FRANKLIN COVEY CO - Annual Report: 2006 (Form 10-K)

Form 10-K 11-14-2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2006
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSISTION PERIOD FROM ___ TO ___

Franklin Covey Co.

(Exact name of registrant as specified in its charter)

Utah		1-11107		87-0401551
(State or other jurisdiction of incorporation)		(Commission File No.)		(IRS Employer Commission File No.)

2200 West Parkway Boulevard

Salt Lake City, Utah 84119-2331

(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (801) 817-1776

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $.05 Par Value		New York Stock Exchange

Securities registered pursuant ot Section 12(g) of the Act:

Series A Preferred Stock, no par value

Title of Class

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oNo þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant ot Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See deifinition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

oLarge accelerated filer

þAccelerated filer

oNon-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of February 24, 2006, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $126.3 million.

As of November 1, 2006, the Registrant had 19,678,591 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders, which is scheduled to be held on January 19, 2007, are incorporated by reference in Part III of this Form 10-K.


Part I.
	Item 1.	Business
	Item 1A.	Risk Factors
	Item 1B.	Unresolved Staff Comments
	Item 2.	Properties
	Item 3.	Legal Proceedings
	Item 4.	Submission of Matters to a Vot of Security Holers

Part II.
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
	Item 6.	Selected Financial Data
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
	Item 8.	Financial Statements and Supplementary Data
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
	Item 9A.	Controls and Procedures
	Item 9B.	Other Information

Part III.
	Item 10.	Directors and Executive Officers of the Registrant
	Item 11.	Executive Compensation
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.	Certain Relationships and Related Transactions
	Item 14.	Principal Accountant Fees and Services

Part IV.
	Item 15.	Exhibits and Financial Statement Schedules


	Signatures
	Exhibit 21	Franklin Covey Co. Subsidiaries
	Exhibit 23	Consent of Independent Registered Public Accounting Firm
	Exhibit 31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
	Exhibit 31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
	Exhibit 32	Section 1350 Certifications
	Exhibit 99.1	Report of KPMG LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statement Schedule for the years ended August 31, 2006, 2005, and 2004
	Exhibit 99.2	Financial Statement Schedule II - Valuation and Qualifying Accounts and Reserves

	l	People are inherently capable, aspire to greatness, and have the power to choose.
	l	Principles are timeless and universal and are the foundation to lasting effectiveness.
	l	Leadership is a choice, built inside out on a foundation of character. Great leaders unleash the collective talent and passion of people toward the right goal.
	l	Habits of effectiveness come only from the committed use of integrated processes and tools.
	l	Sustained superior performance requires a balance of performance and performance capability (P/PC Balance®) - a focus on achieving results and building capability.

	2006		2005		2004
Consumer Solutions Business Unit
Retail Stores	$	62,440	$	74,331	$	87,922
Consumer Direct		63,681		62,873		60,091
Wholesale		19,783		19,691		21,081
Other		4,910		3,757		2,007
Total CSBU		150,814		160,652		171,101
Organizational Solutions Business Unit
Domestic		71,108		68,816		56,015
International		56,701		54,074		48,318
Total OSBU		127,809		122,890		104,333
Total	$	278,623	$	283,542	$	275,434

	1.		FranklinCovey consultants provide on-site consulting or training classes for organizations and schools. In these situations, our consultant can tailor the curriculum to our client’s specific business and objectives.
	2.		We conduct public seminars in 130 cities throughout the United States, where organizations can send their employees in smaller numbers. These public seminars are also marketed directly to individuals through our catalog, e-commerce web-site, retail stores, and by direct mail.
	3.		Our programs are also designed to be facilitated by licensed professional trainers and managers in client organizations, reducing dependence on our professional presenters, and creating continuing revenue through royalties and as participant materials are purchased for trainees by these facilitators.
	4.		We also offer The 7 Habits of Highly Effective People® training course in online and CD-ROM formats. This self-paced e-learning alternative provides the flexibility that many organizations need to meet the needs of various groups, managers or supervisors who may be unable to attend extended classroom training and executives who need a series of working sessions over several weeks.

