Franklin Covey Co (FC) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2005 earnings conference call. My name is Shakira (ph) and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Richard Putnam, Vice President of Investor Relations. Please proceed, sir.

Good morning, shareholders and interested parties. I would like to welcome you to the FranklinCovey fiscal 2005 year-end conference call and webcast. My name is Richard Putnam. I am Vice President of Investor Relations for FranklinCovey.

As the operator told you, you are in a listen-only mode to prevent background noise. We will give you instructions for asking questions at the end of Mr. Whitman's presentation. You will need to dial into the conference call in order to ask questions, and that number is 866-202-0886, with the access code of 79678034.

I would like to introduce those that will be participating and are in the room with us this morning -- Mr. Bob Whitman, who is the CEO and Chairman of the Board; Mr. Bill Bennett, who is the President of our Organizational Solutions Business Unit; Ms. Sarah Merz, who is the President of our Consumer and Small Business Units; Mr. Steve Young, our Chief Financial Officer.

Before I turn the time over to Mr. Young to review the financials and in light of Regulation FD, this presentation is being webcast and can be accessed at the Company's website, franklincovey.com/call.

We would note that this presentation may contain forward-looking statements as defined in securities laws and are based upon certain assumptions and are subject to certain risks and uncertainties that could cause results to vary from management's current expectations. The first slide that you are now showing is the Safe Harbor statement that outlines some of those risks and uncertainties.

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 31, 2005, and any subsequent 8-K filings. Copies of all of these filings with the SEC and additional information about FranklinCovey are available on our website at franklincovey.com.

Some of the numbers that we will discuss this morning have not been audited by KPMG, the Company's external auditors. We assume no obligation to update the matters discussed in this call. It is also illegal to record this call without the Company's commission.

There a number of slides that we will be reviewing this morning and discussing during the call. They can be accessed at franklincovey.com/call. That site was not working well this morning. If it is still not working, hit the Investor Relations home page and click on the Live button; that will take you there.

I would now like to turn the time over to Mr. Young, who is the Chief Financial Officer of FranklinCovey. Mr. Young.

Good morning, everyone. I am very pleased this morning to summarize our financial results for the past year and for the fourth quarter. I will begin by saying that I think we have some good news, we have some better news, and we have some best news.

To me, the good news is that we had net income before the preferred dividend for the first time in several years. That is good news. In my mind, even better news is that our income from operations increased $18 million compared to last year. That is better news.

But to me, the best news is that net sales increased year-over-year by $8.1 million, even after considering the impact of closed stores and reduced technology sales. In my mind, that is best news.

I would like to refer now to page 3 of the slides, which is the financial statements highlights, and just review through these items. First of all, as I said, total sales increased $8.1 million for the year, from just over 175 million to just over 283 million, even after considering the decreases related to closed stores and decreased technology sales.

OSBU sales increased 20.8 million, from 109.4 million to 130.2 million, which is a 19% increase. Operating income increased 18 million, from a $9.1 million loss to an 8. -- 8.9 million of earnings. SG&A decreased 0.6 million. Our gross margin increased 290 basis points, from 56.6 to 59.5. And net income, I mentioned increased 20.3 million from a 10.1 million loss to a 10.2 million net income.

For our fourth quarter, total sales also increased by 5.7 million, from 60.4 million to 66.1 million, which is a 9% increase, and that is also after considering the impact of closed stores and decreased technology sales. OSBU sales increased 6.6 million, from 28.7 to 35.3, which is a 23% increase in that business unit for the fourth quarter.

Operating income improved 0.9 million from a loss of 1.9 to a loss of 1, even after reflecting Q4 SG&A reversals last year and increases in commissions and bonuses and investments in this year, even after that had a 0.9 increase in operating income in the fourth quarter. And our gross margin held constant in the fourth quarter.

The next page, which is page 4, is a summary of our FY '05 results versus the prior year. So this just shows in a summary financial presentation format what we just talked about, showing that sales increased 8.1 million.

