Franklin Covey Co (FC) 2003 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Franklin Covey Second Quarter Earnings Call. Now, over to your conference host, Richard Putnam.

Good morning shareholders and interested parties. I'd like to welcome you to the Franklin Covey Second Quarter Conference Call and Web cast. My name is Richard Putnam, I'm Director of Investor Relations for Franklin Covey. You're currently in a listen-only mode to prevent background noise; we will give you instructions for asking questions at the end of the Mr. Whitman's presentation. You will need to be dialed into the conference in order to ask questions.

I'd like to introduce those who are participating, in room with us this morning and also via telephone. Mr. Bob Whitman is the Chairman and CEO, Bill Bennett is on the phone with us, he's the General Manager of our Organizational Strategic Business Unit, Mark Korros, our General Manager and the President of our Consumer Strategic Business Unit, Scott Nielsen Senior Vice President of Finance and Steve Young our Chief Financial Officer.

Before I turn the time over to Mr. Whitman, and in light of regulation [inaudible], this presentation is being web cast and can be accessed at the company's website, www.franklincovey.com. We will note, that this presentation does contain forward-looking statements as defined in securities laws that are based upon certain assumptions and are subject to certain risks and uncertainties that could cause results to vary from management's current expectations.

We would encourage you to become familiar with these risks and uncertainties which are outlined in our form 10-K, filed with the SEC for the year-ended August 31st 2002, and subsequent 10-Q filings. Copies of all recent fillings with the SEC and additional information about Franklin Covey, are available on our website www.franklincovey.com. Some of the numbers that we'll be discussing this morning have not being audited by KPMG, the company's external auditors, and we assume no obligations to update the matters discussed in this call and it is illegal to record this call without the company's permission.

There are a number of slides that we will be reviewing this morning and discussing during the call. They can be accessed at www.franklincovey.com/call. I'd now like to turn the time over to Mr. Whitman, Chief Executive Officer of Franklin Covey.

Good morning. We appreciate everyone joining us today -- just to go over the overview slide. There are four points I think we'll be discussing today, as well as the Second Quarter and as we look forward for the rest of the year. First, that there was a substantial financial turnaround, that continued for our second quarter for the second consecutive time. That reflected a $31.2m improvement in operating results for the second quarter and $54.2m improvement in operating results for the first half.

Second, we expect that turnaround to continue strong in coming quarters, we expect costs to continue to decline and revenues to achieve substantial stabilization in the third and fourth quarters and we'll speak to that more, later.

And third, our liquidity position has remained strong. As you know, the company is essentially debt-free, we had $44.8m in cash at the end of the quarter, compared with $37.5m of cash at the end of the first quarter, and we expect to be able to maintain a strong liquidity through the balance of this year and beyond.

Fourth, the new strategic direction in offerings, are beginning to gain traction. We --- in the fall, we announced that - there are new offerings and value propositions centered around line-leaders and helping organizations to get everyone, from top to bottom in the organization, focused on-passionately focused on a few dominant priorities of the organization. We've always had a heritage of helping individuals to become more effective and continue to have, of course, new offerings in that area, but also to connect that the organizations own priorities.

We've been out on the road a lot. We've met with more that 100 companies and now have more than 90 significant companies in various stages of the sales process, around our new solutions. Because of the link in the sales process, very few of those deals have began to show up in the revenue column yet, but expect they will in coming quarters. We're getting a very positive reaction to the value propositions and offerings and the sales of our new offerings are ahead of our plan; both on the organizational side and on the consumer side. The organizational side in our new, both training offerings and facilitated Gold Wyman offerings, the consumer side, including our new tablet planner offering is well ahead of our expectations as -- are results for our Plan Plus software.

In last July's web cast, we had anticipated that costs for the year would come in at about $185m. It's been much less than that and is going lower. We expected revenues, we expected a range in the 300 plus range and still feel that, despite a tough economy and a difficult Christmas season, that that still is very realistic and we hadn't even started our new offerings at that point and they are gaining traction. So, on an overall basis, we're encouraged by the results for this quarter and expect that the coming quarters, into which we have some good transparency, will continue to show these trends. We'll now turn the time over to Steve Young, to go over the second quarter results, specifically. Thank you.