	·	Declining traffic in our retail stores and consumer direct channel
	·	Increased risk of excess and obsolete inventories
	·	Operating expenses that, as a percentage of sales, have exceeded our desired business model
	·	Costs associated with exiting unprofitable or underperforming retail stores

	·	The overall demand for training, consulting, and our related products
	·	Conditions and trends in the training and consulting industry
	·	General economic and business conditions
	·	General political developments, such as the war on terrorism, and their impacts upon our business both domestically and internationally
	·	Natural or man-made disasters

	·	Restrictions on the movement of cash
	·	Burdens of complying with a wide variety of national and local laws
	·	The absence in some jurisdictions of effective laws to protect our intellectual property rights
	·	Political instability
	·	Currency exchange rate fluctuations
	·	Longer payment cycles
	·	Price controls or restrictions on exchange of foreign currencies

	·	Our clients’ perceptions of our ability to add value through our programs and products
	·	Competition
	·	General economic conditions
	·	Introduction of new programs or services by us or our competitors
	·	Our ability to accurately estimate, attain, and sustain engagement sales, margins, and cash flows over longer contract periods

	·	Seasonal trends, primarily as a result of scheduled training
	·	Our ability to forecast demand for our products and services and thereby maintain an appropriate headcount in our employee base
	·	Our ability to manage attrition

	·	Fluctuations in our quarterly results of operations and cash flows
	·	Variations between our actual financial results and market expectations
	·	Changes in our key balances, such as cash and cash equivalents
	·	Currency exchange rate fluctuations
	·	Unexpected asset impairment charges
	·	Lack of analyst coverage

	·	Develop new services, programs, or products
	·	Take advantage of opportunities, including expansion of the business
	·	Respond to competitive pressures

	·	In August 2006, we initiated a plan to reconfigure our printing operations in order to lower manufacturing costs, increase operational efficiency, and improve our ability to provide printing services for other entities. As a result of this plan, we are moving our printing operation a short distance from its existing location to our corporate headquarters campus and we are in the process of selling the existing manufacturing facility. We are also selling certain printing presses at the existing location and plan to replace these presses with new presses at the new location. Other existing presses will be moved to the new location as part of the reconfiguration plan. Because of the disruption of printing activity resulting from the move, the Company has developed a supply strategy to maintain adequate inventories of printed material while the reconfiguration plan is completed.
	·	During fiscal 2006, we closed 16 domestic retail store locations and may close additional retail locations during fiscal 2007.

	High		Low
Fiscal Year Ended August 31, 2006:
Fourth Quarter	$	8.37	$	5.16
Third Quarter		9.79		7.00
Second Quarter		7.79		6.00
First Quarter		7.35		6.42

Fiscal Year Ended August 31, 2005:
Fourth Quarter	$	8.10	$	5.80
Third Quarter		7.13		2.22
Second Quarter		2.80		1.65
First Quarter		1.98		1.61

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands)
Common Shares:
May 28, 2006 to July 1, 2006		-	$	-		none	$	6,073

July 2, 2006 to July 29, 2006		50,700		6.65		50,700		5,735

July 30, 2006 to August 31, 2006		145,100		5.85		145,100		4,887	⁽¹⁾

Total Common Shares		195,800	$	6.06		195,800

Total Preferred Shares		none		none

August 31,	2006		2005			2004			2003			2002
In thousands, except per share data

Income Statement Data:
Net sales	$	278,623	$	283,542		$	275,434		$	307,160		$	332,998
Income (loss) from operations		14,046		8,443			(9,064	)		(47,665	)		(122,573	)
Net income (loss) from continuing operations before income taxes		13,631		9,101			(8,801	)		(47,790	)		(122,179	)
Income tax benefit (provision)⁽¹⁾		14,942		1,085			(1,349	)		2,537			32,122
Net income (loss) from continuing operations⁽¹⁾		28,573		10,186			(10,150	)		(45,253	)		(90,057	)
Cumulative effect of accounting change, net of income taxes		-		-			-			-			(75,928	)
Net income (loss) available to common shareholders⁽¹⁾		24,188		(5,837	)		(18,885	)		(53,988	)		(117,399	)

Earnings (loss) per share:
Basic	$	1.20	$	(.34	)	$	(.96	)	$	(2.69	)	$	(5.90	)
Diluted	$	1.18	$	(.34	)	$	(.96	)	$	(2.69	)	$	(5.90	)

