Frequency Electronics Inc (FEIM) 2008 Q3 法說會逐字稿

Good day and welcome to the Frequency Electronics third quarter earnings release conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Martin Bloch, CEO and President; and Mr. Alan Miller, Chief Financial Officer. Please go ahead.

Good morning, everyone. Joe Franklin will not join us. He is traveling on business, so you're stuck with me and Alan Miller and because our service has lost our Safe Harbor statement I'm going to ask Alan Miller to read it. Alan?

Thank you, Martin. Under the Private Securities Litigation Reform Act of 1995 the statements in this conference call regarding the future constitute forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences are enumerated in our press release and by making these forward-looking statements the Company undertakes no obligation to update these statements for revisions or changes after the date of this release.

Thank you, Alan. Alan, why don't you at this time walk everybody through the financial performance for this quarter and the nine months and then I'll address the future business and then we'll turn over to questions and answers.

All right. For the quarter ended January 31, 2008, the Company recorded revenues of $17.1 million compared to $12.1 million in the year-ago quarter. This is a 41% increase in year-over-year revenues which were led by a better than 50% increase in revenues from satellite payload programs. Quarterly revenues from telecommunications infrastructure and nonspace U.S. government programs were also up from year-ago levels. For the nine months at fiscal 2008 total revenues are $50.1 million, an increase of 23% over the $40.8 million recorded over the same period in 2007. Cost of sales was $11.6 million compared to $8.3 million a year ago. A yielding gross margin of $5.5 million in the third quarter of this year compared to $3.8 million in the year-ago period. This is a gross margin rate for this third quarter of 32% compared to 31% in the year-ago quarter and the third quarter results of had year represent a continued sequential improvement from the 30% gross margin rate realized in the first half of fiscal 2008.

As we indicated previously, higher engineering costs and certain satellite programs some of which were completed this quarter kept margins at this lower than targeted level. We expect to realize improved margins in the fourth quarter of this year and into fiscal 2009. SG&A was $3.1 million compared to $2.9 million a year ago and R&D was $1.5 million compared to $2.6 million a year ago. Both SG&A and R&D spending this year are in line with our target of under 20% and 10% of revenues respectively. Our challenge is to continue to bring down the costs of production and to significantly improve our gross margin rates. This should result in continued improvement in our operating margins which in the third quarter were $805,000. This is $2.5 million better than the year-ago period and more than double the operating profit realized in the preceding quarter of this fiscal year.

Investment and other income was $586,000 in the fiscal 2008 quarter which is comparable to the $650,000 realized in the year-ago period. Net income for the third quarter of this fiscal year was $758,000 or $0.09 per diluted share. This is compared to a loss of $754,000 in the year-ago quarter or $0.09 a diluted share. Just a quick word again on our effective tax rate for the year-to-date we're at 42% as we've indicated in previous calls. The $3 million gain on our Morion investment that was recorded in the fourth quarter will offset some of our lost tax carried forwards, as well, any losses that are generated by our foreign subsidiaries do not generate any current tax benefits.

Turning to the balance sheet overall our cash and marketable securities stand at $15.7 million was about on par with where we began the year. You may recall that in the first quarter of this year we reported negative cash from operations of $4.4 million. Had we collected in January of this year, the 41.3 million in cash that came in in early February, we would be operating cash flow positive over the last two quarters of the current current fiscal year. As of January 31, our accounts receivables stand at $20 million of which about $8.7 million is in unbilled receivables which is typical of these large long term contracts. We do anticipate that in addition to the $1.3 million that was collected in early February, that we will be billing and collecting over $6 million during the fourth quarter of this fiscal year on these longer term contracts as we complete certain milestone events. Inventory is at $31.4 million which is about the same as where we began the fiscal year but down from the previous quarter. And finally a word on backlog. We expanded about $40 million in backlog which is slightly up from where we stood at the end of the second quarter this fiscal year.

Now this morning's press release discussed in detail our current dividend policy. Several of you have suggested we buy back stock instead of pay a cash dividend. Obviously in this current economic environment it would be highly imprudent for us to do both. So absent a dividend payment we believe we can justify some limited repurchase of our stock. I'll now turn the call back over to Martin.