Good morning everyone. I'm pleased to be here this morning and pleased to be able to take a few minutes to talk about our second quarter results. I hope that each of you had an opportunity to look at our earnings release. What I plan to do, is to mention some of the key points, related to our second quarter earnings, as opposed to review through every number. So, as we look at the second quarter and the six months ended with our second quarter, in my mind, by far the most important thing to pick up is that our operating loss for the second quarter of this year, while still a loss is $31.2m better than last year and our operating loss for the first half of this year, is $54.2m better than last year.

We are very pleased with those results, as compared to last year. We are pleased with this trend that's represented by these numbers and believe that this trend will continue to the second half of this year and that our results for the second half of this year, will also be better than the results for the second half of last year.

As Bob mentioned, we have focused a significant amount of energy on cost and cost controls. Our selling, general and administrative expenses for the second quarter, are $12.7m less than last year. For the first six months, those same costs are $21.1m less than last year. Again, we are pleased with this result. We are pleased with the trend that these numbers represent, and we also expect that our SG&A costs for the second half of this year, will continue to be less than the second half - - last year.

Our gross margin for the second quarter is slightly up, for the first quarter was slightly down due to discounts and other things. It's slightly up now and so gross margins, as a percentage, are holding steady and holding good. Our depreciation expense continues to decrease, reflecting a more focused control - - over the past the past few years on capital spending. In this quarter, we did record $2.4m of accelerated deprecation for retail stores that are expected and could be closed in the next few months to - - to a year. We also expect that deprecation expense will continue to decrease in coming quarters and years.

Now, revenue for this quarter, primarily due to less than expected sales in the consumer strategic business unit, were $13.5m, or 13% less than last year. So, if we - - if we apply our gross margin to those decreased sales, we end up with $6.7m less gross margin in the quarter, than what we had last year. As we go down the operation statement, we began with a $6.7m decrease from last year, which is more than offset by the changes that we have talked about in SG&A expense - - and in our depreciation expense and also you will notice that our recorded - - impairments and loan loss reserves, are significantly less than they were last year.

So, that is how we get to the $31.2m improvement in operating result, even after - - a decrease in revenue. - - Bob will take about this in a little bit, but we still expect, by the end of the year, to have recognized substantial stabilization in our revenues, and as I mentioned before, we expect our trends to continue, with respect to margins, costs, depreciation and non-cash expenditures. So, in my mind, those are the points that are the most important points related to our second quarter and for our six months just ended.

When we look at our six months, particularly if we are looking at the information contained in the earnings release, we can see that there were some unusual one-time items last year. We had the gain on sale of Premier. In our first quarter, we had a large, $61m cumulative effect of a change in accounting principle. That gain on sale of Premier in the second quarter, was $60.8m, - - so, we look at primarily, at the loss from continuing operations line, which shows the $14.8m loss for the first six months of this year, compared to the $72.2m operating loss for the same period and are pleased by that significant improvement. Thank you.

Thank you Stephen. In terms of the three key trends identified in -- as the opening, the significant turnaround is being realized as we said, we believe will continue. Now let me talk to the second point. Revenue is expected to achieve substantial stabilization and in (inaudible) time, to first to Will Bennett, President of our Organization of Business Unit, to review trends in his business unit. Bill? Bill is joining us by phone, he's traveling this week and perhaps we're having a difficulty --

This is the operator; we're contacting Mr. Bennett as we speak, one moment.

If not we could quickly go through his trends. Perhaps I'll just begin on those and if Bill joins us he can add a color commentary.

Bob, I'm on.

Oh good, Bill. Please go ahead.

Are we ready for my first slide?

Sure.