Balance Sheet Data:
Total current assets	$	87,120	$	105,182		$	92,229		$	110,057		$	124,345
Other long-term assets		12,249		9,051			7,305			10,472			11,474
Total assets		216,559		233,233			227,625			262,146			308,344

Long-term obligations of continuing operations		35,347		46,171			13,067			15,743			15,231
Total liabilities		83,210		100,407			69,146			84,479			81,922

Preferred stock		37,345		57,345			87,203			87,203			87,203
Shareholders’ equity		133,349		132,826			158,479			177,667			226,422

	·	*Sales Performance* - Our consolidated sales decreased $4.9 million compared to the prior year. The decrease in sales was due to an $11.0 million decline in product sales that was primarily the result of closed retail stores. Our training and consulting services sales increased by $6.1 million compared to fiscal 2005, which was attributable to improvements in both domestic and international delivery channels. The improvement in training and consulting services sales was primarily due to increased sales of our recently refreshed The 7 Habits of Highly Effective People training courses.
	·	*Decreased Operating Costs* - Our operating costs decreased by $6.9 million compared to fiscal 2005. Reduced operating expenses were due to a $3.6 million reduction in selling, general, and administrative expenses, a $3.0 million decrease in depreciation expense, and a $0.3 million decline in amortization expense. Consistent with prior years, we continue to seek for and implement strategies that will enable us to reduce our operating costs in order to improve our profitability.
	·	*Income Tax Benefit -* Due to improved operating performance and the expected availability of future taxable amounts, we concluded that it was more likely than not that the benefits of certain deferred income tax assets would be realized. As a result, we reversed the valuation allowances on those domestic net deferred income tax assets during the fourth quarter of fiscal 2006. The reversal of the valuation allowances had a $20.4 million favorable impact on our reported fiscal 2006 income taxes.
	·	*Preferred Stock Redemptions* - During fiscal 2006, we redeemed $20.0 million, or 0.8 million shares, of our Series A preferred stock. Since the fiscal 2005 preferred stock recapitalization, we have redeemed a total of $50.0 million, or 2.0 million shares, of our preferred stock. These preferred stock redemptions have reduced our dividend obligation by $5.0 million per year.

YEAR ENDED AUGUST 31,	2006			2005			2004
Product sales		56.1	%		59.0	%		64.3	%
Training and consulting services sales		43.9			41.0			35.7
Total sales		100.0			100.0			100.0

Product cost of sales		25.3			27.2			31.1
Training and consulting services cost of sales		14.6			13.3			12.3
Total cost of sales		39.9			40.5			43.4
Gross profit		60.1			59.5			56.6

Selling, general and administrative		52.0			52.3			54.1
Depreciation		1.7			2.7			4.3
Amortization		1.4			1.5			1.5
Total operating expenses		55.1			56.5			59.9
Income (loss) from operations		5.0			3.0			(3.3	)

Interest income		0.5			0.3			0.1
Interest expense		(0.9	)		(0.3	)
Recovery from legal settlement		0.3
Gain on disposal of investment in unconsolidated subsidiary					0.2
Income (loss) before income taxes		4.9	%		3.2	%		(3.2	)%

YEAR ENDED AUGUST 31,	2006		Percent change from prior year		2005		Percent change from prior year		2004
Sales by Category:
Products	$	156,205		(7)	$	167,179		(6)	$	177,184
Training and consulting services		122,418		5		116,363		18		98,250
	$	278,623		(2)	$	283,542		3	$	275,434

Consumer Solutions Business Unit:
Retail stores	$	62,440		(16)	$	74,331		(16)	$	87,922
Consumer direct		63,681		1		62,873		5		60,091
Wholesale		19,783		-		19,691		(7)		21,081
Other CSBU		4,910		31		3,757		87		2,007
		150,814		(6)		160,652		(6)		171,101
Organizational Solutions Business Unit:
Domestic		71,108		3		68,816		23		56,015
International		56,701		5		54,074		12		48,318
		127,809		4		122,890		18		104,333
Total net sales	$	278,623		(2)	$	283,542		3	$	275,434