Good morning, everyone. I just want to address a few technical points and then go into the future of this. Although our inventory's about flat, the inventory in the United States has improved, but we've had, of course, an increase in inventory valuation due to the change in currency between the dollar and the euro and we are continuing to work the issues of reducing the inventory and having good opportunity. To do so.

I now want want to focus on this year. First of all, I want to congratulate the Frequency team for filling out the mission that we gave them and this is basically to work hard, to increase revenue which was number one on our hit parade and they have achieved this and will continue to do so. Second of all, the wireless business is projected to be significantly down and we have really no better visibility except that that's where it's going and I think it's reflected in what our customers are looking at. Thirdly, with respect to the wireline, I'm happy to say that from zero we see some significant positives and we expect to book this calendar year 1 million to $2 million worth of business and what's more important is we've gone through all the hurdles and we are approved and we are basically going through the first year of what they call trial by fire and having a limited number of the equipment in actual operation and that is very encouraging to us.

When it comes to space business, that's the brightest spot on our horizon. We've booked a lot of business so far and we anticipate significant improvement in bookings over the next three to five months. I'm happy to report that we haven't lost any of the proposals we have made. They just moved to the right and we have every indication that they will materialize over the next three to four months on this item. With respect to government business, again our largest sensitivity is gaining a lot of visibility and our challenge at this time is to increase throughput as we have successfully done on the space business which has a big payoff and at the same time make it more affordable because the low G sensitivity is required by the military in very, very large quantities. So we have a challenge on our hands on how to be able to produce it in large quantity at an affordable price and I'm sure we'll achieve that objective on this. We made the commitment to our customers that this is our challenge over the next six months to do.

I'm also happy to report that although some of the big proposals did not materialize up to date and they've slipped a little bit to the right, we have been able to book two satellite contracts that we didn't expect for $9 million plus. Again, I want to emphasize Alan Miller's commitment that we are looking forward to to continue improvement in revenue and to work very hard to improve the margins, but our number one margin goal is to everybody is that improvement in revenue is very important because we know we can bring down the margins by improving the manufacturability, throughput, and economy of making it by the investment that we have made in automatic test equipment and by better training our personnel to have good throughput. Like I said, I'd like to at this time stop and let you guys and anybody else have the opportunity for question-and-answers.

Thank you. The question and answer session will be conducted--.

Could you please ask whoever's at the question to address it to either Martin Bloch or Alan Miller?

Yes, certainly.

Thank you.

(OPERATOR INSTRUCTIONS) We have a question with [Michael Amari] with Americo Inc.

Hello, Martin. Hello, Alan. This question is for Alan. First of all, we don't have any more real estate, right? We are out of that. You sold everything?

That's correct. We do own property in Belgium but for the most part here in the United States we're done with real estate.

Great. In terms of the cash that you have, do you have any exposure? Do you have any subprime exposure?

None. Not subprime not at all.

Okay. What are you making on the cash, a couple of percentage or something?

Yes. It's very modestly invested 5 to 5.5% thereabouts, nothing aggressive.

I guess that's part of the reason why you have to remove the dividend which we hope that you would address soon because your investors really need the dividend. We all strapped for cash at this time.

Michael, you are the one that kept on talking. Why do you pay a dividend? Why don't you deploy the money more successfully and that's what we're doing. We're trying to deploy the money for growth and acquisitions.

Well, you are doing absolutely great. You are turning from values to a growth company. It's a time where most of the investors would like to see some sort of a dividend.

I understand that. Michael, visualize that I personally am one of the large benefactors of the dividend and I voted for the Board that this is the right thing to do at this time.

I understand. Well, I hope you'll consider the buyback of the stock tank.

We're looking at it right now.

Thank you and good luck to you guys.

Thank you.

Bye.

And we'll take our next question from Robert Smith.

Hi. Good afternoon.

Good afternoon.

Good afternoon.

Let me first also share with you my surprise about the dividend. I feel this is ill advised and I hope you guys will reconsider it. It's what differentiated you.

Okay.

You distinguished yourself by having a strong balance sheet and a dividend and eliminating the dividend I think is a poor choice. I really feel you should give very serious consideration to reversing this and reconsider it. I'm speaking from the point of view of an investment professional.