It is also very good news that the gross margin increased by a higher dollar amount even in the sales increase as an impact of our 290 basis point improvement in gross margin percentage. So 8.1 million increase in sales, 12.9 increase in gross margin. With other costs also decreasing, we end up with the $18 million year-over-year change to operating income -- or income from operations.

So next page takes that same -- it is the same information, but going down to net loss attributed to common shareholders. So you see in the middle of the page, if we look at the change, it is the same $18 million improvement shown on the prior slide. But then reviewing from there, we go down to net income and we see that the net income change was 20.3 million compared to the prior year.

The reason the net income change is more than the operating income change is we had some favorables reversal of some tax items. We had a tax benefit in the current year compared to a tax provision in the prior year.

Then you see the preferred stock dividend decreased by 400,000 to 8.3 million. We note that we have paid off 40 million of the preferred; the dividend is 10%. So our run rate of preferred dividend is approximately 4.7 million. That won't be our cost this year because we had -- a preferred balance was higher at the beginning of the year, but that is our current run rate.

Then you'll also notice the $7.7 million non-cash charge that we took related to the recapitalization of the preferred, showing that our net loss attributed to common shareholders improved by $13 million.

The next page, which is page 6, is our Q4 of FY '05 financial results. showing that they were also better than last year. As I mentioned earlier also, that is even including the $3.4 million increase in SG&A cost that is primarily a result of offsets recorded in the fourth quarter of last year but not repeated in this year, plus we have higher commissions and higher bonuses (indiscernible) related to our increased sales in the fourth quarter and then some investments related to growth. But even considering those items, we still had a $0.9 million improvement in our operating income, and we did show a $5.7 million increase to net sales in the fourth quarter.

Turning the page -- for some of us, this is our favorite slide. This shows the trailing 4 quarters' EBITDA and operating income, beginning with the fourth quarter of 2002. So as you can see on this page 7, our EBITDA for the year of '02 was a loss of 84.6 million and our operating income loss was 122.6 million. Then you can see as a very good change in that number, improving to the current year EBITDA of 20.9 million and an operating income of 8.9 million, with significant changes in between.

Those changes are a result, obviously, of operations, all from operations. Included in our operations in the earlier years were some impairment of assets and different things like that that also are not repeating now, but a very good slide showing our financial result on a trailing 4 quarter basis since 2002 to the present.

Next slide, page 8, is very simple slide showing that our cash provided by operations has improved steadily, continues to improve from FY '02 loss of cash, or cash used by operations, to $22.3 million of cash provided by operations in the current year.

The next slide, page 9, is a consolidated, condensed view of our balance sheet. The key points here, I believe -- this shows or reflects the fact that we did sell our corporate campus and used that money primarily to redeem preferred. That sale, if you look at Other Liabilities line, you see that this year it is 45.1 million compared to 12.9 million of the prior year. That change is essentially the fact that our sale of the campus was recorded as a financing. And then you see that the preferred stock decreased from 87.2 million to 57.3 million.

So as I said at the beginning, I think that we have significant items of good news, some better news, some great news. I think the balance sheet is healthy and we had a good financial result for this year.

Now I would like to turn the time over to Bob Whitman.

We appreciate everyone joining us this morning. And we will have just a few more slides and then we will open this for questions.

Slide 10 just shows that -- kind of what our priorities have been over the last four years and then we're going to kind of segue into what our priorities are going forward.

As you will recall, for some of you who have been shareholders since then, we had four basic objectives that were absolutely critical priorities for us beginning in the 2001 period. One was to exit our noncore businesses and activities and really focus on the core as we defined it.

Second was to build financial flexibility. We were confident that we could ultimately get the kind of improvements that we're seeing now, but we did not know how long a runway might be needed and we wanted to make sure we had plenty of capital and cash to fund that.

Third, we needed to reset our cost structure and get to a business model that really was attractive and works. And fourth, to reposition ourselves strategically in the marketplace, kind of redefining who we are and the problems we help to solve core customers.

