciation. These increases were offset by the growth of
current assets such as (i) accounts receivable (up $353,000) due to an increase
in costs and estimated earnings in excess of billings on uncompleted contracts
offset by payments received against amounts billed and (ii) inventories (up
$888,000) reflecting the higher level of work-in-process activity. In addition,
cash was used to pay down certain accrued liabilities (reduced by $814,000) such
as bonuses on fiscal 1997's operating results and accrued vacation pay to
coincide with the Company's annual mid-summer plant shutdown. The Company
anticipates that operating activities for the balance of fiscal 1998 will
continue to generate positive cash flow.
Net cash used in investing activities for the six months ended October 31, 1997,
was approximately $3.5 million of which $3 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. For the
six months ended October 31, 1997, the Company acquired capital equipment for
approximately $468,000. At October 31, 1997, the Company had no material
commitments for additional capital expenditures. In addition, the Company
believes that it has sufficient resources to acquire capital equipment as needs
are identified.
Net cash used in financing activities for the six months ended October 31, 1997,
was $88,000 compared to $184,000 for the comparable 1997 period. Included in the
fiscal 1998 amount is $298,000 (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 options ($808,000) or repaid
notes receivable for common stock acquired in a prior year ($148,000).
11 of 14
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
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. In addition, in November 1997, the Company
repaid the balance of its Nassau County Industrial Development Bonds in the
amount of $820,000, including accrued interest. Accordingly, this note was
classified as a current liability on the October 31, 1997 balance sheet. On
December 1, 1997, the Company paid its semiannual cash dividend in the aggregate
amount of $774,000.
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 sufficient to
fund development efforts in these markets.
At October 31, 1997, the Company's backlog amounted to approximately $17.6
million compared to the approximately $14.3 million backlog at April 30, 1997.
Backlog of commercial and foreign customers approximates $14.3 million at
October 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.
12 of 14
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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) On October 14, 1997, the Company filed a report on Form 8-K
regarding the declaration of a $0.15 per share cash dividend and a
50% stock dividend payable on December 1, 1997 to shareholders of
record as of October 31, 1997.
13 of 14
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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 12, 1997 BY /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chief Executive Officer and
Chief Financial Officer
Date: December 12, 1997 BY /s/ Alan Miller
---------------
Alan Miller
Controller
14 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1997
<CASH> 2348
<SECURITIES> 24459
<RECEIVABLES> 15340
<ALLOWANCES> 190
<INVENTORY> 11798
<CURRENT-ASSETS> 55052
<PP&E> 25671
<DEPRECIATION> 16619
<TOTAL-ASSETS> 78312
<CURRENT-LIABILITIES> 14625
<BONDS> 539
0
0
<COMMON> 9009
<OTHER-SE> 50209
<TOTAL-LIABILITY-AND-EQUITY> 78312
<SALES> 15317
<TOTAL-REVENUES> 16112
<CGS> 9902
<TOTAL-COSTS> 9902
<OTHER-EXPENSES> 3439
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 459
<INCOME-PRETAX> 3211
<INCOME-TAX> 180
<INCOME-CONTINUING> 3031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3031
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