Yes, ok. This is Bill Bennett everybody, sorry for the delay. Speaking to the operating trends and organization of business unit, first with regards to revenue. As you know, one of the things that we track is booking pace of billable days and that is --- has been higher than expected. At this point year to date we are about 250 days ahead of where we anticipated being in our plan, which means that's --- at the average rate of $4,400 a day, it's a little over a million dollars of buffer that is over and above plan, which we're obviously pleased with, and the projections suggest, especially what we see on the plans for the rest of the year.

Our facilitator revenue, which is the key component of our business maybe 40% or so of our revenue, is performing ahead of plan as well. And this is particularly good news because as we switched to new solutions, one of the critical success factors was to be sure we are able to turn our facilitator base over to new product line effectively. So the fact that that's ahead of plan, is also encouraging to us.

Our international licensee revenue is growing over last year in a healthy pace. We do have a couple of challenges in revenue. The downside of focus is that we had a wide variety of products last year, we built in to our plan a projection of how fast the ones that we were not choosing to focus on would tail down. Our focus on the important products has been so good that those tail downed a little faster than we expected, so we've been having to offset the declining revenue in our non core products with the core products.

In addition, the speaker's revenue is behind goal. We make a small portion of our revenue from the speakers' bureau, from in-house speakers delivering paid for conferences and that particular business, not only in our company it's been throughout that industry (inaudible) quite a bit, but we have experienced that as well.

From a gross margin standpoint, exclusive of two events, we have been operating ahead of gross margins goals. Those two events being, some accelerated amortization on selected products, which we have not appropriately anticipated and there was a very particular licensee conversion. We have a direct office in Australia and we had planned in the second quarter that would be converting to a licensee and anticipated the revenues from the buy out of that business. That did not occur as plan and caused a gross margin hit for us. So exclusive of the Australia and the accelerated amortization (indiscernible) we are performing ahead of goal. We are performing significantly better than last year in gross margin. 64.7% as oppose to 62%. And our obsolescence, other than what's already been addressed is on plan.

From an SG&A standpoint we are almost 5% ahead of our plan, an improvement overall plan and we are running about 14% less than 2002. We are projecting that we will stay on plan even including whatever personal actions we might anticipate taking between now and year-end, that --- we will be able to stay above the SG&A ---- stay improved against the SG&A plan.

From a strategic initiative standpoint, as Bob already mentioned, we have 90 different companies that we have --- are actively engaged in of all the calls that we've made. These are household names and this is selling the new core product line. Internally we have made a tremendous shift of focus --- a great deal of our effort on the top key accounts as opposed to generalized accounts that has manifested itself throughout our operations internally. Every Monday afternoon we go through all of our key accounts with the sales managers throughout the US. The assignment of our consultants has become consistent with the key accounts, where we're putting our best and brightest on these key accounts to help develop them for us, as well as other operating procedures inside the company and also to help us really focus on addressing the key accounts.

Finally, over the last several months we've developed --- been developing a partnership with Microsoft and that has many different inflection points at the moment. In fact, there is about 25 independent projects going with Microsoft and Franklin Covey. We are anticipating that that's going to yield us tremendous strength going forward and has already contributed significant revenue to OSPU and will so for the reminder of this year. And - well there's a lot of directions that partnership could take, but we anticipate that it's going very well and we'll be able to strengthen that and gain more from it as time goes by.

The next slide is a graph showing our sixty (inaudible) rolling booking pace(ph). As you can see, for the most part; we have stayed above, previous year plan with a couple of minor dips, but per my comment earlier the inventory is still way ahead of plan, which is putting us in a smart position.

[Inaudible] there's the next slide is a detail on facilitator revenues for year-over-year percentage change. As you can see we were falling rapidly compared to previous year, but then closing the gap, which you are going to see throughout fiscal '02. Net cap close up by Q4 to (inaudible) of 16% beyond the previous year. First quarter of this year we pulled ahead and started showing improvements of our previous year. During second quarter almost 30% ahead of plan on the facilitator revenue.

