FRANKLIN COVEY CO - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2008.
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM ___
TO ___
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Franklin Covey
Co.
(Exact
name of registrant as specified in its charter)
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Utah
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1-11107
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87-0401551
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(State
or other jurisdiction of incorporation or organization)
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(Commission
File No.)
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(IRS
Employer Identification No.)
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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:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $.05 Par Value
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New
York Stock Exchange
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Securities
registered pursuant to 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 o No 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
preceding 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 to Item 405 of
Regulation S-K (§ 229.405) 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, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer
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£
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Accelerated
filer
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Non-accelerated
filer
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£
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(Do
not check if a smaller reporting company)
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Smaller
reporting company
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£
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
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As of
February 29, 2008, the aggregate market value of the Registrant's Common Stock
held by non-affiliates of the Registrant was approximately $124.1 million, which
was based upon the closing price of $7.72 per share as reported by the New York
Stock Exchange.
As of
November 3, 2008, the Registrant had 16,879,498 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 16, 2009, are
incorporated by reference in Part III of this Form 10-K.
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Business
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Risk
Factors
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Unresolved
Staff Comments
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Properties
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Legal
Proceedings
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Submission
of Matters to a Vote of Security Holders
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Market
For the Registrant's Common Equity, Related Shareholder
Matters, and Issuer Purchases of Equity
Securities
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Selected
Financial Data
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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Quantitative and
Qualitative Disclosures About Market Risk
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Financial
Statements and Supplementary Data
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
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Controls
and Procedures
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Directors,
Executive Officers and Corporate Governance
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Executive Compensation
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Certain
Relationships and Related Transactions, and Director
Independence
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Principal
Accountant Fees and Services
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Exhibits
and Financial Statement Schedules
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PART I
ITEM 1. Business
General
Franklin
Covey Co. (the Company, we, us, our or FranklinCovey) has enabled greatness in
people and organizations and is a worldwide leader in helping organizations,
families, and individuals achieve their own great purposes through teaching the
principles and practices of effectiveness and by providing reinforcement tools
like the FranklinCovey Planning SystemTM. Over
600 FranklinCovey associates world-wide delivered timeless and universal
curriculum and effectiveness tools to millions of customers in fiscal
2008. We strive to excel in our efforts to enable greatness because
we believe that:
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People are
inherently capable, aspire to greatness, and have the power to
choose.
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Principles are
timeless and universal and are the foundation to lasting
effectiveness.
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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.
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Habits of effectiveness come only
from the committed use of integrated processes and
tools.
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Sustained superior performance
requires
a balance of performance and performance capability (P/PC
BalanceÒ) - a
focus on achieving results and building
capability.
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Our
business has historically been comprised of the Consumer Solutions Business Unit
(CSBU) and the Organizational Solutions Business Unit (OSBU). The
CSBU was primarily focused on sales to individual customers and small business
organizations and included the results of our domestic retail stores, consumer
direct operations (primarily Internet sales and call center), wholesale
operations, international product channels in certain countries, and other
related distribution channels, including government product sales and domestic
printing and publishing sales. Although CSBU sales primarily
consisted of products such as planners, binders, software, totes, and related
accessories, virtually any component of our leadership, productivity, and
strategy execution solutions may have been purchased through the CSBU
channels.
The
OSBU is primarily responsible for the development, marketing, sale, and delivery
of strategic execution, productivity, leadership, sales force performance, and
communication training and consulting solutions directly to organizational
clients, including other companies, the government, and educational
institutions. The OSBU includes the financial results of our domestic
sales force, public programs, and certain international
operations. The domestic sales force is responsible for the sale and
delivery of our training and consulting services in the United
States. Our international sales group includes the financial results
of our directly owned foreign offices and royalty revenues from
licensees.
Over
the past several years, the strategic focus of our CSBU, which was focused
primarily on the sales of our products, and our OSBU, which was focused on the
development and delivery of training, consulting, and related services, has
changed significantly. As a consequence of these changes in strategic
direction, we determined that the extent of overlap between our training and
consulting offerings and our products has diminished. After
significant analysis and deliberation, we decided that these business units
would be able to operate more effectively as separate companies, each with clear
and distinct objectives, market definitions, and competitive products and
services. This conclusion persuaded us to sell substantially all of
the operations of CSBU in fiscal 2008.
During
the fourth quarter of fiscal 2008, we completed the sale of substantially all of
the assets of our CSBU to a newly formed entity, Franklin Covey Products, LLC
(Refer to Note 2 to our Consolidated Financial Statements in Item 8 for further
details). Franklin Covey Products, which is controlled by Peterson
Partners, purchased the CSBU assets for $32.0 million in cash, subject to
adjustments for working capital on the closing date of the sale, which was
effective July 6, 2008. On the date of the sale closing, the Company
invested approximately $1.8 million to purchase a 19.5 percent voting interest
in Franklin Covey Products, made a $1.0 million priority capital contribution
with a 10 percent return, and will have the opportunity to earn contingent
license fees if Franklin Covey Products achieves specified performance
objectives. We recognized a gain of $9.1 million on the sale of the
CSBU assets and we deferred a portion of the gain equal to our investment in
Franklin Covey Products.
Following
the sale of CSBU, our business primarily consists of training, consulting,
assessment services, and related products to help organizations
achieve superior results by focusing on and executing on top priorities,
building the capability of knowledge works, and aligning business
processes.
Late
in the fourth quarter of fiscal 2008, we also initiated a restructuring plan
that included the closing of two domestic sales offices, our Canadian office,
and our Sales Performance Group office. Our Canadian sales associates
and Sales Performance Group personnel will be absorbed into our remaining five
Domestic sales offices. In connection with these office closures, we
have also decentralized certain sales support functions. During the
fourth quarter of fiscal 2008 we expensed $2.1 million for anticipated severance
costs necessary to complete the restructuring plan, which is expected to be
substantially completed in fiscal 2009.
Our
fiscal year ends on August 31 of each year. Unless otherwise
noted, references to fiscal years apply to the 12 months ended August 31 of the
specified year.
Our
principal executive offices are located at 2200 West Parkway Boulevard, Salt
Lake City, Utah 84119-2331 and our telephone number is (801)
817-1776.
Industry
Information
We
are engaged in the performance skills segment of the training
industry. One of our competitive advantages in this highly fragmented
industry stems from our fully integrated training curricula, measurement
methodologies and implementation tools to help organizations and individuals
measurably improve their effectiveness. This advantage allows us to
deliver not only training to both corporations and individuals, but also to
implement the training through the use of powerful behavior changing tools with
the capability to then measure the impact of the delivered training and
tools.