Okay. We will take your input on the next Board meeting and review it.

Okay. I am grateful for your accepting that. So, Martin, you always told me to watch the backlog. So as far as the future indications of where you guys are going.

Yes.

So we see a pretty flat backlog for six months.

Well, yes, but visualize that we shipped $10 million more and yes, there's been some decrease in the backlog and only because some of the major satellite programs are just moved slightly to the right and this is something that I'm sure you've read in the paper, some of the major specialty government programs, they have moved out a couple months and we are expecting some major input on that respect.

Has your optimism for the new fiscal year at all changed?

Not at all. It's going to take a lot of work, but that's what you guys paying us for.

Yes. Are you out of the contracts of programs that you were having difficulty with before?

We are shipped to all of that -- we have shipped, the two most difficult programs are all complete and out on the door and there's a few more programs that had no more technical difficulties. It's just a matter of getting the throughput in a short period of time. As you can see by reflecting in this quarter, a significant reduction in the research and development.

Yes, but I mean when is this low margin stuff going to be finished?

Well, hopefully this quarter.

Okay. All right. And again, you said that you were expecting the backlog to build with new contracts also in this quarter?

That's in the next -- what the government tells us and our contract says it's going to happen in the next three to five months on there. So if it happens within the three months, it's going to be in this quarter and we'll keep you guys advised.

Okay. And your prior comments about the margins on the new business still holds, also, I mean?

What new business? Oh, the margins, yes. We're looking forward to increased margins, no question about that.

That I know, but I mean the magnitude of the -- of what your objectives were and targets are still intact?

Absolutely. We increased revenues. We have a fixed burden to carry on this. The margins will automatically go up.

You comment about the wireless end of the business. Can you just give me some additional color on that.

Yes. What we hear from our major customers is that business is lousy. There's no decisions are being made by the Chinese to implement it and then new roll-out of base stations are lagging far behind. There are some bright lights on the horizon, but we don't know how to characterize like, for example, we prototype the WiMAX demonstrations in the three cities and, of course, if you listen to them, they're going to buy a zillion units but we are taking it with a grain of salt until we see it.

And which three cities are those?

Chicago is one, one in -- someplace in North Carolina is another and someplace in the Midwest. I believe it's -- I don't remember the exact city and the trials are now underway. As a matter of fact, I'm going out on Monday to get a briefing on this because we don't really have a clear picture.

And could you elaborate a little on the Chinese situation in question?

The Chinese have come up with a simpler solution. They are going to have one-third of the cell phones that the population has, they'll turn them off each day during their Olympic season since they cannot build out the infrastructure.

And what does that hold for subsequent to the Olympics?

Well, eventually they're going to have to build out. There's no question about it on this, that's a population that has exceeded the number of cell phones. They are now the largest user of cell phones in the world and the more cell phones you have, the more stations you need. So the future over there, it will happen. When it's going to happen only the Chinese know.

Okay. Thanks very much and thank you again for the question of the dividend.

Thank you.

And our next question will come from Larry Litton with Second Line Capital Management.

Who?

Larry Litton.

Mr. Litton?

Hello?

Hi, Larry.

Hi. Alan, a question for you. What's the total long term and short term debt at the end of the quarter?

Well, we entered into a couple of capital leases for some test equipment. So there's about I think around $260,000 is in the current portion and we have about 900,000 and some in long term. So it's about 1.2 million of capital equipment that we acquired.

Right, but what will the queue show in terms of total debt?

Oh, the balance is about 5.7 million I think is in current. So it's another 5.5 million still hanging on the credit line that we've drawn down.

Okay. 5.7 in current and nothing in long term?

No. There's 900,000 and some $60,000 in long term debt which is a capital lease obligation.

Okay, fine. And what credit lines -- what is the size of the credit lines and is there any indenture issues there?

The credit line I believe is the draw could go up to 11 million.

Okay. And is there any -- are you active in terms of expanding that or is that?

No.

Okay. If you look out over basically over the next four quarters, we'll be generating cash, we'll be using cash? What type of cash generation or use would you expect?