My final slide is just a pie chart, showing the change in the international licensees revenue for the first half last year compared to first half this year. We continue with conversions of new --- or additions of new licensees program as well as improvements to the plan of the licensees over previous years.

Well you might just speak to the ---- some of the strength in some of the licensees in Europe.

Yes we have recently added many licensees throughout Continental Europe. Historically, in years past the licensees have been growing, but have been responsible for a high volume of very small accounts. As we started to add new licensees for the last two to twelve months, we tried to stress and help try to build with them business plans, we'd encourage them and reward them for going after a large account.

We recently just received from our new licensees in Italy over a million dollars worth of business spread across only three companies, which is a tremendous, tremendous improvement in average revenue per clients firms. We have a better pipeline than we've ever had before in Europe. And so --- and since David Covey has taken complete ownership this, the mix of licensees and the mix of their business has improved tremendously.

I think just some of worth mentioning is that in addition to maintaining our historical access point with HR directors, which of course is difficult in this environment, most of these 90 million caps about which we are speaking are line leader led initiatives for we are appealing to the line leader around helping them to achieve an increase in key metrics for their business, whether it's an increased in sales for their sales force or improving cash flow or improving customer service or something that is very line oriented.

There's a consequence where --- while many of these HR directors in the same companies might say to us that they have no budget in these difficult times, that training budgets are being cut. Nevertheless, when we are able to talk to the line leaders and tell them --- and talk to them about the kind of improvements in core operations we can help them to achieve.

We're getting business in these companies even though they have no HR budgets per say and with this our hope would be that our initial engagements with these major accounts work so well that we're able to grow pervasively throughout their companies and that of course is the aim. With that the international capability of delivery becomes important so that we have the same capability to deliver for international associates as we do here domestically. Thank you Bill. Anything else you'd like to add?

Just --- Bob you might have mentioned this while I was cut off the line for a second, but one of the ways we tried to assure that this new key accounts business develops at the right level and appropriately is that primarily Bob, but myself also and Derrick Clements (ph) who is the head of the sales in the U.S, have been making the calls personally on these accounts and we've been bringing along our sales management in the appropriate part of the United Sates and ask them to actually play client partner on the account cause of the level that you're calling on in the account.

We really attributed, I think, great deal of the success to the attention level that these mangers have given the accounts, working with them directly. For involving the sales force, it helped make sure that the work is done in the account, but when we get that kind of a level contact we felt it was appropriate to call on these higher levels and our confidence works very well.

Thanks Bill. I'd make sure to turn over to Mark Korros now. Mark talk about the consumer business units please.

Thanks Bob. As we look at the key operating trends for the consumer business unit we continue to make progress in the overall business unit, narrowing the revenue gap from the prior year. However, we still experience retail traffic being soft. It's not unlike to us as other retailers are experiencing in this current economic and war environment, but we've done a good job partially offsetting some of these traffic decreases with our new product initiatives, which are driving up our average order size and conversion rate. The successes of our new training offerings as well as these new tools are helping us generate these increases.

In our catalog or call center our traffics again reflects some softness, however, this softness is being substantially offset by increases in our E-commerce business. We've also further embarked in terms of the third party or wholesale initiatives with some major emphasis on the office superstore channel. We currently are building product for Staples that will be shipped during our fourth quarter of this year and along with that we developed a sub brand called 365 by Franklin Covey for Target stores, that's performing very, very well. As we've heard from our office superstore partners, Franklin Covey is truly the one global brand in this arena and they have looked forward to as we all move forward in establishing these product relationships for their customers.

On gross margin standpoint, all of our categories except for technology and media have shown gross margin improvement. Technology, however, becoming a larger part of our mix has basically negated any substantial gross margin improvement. The onset of the Tablet PC, the new Tungsten Palm, IO Pen, have all brought a lot of excitement and new customers into our channels but the gross margin perspective is not what we have enjoyed on paper in the past. Additionally, we've shown improvement in terms of obsolescent. Obsolescent is significantly better than last year and on plan for this year.