In
fiscal 2008, we provided products and services to 97 of the Fortune 100
companies and more than 75 percent of the Fortune 500 companies. We
also provide products and services to a number of U.S. and foreign governmental
agencies, including the U.S. Department of Defense, as well as numerous
educational institutions. We also provide training curricula,
measurement services and implementation tools internationally, either through
directly operated offices, or through independent licensed
providers. At August 31, 2008, we had directly owned offices in
Australia, Canada, Japan, and the United Kingdom. We also had
licensed operations in 99 countries and licensed rights in more than 140
countries.
Training
and Consulting Services
We
offer a range of training programs designed to measurably improve the
effectiveness of organizations, families, and individuals. Our
offerings are oriented to address organizational, managerial, interpersonal, and
personal needs. In addition, we believe that our learning process
provides an engaging and behavior-changing experience, which frequently
generates additional business. During fiscal 2008, over one million
individuals were trained through our direct offices using the Company’s
curricula in our single and multiple–day workshops and seminars.
Our
training and consulting services are designed to inspire organizations,
communities, and individuals to become measurably more efficient and effective
through our various leadership and
productivity
courses including: The 7 Habits of
Highly Effective PeopleÒ;
Leadership:
Great Leaders—Great Teams—Great Resultsä;
The 4
Disciplines of ExecutionTM;
FOCUS:
Achieving Your Highest Priorities; The 8 Habits
of a Successful Marriage; Building
Business Acumen; Championing
Diversity; Leading at the
Speed of Trust; Writing
Advantage, and Presentation
Advantage. The Company is also in the process of developing
curriculum based on the book The Leader in
Me by Stephen R Covey, which is aimed at helping principals and teachers
implement The 7 Habits of
Effective People in their schools. Curriculum and tools are
also being developed to assist companies to increase customer
loyalty.
Our
most popular courses are based on the material presented in The 7 Habits of
Highly Effective People® and includes our three-day 7 Habits of
Highly Effective People Signature Program. We offer
several other variations of this course including The 7 Habits
for Managers: Managing Yourself, Leading Others, Unleashing
Potential, The 7 Habits of Highly Effective People, Introductory Course for
Associates, and other courses targeted for families, teens, and college
students. In addition to the principles taught in the
best-selling book, these courses contain various teaching aids including several
award-winning videos which demonstrate the principles being
taught. During fiscal 2008 we released a web-based interactive
version of this course, making the principles and content taught in our course
accessible to individuals and organizations world-wide without the expense of a
facilitator, training room, and the opportunity cost of taking individuals out
of the workforce for multiple days.
Our
training and consulting offerings include the following.
The 7 Habits of
Highly Effective People is one of our best-known offerings and is
designed to help organizations and individuals achieve sustained superior
results by focusing on making individuals and leaders more
effective. Participants gain hands-on experience applying timeless
principles that yield greater productivity, improved communication, strengthened
relationships, increased influence, and focus on critical
priorities. This offering is the basis for some of our other courses
and includes over 30 award winning video segments.
Leadership:
Great Leaders—Great Teams—Great Resultsä is
built on the foundation that people are capable of greatness, that they can make
dramatic contributions and that they offer their best when they live by the four
imperatives of great leaders, which are 1) that they inspire trust, 2) that they
clarify purpose, 3) that they insure systems are aligned, and 4) that they
unleash talent.
The 4
Disciplines of Executionä
course teaches that execution succeeds or fails on the basis of four critical
disciplines, which include 1) focus on the most important goals, 2) acting on
the key measures that influence outcome, 3) track the progress on a compelling
scoreboard which makes progress visible, and 4) holding individuals
accountable. Our Execution products help organizations adopt
and implement an operating system for achieving their most pressing objectives
measurably and predictably.
Our
productivity course FOCUS:
Achieving Your Highest Priorities focuses on helping individuals
understand their personal values so they can accomplish their most important
tasks, both personally and professionally. Our training is based on a
productivity pyramid that helps individuals identify their values, set
achievable goals, and then build a system of weekly and daily planning, which
helps individuals achieve their highest priorities.
We
offer a series of pre- and post-assessment surveys and assessments to measure
and track key principles and actions taught in our course that directly relate
to individual and organizational effectiveness. These products
include xQä,
(Execution QuotientÔ),
LQÔ
(Leadership Quotient), tQÔ
(Trust Quotient), and the 7 Habits
Profile. These surveys, which are administered through a
Web-based system, search for details to uncover underlying focus and teamwork
barriers or issues.
We
also provide The 7 Habits of
Highly Effective Teensä as a
workshop or as a year-long curriculum to schools and school districts and other
organizations working with youth. Based on The 7 Habits of
Highly Effective Teens book, it helps to teach students and teachers
studying skills, learning habits, and interpersonal development. We
are currently developing a new curriculum entitled The Leader in
Meä,
which will help elementary
schools
incorporate The 7
Habits principles into their lessons to help students develop the life
skills they need to be successful.
In
addition to providing consultants and presenters, we train and certify client
facilitators to teach our workshops within their organizations. We
believe client–facilitated training is important to our fundamental strategy of
creating pervasive on-going client relationships, which results in perpetual
revenue streams. After having been certified by attending one of our
certification workshops and completing certain requirements, client facilitators
can purchase manuals, profiles, planners and other products to conduct training
workshops within their organization without incurring the costs of one of our
presenters, which makes it more cost-effective to distribute our curriculum
within all departments of their organization. Since 1988, we have
trained approximately 25,000 client facilitators.
Software
During
fiscal 2008, we launched a new web-based interactive
version of The 7 Habits of
Highly Effective People® course which was developed through a partnership
with Personnel Decisions International (formerly 9th
House), a leading firm which uses technology to create engaging learning
experiences. During the three-hour online instruction, participants
engage in interactive exercises that illustrate how to use The 7
Habits® in real work situations. Participants then get to test
their new skills in a state-of-the-art virtual simulation that shows the
real-world triumphs and challenges associated with the choices they have
made. Participants can also join a live one-day application workshop
to dive deeper in the content and practice what they have learned.
The 7 Habits of
Highly Effective People® course is also available on a CD-ROM
version. This edition delivers the content from the 3-day classroom
workshop in a flexible self-paced version via the Internet or CD-ROM and is
available when and where employees need it. The online edition is
presented in a multi-media format with video segments, voiceovers, a learning
journal, interactive exercises, and other techniques. Included with
the course is a 360-Degree profile and e-Coaching to help participants gain a
broader perspective of their strengths and weaknesses and to help them implement
the training to improve their skills.