Slide 11 -- well, I'll need to talk first about -- before we go to slide 11, I guess. In terms of exiting noncore businesses and activities, that is largely done. There have been 20 some odd businesses or activities that have either been eliminated or outsourced. And at this point, the only remaining activity continues to be moving toward an equilibrium point on our number of retail stores.

As you know, we've reduced the number of retail store substantially over the last years; we will talk about that in a minute. But we believe there will be further closures in the future to get to an equilibrium number of stores. The timing on that is driven by the time at which leases roll out and so that is driving it. But otherwise, number one has largely been accomplished.

In terms of building financial flexibility, there have really been 3 efforts. The first, of course, resulted from the sale of assets, which allowed us to pay off all of our debt late in 2001 -- in calendar 2001. And we have maintained substantial cash balances all the way through this period of time without having senior debt or any debt, other than just some small pieces of mortgage debt, which were paid off this year in connection with the sale of the building.

The second effort in terms of financial flexibility was managing our working capital. And as you see from the balance sheet, there have been substantial efforts to reduce the inventories necessary to support a given level of sales. Our inventory turns have improved, as have our Days Sales Outstandings in general. And so there's been a lot of focus there. We are pleased that our in-stock levels in our consumer channels are at record highs, even though our inventory levels are at record lows.

Third -- the third element of our financial flexibility has been this recapitalization, which gave us the flexibility to repurchase preferred and Common Stock, and gave us other opportunities in connection with the recapitalization.

As you may have seen in our 10-K, we're also proposing to achieve further flexibility by an agreement that would extend the period during which we have the right to redeem preferred from March of this year until December of calendar 1997 (ph), provided that we make certain paydowns on the preferred during that period of time. We believe this will give us additional flexibility.

In terms of resetting our cost structure, slide 11 shows that as a consequence, on an apples-to-apples basis, after eliminating businesses that we have sold or closed, that our breakeven point has been reduced dramatically over the past year, from a little over 500 million, which was our high water mark or run rate in 2001, to fiscal '05 266 million, in terms of the sales level that would -- which we would generate a dollar of operating profit.

And that has been a major effort, where more than $100 million of costs have been taken out of operations, only a small portion of that related to closing down stores and other things. Most of it has been the re-engineering of almost everything we do. Some of that cost -- a lot of that cost runs through our SG&A line, and we have seen dramatic reductions from a high water mark of around 247 million run rate of SG&A to approximately 145 million.

Other amounts have run through cost of sales, improvements in our cost of goods sold, and have been part of the reason behind the increases in our gross margins over the years. But we feel that now with our cost model in place -- largely in place -- that we have real opportunities for improving our business model further.

Slide 12 shows that this business model improvement has occurred in both business units. First, the Consumer and Small Business Unit, you see -- and this you can track back to the segment reporting and the various years' financial statements -- but we have gone in that business unit from -10 million of EBITDA to approximately $14 million in 2005. So that has been a very good progress.

That has been driven, as you will see on slide 13, by several things, one of which is the closure of unprofitable or marginally profitable stores. Slide 12 just shows an example of kind of the leverage that we been able to get from closing unprofitable or low profitability stores. You see in the first column how a typical poorly performing store might have been doing, with 450,000 of revenue generating EBITDA at the store level of only about $5000, and actually costing somewhere between 30 and $40,000 of field management costs in order to oversee that store.

Yet when we close that store, we have been able to maintain roughly 20% or so of the revenue from that store, either moving to other stores or to our consumer direct channels. And so we're keeping 55,000 saved at gross margin, with small incremental SG&A costs at the unit level, which would be for commissions and other things; and showing, therefore, a $40,000 improvement as a result of closing stores.

In the early stages of store closures, where we were closing losing stores, the leverage was higher. As we now move towards stores that are marginal, like this one or might even be doing a little better than this, the impact of each store closure will likely become a little less in the future. But nevertheless, there's been a significant positive impact by the store closures in getting back to a closer to equilibrium number of stores.