SG&A, our retail stores, our retail store division, we have reduced our head count, we have tightened our staffing costs and we are running significantly below last year and slightly below our expectations this year. Additionally, we are working with our service provider, EDS on right sizing our contract with them to adjust for our new business model in terms of the size of our business. As Bob had mentioned, we have some store closures in our plan. The stores that we have closed and are looking to close are stores that are primarily losing money, the benefit in closing these stores is not only recapturing those losses, but the transfer of a significant number of those customers to other channels or other stores. Thus, we see our retail division emerging to a more profitable business unit and enjoying the fact that the migration of customers to our catalogue and E-com channel will keep them in the family.

In terms of strategic initiatives, we combined the E-commerce and catalogues channels to provide one comprehensive sales and marketing unit, the concept being -- let's touch our customers as often and as meaningfully as we possibly can and drive them to the lowest cost distribution channel. Therefore, catalogue and E-com provide us an opportunity to tell our story, tell our new product stories and engage our customer to visit us more frequently.

Bill had mentioned a significant strategic partnership, evolving with Microsoft. This is both on a product and a marketing level. We're currently with the new tablet planner on the Microsoft site and working on plans to expand our software offerings with Microsoft. In addition to that, wholesale product initiatives this year through our third party initiatives will deliver over a million dollars in EBITDA over our original business plans. So as we look at what's happening with traffic, specifically through the malls into our retail stores there is still a major opportunity for us to move into, such as the office super store channel and take shelf space away from competitors and use that as a fair opportunity to drive new customers to both our products and our training and this is part of our overall strategy.

If you look at the next slide on retail stores, it shows a fairly (technical difficulty) consistent performance in our average order size, a lot of this being driven by the new tablet PC and Palm Tungsten. So, though we're seeing fewer people visiting the stores, they are spending more money. In terms of conversion rate, we're very proud of the fact that we have been able to step up the conversion rate, the number of people coming into the store that actually purchase.

And this is because of several new product offerings that are truly creating more passionate users out of our client base. Product introductions like the Cranium Planner and the Bally's Planner. We're very excited, in July, we'll be introducing the New Yorker Cartoon Planner and we believe that making paper more fun, more cool will further help us drive both our revenues as well as the commitment to our methodology.

The final slide on retail addresses units per transaction and again this a reflection from the fact that we believe our products are more highly desired by our client base and the fact is they want more. And the opportunity to customize some of these tools with forms and tabs and other products, so that they better fit into the individual's Corporate needs or lifestyle is what we see part of long term performance.

Great thank you Mark. These - - move on just then to the overall financial trends, just to summarize. Obviously as Steve mentioned, Mark and Steve mentioned - - it is good to focus on cost, as you see more than $66m in actual G&A cost have been eliminated. With an additional - - just less than perhaps $15m in costs that were according to cost of goods sold of top that. And, we expect to continue to reduce this number, so we think in the future period the run rate- -the annualized run rate will decline, and will continue to decline in a specific cost projects underlying that we're making very good progress.

There's also very - - as Steve mentioned, a significant reduction in capital expenditures, with a resulting reduction in depreciation and amortization. We expect, as you see, we've gone in annual capital expenditures from $27m down to approximately $5m for this year - - just over $5m for this year. And depreciation and amortization is starting to follow that number down, we expect the depreciation and amortization number to continue to decline, and relatively significantly over the next year or two. As a consequence, you know, these factors have combined to dramatically reduce the break-even point for EBITDA, cash flow and operating income.

As a result, at statewide revenue levels we expect to continue to see significant improvements in operating results, and we're seeing those and should continue to see those improvements quarter by quarter. As you can see, it should say operating loss, with the operating losses Steve made sure he has been - - there was a significant improvement for the first quarter and second quarter. We expect that for the back half of the year, we will also achieve substantial improvements, a little less in the third quarter, a little bit more in the fourth quarter primarily because last year's fourth quarter was atypically weak.