We'd expect we'd generate cash. As indicated in the call earlier, we have some major milestone billings that should take place in this quarter and would generate some very positive cash flow for us. We were impacted quite dramatically by the first quarter's results which put us quite a bit behind in this fiscal year.

All right. And maybe two questions for Martin.

Sure.

Next three to five months you're hoping for some big bookings if things get released. What's the magnitude of those bookings if you got all of it?

We'll choke.. We're addressing a market that's someplace between 80 million and 100 million. How much we capture of this is statistically we've been capturing 50% plus. So it would be a very significant injection in our backlog.

Okay. And obviously the wireless business is terrible and I guess that's part of what you call infrastructure, but just remind us in this quarter how big was the infrastructure, telecom infrastructure revenues roughly?

Just a moment. Alan is going to look it up.

Larry, we don't really break it down with the specifics, but we did indicate that we were on par for the nine months with what we had recognized in the prior year. Last year we did I think about what, 35 to 40% revenues I think was in telecom.

I guess what I'm trying to get, if the about business falls off the table, how difficult a drag is that? We're not talking about 35% of the revenues going away?

Oh, no, no.

They're not disappearing.

They're not disappearing. They're just going down, plus the fact that our growth in the satellite is more than making up for the shortfall in that area.

Okay.

So it's very fortunate that we address multiple markets so if one gets slowed down, we have the opportunities in the other two major markets.

Okay. Thank you.

You're welcome.

And our next question is from [David Starky] with Smith Barney.

Hi, guys, just a couple questions. Most of them have been answered here by the last caller.

Hi, David.

Hi, how you doing?

Good.

Good. I was wanting to check on the accounts receivable information. You expect a good chunk of payments to come in here and perhaps be paying down that line of credit over the next quarter?

Yes. I definitely expect some sizable payments to be coming in as I indicated. Some of them have to be billed out because we have 8.7 billion that hasn't yet even been billed to the customer at least as of January. We have subsequently billed some of that and then we should collect that within a 30 to 45 days after billing.

Okay, great. And this whole question about the dividend and all that, I don't see -- I mean the dividend's fairly insignificant anyway relative to the stock and everything, but could you try to get on a I would hope that, at the same time you announce that you did announce a stock buyback or something which should be sort of a reason other than the credit market, so you're not really in a position to be hurt from the credit markets at all because you got cash in the bank and you're not really borrowing in that sense. So it would be more or less a reason to me to be very adamant about buying the stock especially below book value where it is right now. So hopefully you guys will be able to announce something in that respect pretty soon.

I understand, David, what you're saying, but I'll tell you our motivation is more motivated by the opportunity for growth.

Right.

Than buying back the stock. We will buy back stock in a small amount, but we have great opportunities for growth and partnering and acquisitions and that's the areas where we're looking for. The margin goal you all gave us is increase the revenues because you know that eventually we can significantly increase the bottom line and that's where everybody got the margin goal at.

Right. Right now your R&D expenses, are they going to stay on a downward trend now for a while so with increased revenues--?

Yes. They will. They will stay on the downwards for a couple of reasons. This is Martin Bloch again. One of the reasons is that we have solved the majority of our technical programs and we are budgeting the investment in trying to get the lower G sensitivity more affordable and producible in larger quantity, but to balance -- but that's more compared to the investment we made in the satellite which has paid off very well and second item for reducing the inventory is that we are -- we've been very fortunate to get a couple of programs from the government that are really paying a lot of the IR&D that we wanted to do. So that both of them will keep the IR&D in the future down.

Okay. And the question about your subsidiaries that are overseas at Zyfer and that. Are you going to stay with these things? They seem to be kind of plodding along for you.

Well, let's take a look at them one at a time.

Okay.

Zyfer is not overseas. They are in Anaheim, California, and we acquired them for the technology and the insertion of their technology that we hope to put in other systems on this. So as long as they don't lose money on this, that's not a big deal.

Right.

When it comes to Gillam, the main and only reason we acquired them is for the technology they have for the wireline and that is a great potential for growth for the corporation on this. I want to remind you sooner or later, there is 25,000 shelfs to be replaced and at this moment there's only two competitors that's addressing this market in the United States and now that we are qualified we hope to get a significant chunk of it and again, if they can provide the technology and not lose money, they have more than fulfilled the mission.