You see on slide 14 that we have had similar improvement in our Organizational Solutions Business Unit. From nearly 30 million negative at the EBITDA line, which included impairments, in 2002, to positive almost 20 million in 2005. And again, the leverage on that has been partially through cost reductions in margin improvements, because as you see on slide 15, the basic leverage in our business model there is that we call a salesperson in our Organizational Business Unit a client partner.

And when we hire a new client partner, the first year, they might be slightly negative on EBITDA because of the guarantees that we provide them in terms of salaries and so forth. But the ramp-up is relatively quick, it is relatively easy to hit breakeven. And the flowthrough is very significant as they begin to ramp up and as they ultimately achieve full ramp-up.

This has been partially -- part of the improvements in the past can be attributed to this, but actually only a small portion. It has been primarily a combination of the cost reductions, gross margin improvements, and of course the almost 20% revenue increase this past year. But as we look to the model going forward in OSBU, we are -- we have been hiring a number of new client partners; we expect to continue to ad significant numbers of client partners, both domestically and internationally.

And so while, again, in the years in which we hire them, our SG&A will go up some and we come to covering the costs, under a reasonable ramp-up scenario, each new person that becomes successful will provide a lot of financial leverage for us in addition to, of course, impacting the marketplace.

Finally, on page 16, just to give an idea of the strategic repositioning, since 2000, our focus has produced 6 strategic shift in our business, each of which we expect to continue into the future. The first shift has been primarily from a product-focused company, where something close to 70% of all of our revenues came from selling products, primarily through our consumer channels, to really a training/consulting focus, where it is more balanced today and over time we expect it to become increasingly balanced toward the Organizational Business Unit side, or I should say at least to the training/consulting side, as we continue to close stores on one hand, continue to expand our sales force in the OSBU on the other hand.

And finally, a third initiative that will drive this further this way is a new effort which we undertook this past year to build a sales force out of the Consumer and Small Business Unit that will be focused on selling our training/consulting offerings to businesses with 100 or fewer employees. And so we expect this shift to continue, ultimately possibly getting to at the point where it's 2/3-1/3, training and consulting and 1/3 that are pure product.

The impact on that strategically is obviously significant, where our focus is on having an organizational impact inside our clients and where our consumer channels play a supporting role of ensuring that there are great tools that help people remain productive and that they are accessible through our channels as well as through others.

The second shift has been within our Organizational Business Unit, primarily today, which has been from selling -- if you see the world of training and consulting as fitting into two broad camps, one camp is building capabilities of individuals, which is typically the domain of human resources professionals, who are worried about building capabilities into the workforce. That is historically where almost all of our training and consulting selling has been done.

The other side of that equation is actually focusing on helping the organization get specific business results today, meaning somebody who wants to take $1 billion out of costs or increase same-store sales by 5%. And historically we had no role in that, and over the last 3.5 years, we have actually had more than 300 organizations that have engaged us to help them on getting specific business results, and we expect that to become an increasing share of our total business. It has been and will continue to be an increasing share of our business going forward.

Third, from selling primarily to medium to large organizations, to attempting to sell both to medium and large and also smaller organizations. We believe we would have a lot of opportunity in even the medium and larger businesses. By our calculation, there are somewhere around 102,000 businesses in the United States -- just in the United States alone -- that have more than 100 employees. And our best calculation is that around 4% of those are our clients -- are active clients with us today. So there is obviously a big opportunity, we believe, to the extent we can be successful at hiring new salespeople and have them be successful at going out and finding new clients, there is a big opportunity there.

At the same time, there are approximately 5.6 million businesses just in the United States alone that have 100 or fewer employees, and we historically have made no concerted effort to go after these. Many of them are customers for our consumer products, but in terms of any kind of a sales effort focused on selling organizational effectiveness training or consulting products or services, we have not had that.

And as I mentioned a moment ago, we now have an effort going with approximately 14 small-business client partners working from various cities. We are encouraged, but their ramp-up will be similar in terms of the ramp-up curve that we showed in the Organizational Business Unit. These people perhaps have less total upside potential, but we think they can ramp perhaps a little bit faster.