	·	Retail Sales - The decline in retail sales was primarily due to store closures, which had a $12.5 million unfavorable impact on our retail store sales in fiscal 2006. Our retail stores also sold $1.7 million less technology and specialty products when compared to the prior year, primarily due to declining demand for electronic handheld planning products. Although store closures and reduced technology and specialty product sales caused total retail sales to decline compared to the prior year, we recognized a 1 percent improvement in year-over-year comparable store (stores which were open during the comparable periods) sales in fiscal 2006 as sales of “core” products (e.g. planners, binders, totes, and accessories) increased compared to the prior year. At August 31, 2006, we were operating 89 domestic retail locations compared to 105 locations at August 31, 2005.
	·	Consumer Direct - Sales through our consumer direct segment (eCommerce, catalog, and public seminars) increased primarily due to increased public seminar sales and increased sales of core products. Increased public seminar sales was the result of additional seminars held during fiscal 2006 and an increase in the number of participants attending these programs.
	·	Wholesale Sales - Sales through our wholesale channel, which includes sales to office superstores and other retail chains, were essentially flat compared to the prior year.
	·	Other CSBU Sales - Other CSBU sales primarily consist of domestic printing and publishing sales and building sublease revenues. The increase in other CSBU sales was primarily attributable to increased sublease income from additional sublease contracts obtained during fiscal 2006. We have subleased a substantial portion of our corporate headquarters in Salt Lake City, Utah and have recognized $1.9 million of sublease revenue during fiscal 2006, compared to $1.1 million in fiscal 2005.

YEAR ENDED AUGUST 31, 2006
	November 26			February 25			May 27			August 31
In thousands, except per share amounts
Net sales	$	72,351		$	78,333		$	63,282		$	64,657
Gross profit		44,406			48,173			36,292			38,514
Selling, general, and administrative expense		37,767			35,488			35,629			35,863
Depreciation		1,408			1,221			1,134			1,016
Amortization		1,095			908			908			902
Income (loss) from operations		4,136			10,556			(1,379	)		733
Income (loss) before income taxes		3,823			11,085			(1,735	)		458
Net income		3,233			9,213			1,019			15,108
Preferred stock dividends		(1,379	)		(1,139	)		(934	)		(933	)
Income available to common shareholders		1,854			8,074			85			14,175

Earnings (loss) per share available to common shareholders:
Basic	$	.09		$	.40		$	.00		$	.71
Diluted	$	.09		$	.39		$	.00		$	.70


YEAR ENDED AUGUST 31, 2005
		November 27			February 26			May 28			August 31
In thousands, except per share amounts
Net sales	$	69,104		$	82,523		$	65,788		$	66,128
Gross profit		41,435			50,217			38,268			38,775
Selling, general, and administrative expense		35,930			38,939			36,095			37,341
Depreciation		2,178			2,320			1,848			1,428
Amortization		1,043			1,043			1,043			1,044
Income (loss) from operations		2,284			7,915			(718	)		(1,038	)
Income (loss) before income taxes		2,364			8,051			63			(1,377	)
Net income (loss)		1,526			7,086			3,069			(1,495	)
Preferred stock dividends		(2,184	)		(2,184	)		(2,184	)		(1,718	)
Loss on recapitalization of preferred stock		-			-			(7,753	)		-
Income (loss) attributable to common shareholders		(658	)		4,902			(6,868	)		(3,213	)

Basic and diluted loss per share attributable to common shareholders	$	(.03	)	$	.19		$	(.34	)	$	(.16	)

	Fiscal		Fiscal		Fiscal		Fiscal		Fiscal
Contractual Obligations	2007		2008		2009		2010		2011		Thereafter		Total

Minimum required payments to EDS for outsourcing services	$	17,217	$	15,901	$	15,927	$	15,577	$	15,298	$	73,233	$	153,153
Required payments on corporate campus financing obligation		3,045		3,045		3,045		3,055		3,115		49,957		65,262
Minimum operating lease payments		8,475		7,228		5,564		4,012		2,402		6,013		33,694
Preferred stock dividend payments⁽¹⁾		3,734		3,734		3,734		3,734		3,734		-		18,670
Debt payments⁽²⁾		176		168		160		153		145		435		1,237
Contractual computer hardware purchases⁽³⁾		535		483		556		587		525		3,192		5,878
Payments for new printing services equipment⁽⁴⁾		3,137		-		-		-		-		-		3,137
Purchase obligations		10,523		-		-		-		-		-		10,523
Monitoring fees paid to a preferred stock investor⁽¹⁾		166		166		166		166		166		-		830
Total expected contractual obligation payments	$	47,008	$	30,725	$	29,152	$	27,284	$	25,385	$	132,830	$	292,384