Books
and Audio
The
principles we teach in our curriculum have also been published in book,
audiotape and CD formats, and can be downloaded from various Internet
sites. Books to which the Company holds copyrights include The 7 Habits of
Highly Effective People®,
Principle–Centered Leadership, First Things First, The 7 Habits of Highly
Effective Families, Nature of Leadership, Living the 7
Habits, The 8th
Habit: From
Effectiveness to Greatness, Everyday
Greatness, The Leader in Me, all by Stephen R. Covey; The 10 Natural
Laws of Time and Life Management, What Matters
Most and The Modern
Gladiator by Hyrum W. Smith; The Power
Principle by Blaine Lee; The 7 Habits of
Highly Effective Teens, The 6 Most
Important Decisions You’ll Ever Make, and The 7 Habits of Happy Kids by
Sean Covey; and Business
Think by Dave Marcum and Steve Smith. These books, as well as
audiotape and CD audio versions of many of these products, and the products
mentioned above are sold through general retail channels, audio book websites,
as well as through our own Internet site at www.franklincovey.com.
Segment
Information
Prior
to the sale of CSBU in the fourth quarter of fiscal 2008, our business was
organized in two segments: (1) the CSBU, which was designed to sell products to
individual consumers and small businesses; and (2) the OSBU, which is designed
to serve organizational clients. The following table sets forth, for
the fiscal periods indicated, the Company’s sales from external customers for
each of these operating segments (in thousands):
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YEAR
ENDED
AUGUST
31,
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2008
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Percent
change from prior year
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2007
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Percent
change from prior year
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2006
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Organizational
Solutions Business Unit:
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Domestic
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$ | 91,287 | (2 | ) | $ | 93,308 | 10 | $ | 84,904 | |||||||||||
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International
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59,100 | 2 | 57,674 | 18 | 48,984 | |||||||||||||||
| 150,387 | - | 150,982 | 13 | 133,888 | ||||||||||||||||
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Consumer
Solutions Business Unit:
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Retail stores
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42,167 | (22 | ) | 54,316 | (13 | ) | 62,156 | |||||||||||||
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Consumer direct
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38,662 | (19 | ) | 48,018 | (8 | ) | 52,171 | |||||||||||||
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Wholesale
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16,970 | (6 | ) | 17,991 | 1 | 17,782 | ||||||||||||||
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CSBU International
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7,295 | (1 | ) | 7,342 | (5 | ) | 7,716 | |||||||||||||
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Other CSBU
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4,611 | (16 | ) | 5,476 | 12 | 4,910 | ||||||||||||||
| 109,705 | (18 | ) | 133,143 | (8 | ) | 144,735 | ||||||||||||||
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Total
net sales
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$ | 260,092 | (8 | ) | $ | 284,125 | 2 | $ | 278,623 | |||||||||||
Additional
financial information related to our operating segments, as well as geographical
information can be found in the notes to our consolidated financial statements
(Note 19).
Organizational
Solutions Business Unit
The
following is a more detailed description of our OSBU and its primary operations,
which consist of domestic and international operations.
Domestic
Operations
In
general, we sell effectiveness and productivity solutions to our customers
through our own direct sales force. We then deliver training services
to organizations, schools and individuals in one of five ways:
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1.
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Our
consultants provide on-site coaching, consulting or training
classes. In these situations, our consultants tailor the
curriculum to our client’s specific business and
objectives.
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2.
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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 knowledgeable advocates of our
curriculum in organizations.
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3.
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Our
consultants provide training to individuals or small groups of individuals
through executive coaching sessions. In these sessions, our
consultants are able to deliver course content in greater detail and can
help adapt our course principles to the specific needs of the
organization.
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4.
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We
conduct public seminars in more than 100 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 Internet web-site and by direct mail.
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5.
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We
also offer The 7 Habits of Highly
Effective People® training course in online and CD-ROM
formats. These products provide the flexibility required by
many organizations.
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Our
domestic training operations are organized in geographic regional sales teams in
order to assure that both the consultant and the client sales professional
participate in the development of new business and the assessment of client
needs. Consultants are entrusted with the actual delivery of content,
seminars, processes and other solutions and are required to follow up with
client service teams to develop lasting client impact and ongoing business
opportunities.
We employ
over 150 sales professionals and business developers. Our sales
professionals have selling experience prior to employment by the Company and are
trained and evaluated in their respective sales territories. Sales
professionals typically call upon persons responsible for corporate employee
training, such as corporate training directors or human resource
officers. Increasingly, sales professionals are calling upon our
clients’ executive leadership or line leaders as they educate our clients on the
value of our solutions. Our sales professionals work closely with
training consultants in their territories to schedule and tailor seminars and
workshops to meet the specific objectives of our institutional
clients. We currently employ over 150 training
consultants
worldwide. Our
training consultants are selected from a large number of experienced
applicants. These consultants generally have several years of
training and/or consulting experience and are known for their excellent
presentation skills. Once selected, the training consultant goes
through a rigorous training program including multiple live
presentations. The training program ultimately results in the
Company's certification of the consultant.
International
Operations
We
deliver training services and products internationally through Company-owned and
licensed operations. We have wholly-owned operations and offices in
Australia, Canada, Japan, and the United Kingdom. We also have
licensed operations in Argentina, Angola, Austria, Bahrain, Bangladesh, Belgium,
Bermuda, Bolivia, Botswana, Brazil, Bulgaria, Chile, China, Colombia, Costa
Rica, Croatia, Czech Republic, Cyprus, Denmark, Dominican Republic, Ecuador,
Egypt, El Salvador, Estonia, Finland, France, Germany, Greece, Guatemala, Hong
Kong, Hungary, India, Iceland, Indonesia, Israel, Italy, Jordon, Kenya, Kuwait,
Latvia, Lebanon, Lesotho, Lithuania, Luxembourg, Madagascar, Malaysia,
Mauritius, Mexico, Mozambique, Namibia, Nepal, Netherlands,
Nicaragua, Nigeria, Norway, Oman, Panama, Paraguay, Peru, Philippines, Poland,
Portugal, Puerto Rico, Romania, Russia, Qatar, Saudi Arabia, Serbia, Singapore,
Slovak Republic, Slovenia, South Africa, South Korea, Spain, Sri Lanka,
Swaziland, Sweden, Switzerland, Tanzania, Taiwan, Thailand, Trinidad/Tobago,
Turkey, UAE, Ukraine, Uruguay, Venezuela, Vietnam, and Zambia. There
are also licensee retail operations in Hong Kong and South Korea. Our
nine most popular books, The 7
Habits of Highly Effective People, Principle–Centered Leadership, The
10 Natural Laws of Time and Life Management, First Things First, The Power
Principle, The 7 Habits of Highly Effective Families, The 7 Habits of Highly
Effective Teen, The 8th Habit: From Effectiveness to
Greatness, and The Six Most Important
Decisions You’ll Ever Makes are currently published in multiple
languages. Financial information about our foreign operations
is contained in Note 19 to our consolidated financial statements.
