Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Rick Nelson - Stephens Inc.
Rick Nelson - Stephens Inc.
What covenants did the auditor’s raise questions about to raise at this going concern opinion and also how much flexibility do you think your banks have to amend covenants if necessary?
Craig Monaghan
The tightest covenant is a leverage test. One of the reasons that we have attached covenant calculations to the release is so that everybody has full disclosure, complete transparency on all of the covenants. So they are there. The bank’s concern was that over the course of the next 12 months we could trip that covenant. I think more specifically one of the things they had some reservation about is that we may have to buy back debt at a discount in order to clear that covenant. In their view there was no certainty we would be able to buy back the debt or what the price we would be able to obtain that debt.
The second part of your question?
Rick Nelson - Stephens Inc.
The flexibility that the banks have to amend covenants if necessary.
Craig Monaghan
We are not in a position to speak to what the banks will do in the future. We can’t predict that. I think the fact that every one of our lenders stepped up at very short notice and gave us the waiver we needed on the heels of this auditor opinion I think speaks mountains about the relationship we have with them and the support that they provide us.
Rick Nelson - Stephens Inc.
Are you having conversations now with the banks on the amendments of covenants?
Craig Monaghan
We are constantly in dialogue with our banks but no we are not talking about amendments at this point in time.
Rick Nelson - Stephens Inc.
A question also on the annualized cost savings of $100 million. I’m wondering how much of that is permanent and how much of that reflects the downturn in the business?
Craig Monaghan
It is very difficult for us to say what is permanent and what is a function of the variable cost structure in this industry. To try to do that internally we are of the view that some of the things we are doing at the regional level and the corporate headquarter levels, those are permanent. Those costs will never come back. I think you can lock those in. I would say roughly, as best estimate, that 50% of the costs are just a function of how the business operates. The cost structures are variable whether it is the sales force or in parts and service so I would lock that 50% in as variable. I would say the costs in between are fuzzy. Some are hard and some are structural. It is very difficult to know that much more precisely.
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