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, 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 March 9, 1998 - 7,710,037.
Page 1 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
January 31, 1998 and April 30, 1997 3-4
Consolidated Condensed Statements of Operations
Nine Months Ended January 31, 1998 and 1997 5
Consolidated Condensed Statements of Operations
Three Months Ended January 31, 1998 and 1997 6
Consolidated Condensed Statements of Cash Flows
Nine Months Ended January 31, 1998 and 1997 7
Notes to Consolidated Condensed Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
Part II. Other Information:
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 17
See accompanying notes to consolidated condensed financial statements.
2 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
January 31, April 30,
1998 1997
(UNAUDITED) (NOTE A)
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 9,283 $ 3,448
Marketable Securities 36,557 21,112
Accounts receivable, net (NOTE B) 17,179 14,797
Inventories (NOTE C) 9,615 11,060
Prepaid and other 1,898 1,233
------- -------
Total current assets 74,532 51,650
Property, plant and equipment, net (NOTE D) 3,108 9,059
Investment in direct finance lease (NOTE D) -0- 9,702
Other assets 2,834 4,455
------- -------
Total assets $80,474 $74,866
======= =======
See accompanying notes to consolidated condensed financial statements.
3 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets (Continued)
January 31, April 30,
1998 1997
(UNAUDITED) (NOTE A)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt (NOTE D) $ 475 $ 9,718
Accounts payable - trade 1,450 882
Accrued liabilities and other 4,101 3,740
------- -------
Total current liabilities 6,026 14,340
Long term debt net of current maturities (NOTE D) 662 1,687
Deferred gain (NOTE D) 6,121 -0-
Deferred income tax liability (NOTE F) 1,400 -0-
Other 4,008 3,773
------- -------
Total liabilities 18,217 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 35,767 35,190
Retained earnings 22,079 20,414
------- -------
66,855 61,610
Common stock reacquired and held in treasury
- at cost, 1,299,664 shares at January 31, 1998
and 1,549,218 shares at April 30, 1997 (3,641) (4,612)
Unamortized ESOP debt (1,125) (1,500)
Notes receivable - common stock (287) (435)
Unearned compensation 117 (77)
Unrealized holding gain 338 80
------- -------
Total stockholders' equity 62,257 55,066
------- -------
Total liabilities and stockholders' equity $80,474 $74,866
======= =======
See accompanying notes to consolidated condensed financial statements.
4 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
Nine Months Ended January 31,
(Unaudited)
1998 1997
(In thousands except per share data)
Net Sales $ 23,350 $ 20,258
-------- --------
Cost of sales (NOTE C) 17,564 12,906
Selling and administrative expenses 4,544 4,251
Research and development expenses 896 1,189
-------- --------
Total operating expenses 23,004 18,346
-------- --------
Operating profit 346 1,912
Other income (expense):
Interest income 1,528 1,133
Interest expense (632) (660)
Other income, net (NOTE D) 6,449 1,336
-------- --------
Earnings before provision for income taxes 7,691 3,721
Income tax provision: (NOTE F)
Current 980 230
Deferred 1,300 -
-------- --------
2,280 230
-------- --------
Net earnings $ 5,411 $ 3,491
======== ========
Net earnings per common share (NOTE E)
Basic $ 0.74 $ 0.50
======= =======
Diluted $ 0.70 $ 0.48
======= =======
Weighted average common shares outstanding (NOTE E)
Basic 7,325,974 6,915,144
========= =========
Diluted 7,691,498 7,225,772
========= =========
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.