Clients
We have a
relatively broad base of organizational and individual clients. We
have more than 6,000 organizational clients consisting of corporations,
governmental agencies, educational institutions, and other
organizations. We believe that our products, workshops, and seminars
encourage strong client loyalty. Employees in each of our domestic
and international distribution channels focus on providing timely and courteous
responses to client requests and inquiries. Due to the nature of our
business, the Company does not have, nor has it had, a significant backlog of
firm orders.
Competition
Competition
in the performance skills organizational training and education industry is
highly fragmented with few large competitors. We estimate that the
industry represents more than $7 billion in annual revenues and that the largest
traditional organizational training firms have sales in the $100 million to $400
million range. Based upon our fiscal 2008 OSBU sales of $150.4
million, we believe we are a leading competitor in the organizational training
and education market. Other significant competitors in the training
market are Development Dimensions International, Institute for International
Research (IIR), Organizational Dynamics Inc., American Management Association,
Wilson Learning, Forum Corporation, EPS Solutions and the Center for Creative
Leadership.
Given the
relative ease of entry in our training market, the number of competitors could
increase, many of whom may imitate existing methods of distribution, or could
offer similar products and seminars at lower prices. Some of these
companies may have greater financial and other resources than us. We
believe that our products compete primarily on the basis of quality, proven
results, content, client loyalty, price, and client service. We also
believe our curriculum based upon best-selling books, which encompasses relevant
high-quality video segments, has become a competitive advantage. This
advantage is strengthened and enhanced by our ability to easily train
individuals within organizations to become client facilitators who in turn can
effectively relay our curriculum throughout their
organization. Moreover, we believe that we are a market leader in the
United
States in
productivity, leadership and execution products and
services. Increased competition from existing and future competitors
could, however, have a material adverse effect on our sales and
profitability.
Manufacturing
and Distribution
Following
the sale of CSBU in fiscal 2008, we no longer manufacture a significant portion
of our products. We purchase our training materials and related
products from various vendors and suppliers located both domestically and
internationally and we are not dependent upon any one vendor for the production
of our training and related materials as the raw materials for these products
are readily available. We currently believe that we have good
relationships with our suppliers and contractors.
During
fiscal 2001, we entered into a long-term contract with Electronic Data Systems
(EDS) to provide warehousing and distribution services for our training products
and related accessories. EDS maintains a facility at the Company’s
headquarters as well as at other locations throughout North
America.
Research
and Development
FranklinCovey
believes that the development of new curricula and related products are
important to maintaining its competitive position. Our products and
services are conceived, designed, and developed through the collaboration of our
internal innovations group and external partner organizations. We
expense in the same year incurred part of the costs to develop new curricula and
products. Curriculum costs are only capitalized when a course is
developed that will result in significant future benefits or when there is a
major revision to a course or course materials. Our research and
development expenditures totaled $4.6 million, $3.3 million, and $2.3 million in
fiscal years 2008, 2007, and 2006 respectively. Capitalized
curriculum development costs are reported as a component of other long-term
assets in our consolidated balance sheets and totaled $6.8 million and $8.6
million at August 31, 2008 and 2007. Amortization of capitalized
curriculum development costs is reported as a component of cost of
sales.
Trademarks,
Copyrights, and Intellectual Property
We seek
to protect our intellectual property through a combination of trademarks,
copyrights, and confidentiality agreements. We claim rights for 80
trademarks in the United States and have obtained registration in the United
States and many foreign countries for many of our trademarks, including FranklinCovey, The 7 Habits of
Highly Effective People, Principle–Centered Leadership, The 4 Disciplines of
Execution, FranklinCovey Planner, PlanPlus, The 7 Habits, and The 8th Habit. We
consider our trademarks and other proprietary rights to be important and
material to our business. Each of the marks set forth in italics
above is a registered mark or a mark for which protection is
claimed.
We own
sole or joint copyrights on our planning systems, books, manuals, text and other
printed information provided in our training seminars, and other electronic
media products, including audio tapes and video tapes. We license,
rather than sell, facilitator workbooks and other seminar and training materials
in order to protect our intellectual property rights
therein. FranklinCovey places trademark and copyright notices on its
instructional, marketing and advertising materials. In order to
maintain the proprietary nature of our product information, we enter into
written confidentiality agreements with certain executives, product developers,
sales professionals, training consultants, other employees and
licensees. Although we believe the protective measures with respect
to our proprietary rights are important, there can be no assurance that such
measures will provide significant protection from competitors.
Employees
At August
31, 2008, FranklinCovey had over 600 full- and part-time associates located in
the United States of America, Japan, the United Kingdom, Canada, and
Australia. During fiscal 2001, we outsourced a significant part of
our information technology services, customer service, distribution and
warehousing operations to EDS. A number of the Company’s former
employees involved in these operations are now employed by EDS to provide those
services to FranklinCovey. None of our associates are represented by
a union or other collective bargaining group.
Management
believes that its relations with its associates are good and we do not currently
foresee a shortage in qualified personnel needed to operate our
business.
Available
Information
The
Company’s principal executive offices are located at 2200 West Parkway
Boulevard, Salt Lake City, Utah 84119-2331 and our telephone number is (801)
817-1776.
We
regularly file reports with the Securities Exchange Commission
(SEC). These reports include, but are not limited to, Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
security transaction reports on Forms 3, 4, or 5. The public may read
and copy any materials that the Company files with the SEC at the SEC’s Public
Reference Room located at 100 F Street, NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic
versions of the Company’s reports, proxy and information statements, and other
information that the Company files with the SEC on its website at www.sec.gov.