Okay. Great. Do you feel that the book value kind of understates the value of your technology?

Definitely.

Yes. And, given the sense of where we are and the potential for the improvement in the satellite and the government business now, have you been approached by anybody looking at your Company?

I don't know if we're at liberty to discuss it at this time.

Okay. Well, that's a no comment, I guess.

No comment is appropriate.

Okay. Well, I'll read into that whatever I want.

That's the whole idea.

Okay. Well, thank you, guys. Look forward to the next few quarters here. Hopefully we'll see more improvement here. Thanks.

Okay.

(OPERATOR INSTRUCTIONS) And we'll take our next question from Hardin Bethea with Idea Group.

Hello, Hardin.

Hey, Alan, how are you. Unfortunately I was on and got cut off, so I missed your discussion of the dividend policy and I've gathered some of what you've said and I've obviously read the release, but I'm clearly disappointed by the decision to suspend the dividend. I think it sends exactly the wrong signal without anything to -- in its stead to enhance shareholder value at the exact same time or with the same use of proceeds or cash that you would otherwise have used. So I agree completely with the prior callers urging to announce some buyback authorization and not just announce but to activate and I think the marching orders as you described them, Martin, are not to grow revenue without growth and profitability. Growth in revenue doesn't really help the value of your Company unless it generates cash flow and profitability.

Hardin?

Yes.

I grossly disagree with you on this. You have to realize the structure of Frequency Electronics. In order to do our business--.

I know the structure quite well.

Okay. We have a certain base of costs independent of revenue. If we do $30 million or we do $100 million, our basic infrastructure is about the same. So the first thing that we have to do is need an attempt to make research and development investment and capital investment is to grow the revenue on this and the bottom line will have to improve. There's no if, buts and maybes. We're not just doing it for growth of revenue, but once we grow the revenue the bottom line will significantly improve and I'd like to call your attention that you should read the language in the press release. We're not suspending dividends because we don't have anything better to do with the money. We are looking for significant opportunities in expanding Frequency's business and looking for partnership and acquisitions which we feel is a great opportunity right now talking to us and like I indicated, you say you're disappointed. I want to emphasize again I voted with the Board to do it and I'm one of the few people that is most affected by it since I'm the largest single stockholder.

I would say that there are absolutely ways to improve profitability without revenue growth that do not damage the Company's capability to grow, nor generate intellectual capital and property that can ultimately translate into revenue growth and new business opportunities and just looking at the size of Frequency Electronics, a run rate of SG&A at 12.5 million or $13 million a year seems quite high. That's not including research and development. So the combination of let's call it $5 million a quarter of R&D and SG&A--.

$5 million a quarter, where do you get that?

In the third -- well, let's look back at October and, in fact, this quarter was 4.6 million for R&D and SG&A.

Yes.

I mean that's $20 million a year. That's real money to shareholders that they need to have better visibility into your use of those corporate revenues. Clearly I think there's a disconnect. Stock's trading below book value. You suspended your dividends. You haven't been clear about what it is you're going to use that cash for. You're not generating cash. You now have a new credit line. The business isn't developing as you've said it would and that's the only consistency that I see.

Okay. And I presume that having a 23% growth in revenue is nothing, right?

You're making $800,000 in operating profit on $17 million in revenue. The business is supposed to be generating 40% gross margins on this kind of revenue run rate, not 30.

And our goal is to achieve 50.

Right. So again you've talked about these initiatives for as long as I've been a shareholder which I think is around six years and I still haven't seen it come to fruition and some of your large shareholders are going to start to get frustrated especially some of which require you to own, to have a dividend which you just omitted. So there's some disconnects between the way you're managing the Company and the value that the public markets are going to apply to it if you can't deliver on people's expectations.

All right. I hear you. If you have any specific recommendations, I would welcome. I've always respected your opinions, but we are finally making some significant breakthroughs on this on increasing our revenue and now the focus is to continue increasing revenue and to increase our margins. So it's not falling on deaf ears and we are evaluating very carefully. I just want to tell you the investment we made in establishing the manufacturing line for high rail satellite hardware is paying off in big times. Yes, it was expensive to make the investment, but our bookings in that area is very, very positive. So I feel that we are on the right track and we have to keep our eyes focused on both increasing revenue and at the same time to see what we can do to increase our margins to get to the 50% goal that we have. So we're not forgetting it.