Fourth, from being primarily a domestic company to becoming increasingly global. In this past year for the first time, our international sales of consulting and training exceeded our domestic sales of consulting and training, and that is notwithstanding the fact that we had good growth also domestically. We believe there is a big opportunity around a world.

We have spent a lot of time and effort and investment over the past years in building a worldwide licensee network through which we operate in approximately 45 countries, in addition to 6 of our own offices in the UK, Canada, Mexico, Brazil, Japan and Australia, where we're seeing good growth generally.

Fifth we may see less in the financials. In fact, this is more an investment and an expense than it is (ph) today an asset that you can measure or income. But historically, our clients have had great results, which they measured though in terms of the way -- just the way their organization felt, the way the people functioned together, etc. A little hard to tied exactly to business outcomes, although there is a plausible incredible connection.

As we have increasingly focused our effort on helping organizations get specific business results, we are finding that in addition to the great anecdotal results that we continue to get, we also are now really getting purely empirical kind of results, and we're actually making a concerted effort to generate that kind of data, both so that we have case-worthy client results, but also so that the depth of our understanding of the problems we're helping our clients to solve increases with research over time.

And then finally, from selling primarily through our own channels to selling through a mix of our own and third party channels. This has actually occurred in both units. In the Organizational Business Unit, it is primarily taking the form of our international licensee partners. Domestically, it has taken the form of selling products both under our own brand name, as well as sub-brands in channels other than their own, such as the office superstore channels as well as the mass channels.

So that is the end of the presentation portion. We would like to now open it to questions and answers. What we did on page 17 is posed 4 questions that have come up -- they have probably come up more frequently than most, as we get calls from investors or potential investors. We thought we might just address those really quickly here in the first five minutes or so and then leave the rest of the time for your questions.

Question 1, I guess on this a question -- does it make sense for us to use our excess cash to redeem preferred stock? The alternatives we might consider would be just continue to build up cash, perhaps through an acquisition or something in the future; or to repurchase common stock instead of preferred. Or I guess the third one would be to actually use more of our cash to buy preferred or even borrow money to eliminate the preferred.

Our thoughts on why not just build up cash are probably obvious. At year-end, we had just over 50 million of cash. That's well, well in excess of what we can imagine would be our worst-case liquidity need. We are generating positive free cash flow, adding further to our cash. We don't envision many attractive acquisition opportunities honestly because of our focus on the training and consulting side.

The particular focus of our efforts is such that we don't have a lot of large competitors in many of our markets. We have a lot of smaller competitors, but ones we may not see a real advantage to acquiring. And of course we have a negative arbitrage on our cash earning 3.5% or so in the bank, pretax, and paying 10% after-tax on the preferred. So the idea of just building up more cash at this point, we don't see the need for, and if we were to find an opportunity for acquisitions, we would -- with a clean balance sheet, we believe we could borrow the money necessary to do it.

On the question of purchasing preferred versus common at present, it is not necessarily in our minds an either/or strategy. Under the proposed modification of our recapitalization, we have already made an additional $10 million paydown. Assuming that we redeem at least another $10 million of preferred stock between now and next December -- it would be a year from December 31 -- we will actually have the right to redeem preferred all the way through December 31, 1997 (ph). So while it's not an either/or, it seems to us to make sense to get that flexibility for the Company.

Also, of course, there is an immediate impact on the net income. The stock price has risen some, as you all know, in the recent months. And while by our calculations, the stock is still trading at less than 5 times trailing real operating EBITDA, the way we think of it -- because we have had some charges for store closures and things -- but roughly 5 times the trailing EBITDA -- I mean, therefore it would be an attractive purchase.

We also have a new base of shareholders, who are more value oriented, more institutional, and we're not so sure that we would be able to get a lot of the common stock where we do go out and buy it today at prices that are still that 5 times or less.