The
Company makes our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
current reports on Form 8-K, and other reports filed or furnished with the SEC
available to the public, free of charge, through our website at www.franklincovey.com. These
reports are provided through our website as soon as reasonable practicable after
we file or furnish these reports with the SEC.
ITEM 1A. RISK
FACTORS
Our
business environment, current domestic and international economic conditions,
and other specific risks may affect our future business decisions and financial
performance. The matters discussed below may cause our future results
to differ from past results or those described in forward-looking statements and
could have a material adverse effect on our business, financial condition,
liquidity, results of operations, and stock price, and should be considered in
evaluating our company.
The
following list of potential risks does not contain the only risks currently
facing us. Additional business risks and uncertainties that are not
presently known to us or that are not currently believed to be material may also
harm our business operations and financial results in future
periods.
Our
results of operations could be adversely affected by economic and political
conditions and the effects of these conditions on our clients’ businesses and
their levels of business activity.
Global
economic and political conditions affect our clients’ businesses and the markets
in which they operate. A serious and/or prolonged economic downturn
combined with a negative or uncertain political climate could adversely affect
our clients’ financial condition and the business activity of our
clients. These conditions may reduce the demand for our services and
solutions or depress the pricing of those services and have a material adverse
impact on our results of operations. Changes in global economic
conditions may also shift demand to services for which we do not have
competitive advantages, and this could negatively affect the amount of business
that we are able to obtain. Such economic, political, and client
spending conditions are influenced by a wide range of factors that are beyond
our control and that we have no comparative advantage in
forecasting. If we are unable to successfully anticipate these
changing conditions, we may be unable to effectively plan for and respond to
those changes, and our business could be adversely affected.
Our
business success also depends in part upon continued growth in the use of
training and consulting services in business by our current and prospective
clients. In challenging economic environments, our clients may reduce
or defer their spending on new services and consulting solutions in order to
focus on other priorities. At the same time, many companies have
already invested substantial resources in their current means of conducting
their business and they may be reluctant or slow to adopt new approaches that
could disrupt existing personnel and/or processes. If the growth in
the general use of training and consulting services in business or our clients’
spending on these items declines, or if we cannot convince our clients or
potential clients to embrace new services and solutions, our results of
operations could be adversely affected.
In
addition, our business tends to lag behind economic cycles and, consequently,
the benefits of an economic recovery following a period of economic downturn may
take longer for us to realize than other segments of the economy.
We
operate in an intensely competitive industry and our competitors may develop
courses that adversely affect our ability to sell our offerings.
The
training and consulting services industry is intensely competitive with
relatively easy entry. Competitors continually introduce new programs
and services that may compete directly with our offerings or that may make our
offerings uncompetitive or obsolete. Larger and better capitalized
competitors may have superior abilities to compete for clients and skilled
professionals, reducing our ability to deliver quality work to our
clients. In
addition,
one or more of our competitors may develop and implement training courses or
methodologies that may adversely affect our ability to sell our curricula and
products to new clients. Any one of these circumstances could have a
material adverse effect on our ability to obtain new business and successfully
deliver our services and solutions.
Our
results of operations may be negatively affected if we cannot expand and develop
our services and solutions in response to client demand.
Our
success depends upon our ability to develop and deliver services and consulting
solutions that respond to rapid and continuing changes in client
needs. We may not be successful in anticipating or responding to
these developments on a timely basis and our offerings may not be successful in
the marketplace. The implementation and introduction of new programs
and solutions may entail more risk than supplying existing offerings to our
clients. In addition, the introduction of new or competing services
or solutions by current or future competitors may render our service or solution
offerings obsolete. Any one of these circumstances may have an
adverse impact upon our business and results of operations.
Our
business could be adversely affected if our clients are not satisfied with our
services.
The
success of our business model significantly depends on our ability to attract
new work from our base of existing clients, as well as new work from prospective
clients. Our business model also depends on the relationships our
senior executives and sales personnel develop with our clients so that we can
understand our clients’ needs and deliver services and solutions that are
specifically tailored to those needs. If a client is not satisfied
with the quality of work performed by us, or with the type of services or
solutions delivered, then we may incur additional costs to remediate the
situation, the profitability of that work might be decreased, and the client’s
dissatisfaction with our services could damage our ability to obtain additional
work from that client. In particular, clients that are not satisfied
might seek to terminate existing contracts prior to their scheduled expiration
date and could direct future business to our competitors. In
addition, negative publicity related to our client relationships, regardless of
its accuracy, may further damage our business by affecting our ability to
compete for new contracts with current and prospective clients.
Our
profitability could decrease if we are unable to control our costs.
Our
future success and profitability depend in part on our ability to achieve the
appropriate cost structure and improve our efficiency in the highly competitive
services industry in which we compete. We regularly monitor our
operating costs and develop initiatives and business models that impact our
operations and are designed to improve our profitability. Our recent
initiatives have included redemptions of preferred stock, exiting non-core
businesses, asset sales, headcount reductions, and other internal initiatives
designed to reduce our operating costs. If we do not achieve targeted
business model cost levels and manage our costs and processes to achieve
additional efficiencies, our competitiveness and profitability could
decrease.
Our
work with governmental clients exposes us to additional risks that are inherent
in the government contracting process.
Our
clients include national, provincial, state, and local governmental entities and
our work with these governmental entities has various risks inherent in the
government contracting process. These risks include, but are not
limited to, the following:
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·
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Governmental
entities typically fund projects through appropriated
monies. While these projects are often planned and executed as
multi-year projects, the government entities usually reserve the right to
change the scope of or terminate these projects for lack of approved
funding and at their convenience. Changes in government or political
developments could result in changes in scope or in termination of our
projects.
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Government
entities often reserve the right to audit our contract costs, including
allocated indirect costs, and conduct inquiries and investigations of our
business practices with respect to our government contracts. If the
governmental entity finds that the costs are not reimbursable, then we
will not be allowed to bill for those costs or the cost must be refunded
to the client if it has already been paid to us. Findings from an audit
also may result in our being required to prospectively adjust previously
agreed rates for our work and may affect our future
margins.
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·
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If
a government client discovers improper activities in the course of audits
or investigations, we may become subject to various civil and criminal
penalties and administrative sanctions, which may include termination of
contracts, forfeiture of profits, suspension of payments, fines and
suspensions or debarment from doing business with other agencies of that
government. The inherent limitations of internal controls may
not prevent or detect all improper or illegal activities, regardless of
their adequacy.
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·
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Political
and economic factors such as pending elections, revisions to governmental
tax policies and reduced tax revenues can affect the number and terms of
new government contracts signed.