I mean again I just can't stress enough delivering on expectations and generating profitable revenue growth, significantly profitable revenue growth. That's what will move your stock up, not down and that's what will allow you to pay a dividend, not omit one. That's what it will allow you to pursue strategic and accretive acquisitions is strength in your financial profile and your share price.

That is good advice and we'll do the best to execute it.

Martin, have you given any consideration to changing your compensation structure as a method of reducing overhead burden?

You mean reducing salaries?

In particular I think your bonus is pegged at about 8.5% of corporate profit before tax. About $20 million if I remember right. You receive a percentage of operating profit of the Company as compensation.

Yes. But it's less than that. Less than that rate.

Hardin, I received zero last year.

Again, I mean when you say there's a fixed burden to carry, it's only as fixed as you let it be.

Well, actually this is really -- I'll look at it, but that's really small potatoes compared to the burden that we have. Our burden is, you say G&A. It's not just G&A. It's SG&A. So the more you sell, the more expenses you have in selling and the more commissions you pay and then there is the space and the quality control system and the infrastructure that you build for building our sophisticated hardware. That is where the bulk of the money is going into and when we compared our renumeration to our peers we were in the low 50 percentile and we do that study periodically. We hired an outside consultant and they compared it and reported to us and to the Board because we want to stay competitive. So if you are attacking me personally, I will think about it.

No, I'm not attacking anyone. I'm just I'm talking about opportunities for profit improvement that don't require revenue growth which is really the modus operandi of a public company is to generate profit for all shareholders.

We'll look at it, Hardin.

Yes. I've got some questions, but I want to allow others a chance.

Okay.

Let me get back in the queue.

That's why we made our presentation short so we can turn over the whole spiel to you guys and if we don't get to all the answers, feel free to call Alan direct or me.

Thanks.

And our next question is from Robert Lambert.

I can't hear you.

Our next question is from Robert Lambert.

Hi, Martin and Alan.

Hi, Bob.

Just a comment from the last caller. I mean I think he's been around Frequency a long time, but if I have it right, didn't we really make a transformation over the last 18 months into a whole new development of satellite business which, of course, costs a lot of money to do that?

You're absolutely right on this. We were capturing approximately $0.5 million per payload and we're now going after in this step from 7 million to $8 million per satellite and are putting development in process to capture larger portions of the payroll and that's where a lot of -- this is where significant growth and profitability lies. You got it right on the money.

Okay. And the other thing which seems clear to me and I know you have no control over it, but in the wireless area WiMAX it seems like India is going to be a lot more -- I mean a lot more activity than maybe China and I see a lot of growth there. You will see it, of course, through your suppliers, but I mean, because you deal with Alcatel and I think they're in India or maybe Motorola or maybe both.

They're both in India and they're both looking at the market which they expressed to us is gigantic but we have heard so many stories from them, Hardin, more than frequency is selling and we're just waiting to see what materializes. There's no question that there's opportunity there, but I want to emphasize again . FEI's large seller opportunity lies in satellite.

We should have, at least maybe over the next three, four quarters maybe some significant progress and that's what I'll be looking for.

We're working very hard to get it achieved.

Thank you.

And we have a follow-up question with Larry Litton with Second Line Capital Management.

Martin, maybe somewhat of an open end question.

Speak up, please.

Somewhat of an open ended question that maybe gives you an opportunity to speak about the longer term future. A prior question talked about you feeling that the stock undervalues the technology of infrastructure obviously trading at a discount to book value. Can you expand on why you think the stock is undervaluing the potential or undervaluing the assets?

Well, I'm a good technologist and I can see the future of products and development, but the mystery of the stock market I've never -- I don't know. I have no idea on how a stock is valued on this. I hear Hardin say on this and it's our job to generate value by increasing revenue and increase our margins.

Talk about the value of our technology.

And why our technology is not being valued, we are a hidden secret.

But in terms of how much it would cost someone to reproduce that technology or whether there are strategic people out there who would love to have it, those type of issues.