	·	Products - We sell planners, binders, planner accessories, handheld electronic devices, and other related products that are primarily sold through our CSBU channels.
	·	Training and Consulting Services - We provide training and consulting services to both organizations and individuals in strategic execution, leadership, productivity, goal alignment, sales force performance, and communication effectiveness skills. These training programs and services are primarily sold through our OSBU channels.

Sales Growth	Percent of Target Shares Awarded
30.0%	115%	135%	150%	175%	200%
22.5%	90%	110%	125%	150%	175%
15.0%	65%	85%	100%	125%	150%
11.8 %	50%	70%	85%	110%	135%
7.5%	30%	50%	65%	90%	115%
	$36.20	$56.80	$72.30	$108.50	$144.60
	Cumulative Operating Income (millions)

Contract Description	Notional Amount in Foreign Currency		Notional Amount in U.S. Dollars

Japanese Yen		290,000	$	2,491
Australian Dollars		1,500		1,148
Mexican Pesos		11,650		1,061

AUGUST 31,	2006			2005
In thousands, except per share data

ASSETS
Current assets:
Cash and cash equivalents	$	30,587		$	51,690
Restricted cash					699
Accounts receivable, less allowance for doubtful accounts of $979 and $1,425		24,254			22,399
Inventories		21,790			20,975
Deferred income taxes		4,130			2,396
Prepaid expenses and other assets		6,359			7,023
Total current assets		87,120			105,182
Property and equipment, net		33,318			35,277
Intangible assets, net		79,532			83,348
Deferred income taxes		4,340			375
Other long-term assets		12,249			9,051
	$	216,559		$	233,233

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and financing obligation	$	585		$	1,088
Accounts payable		13,769			13,704
Income taxes payable		1,924			3,996
Accrued liabilities		32,170			36,536
Total current liabilities		48,448			55,324
Long-term debt and financing obligation, less current portion		33,559			34,086
Other liabilities		1,192			1,282
Deferred income tax liabilities		11			9,715
Total liabilities		83,210			100,407

Commitments and contingencies (Notes 1, 5, 6, and 10)

Shareholders’ equity:
Preferred stock - Series A, no par value; 4,000 shares authorized, 1,494 and 2,294 shares issued and outstanding; liquidation preference totaling $38,278 and $58,778		37,345			57,345
Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued		1,353			1,353
Additional paid-in capital		185,691			190,760
Common stock warrants		7,611			7,611
Retained earnings (accumulated deficit)		14,075			(14,498	)
Deferred compensation on unvested stock grants		-			(1,055	)
Accumulated other comprehensive income		653			556
Treasury stock at cost, 7,083 shares and 6,465 shares		(113,379	)		(109,246	)
Total shareholders’ equity		133,349			132,826
	$	216,559		$	233,233