So the key is, the cost structure is coming down, both in terms of SG&A, depreciation and amortization, and our capital expenditure coming down, the key of course is revenue stabilization. In the consumer business unit, despite lower that than expected consumer sales, the gap still narrowed from approximately 21% for the - - year over year for the second quarter of last year to approximately 15% year over year this year. And we expect to - - based on the trends we're already seeing and what we're forecasting in the last quarter, we expect that to narrow further in the third and fourth quarters.

Organizational business unit, the second quarter came in at $29.3m versus $33.6m last year. In last year we had a $3.1m product sale to an organizational customer, which, because of their low margin we chose not to repeat this year, so without that we have been very close to being flat, for the second quarter, for the six months, 61.7 versus 65.2, most of the difference again can be explained on a year-over-year basis by the non-comfortable product sale last year.

In any event though, for the last half of the year, for the third and fourth quarters we expect to be even to slightly ahead of last year, for the overall second half, with the increase booking (inaudible) are beginning to build particularly for fourth quarter sales. We have to date, the transparencies of those numbers. So, the CSBU GAAP, the consumer business unit GAAP narrowing, organizational business GAAP being eliminated to being slightly positive. We do expect to achieve substantial revenue stabilization. And with our gross margin percentage improving and our cost (inaudible) should continue to grow through the future quarters.

So overall, to summarize, sensational substantial turn-around again for the second consecutive quarter, turn-around expected to continue strong in the coming quarters, little less in the third and a little more in the fourth. Our liquidity position remains strong; we continue to have the ability to generate additional liquidity we believe. Although its - - we have capital tied up in assets that basically have no debt on them, so some of those assets are being considered for sale.

And the use to treat this strategic direction is - - we're getting a good response to the market place, it's early on - - we're having a our initial engagements and most of these organizations, real - - so that's a good thing in and of itself. But for us the real measure will be the extent of which these initial engagements turn into pervasive ongoing engagements with these new organizations, as you may recall these tend to be kind of research and database, as each of the clients goes through this new XQ profile that allows them to identify specifically the execution gaps, as we call them, which exist in their organization.

Our offerings are focused specifically in looking to close those gaps, and we expect that the ongoing measure of these will both provide income as well as opportunities for us to continue involve with these companies. So at this point I would like to just turn the time over for questions, we have - - we have some time to answer questions that you all may have.

If you have a question, key star 1 on your tone-dial phone, if you want to withdraw your question key star 2. Again, star 1 for questions and we'll pause for just a moment.

And our first question comes from Brian Hunsicker (ph) from Hemenson & Hunsicker (ph).

Hi, just a quick question. I missed the first fifteen minutes of the call, but I'm curious, what happens to Franklin Covey stock price in the spring of '05 when the stock hold is due and the stock price is still down where its at today - - or substantially in this same area?

Well I don't know specifically what will happen to the stock price, but maybe - - perhaps you're asking, Brian, what will happen because of the underlying financial.

Yeah, well I mean what happens to the - -yeah, the underlying financial, what’s going to happen there?

I can turn the time to Steve's answer specifically, but approximately $28m of the $33m plus, of receivable relating to the management stock loan program, approximately $28m has been reserved as of now. And the methodology for determining the reserve, if the stock price were to remain low throughout that period of time, we would be fully reserved by the end of the period, so, in terms of any particular impact, we already are showing, included in our quarterly results are the impacts of these reserves of management loan losses which will continue and are reflected in the projection that which we spoke of today.

So, I guess the impacts would be three. Number one from the stand point of the financial statement that will incur quarter by quarter at the end of the period as you discussed, where there would be none, because it would be fully reserved. Obviously verses - compared with getting to collect the $33m to the extent that even (inaudible) fully reserved if we are able if stock prices increase and we are able to collect all of that, obviously that would be a good thing. But, otherwise from a financial standpoint we're making those reserves quarter by quarter pursuing to the formula and we will be fully reserved at prior that time. Does that answer your question?

Yes thank you.