5 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
Three Months Ended January 31,
(Unaudited)
1998 1997
(In thousands except per share data)
Net Sales $ 8,033 $ 7,558
------- -------
Cost of sales (NOTE C) 7,662 4,838
Selling and administrative expenses 1,713 1,459
Research and development expenses 288 548
------- -------
Total operating expenses 9,663 6,845
------- -------
Operating profit (loss) (1,630) 713
Other income (expense)
Interest income 630 420
Interest expense (173) (217)
Other income, net (NOTE D) 5,653 526
------- -------
Earnings before provision for income taxes 4,480 1,442
Income tax provision: (NOTE F)
Current 800 100
Deferred 1,300 -
------- -------
2,100 100
------- -------
Net earnings $ 2,380 $ 1,342
======= =======
Net earnings per common share (NOTE E)
Basic $ 0.32 $ 0.19
======= =======
Diluted $ 0.31 $ 0.18
======= =======
Weighted average common shares outstanding (NOTE E)
Basic 7,422,883 7,003,472
========= =========
Diluted 7,786,363 7,318,803
========= =========
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 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Nine Months Ended January 31,
(Unaudited)
1998 1997
---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 5,411 $ 3,491
Non-cash charges to earnings 58 1,333
Net changes in assets and liabilities (2,601) (2,226)
------- -------
Net cash provided by operating activities 2,868 2,598
Cash flows from investing activities:
Net proceeds from sale of building 6,587 -
Purchase of marketable securities (3,098) (15,073)
Other - net (642) (287)
------- -------
Net cash provided by (used in) investing activities 2,847 (15,360)
Cash flows from financing activities:
Payment of cash dividend (1,520) -
Receipt on prepayment of note receivable 1,879 -
Principal payments of long-term debt (1,237) (563)
Payments from employees for exercise
of stock options or notes receivable 998 302
------- -------
Net cash provided by (used in) financing activities 120 (261)
-------- -------
Net increase (decrease) in cash 5,835 (13,023)
Cash at beginning of period 3,448 15,915
-------- -------
Cash at end of period $ 9,283 $ 2,892
======= =======
See accompanying notes to consolidated condensed financial statements.
7 of 17
<PAGE>
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, 1998; the results of its operations for the
three and nine months ended January 31, 1998 and 1997, and its cash flows
for the nine months ended January 31, 1998 and 1997. 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 January 31, 1998 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
$12,107,000 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 January 31,
1998 and $350,000 at April 30, 1997, consist of the following:
January 31, 1998 April 30, 1997
---------------- --------------
(In thousands)
Raw materials and Component parts $ 2,708 $ 2,797
Work in progress 6,907 8,263
------- -------
$ 9,615 $11,060
======= =======
During the quarter ended January 31, 1998, the Company wrote down
approximately $2.3 million of work-in-progress inventory. This inventory
had been built in prior years in anticipation of future orders from the US
Government. The writedown is a result of the Company's transformation into
a primarily commercial space and telecommunications manufacturer as well
its expectation for reduced procurement volumes by the US Government due to
both smaller Defense Department budgets and the Government's migration to
new technologies.
8 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE D - SALE OF BUILDINGS
In January 1998, in two simultaneous transactions, the Company sold two
buildings to Reckson Associates Realty Corp., a real estate investment
trust. In one sale transaction, the Company sold the building which it had
leased to Laboratory Corporation of America (LCA), taking cash of
approximately $15.6 million and realizing a gain of approximately $4.8
million after expenses. In the other sale, the Company effected a
tax-deferred exchange of the building which it occupies for participation
units of Reckson Operating Partnership, L.P. (REIT units) which were valued
at closing at $12 million. The REIT Units are convertible to shares of
Reckson Associates Realty Corp. in January 1999. The Company will lease
back approximately 43% of the building from the purchaser. Under the
accounting provisions for sale and leaseback transactions, a portion of the
$6.1 million gain on this sale will be deferred and recognized into income
over the term of the lease with the balance recognized in income upon sale
or conversion of the REIT units. After Reckson completes renovation of the
building at its expense, the Company will occupy new space at an annual
rental of $400,000.
A portion of the cash proceeds were used to repay the $9 million loan
obtained to finance the construction of the LCA building. Preceeding the
sale of its buildings, the Company prepaid the balance of its Nassau County
Industrial Development Bonds in the amount of $820,000, including accrued
interest.
NOTE E - EARNINGS PER SHARE
Financial Accounting Standards Board pronouncement SFAS No. 128, "Earnings
per Share," became effective for the nine-month period and quarter ended
January 31, 1998. In accordance with SFAS 128, basic earnings per share are
computed by dividing net earnings by the weighted average number of shares
of common stock outstanding. Diluted earnings per share are derived by
dividing net earnings by the sum of the if-converted effect of unexercised
stock options and the weighted average number of shares of common stock
outstanding. All periods have been restated to conform with the
requirements of SFAS 128.
Reconciliation of the denominator of the Earnings Per Share calculation
(the numerator in all cases is Net Income for the given period.):
Three months ended Nine months ended
January 31, January 31,
1998 1997 1998 1997
---- ---- ---- ----
Basic EPS Shares outstanding 7,422,883 7,003,472 7,325,974 6,915,144
(weighted average)
Effect of Dilutive Securities 363,480 315,331 365,524 310,628
--------- --------- --------- ---------
Diluted EPS Shares outstanding 7,786,363 7,318,803 7,691,498 7,225,772
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.