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The
occurrences or conditions described above could affect not only our business
with the particular governmental agency involved, but also our business with
other agencies of the same or other governmental
entities. Additionally, because of their visibility and political
nature, government projects may present a heightened risk to our
reputation. Any of these factors could have a material adverse effect
on our business or our results of operations.
Our
profitability will suffer if we are not able to maintain our pricing and
utilization rates and control our costs.
Our
profit margin on our services and solutions is largely a function of the rates
we are able to recover for our services and the utilization, or chargeability,
of our trainers, client partners, and consultants. Accordingly, if we
are unable to maintain sufficient pricing for our services or an appropriate
utilization rate for our training professionals without corresponding cost
reductions, our profit margin and overall profitability will
suffer. The rates that we are able to recover for our services are
affected by a number of factors, including:
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Our
clients’ perceptions of our ability to add value through our programs and
products
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Competition
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General
economic conditions
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Introduction
of new programs or services by us or our
competitors
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Our
ability to accurately estimate, attain, and sustain engagement sales,
margins, and cash flows over longer contract
periods
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Our
utilization rates are also affected by a number of factors,
including:
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Seasonal
trends, primarily as a result of scheduled
training
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Our
ability to forecast demand for our products and services and thereby
maintain an appropriate headcount in our employee
base
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·
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Our
ability to manage attrition
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During
recent periods we have maintained favorable utilization
rates. However, there can be no assurance that we will be able to
maintain favorable utilization rates in future periods. Additionally,
we may not achieve a utilization rate that is optimal for us. If our
utilization rate is too high, it could have an adverse effect on employee
engagement and attrition. If our utilization rate is too low, our
profit margin and profitability could suffer.
If
our pricing structures do not accurately anticipate the cost and complexity of
performing our services, then our contracts may become
unprofitable.
We
negotiate pricing terms with our clients utilizing a range of pricing structures
and conditions. Depending on the particular contract and service to be provided,
these include time-and-materials pricing, fixed-price pricing, and contracts
with features of both of these pricing models. Our pricing is highly
dependent on our internal forecasts and predictions about our projects and the
marketplace, which might be based on limited data and could turn out to be
inaccurate. If we do not accurately estimate the costs and time
necessary to deliver our work, our contracts could prove unprofitable for us or
yield lower profit margins than anticipated. There is a risk that we
may under price our contracts, fail to accurately estimate the costs of
performing the work, or fail to accurately assess the risks associated with
potential contracts. In particular, any increased or unexpected
costs, delays or failures to achieve anticipated cost savings, or unexpected
risks we encounter in connection with the performance of our work, including
those caused by factors outside our control, could make these contracts less
profitable or unprofitable, which could have an adverse effect on our profit
margin.
Our
global operations pose complex management, foreign currency, legal, tax, and
economic risks, which we may not adequately address.
We have
Company-owned offices in Australia, Canada, Japan, and the United
Kingdom. We also have licensed operations in numerous other foreign
countries. As a result of these foreign operations and their growing
impact upon our results of operations, we are subject to a number of risks,
including:
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Restrictions
on the movement of cash
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Burdens
of complying with a wide variety of national and local
laws
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The
absence in some jurisdictions of effective laws to protect our
intellectual property rights
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Political
instability
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Currency
exchange rate fluctuations
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Longer
payment cycles
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Price
controls or restrictions on exchange of foreign
currencies
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While we
are not currently aware of any of the foregoing conditions materially adversely
affecting our operations, these conditions, which are outside of our control,
could change at any time.
We
may experience foreign currency gains and losses.
Our sales
outside of the United States totaled $62.9 million, or 24 percent of total
sales, for the year ended August 31, 2008. As our international
operations continue to grow and become a larger component of our overall
financial results, our revenues and operating results may be adversely affected
when the dollar strengthens relative to other currencies and may be positively
affected when the dollar weakens. In order to manage a portion of our
foreign currency risk, we make limited use of foreign currency derivative
contracts to hedge certain transactions and translation
exposure. There can be no guarantee that our foreign currency risk
management strategy will be effective in reducing the risks associated with
foreign currency transactions and translation.
Our
global operations expose us to numerous and sometimes conflicting legal and
regulatory requirements, and violation of these regulations could harm our
business.
Because
we provide services to clients in many countries, we are subject to numerous,
and sometimes conflicting, legal regimes on matters as diverse as import/export
controls, content requirements, trade restrictions, tariffs, taxation,
sanctions, government affairs, internal and disclosure control obligations, data
privacy and labor relations. Violations of these regulations in the
conduct of our business could result in fines, criminal sanctions against us or
our officers, prohibitions on doing business, and damage to our
reputation. Violations of these regulations in connection with the
performance of our obligations to our clients also could result in liability for
monetary damages, fines and/or criminal prosecution, unfavorable publicity,
restrictions on our ability to process information and allegations by our
clients that we have not performed our contractual obligations. Due
to the varying degrees of development of the legal systems of the countries in
which we operate, local laws might be insufficient to protect our
rights.
In many
parts of the world, including countries in which we operate, practices in the
local business community might not conform to international business standards
and could violate anticorruption regulations, including the U.S. Foreign Corrupt
Practices Act, which prohibits giving anything of value intended to influence
the awarding of government contracts. Although we have policies and
procedures to ensure legal and regulatory compliance, our employees, licensee
operators, and agents could take actions that violate these
requirements. Violations of these regulations could subject us to
criminal or civil enforcement actions, including fines and suspension or
disqualification from U.S. federal procurement contracting, any of which could
have a material adverse effect on our business.
Failure
to comply with the terms and conditions of our credit facility may have an
adverse effect upon our business and operations.
Our line
of credit facility requires us to be in compliance with customary non-financial
terms and conditions as well as specified financial ratios. Failure
to comply with these terms and conditions or maintain adequate financial
performance to comply with specific financial ratios entitles the lender to
certain remedies, including the right to immediately call due any amounts
outstanding on the line of credit. Such events would have an adverse
effect upon our business and operations as there can be no assurance that we may
be able to obtain other forms of financing or raise additional capital on terms
that would be acceptable to us.
Our
strategy to focus on training and consulting services may not be successful and
may not lead to the desired financial results.
During
the fourth quarter of fiscal 2008, we sold substantially all of the assets of
our Consumer Solutions Business Unit (CSBU) to a newly formed entity, Franklin
Covey Products. Although we believe the sale of the CSBU assets will
allow us to focus our resources and abilities on our services and solutions
offerings, many of the aspects of this plan, including future economic
conditions and the business strength of our clients, are not within our control
and we may not achieve our expected financial results within our anticipated
timeframe.