As a reminder key star than one for questions. And the next question comes from Kevin Richardson from Blum Capital, Ltd.

It's more of a question more on the slides that you referred to on the web page. Where specifically were they? I apologize for asking that more technical question.

Sure. I bet we have somebody who is technical (inaudible) to answer your question.

Just go to franklincovey.com. You can locate the slides by clicking on the lower left hand banner that says investor relation call. If you just log on you'll access the slides. We will have this archived on the web site for ---

Probably another 90 days or so.

Probably 90 days so you can refer back to the entire presentation at any time.

Thank you.

Once you have any problem getting we just invite you to call Richard Putnam directly at 801-817-7134. That's his home phone excuse me.

No.

And the next question comes from Jerry Berlin from GL Capital.

Yeah hi. Could you do me a favor? Could you walk me through the terms of the preferred stock?

I can try to do that, I'll give you the overview of it and then the specific details we'd be happy to give you. We have --- those have been included in previous filings. Val Christensen general counsel is not on the phone with us today. He is out of town. He is traveling. I can give you the basic terms. Basic terms are that its 10% --- the preferred stock is non redeemable, non callable, so its permanent capital as a 10% coupon rate. Its convertible into common stock at $14 a share. There is a force conversion if it's traded at some price north of that.

And I can't remember exactly at $20 if the stock trades at over $20 for a period of time there is a force conversion rate. Those are the basic terms. The dividends are payable in cash quarterly. There was a time when it was a lot --- the company was allowed to pick payments on the preferred --- that period expired some time ago. So those are the basic terms. In terms --- they vote on an as converted basically have the right to nominate three directors which they have not taken advantage of they have two currently that they vote on an as converted basis.

Could you ---?

Did I hit the detail you wanted or was there some other question?

I guess I need to follow-up off line to understand the capital structure. I am just guess missing something.

I will be happy to go deeper. The basic capital structure, so this preferred we have very little data. There is about a $1,400,000 mortgage on a building in Canada, which is being held for resale. It's just a mortgage debt. Otherwise we do not have debt of any kind, in terms of notes payable or any kind of bank loans. So this becomes the senior part of the capital structure and it is permanent ---- permanent capital which is convertible into common on the terms that I've described. We'll be happy to go into any detail on that off line if you'd like. You want to give Richard Putnam a call we could --- he could I'm sure, answer any specific questions you may have.

I'll do so. Thank you very much.

thank you.

And the next question is from Nick Richteller (ph) from NR Management.

Good afternoon. I'm just curious, how exactly does it help common shareholders to have all that cash on your balance sheet? And can you figure out some way to, you know, get this noose off the preferred somehow so we can help the common shareholders? Have you thought of a more drastic plan? Because I understand results are improving, yeah, you are still not making any money and the preferred is very, very expensive.

And it just seems like you're keeping whatever liquidity so that you can you know, take the preferred shareholders and the common equity is just, you know becoming worthless. So can you address that? Do you have any sort of draconian measures that you can take at this point to just, you know get any value you can for common shareholders?

Let’s just talk briefly about draconian measures that have been taken to date operationally. And then let’s talk about the financial. And obviously over the last years we've sold and exited essentially every non core business. The proceeds we paid off the debt was also ahead of common shareholders and so that's been one thing.

We've built liquidity up so that even though today under the terms of the preferred we do not have the right to buy common stock and therefore that alternative therefore close. Nevertheless we've pursued a strategy that we build our liquidity to the point where we might be able to get that permission from the preferred shareholders. So when I talked about the liquidity we have now together with the other outfit that might be for sale. Some of those things, you know point towards the direction that you are talking about, where we could gain additional liquidity so that perhaps in discussions with the preferred, who are also significant common shareholders I'll note, there might be some ability to free that up.

Now the third (inaudible) thing in course is the fact that over $70m of costs have been eliminated. We are trying to get ourselves in the position where the perspective on how dilutive (ph) the preferred stock is of course depends on your perspective. From the standpoint of helping us to reduce initial amounts of debt by providing the base capital structure during difficult time, it's been great to have.