9 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
NOTE F- INCOME TAXES
As a result of continued operating profits and the building sales described
in Note D above, the Company expects to fully utilize its tax net operating
loss carryforward during fiscal 1998. As a consequence, the valuation
allowance previously recorded against net deferred tax assets is not
required as of January 31, 1998. Accordingly, the Company has recorded a
provision to recognize net deferred tax liabilities of $1.3 million. This
amount was determined based upon the difference 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 for certain employee benefits, accounting for long-term
contracts and depreciation of property, plant and equipment.
NOTE G - 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 H - RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued 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. Since both of these pronouncements
principally relate to presentation and disclosures of financial
information, adoption of these standards will have no impact on the
Company's results of operations, financial position or cash flows. The
Company is in the process of determining how these pronouncements will
impact its financial statement disclosures. If the Company is required to
make changes to its financial statement disclosures, both pronouncements
require restatement of comparative prior periods.
10 of 17
<PAGE>
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)
NM = Not meaningful
<TABLE>
<CAPTION>
Three months ended Nine months ended
January 31, % January 31, %
1998 1997 change 1998 1997 change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Commercial ........... $6,337 $5,694 11% $19,270 $14,161 36%
US Government ........ 1,696 1,864 (9%) 4,080 6,097 (33%)
------ ------ ------- -------
8,033 7,558 6% 23,350 20,258 15%
Cost of Sales ............ 7,662 4,838 58% 17,564 12,906 36%
Selling and administrative
expenses ................. 1,713 1,459 17% 4,544 4,251 7%
Research and development
expenses ................. 288 548 (47%) 896 1,189 (25%)
------ ------ ------- -------
Operating income (loss) .. (1,630) 713 (329%) 346 1,912 (82%)
Nonoperating income- net . 6,110 729 NM 7,345 1,809 NM
Income tax provision ..... 2,100 100 NM 2,280 230 NM
------ ------ ------- -------
Net earnings ............. $2,380 $1,342 77% $ 5,411 $ 3,491 55%
====== ====== ======= =======
</TABLE>
Significant Third Quarter 1998 Events
During the quarter ended January 31, 1998, the Company's results of operations
were impacted by two singular events which had a material impact on both the
quarter and the fiscal year-to-date. The most significant event was the sale in
two simultaneous transactions of the Company's real estate to Reckson Associates
Realty Corp. and the subsequent leaseback of a portion of the building which it
occupies. In one sale transaction, the Company sold the building which it had
leased to Laboratory Corporation of America, taking cash of approximately $15.6
million and realizing a gain of approximately $4.8 million after expenses. A
portion of the proceeds were used to repay the $9 million loan obtained to
finance the construction of this building. In the other sale, the Company
effected a tax-deferred exchange of the building which it occupies for
participation units of Reckson Operating Partnership, L.P. (REIT units) which
were valued at closing at $12 million. The Company will lease back approximately
43% of this building from Reckson. Under the accounting provisions for sale and
leaseback transactions, a portion of the $6.1 million gain on this sale will be
deferred and recognized into income over the term of the lease with the balance
recognized in income upon sale or conversion of the REIT units into shares of
Reckson Associates Realty Corp.
11 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Preceeding the sale of its building, the Company prepaid the balance of its
Nassau County Industrial Development Bonds in the amount of $820,000, including
accrued interest.
The second significant event was the Company's determination that a writeoff of
$2.3 million of certain work-in-progress inventory was appropriate. This
inventory had been built in prior years in anticipation of future orders from
the US Government. The writeoff results from the Company's transformation to a
commercial space and telecommunications manufacturer as well as its expectation
for reduced procurement volumes by the US Government due to both smaller Defense
Department budgets and the Government's migration to new technologies.
As a result of the building sales coupled with continued operating profits, the
Company expects to fully utilize its tax net operating loss carryforward.
Accordingly, in the quarter ended January 31, 1998, the Company recorded a
deferred tax provision of $1.3 million to give effect to tax obligations which
will be due in future periods but relate to events which occurred in the current
or prior fiscal years.
Discussion of Third Quarter Operations
Operating income for the fiscal quarter ended January 31, 1998 decreased by
$2.34 million over the comparable period of fiscal 1997 while net earnings
increased by $1.04 million. For the nine months ended January 31, 1998,
operating income decreased by $1.57 million over the comparable period of fiscal
1997 while net earnings increased by $1.92 million. Without the two significant
events described above, for the three months ended January 31, 1998, operating
income would have decreased by $47,000 (-7%) and net income would have increased
by $473,000 (35%) over the comparable period of fiscal 1997. For the nine months
ended January 31, 1998, operating income would have increased $730,000 (38%) and
net income would have increased by $1.36 million (39%) over the comparable
period of fiscal 1997. These outcomes were the result of increases in sales of
6% and 15% for the three- and nine-month periods, respectively, offset by loss
reserves ($330,000 at January 31, 1998) and additional costs recorded against
three long-term contracts. Other operating costs, as a ratio of sales, remained
relatively constant from one period to the next.