So all in all, we believe we should use some cash in the foreseeable future to pay off preferred. As to why not use more of our cash, that is I think a good fair question. I think the simple answer is, we believe, while we have very substantial liquidity and it doesn't appear we have a lot of needs for it, we like the flexibility of having our future in our own hand and having cash to make investments without having to go through bank covenants.

We know that borrowing money to pay off preferred would get the preferred paid off faster; we would probably would have a positive arbitrage in doing so. At the same time, our flexibility to use cash to buy back common or some other things would be somewhat restricted.

Second question, what is the role of retail stores in FranklinCovey's strategy. I'm going to turn that to Sarah Merz, the President of our Consumer and Small Business Unit.

Thank you, Bob. It's a pleasure to participate on this investor call. To the question of the role of retail stores at FranklinCovey, we continue to believe that the retail stores do play an important role and they facilitate our mission of enabling greatness in people and organizations everywhere.

Our customers tell us that when to come to our retail stores, they reexperience some of what they experienced in the FranklinCovey workshop, and it's an opportunity to see the full offering of our FranklinCovey products, particularly the great new products we have launched over the last year.

We also believe it's important that they have an opportunity to get the full-service consultative sales support that they get at our stores.

We have included a slide on the next page, slide 18, that shows the comparable store sales year-over-year, and we're delighted to report that this past quarter was very much a watershed quarter for us in that we saw our stores growing their sales again, with that growth coming from the products that we call our core products, products that have the intellectual property, the training, that is so important to us.

So retail stores will continue to play a role, and they are much stronger and continue to grow in their sales efforts.

Bob, should I take the next question? Question 3, which has been posed to us over the years, is what is going to happen to paper products and will electronics take over and wipe out the paper business?

We have found, particularly in the last few years, many of our customers coming back to paper, that hand-held devices play a wonderful role in the archiving of information and as a mobile device for the computer, but that there is really nothing like paper for taking notes and documenting and keeping track of certain organizational needs.

We have seen growth in our core, as I mentioned earlier, and we have included a slide, slide 19, that gives another perspective on where that growth is coming from. What you see on slide 19 is our planner unit sales from fiscal year 2001 through the fiscal year 2005, and in the slide we have broken out the channels in which we realized those sales. The bottom layer are the FranklinCovey comparable channels, so stores that have been open over the full time period, as well as consumer director. And then the noncomparable or closed store volumes, contract stationers, superstores, and finally mass, particularly Target, Wal-Mart and some of the clubs.

We are seeing some very healthy growth, as you can see from those last two layers, in channels outside of our proprietary FranklinCovey channels. We believe that's an important avenue to introduce the FranklinCovey brand to consumers who have planning and organization needs, but may not be quite familiar with the FranklinCovey product.

So paper is alive and well, we're happy to report, and we continue to innovate in this category and see some strong growth, particularly in certain lines for new adoptees of the FranklinCovey planning system.

Thanks, Sarah. I'm going to ask Bill Bennett, the President of our Organizational Solutions Business Unit, to just address this question 4. Bill?

Thank you, Bob. Good morning, everyone. As far as the plans for growing OSBU, we are already a year into the plans that we have put forward that will take us up through the next several years. First of all, that depends on adding a significant number of salespeople each year, both domestically and internationally, as Bob has already mentioned. We will continue to do that for the next several years.

Secondly is with all of the new salespeople, and over time converting a good share of the existing salespeople, change their strategic approach with our clients to enter along the lines of our new strategic positioning, which has shown to build over time a larger, more complete sale for a client that will last a longer time in a client experience as well.

In our test cases in one of our regions in the United States, we had tremendous success with that approach and have begun the process already of training our entire sales force to use that same approach in our clients. And as I already mentioned, this new salespeople will be focused entirely on that and we will be in the process of converting our existing salespeople.

Third is just to improve the productivity generally of our salespeople. We have made investments in the training function in our Company in order to increase their capabilities over time, and of course have added new and upgraded offerings over the last year and will continue over the next several years to be very aggressive in updating and improving our offerings as well as adding new ones where appropriate.