If
we are unable to attract, retain, and motivate high-quality employees, including
training consultants and other key training representatives, we will not be able
to compete effectively and will not be able to grow our business.
Our
success and ability to grow are dependent, in part, on our ability to hire,
retain and motivate sufficient numbers of talented people with the increasingly
diverse skills needed to serve our clients and grow our
business. Competition for skilled personnel is intense at all levels
of experience and seniority. To address this competition, we may need
to further adjust our compensation practices, which could put upward pressure on
our costs and adversely affect our profit margins. At the same time,
the profitability of our business model is partially dependent on our ability to
effectively utilize personnel with the right mix of skills and experience to
effectively deliver our programs and content. There is a risk that at
certain points in time and in certain geographical regions, we will find it
difficult to hire and retain a sufficient number of employees with the skills or
backgrounds we require, or that it will prove difficult to retain them in a
competitive labor market. If we are unable to hire and retain
talented employees with the skills, and in the locations, we require, we might
not be able to deliver our content and solutions services. If we need
to re-assign personnel from other areas, it could increase our costs and
adversely affect our profit margins.
In order
to retain key personnel, we continue to offer a variable component of
compensation, the payment of which is dependent upon our sales performance and
profitability. We adjust our compensation levels and have adopted
different methods of compensation in order to attract and retain appropriate
numbers of employees with the necessary skills to serve our clients and grow our
business. We may also use equity-based performance incentives as a
component of our executives’ compensation, which may affect amounts of cash
compensation. Variations in any of these areas of compensation may
adversely impact our operating performance.
If
we are unable to collect our accounts receivable on a timely basis, our results
of operations and cash flows could be adversely affected.
Our
business depends on our ability to successfully obtain payment from our clients
of the amounts they owe us for services performed. We evaluate the
financial condition of our clients and usually bill and collect on relatively
short cycles. We maintain allowances against our receivables and
unbilled services that we believe are adequate to reserve for potentially
uncollectible amounts. However, actual losses on client balances
could differ from those that we currently anticipate and as a result we might
need to adjust our allowances and there is no guarantee that we will accurately
assess the creditworthiness of our clients. Macroeconomic conditions
could also result in financial difficulties for our clients, and as a result
could cause clients to delay payments to us, request modifications to their
payment arrangements that could increase our receivables balance, or not pay
their obligations to us. Timely collection of client balances also
depends on our ability to complete our contractual commitments and bill and
collect our invoiced revenues. If we
are
unable to meet our contractual requirements, we might experience delays in
collection of and/or be unable to collect our client balances, and if this
occurs, our results of operations and cash flows could be adversely
affected. In addition, if we experience an increase in the time to
bill and collect for our services, our cash flows could be adversely
affected.
We
have only a limited ability to protect our intellectual property rights, which
are important to our success.
Our
financial success depends, in part, upon our ability to protect our proprietary
methodologies and other intellectual property. The existing laws of
some countries in which we provide services might offer only limited protection
of our intellectual property rights. To protect our intellectual
property, we rely upon a combination of trade secrets, confidentiality policies,
nondisclosure and other contractual arrangements, and patent, copyright and
trademark laws to protect our intellectual property rights. The steps
we take in this regard might not be adequate to prevent or deter infringement or
other misappropriation of our intellectual property, and we might not be able to
detect unauthorized use of, or take appropriate and timely steps to enforce, our
intellectual property rights, especially in foreign
jurisdictions.
The loss
of proprietary methodologies or the unauthorized use of our intellectual
property may create greater competition, loss of revenue, adverse publicity, and
may limit our ability to reuse that intellectual property for other
clients. Any limitation on our ability to provide a service or
solution could cause us to lose revenue-generating opportunities and require us
to incur additional expenses to develop new or modified solutions for future
engagements.
Our
strategy of outsourcing certain functions and operations may fail to reduce our
costs for these services.
We have
an outsourcing contract with Electronic Data Systems (EDS) to provide
warehousing, distribution, and information system operations. Under
the terms of the outsourcing contract and its addendums, EDS provides
warehousing and distribution services and supports our various information
systems. Due to the nature of our outsourced operations, we are
unable to exercise the same level of control over outsourced functions and the
actions of EDS employees in outsourced roles as our own employees. As
a result, the inherent risks associated with these outsourced areas of operation
may be increased.
Our
outsourcing contracts with EDS also contain early termination provisions that we
may exercise under certain conditions. However, in order to exercise
the early termination provisions, we would have to pay specified penalties to
EDS depending upon the circumstances of the contract termination.
We
have significant intangible asset balances that may be impaired if cash flows
from related activities decline.
At August
31, 2008 we had $72.3 million of intangible assets, which were primarily
generated from the fiscal 1997 merger with the Covey Leadership
Center. These intangible assets are evaluated for impairment based
upon cash flows (definite-lived intangible assets) and estimated royalties from
revenue streams (indefinite-lived intangible assets). Although our
current sales and cash flows are sufficient to support the carrying basis of
these intangibles, if our sales and corresponding cash flows decline, we may be
faced with significant asset impairment charges that would have an adverse
impact upon our operating margin and overall results of
operations.
Our
business could be negatively affected if we incur legal liability in connection
with providing our solutions and services.
If we
fail to meet our contractual obligations, fail to disclose our financial or
other arrangements with our business partners or otherwise breach obligations to
clients, we could be subject to legal liability. We may enter into
non-standard agreements because we perceive an important economic opportunity or
because our personnel did not adequately adhere to our guidelines. We
may also find ourselves committed to providing services that we are unable to
deliver or whose delivery will cause us financial loss. If we cannot,
or do not perform our obligations, we could face legal liability and our
contracts might not always protect us adequately through limitations on the
scope of our potential liability. If we cannot meet our contractual
obligations to provide services and solutions, and if our exposure is not
adequately limited through the terms of our agreements, then we might face
significant legal liability and our business could be adversely
affected.
We
depend on key personnel, the loss of whom could harm our business.
Our
future success will depend, in part, on the continued service of key executive
officers and personnel. The loss of the services of any key
individuals could harm our business. Our future success also depends
on our ability to identify, attract, and retain additional qualified senior
personnel. Competition for such individuals in our industry is
intense and we may not be successful in attracting and retaining such
personnel.