As illustrated in the table above, commercial sales continue to grow, increasing
by 11% and 36%, respectively, in the three- and nine-month fiscal 1998 periods
over the comparable fiscal 1997 periods. In the three months ended January 31,
1998, commercial sales are 79% of total sales compared to 75% in the fiscal 1997
quarter; and 83% of total sales for the nine months ended January 31, 1998 from
70% for the comparable 1997 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.
Margins on the Company's commercial projects, including all related reserves and
costs, were 38% for the three- and nine-month periods of fiscal 1998. As noted
above, consolidated gross margins for the three- and nine-month periods ended
January 31, 1998, were significantly impacted by the inventory writedown. Fiscal
1998 margins were further negatively impacted by reductions in margins to be
realized on the three long-term contracts mentioned above. Excluding the
inventory writedown and those three contracts, margins on the remainder of the
Company's revenues were approximately 40%. The Company does not anticipate
losses on other current contracts and, 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.
12 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Selling and administrative costs increased by $254,000 for the quarter ended
January 31, 1998, and were up by $293,000 for the nine month period then ended
over the comparable fiscal 1997 periods. The increases in the fiscal 1998
periods reflect increased accruals for incentive bonuses as a result of the
Company's increased profitability, compensation expense related to the grant of
stock options to members of the Company's new advisory board 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
a refund of prior year property taxes, 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- and nine-month periods ended
January 31, 1998 decreased by $260,000 and by $293,000, respectively, compared
to the comparable three- and nine-month periods ended January 31, 1997. In the
third quarter of fiscal 1997 the Company expensed certain residual materials and
costs related to the Company's development efforts on new commercial product
lines; a comparable level of expensing did not recur in fiscal 1998. Excluding
such occasional writedowns, for the balance of fiscal 1998 and for the
foreseeable future the Company expects to maintain or increase its rate of
investment in research and development of new products, processing improvements
and enhancements to the functional capabilities of existing products which will
serve primarily the Company's commercial customers for space and
telecommunications products.
Net nonoperating income and expense in the three months and nine months ended
January 31, 1998, increased by $5.4 million and $5.5 million, respectively, from
the comparable fiscal 1997 periods. Interest income increased by $210,000 (50%)
in the 1998 quarter over the comparable fiscal 1997 quarter and by $395,000
(35%) for the fiscal 1998 nine-month period over the comparable fiscal 1997
period. During the third quarter, the purchaser of the Company's former west
coast facility prepaid its mortgage loan including a prepayment penalty of
$149,000 which was credited to interest income. Without this onetime income
item, interest income would have increased by 15% and 22% for the three- and
nine-month periods ended January 31, 1998, respectively. This is the result of
the 16% weighted average increase in interest-earning assets from January 31,
1997 to January 31, 1998 offset or enhanced by variations in interest rates from
the levels of the fiscal 1997 three- and nine-month periods. As a result of the
additional investments in marketable securities and other interest-bearing
accounts, the Company anticipates increased interest income in future periods
subject to fluctuations in interest rates.
Interest expense decreased by $44,000 (20%) during the fiscal 1998 quarter and
by $28,000 (4%) during the nine-month period ended January 31, 1998 compared to
the comparable fiscal 1997 periods. These decreases are principally the result
of the repayment of long-term debt in the aggregate amount of $9.8 million
during the fiscal 1998 third quarter. (See discussion of significant third
quarter events above.) As a consequence, the Company will report significantly
reduced interest expense in future periods.
Other income, which consists principally of the gain on the sale of its
buildings, plus the refund of prior year property taxes and rental income under
a long-term lease, net of related expenses, increased by $5.1 million for both
the three-and nine-month periods ended January 31, 1998, compared to the
comparable fiscal 1997 periods. Without the building sale gain and the property
tax refund, other income would have decreased by $269,000 (51%) and $283,000
(21%) for the three-and nine-month periods ended January 31, 1998. Most of this
decrease is attributable to the lack of rental income during January 1998 due to
the sale of the buildings. For the balance of fiscal 1998, other income
(expense) will likely show net expenses reflecting the cost of moving the
Company into new office and production space. In future periods, other income
(expense) should be a nominal amount compared to the income realized in recent
years.