These factors combined, we think, should continue to provide a good growth trend for OSBU.

Thank you, Bill. We will now open this for questions and answers. I might just note that apparently twice in my comments, I mentioned that the proposed recapitalization would allow us to buy preferred stock up through 1997. Of course that is 2007. I have been accused of living in the past, but apparently I still am. Richard, would you give us (multiple speakers) --?

Turn the time back to the operator and she will give us instructions.

(OPERATOR INSTRUCTIONS) Thomas (indiscernible).

Yes, hi. Thank you very much for having this call. It is great to be able to get kind of these issues and questions out in the open. I just first had a couple of kind of just basic financial type questions. Regarding the SG&A expenses, are there any things in there that you would deem to be one-time, both on an annual and a quarterly basis?

Steve?

Yes. During the year in SG&A, we had a -- the one thing we disclosed was the separation agreement with Legal Executive (ph), which we took an expense of a little bit over $1 million. I am sure that there are other amounts associated with stock grants and other things that will not repeat at the same level. We have some one-time costs associated with store closure costs. So when we look internally, we say, yes, we have a number that is in the millions of dollars that we internally would classify as one-time.

Then we also have some -- well, changes are some of our investments. Like I mentioned in the fourth quarter, we had a little higher bonuses, a little higher commissions because their sales were higher. And we hope to have even higher commissions and bonuses as sales go up. But I don't know if that answers your question totally, but yes, we do have one-time charges and we think our one-time charges are a little bit more than our one-time benefits.

Okay, and would the vesting of the CEO options of the 1.9 million be in cost of goods sold, SG&A, or is that below the operating income line?

It is not included. In the new accounting rules, if that were to happen in a future year, then we would take that to our financial. But as it happened prior to the implementation of 123R, it is a pro forma expense and recorded in our notes.

But is that -- that did incur in fiscal '05, right? The $1.9 million cost, so to say?

The accelerated vesting of the options did not result in a cost in our SG&A.

Okay. Okay.

Any amounts that we had that were related to stock grants that we disclosed were included and disclosed. But the acceleration of the option part of that change was not expensed in our P&L.

Okay. And then just referring to Bob's comment that the way -- I can't remember the words you used -- but your internal EBITDA number based on where the stock is trading would result in about a 5 times multiple. That would kind of imply that you're talking about an EBITDA level that is in the upper 20s as opposed to what was reported, around 21. Is that correct?

Let me tell you how I do the math on it and you can do the right math. If you were to take our internal EBITDA number, which would be a little higher than the 20 million because of the nonrecurring SG&A expenses -- let's just say, for example, it was around 24 million -- and multiply that --.

Well, if you take that at 5 times EBITDA, add to that our excess working capital and subtract from that preferred stock outstanding, it kind of nets out about to the point where it is around 5. And so a number like around 24 would get you to that number.

Okay. And then a separate financial question. Regarding NOLs, can you talk about what was utilized in fiscal '05 and what is remaining? And can you tie that in with what was your cash tax picture in '05 and what will that look like in '06?

We're looking at each other saying how much do you want to take a shot at this, since our tax expert is not here. We did consume NOL carryforward in the current year, primarily as an offset to the gain on sale of the building. So there was a tax gain on our sale of the building. And so we consumed NOL relating to that.

Obviously, as we have earnings, we will consume NOL, so let's say that our NOL carryforward is in the 10s of millions. I would hate to put out a wrong number. But it is the 10s of millions -- I would guess 30 -- 19.4 million after the consumption of this year, at least.

And as you know, that NOL carryforward, rather than being shown as a deferred tax asset, that asset is reserved, so that as we have earnings and that NOL reverses, we won't have P&L expense. For the taxes that we pay are primarily related to foreign taxes, which we have a few million dollars a year, actual cash paid for foreign taxes.

Okay, a few million dollars?

So the 19 million of NOL I talked about before, looking at it now (ph), that was only a partial amount. We have almost 40 million of NOL that is reserved against.