To the extent that there is no cash flow, it's taking all, obviously there isn't much left for the common. But the direction of what we talked about earlier, of course the aim of this will be the return to a point where we are generating significant profit - would generate profitability and significant cash flow above that needed to pay dividends to the preferred. And so there are different alternatives that you might think of that offers could be made either to the preferred, but that again uses capital up, which might be used for other purposes.

And so I think the basic idea here is first to focus on operations and getting ourselves to position of profitability, positive cash flow so that we are generating significant cash flow in addition to what's needed to service the preferred. And second to generate enough additional liquidity that the preferred holders could feel comfortable with us utilizing some of those proceeds perhaps for the common shareholders for different things. And that includes both what you say operating and capital. And third, would just be other capital alternatives, which might be considered in the future. Which would, you know, change the relationship between preferred and common by the restructuring it in some way.

Okay, I understand all that but I'm just curious, you know, from where we sit right now, why we aren't accelerating those discussions of restructuring the preferred? Or may be the people that, you know, hold the preferred and you say they own the common as well significant-- may be they just don't care that much about that aspect of it.

But, you know, it's pretty apparent that that equity price, I mean should common holders we're not going to realize any value, unless, you know some kind of a hail Mary plan, you know is pulled off here and the business starts generating a lot of free cash flow. Unless you can accelerate discussions to restructure the preferred, like right now.

And so again may be I should just point out that the balance of the preferred $87.2m our cash balanced about $45m.

Yeah.

And so - and we believe if you look at the assets, we believe we have substantial assets. So for the preferred shareholders today to want to take, you know, a very, very, very significant reduction it doesn't seems like there is a lot of reason for that given that things are improving. They in fact do have a lot of interest in the value of the common shares. Because eventually that's the reason they bought the security initially was for the right to convert them to common shares. And they also bought substantial number of common. So I would say that - I would not assume that discussions aren't on going.

On the other hand, we need to put our elves in the position so that we have the liquidity with which to back up some kind of restriction discussion with something besides words. And so the discussion that we have to finish liquidity and the means by which we generate additional liquidity becomes a relevant one. So that we can put ourselves in the position as quickly as we can to have whatever discussions ought to be had. Now, still from an operating standpoint, I don't perhaps share your view that the current direction, if continued, wouldn't put the common shareholders in the position where they would have value independent of whether or not be preferred is restructured but I understand your point.

Okay you can't pay any dividends or anything to common at this point right?

Without consent of the preferred because obviously the reason for their security.

Can you make acquisitions?

Subject to approval.

Excuse me?

Subject to board approval, which includes the right if we are taking on debt or other things. It depends on the characterization and the terms of the preferred spell that out. But sure, acquisitions could be made on certain terms with out their approval. But if we are going to be taking on substantial obligations or if it was going to dilute obviously it wouldn't be a reason to do for the common either. But there are certain restrictions so that their position isn't undermined. The restrictions of course are a lot less and they were when we hit bank debt. Those restrictions were much more substantial but never the less there are some restrictions under the preferred.

Okay, well it's always easy to look and hindsight. But I guess, you know, in the absence of some very significant improvement I just hope that you will be able to restructure something. Or else there is no hope for the common equity holders at this point.

Point taken and I would just say again, we expect operations to continue to improve dramatically and therefore -

Yeah, but you have a new surround - I mean I understand what you are saying but -- okay well --.

The news comes thankfully they don't have a right of redemption so that one of the nuisances is that we might have that liquidity taken out from underneath us. But I understand your point. We would like to get to the point where we could just maximize the --have all of our capital be applied to something that is directly affecting the common shareholder and all the discussions are on going.

There is a reason why the market cap is, you know, is what it is with cash. And I mean. I think it's pretty clear so -

I'm with you.

Thank you.

Thank you.

And that was our final question.

Alright we thank all of you for being on the call today and we look forward to talking to you again in the coming months. Thanks very much.