13 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a strong working capital
position of $68.5 million at January 31, 1998 compared to working capital at
April 30, 1997 of $37.3 million. Included in working capital at January 31, 1998
is $45.88 million of cash, cash equivalents, marketable securities and REIT
Units which may be converted to cash. As a result of the building sales
described above, the Company repaid $9.8 million of bank loans during the
quarter ended January 31, 1998.
Net cash provided by operating activities for the nine months ended January 31,
1998, was $2.9 million compared to $2.6 million 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 55% increase in net income offset by
the growth of current assets such as accounts receivable (up $2.4 million due to
an increase in costs and estimated earnings in excess of billings on uncompleted
contracts) and inventories (up $1 million before writedowns and reserves)
reflecting the higher level of work-in-process activity. These asset increases
were partially offset by increased accruals for income taxes as a result of the
Company's greater profitability. The Company anticipates that operating
activities for all of fiscal 1998 will generate positive cash flow.
Net cash provided by investing activities for the nine months ended January 31,
1998, was approximately $2.8 million of which $6.6 million was the net amount
derived from the sale of the LCA building. This amount was offset by $3.1
million to acquire certain securities of the U.S. government and its agencies.
The Company may continue to acquire or redeem marketable securities as dictated
by its investment strategies.
For the nine months ended January 31, 1998, the Company acquired capital
equipment for approximately $642,000. At January 31, 1998, the Company had no
material commitments for additional capital expenditures. The Company
anticipates it will incur approximately $500,000 in costs related to moving its
operations into newly leased and renovated office and production space. Reckson
Associates Realty Corp. is obligated to bear the renovation costs for the new
leased facility. In addition, the Company is continuing to evaluate its exposure
to the Year 2000 computer software issue. Based on a preliminary analysis, the
Company believes that the costs it will incur to meet the Year 2000 requirements
will be less than $250,000 and will be spent in the next nine to twelve months.
The Company has sufficient resources to acquire capital equipment, move into the
new operating facility and meet its Year 2000 requirements.
Net cash provided by financing activities for the nine months ended January 31,
1998, was $120,000 compared to $261,000 used in financing activities for the
comparable 1997 period. Included in the fiscal 1998 amount is the receipt of
$1.9 million for early payment of a mortgage note receivable from the purchaser
of the Company's former west coast facility plus receipts from transactions
related to the Company's common stock and involving certain officers and other
employees who exercised stock option rights ($849,000) or repaid notes
receivable for common stock acquired in a prior year ($148,000). These inflows
were partially offset by $820,000 used to pay down the Industrial Development
Bonds in anticipation of the sale of its buildings. An additional $1.9 million
was used to make regularly scheduled long-term debt payments and payment of the
Company's semiannual dividends.
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.
14 of 17
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
At January 31, 1998, the Company's backlog amounted to approximately $25.9
million compared to the approximately $14.3 million backlog at April 30, 1997.
Backlog of commercial and foreign customers approximates $23.8 million at
January 31, 1998. Of this backlog, approximately 60% is realizable during the
next 12-month period.
"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.
15 of 17
<PAGE>
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 nine 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 December 2, 1997, the Company filed a report on Form 8-K
indicating the impact of the Registrant's previously declared 50%
stock dividend on issued and outstanding shares and treasury
shares and further amended a previously filed Registration
Statement on Form S-8 regarding various stock option plans.
16 of 17
<PAGE>
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 16, 1998 BY /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chief Executive Officer and
Chief Financial Officer
Date: March 16, 1998 BY /s/ Alan Miller
---------------
Alan Miller
Controller
17 of 17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 9283
<SECURITIES> 36557
<RECEIVABLES> 17369
<ALLOWANCES> 190
<INVENTORY> 9615
<CURRENT-ASSETS> 74532
<PP&E> 17094
<DEPRECIATION> 13986
<TOTAL-ASSETS> 80474
<CURRENT-LIABILITIES> 6026
<BONDS> 662
0
0
<COMMON> 9009
<OTHER-SE> 53248
<TOTAL-LIABILITY-AND-EQUITY> 80474
<SALES> 23350
<TOTAL-REVENUES> 24618
<CGS> 15269
<TOTAL-COSTS> 17564
<OTHER-EXPENSES> 5440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 632
<INCOME-PRETAX> 7691
<INCOME-TAX> 2280
<INCOME-CONTINUING> 5411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5411
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.70
</TABLE>