	Series A Preferred Stock Shares			Series A Preferred Stock Amount			Common Stock Shares		Common Stock Amount		Additional Paid-In Capital			Common Stock Warrants		Retained Earnings (Accumulated Deficit)			Notes and Interest Receivable			Deferred Compensa-tion			Accumulated Other Comprehensive Income (Loss)			Treasury Stock Shares			Treasury Stock Amount
In thousands
Balance at August 31, 2003		873			87,203			27,056		1,353		221,968			-		(3,912	)		(8,459	)		-			445			(7,007	)		(120,931	)
Preferred stock dividends												(5,866	)				(2,869	)
Issuance of common stock from treasury												(27	)																99			181
Purchase of treasury shares																													(93	)		(182	)
Cumulative translation adjustment																										788
Adjustment for fair value of hedge derivatives																										(207	)
Modification of management stock loans												(7,565	)							7,565
Cancellation of note receivable from sale of common stock												1,495								894									(121	)		(2,389	)
Unvested stock award												(4,420	)										(829	)					304			5,249
Common stock held in non-qualified deferred compensation plan																													(210	)		(953	)
Amortization of deferred compensation																							97
Net loss																	(10,150	)
Balance at August 31, 2004		873			87,203			27,056		1,353		205,585			-		(16,931	)		-			(732	)		1,026			(7,028	)		(119,025	)
Preferred stock dividends												(8,270	)
Extinguishment of previously existing Series A Preferred Stock		(873	)		(87,203	)
Preferred stock recapitalization		3,494			87,345										7,611		(7,753	)
Preferred stock redemption		(1,200	)		(30,000	)
Issuance of common stock from treasury												(257	)																42			366
Purchase of treasury shares																													(23	)		(91	)
Unvested stock awards												(5,192	)										(1,114	)					352			6,234
Amortization of deferred compensation																							791
CEO fully-vested stock award												(2,837	)																187			3,241
Non-qualified deferred compensation plan treasury stock transactions												892																	5			29
Payments on management common stock loans												839
Cumulative translation adjustments																										(152	)
Adjustment for fair value of hedge derivatives																										(318	)
Net income																	10,186
Balance at August 31, 2005		2,294		$	57,345			27,056	$	1,353	$	190,760		$	7,611	$	(14,498	)	$	-		$	(1,055	)	$	556			(6,465	)	$	(109,246	)
Preferred stock dividends												(4,385	)
Preferred stock redemptions		(800	)		(20,000	)
Issuance of common stock from treasury												(334	)																69			743
Purchase of treasury shares																													(690	)		(5,167	)
Unvested stock award												(458	)																27			458
Stock-based compensation												862
Reclassification of deferred compensation upon adoption of SFAS 123R												(1,055	)										1,055
Receipt of common stock as consideration for payment on management common stock loans												301																	(24	)		(167	)
Cumulative translation adjustments																										97
Net income																	28,573
Balance at August 31, 2006		1,494		$	37,345			27,056	$	1,353	$	185,691		$	7,611	$	14,075		$	-		$	-		$	653			(7,083	)	$	(113,379	)

Description	Useful Lives
Buildings		15-39 years
Machinery and equipment		3-7 years
Computer hardware and software		3 years
Furniture, fixtures, and leasehold improvements		5-8 years

AUGUST 31, 2006	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Definite-lived intangible assets:
License rights	$	27,000	$	(7,417	)	$	19,583
Curriculum		58,229		(26,826	)		31,403
Customer lists		18,774		(13,228	)		5,546
Trade names		1,277		(1,277	)		-
		105,280		(48,748	)		56,532
Indefinite-lived intangible asset:
Covey trade name		23,000		-			23,000
	$	128,280	$	(48,748	)	$	79,532

AUGUST 31, 2005
Definite-lived intangible assets:
License rights	$	27,000	$	(6,480	)	$	20,520
Curriculum		58,232		(25,146	)		33,086
Customer lists		18,774		(12,032	)		6,742
Trade names		1,277		(1,277	)		-
		105,283		(44,935	)		60,348
Indefinite-lived intangible asset:
Covey trade name		23,000		-			23,000
	$	128,283	$	(44,935	)	$	83,348

Category of Intangible Asset	Range of Remaining Estimated Useful Lives	Weighted Average Amortization Period

License rights	20 years	30 years
Curriculum	13 to 20 years	26 years
Customer lists	5 years	13 years

YEAR ENDING AUGUST 31,
2007	$	3,613
2008		3,613
2009		3,613
2010		3,613
2011		3,471

YEAR ENDING AUGUST 31,
2007	$	3,045
2008		3,045
2009		3,045
2010		3,055
2011		3,115
Thereafter		49,957
Total future minimum financing obligation payments		65,262
Less interest		(33,283	)
Present value of future minimum financing obligation payments	$	31,979

YEAR ENDING AUGUST 31,
2007	$	2,298
2008		2,293
2009		2,289
2010		1,388
2011		744
Thereafter		1,411
	$	10,423

	·	Have the conditional right to redeem shares of preferred stock;
	·	Place a limit on the period in which we may be required to issue common stock. The new warrants to purchase shares of common stock expire in eight years, compared to the perpetual right of previously existing Series A preferred stock to convert to shares of common stock;
	·	Increase our ability to purchase shares of our common stock. Previous purchases of common stock were limited and potentially subject to the approval of Series A preferred shareholders;
	·	Create the possibility that we may receive cash upon issuing additional shares of common stock to Series A preferred shareholders. The warrants have an exercise price of $8.00 per share compared to the previously existing right of Series A preferred shareholders to convert their preferred shares into common shares without paying cash; and
	·	Eliminate the requirement to pay common stock dividends to preferred shareholders on an “as converted” basis.