Oh, those are definitely things that I think we can do something about. And something that I can share with you is that we are exploring this to get our technology and added value that we are out to some of our bigger customers. You hit it right on the money. Any other questions?

And we do have a follow-up question from Robert Smith with the Center for Performance Investing.

Yes. One of the callers posed a question to Alan about where the cash and cash equivalents are invested and Alan said that you're not in subprime. Do you have any exposure to what's been having with derivatives?

We're in, mostly in government agencies, so there's no derivatives out there.

Okay. And again a previous caller did suggest that there are institutions who cannot hold your stock or would not buy your stock without a dividend and that is true. I'm not saying that they would be banging at the door to do this, but you are eliminating a certain percentage of institutional investors who would look at you.

We understand that and remember, we did pay out $18 million worth in dividends over the past.

Well, I'm looking for another 50 million.

Me, too. Remember I'm the largest single recipient.

You have to pay a dividend to get there and I understand what you're saying, Martin, but total return on an investment is an important characteristic of the market and actually many growth companies are now considering instituting dividends as opposed to companies that are paying dividends eliminating them and I again strongly suggest that you revisit this and I'm hopeful that you will have an open mind and reflect upon it.

Yes. Bob, this is Alan Miller. We're looking to look at what can be the rational approach for a small hi-tech Company. It's not like we're cutting off all discussion on this.

Yes, but, Alan, it's so differentiated you that you did pay a dividend, that someone who wanted to buy this stock said look, I'm getting 2.5% on my money while I'm waiting. I mean it is an important characteristic. When you look back at what returns have been to investors over long stretches of time the dividend is an important aspect of that.

Yes, we understand.

We understand and we'll take it in very careful consideration.

Thanks a lot. I appreciate it.

And we do have a follow-up question from Hardin Bethea with Idea Group.

Hey, Alan, was the Company cash flow positive in the quarter?

No. Not for the quarter.

Well, I think through the six months if I remember correctly because I don't see the cash flow statement for the quarter, operations used $2.6 million for six months.

Correct.

What's the usage through nine months?

Usage through nine months is 4 million. As I indicated, we had collected about $1.5 million in early February that was due by January 31, but the customer didn't pay us on time. So had that come in we would have been probably cash flow neutral for the quarter.

Okay. The other question is is there any restriction in your current line of credit agreement that would prohibit the Company from paying a dividend or buying back stock?

No, no.

Are there any other reasons why, I mean really that I can kind of get my arms around that are tangible for why the Company decided today instead of 12 months ago or six months ago to suspend the dividend?

Well, we looked at other growth opportunities, how can we obtain other opportunities out there and one of the things we've explored even a year ago was perhaps doing a secondary offering or doing some other private placements or things of that nature and, all these things are pretty much iffy in this current economic environment. So that's one of the things we thought we'd be more prudent to simply hang onto the cash for right now until we see how things shake out in this current economic environment.

Right. So I mean can you describe to me then how the Company internally is managing its cash from operations to generate, you know, inflows instead of outflows?

Well, I think one of the major keys of this whole thing is getting the billings done, meeting the milestones in our long term contracts are. As I indicated, our receivables have grown to $20 million and $8.5 million of that is in unbilled. So we have to get our arms around some of these milestone programs, progress billings and make sure we can get them out more timely than we have in the past. So that's one of the very first steps we had to take to make sure we can improve the cash flow situation here.

This is Martin, Hardin. The other things that we're doing from an operational point of view is really trying to improve the cost of product manufacture and this is key on this. There's room for significant improvement on the space products with automated test equipment that we've invested and built and with better training and a better understanding of the technology to improve the manufacturing costs and that goes down straight to the bottom line and we have a major effort in the Company to do that.

Is it I guess that process has been underway for some time now and I think the results from that, those investments, have, I guess would have been thought to have begun generating results before now?