Okay. And one other one. When you speak about eventually reaching an optimal equilibrium as far as number of stores, can you give us any more detail or color on where you kind of expect that is going to go?

It's a moving target, of course, in one respect because operations are improving. We're also doing a lot of outbound selling from these stores. And we've really given our store managers an incentive to have that number be as high as possible, and they are doing some great things in that regard. And so I think it's hard to pick an exact number.

But I would think that in this year, you could think of -- in the next year or so you could certainly think of a number that is 15 to 20 stores fewer than where we are today (technical difficulty) hits equilibrium or not. We're hoping that it might. But it's in that range, we would probably guess.

Was that responsive to him?

Yes. And I just have one last one, which is regarding this cash balance that you talked about, I didn't hear you mention anything about a dividend. I am a little surprised that there is no -- that the Board has not authorized an incremental share buyback as well.

And I listened to what you said, Bob, but I still don't quite understand if there are not articulated acquisitions vehicles out there, why do you need all of this flexibility and why not return some of this cash to shareholders?

I think it is a great question. Let me try to be more specific. We have, today, a preferred stock balance of somewhere around $47 million. And we know that we get an immediate after-tax benefit of 10% to the shareholders, which most of our shareholders -- maybe our shareholders are able to invest an average and getting more than that, but at least it's a good return, we think, on an after-tax basis for most of our shareholders to pay that off. And so I think using cash to pay that off was kind of the subject of the sentence.

In terms of using it to buy back common, again, what gives us the flexibility to do that is we have already pay the 30 million of preferred, without which we had no flexibility to buy common. And I think it's very possible and probably in the future the Board might be asked to consider to approve funds for common stock buyback as well.

As to delivering -- starting to dividend, I would hope that we can find usage of cash between at least those two things that we talked about that wouldn't result in that in the near-term.

I think the biggest question is why are we keeping so much cash, and I think my only answer on that was stated by one of our Board members in our recent Board meeting, referring to the movie Gone with the Wind, where Scarlet said, I'll never be poor again. We have had some tough years, and while we're confident about where we are headed now and know that we could certainly have plenty of cushion (indiscernible) left, I guess the simple answer is I personally do not want to go below 30 million this year. And I think as we continue to perform and move forward, then that threshold can come down. But I guess it is not maybe a good answer, but it is the answer.

So that sounds like, given the amount of cash at 51, you have got -- and that's going to go down to 41 when you pay down more preferred -- 41 plus whatever you generate this year is going to allow you to conceivably pay down another 10 to 30 million of preferred in the next 12 months?

It could. If you set a threshold of 30 depending on how we do this year, you could anticipate additional paydowns really as early as getting through our high season. We consume cash in the first quarter as we build up our inventory for our consumer business. That buildup is largely done now.

And assuming that we have a good high season, that cash comes back over the next 6 to 8 weeks; most of the sales for all of that inventory should occur. And at that point, our cash level very conceivably could be at a level where it would warrant above that $30 million level and therefore allowing for additional redemption.

All right, thanks. I look forward to that.

There are no more questions in the queue at this time.

All right. I will just maybe close up here since we have 2 minutes to go anyway, and just thank everyone for being on the call. We appreciate the support of our shareholder base. We've enjoyed getting to know a number of you this year, appreciate the visit that some of you have made out here to just see operations. We invite you to do that if you're going to be in the area.

We also would invite you -- and we'll maybe send out -- if you're interested, we have our big international symposiums coming up in the spring of this year. Our guest there will be Jack Welch, as well as our FranklinCovey faculty etc. It will be a series of executive conferences and symposiums in 4 cities around the United States. And I encourage you to come and see really what it is we are doing with clients.

We are very excited about the work we're doing with a number of clients. While this move toward the business results side is still in its earlier stages, it has nevertheless been -- we have seen significant growth. And I think the impact we're having on clients is giving us a whole different position in their eyes, where they're actually meeting with line leaders instead of just HR people and seeing us work on real business problems is giving us a new position, which we hope to continue.

So thank you, and we will look forward to talking to you soon. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.