	·	Liquidation Preference - Both Series A and Series B preferred stock have a liquidation preference of $25.00 per share plus accrued unpaid dividends, which will be paid in preference to the liquidation rights of all other equity classes.
	·	Conversion - Neither Series A nor Series B preferred stock is convertible to shares of common stock. Series A preferred stock converts into shares of Series B upon the sale or transfer of the Series A shares. Series B preferred stock does not have any conversion rights.
	·	Dividends - Both Series A and Series B preferred stock accrue dividends at 10.0 percent, payable quarterly, in preference to dividends on all other equity classes. If dividends are in arrears for six or more quarters, the number of the Company’s Board of Directors will be increased by two and the Series A and Series B preferred shareholders will have the ability to select these additional directors. Series A and Series B preferred stock may not participate in dividends paid to common stockholders.
	·	Redemption- Under the original recapitalization agreements, we were only permitted to redeem any of the Series A or Series B preferred shares during the first year following the recapitalization at a price per share equal to 100 percent of the liquidation preference. Subsequent to the first anniversary of the recapitalization and before the fifth anniversary of the transaction, we were allowed to purchase preferred shares (up to $30.0 million in aggregate) only from Knowledge Capital, which holds the majority of our preferred stock, at a premium that increases one percentage point annually. After the sixth anniversary of the recapitalization, we may redeem any shares of preferred stock at 101 percent of the liquidation preference on the date of redemption. At our Annual Meeting of Shareholders held in January 2006, we obtained shareholder approval of an amendment to our articles of incorporation that extends the period during which we have the right to redeem outstanding shares of preferred stock at 100 percent of its liquidation preference. The amendment extended the original redemption deadline from March 8, 2006 to December 31, 2006 and also provides the right to extend the redemption period for an additional year to December 31, 2007, if another $10.0 million of preferred stock is redeemed before December 31, 2006. On February 13, 2006 we redeemed $10.0 million of preferred stock, which satisfied the additional extension provision and the Company can redeem preferred stock at the liquidation preference through December 31, 2007. If any shares remain outstanding subsequent to December 31, 2007, we must wait until after the sixth anniversary of the recapitalization to redeem shares of preferred stock as described above.
	·	Change in Control - In the event of any change in control of the Company, Knowledge Capital, to the extent that it still holds shares of Series A preferred stock, will have the option to receive a cash payment equal to 101 percent of the liquidation preference of its Series A preferred shares then held. The remaining Series A and Series B preferred shareholders have no such option.
	·	Voting Rights - Although the new Series A preferred shareholders will not have conversion rights, they will still be entitled to voting rights. The holder of each new share of Series A preferred stock will be entitled to the voting rights they would have if they held two shares of common stock. The cumulative number of votes will be based upon the number of votes attributable to shares of Series A held immediately prior to the recapitalization transaction less any transfers of Series A shares to Series B shares or redemptions. In the event that a Series A preferred shareholder exercises a warrant to purchase the Company’s common stock, their Series A voting rights will be reduced by the number of the common shares issued upon exercise of the warrant. This feature will prevent the holders of Series A preferred stock from increasing their voting influence through the acquisition of additional shares of common stock from the exercise of the warrants.
	·	Registration Rights - We were required to use our best efforts to register the resale of all shares of common stock and shares of Series B preferred stock issuable upon the transfer and conversion of the Series A preferred stock held by Knowledge Capital and certain permitted transferees of Knowledge Capital within 240 days following the initial filing of the registration statement covering such shares. The initial filing of the registration statement was required to occur within 120 days following the closing of the recapitalization transaction. However, we obtained an extension on this filing from Knowledge Capital and the registration statement was filed and became effective in September 2005.