Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Arnold Brief with Goldsmith and Harris.
Arnold Brief – Goldsmith & Harris
It looks to me like at this point the revenue base for the gift business seems to be running in the $135 million area. It lost money for three out of four quarters in ’07, probably all four quarters in ’08 and certainly the first two quarters of ’09 with the seasonal decline in revenues. You have SG&A over $75 million and the gross margin under 45%. This is a model that’s not viable in terms of revenue base and cost structure. I’m wondering number one where do you get the cash to pay your contribution to corporate overhead. Number two, with losses being 9 out of 10 quarters, how much longer can you go before you violate some of the debt covenants, and then finally, is there any plan that at this level of revenues you’ve got to get your cost structure down $15 million or $20 million. I don’t know how you do that. Could you discuss these problems?
Bruce G. Crain
Let me talk generally and then I’ll have Tony talk a couple specifics on covenants and stuff. We are very cognizant of the business model and the structure and the costs. We’re also very cognizant at the end of the day, a tremendous amount of economics of gift is driven by top line and we are missing the top line. So as I said in my remarks, we’re focused very much on trying to drive top line and introducing a lot of new product but recognizing that we can’t count on top line showing up. We do not have a Shining Stars equivalent in the near term that we see or the one that we’re experiencing right now. The cost structure is fundamentally what we need to go after and we’re doing a lot of work against that on the SG&A front.
On the gross margin front, we’re actually... there’s some reasonably okay things going on in gross margin but it really isn’t an SG&A overhead issue and it is a top line issue. We should remind everybody though, also when we talk about our gift business, within the gift P&L and numbers you are also seeing a lot of our corporate cost structure which is reported through our gift segment numbers and they enjoy some pick up from the I&J side. If you read our debt covenants in there, there’s a $3.5 million contribution on an annual basis from our most recent refinancing that comes over from I&J but everything else is supported. All the other corporate charges are supported within the gift segment.
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