Well, we said in the beginning Hardin, I want to call to you some very statistics. In 2006 Frequency Electronics shipped seven Frequency generators out the door. In 2007 we had the challenge of bringing it to over 100. That's more than almost 15 times fold and that changes the nature of manufacturing and how you do it and that required a significant investment in training of personnel, in hiring personnel. Which is an expensive process. They don't grow on trees. It all takes, even if you get good people, it takes a certain training before they become productive and investment in capital equipment and automatic test equipment in order to be able to do it. We now are at a point where we can produce fairly large quantity of this Frequency generators to take advantage of the business that's growing very rapidly in the satellite industry. So we have made enormous progress on this and I really want to congratulate the team at Frequency again for getting it accomplished. To increase manufacturing capacity of a high technology complex product by a factor of 15 in one year is an enormous challenge. Now we have to build on it.

Is that fiscal '06 or calendar '06?

Fiscal '06 we shipped seven frequency generators. Fiscal '07 I think we shipped 92. Don't hold me to the exact numbers. In fiscal '08 I will ship someplace around 120.

And based on the changes in place or underway, what would -- I mean what would your run rate of capacity be for the forward year? What would it be today on a quarterly run rate?

Well, a quarterly is hard to predict, but our goal for an annual is to do over 200 -- to have the capacity of over 200.

But that will take time, not just happen in fiscal '09? It will probably--?

Well, I am fairly confident that we'll be at that rate in fiscal 2009 for sure, if not sooner. We really made a lot of progress in that area of putting it through and this is both the business opportunities and the demand of our customers of what they need on their product. So we are working very, very hard to get to that capacity and we have all the capital equipment in place. We have the automatic test sets in place and paid for. We have invested a lot in training of the people. Our population increased, it went up by 33% from 2006 and that is a big investment when you hire new people. Hardin, it takes time before they start producing on this and it isn't like you're putting a salesperson in a common product. Each individual has to become an expert in that technology in order to become productive and we've made a lot every progress in that area and now we got to build on it.

Is the Company, I guess the other question would be is there any other external factor that, either strategic discussions that are underway that might have influenced the Board's decision to suspend the dividend?

If there were, we couldn't tell you.

If there were, you couldn't tell us?

If there were, we couldn't tell you. So, that type of situation.

Has the Board--?

I won't answer for us again. Read our press release, Hardin, and we tried to be as truthful as we see it on this. We have opportunities at this moment for growth and partnering and acquisitions on this and we feel that this is the prudent thing to do at this time. We are looking at buying back some stock and we will do so in small quantities from time to time, but primarily is to look at our growth opportunities that's in front of us.

I guess the one other question regarding uses of cash or sources of cash, there are some assets on the balance sheet that, I guess when it comes to cash, somebody asked how that is cash marketable securities are invested. Would you say they're -- I mean do you have an immediate liquidity or is there -- are there some lockout periods on your marketables securities?

No. The only question there really is market value of some of these securities, in the current environment. They may be under par at this point in time when we mark-to-market. So it's reflecting the balance sheet. So it may be imprudent for us to liquidate them at this point and take a loss if we don't have to.

How much of -- again because in the 10-Q or K you'll show both cash and equivalents and marketable securities but they're lumped together in the press release.

Yes.

Can you break those out for me?

It's -- let's see. Cash is 6.7 million and the marketable securities is 9.

And did you sell any marketable securities in the--?

We had a number of redemptions in the quarter. They were callable bonds, so they were redeemed.

They were redeemed. Okay. And then there's a cash surrender value of life insurance?

Yes.

At least on October 31, it was $7 million?

Right.

What's the value of that currently in other assets?

It's about 7.5 million at this point in time including some cash proceeds on some life insurance that unfortunately came due as people -- a couple people died.

What's the marketability of that asset?

We haven't really explored it. Some people have raised that question before, but that asset is there, sort of an offset to the long term deferred compensation liability on the other side of the balance sheet. So that's why we really don't intend to do anything with it at this point.

All right. Thanks.

Okay.

And, Mr. Bloch, and Mr. Miller, there are no further questions.

All right.

Well, we want to thank everybody for a lively discussion, gave us a lot of food for thought which we take very seriously. I want to express General Franklin's parting remark and wishing all our armed services that are in harm's way the best type of luck and good wishes and again my great thanks to the employees that are working very hard to make progress and to all of you loyal stockholders that are interested in the Company and we will do our best to not disappoint you. We wish you all a very good gracious good-bye.

This concludes today's conference call. We thank you for your participation. Have a wonderful day.