Our
future quarterly operating results are subject to factors that can cause
fluctuations in our stock price.
Historically,
our stock price has experienced significant volatility. We expect
that our stock price may continue to experience volatility in the future due to
a variety of potential factors that may include the following:
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Fluctuations
in our quarterly results of operations and cash
flows
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Increased
overall market volatility
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Variations
between our actual financial results and market
expectations
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Changes
in our key balances, such as cash and cash
equivalents
|
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Currency
exchange rate fluctuations
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Unexpected
asset impairment charges
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Lack
of analyst coverage
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In
addition, the stock market has recently experienced substantial price and volume
fluctuations that have impacted our stock and other equity issues in the
market. These factors, as well as general investor concerns regarding
the credibility of corporate financial statements, may have a material adverse
effect upon our stock price in the future.
We
may need additional capital in the future, and this capital may not be available
to us on favorable terms.
We may
need to raise additional funds through public or private debt offerings or
equity financings in order to:
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Develop
new services, programs, or
offerings
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Take
advantage of opportunities, including expansion of the
business
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Respond
to competitive pressures
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Any
additional capital raised through the sale of equity could dilute current
shareholders’ ownership percentage in us. Furthermore, we may be
unable to obtain the necessary capital on terms or conditions that are favorable
to us, or at all.
We
are the creditor for a management common stock loan program that may not be
fully collectible.
We are
the creditor for a loan program that provided the capital to allow certain
management personnel the opportunity to purchase shares of our common
stock. For further information regarding our management common stock
loan program, refer to the notes to our consolidated financial statements as
found in Item 8 of this Annual Report on Form 10-K. Our inability to
collect all, or a portion, of these receivables could have an adverse impact
upon our financial position and future cash flows compared to full collection of
the loans.
We
may have exposure to additional tax liabilities.
As a
multinational company, we are subject to income taxes as well as non-income
based taxes, in both the United States and various foreign tax
jurisdictions. Significant judgment is required in determining our
worldwide provision for income taxes and other tax liabilities. In
the normal course of a global business, there are many intercompany transactions
and calculations where the ultimate tax determination is
uncertain. As a result, we are regularly under audit by tax
authorities. Although we believe that our tax estimates are
reasonable, we cannot assure you that the final determination of tax audits will
not be different from what is reflected in our historical income tax provisions
and accruals.
We are
also subject to non-income taxes, such as payroll, sales, use, value-added, and
property taxes in both the United States and various foreign
jurisdictions. We are regularly under audit by tax authorities with
respect to these non-income taxes and may have exposure to additional non-income
tax liabilities.
We
could have liability or our reputation could be damaged if we do not protect
client data or if our information systems are breached.
We are
dependent on information technology networks and systems to process, transmit
and store electronic information and to communicate among our locations around
the world and with our clients. Security breaches of this infrastructure could
lead to shutdowns or disruptions of our systems and potential unauthorized
disclosure of confidential information. We are also required at times
to manage, utilize and store sensitive or confidential client or employee
data. As a result, we are subject to numerous U.S. and foreign
jurisdiction laws and regulations designed to protect this information, such as
the various U.S. federal and state laws governing the protection of health or
other individually identifiable information. If any person, including
any of our associates, negligently disregards or intentionally breaches our
established controls with respect to such data or otherwise mismanages or
misappropriates that data, we could be subject to monetary damages, fines and/or
criminal prosecution. Unauthorized disclosure of sensitive or
confidential client or employee data, whether through systems failure, employee
negligence, fraud or misappropriation, could damage our reputation and cause us
to lose clients.
International
hostilities, terrorist activities, and natural disasters may prevent us from
effectively serving our clients and thus adversely affect our operating
results.
Acts of
terrorist violence, armed regional and international hostilities, and
international responses to these hostilities, natural disasters, global health
risks or pandemics or the threat of or perceived potential for these events,
could have a negative impact on our directly owned or licensee
operations. These events could adversely affect our clients’ levels
of business activity and precipitate sudden significant changes in regional and
global economic conditions and cycles. These events also pose
significant risks to our people and to physical facilities and operations around
the world, whether the facilities are ours or those of our alliance partners or
clients. By disrupting communications and travel and increasing the
difficulty of obtaining and retaining highly skilled and qualified personnel,
these events could make it difficult or impossible for us or our licensee
partners to deliver services to clients. Extended disruptions of
electricity, other public utilities or network services at our facilities, as
well as system failures at, or security breaches in, our facilities or systems,
could also adversely affect our ability to serve our clients. While
we plan and prepare to defend against each of these occurrences, we might be
unable to protect our people, facilities and systems against all such
occurrences. We generally do not have insurance for losses and
interruptions caused by terrorist attacks, conflicts and wars. If
these disruptions prevent us from effectively serving our clients, our operating
results could be adversely affected.
A
natural or man-made disaster in Salt Lake City, Utah could have an adverse
effect on our business.
We
manufacture and ship training materials at numerous sites located around the
world. However, a significant portion of our training materials are
manufactured and shipped from facilities located in Salt Lake City,
Utah. In the event that these facilities were severely damaged or
destroyed as a result of a natural or man-made disaster, we could suffer
significant disruptions to our ability to manufacture and ship training
materials to our clients. Such events may have a material adverse
effect on our business prospects, results of operations, and financial
condition.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. Properties
Franklin
Covey’s principal business operations and executive offices are located in Salt
Lake City, Utah. The following is a summary of our owned and leased
properties. Our corporate headquarters lease is accounted for as a
financing arrangement and all other facility lease agreements are accounted for
as operating leases. Our lease agreements expire at various dates
through the year 2025.
Corporate
Facilities
Corporate
Headquarters and Administrative Offices:
Salt Lake City, Utah (7 buildings) –
all leased
Organizational Solutions
Business Unit
Regional
Sales Offices:
United States (5 locations) – all
leased
International
Administrative/Sales Offices:
Canada (1 location) –
owned
Asia Pacific (4 locations) – all
leased
England (1 location) –
leased
International
Distribution Facilities:
Canada (1 location) –
owned
Asia Pacific (3 locations) – all
leased
England (1 location) –
leased
We
consider our existing facilities to be in good condition and suitable for our
current and anticipated level of operations in the upcoming fiscal
year.
A
significant portion of our corporate headquarters campus located in Salt Lake
City, Utah is subleased to several unrelated entities.
The
following significant developments occurred during fiscal 2008 that affected our
properties:
|
·
|
During
the fourth quarter of fiscal 2008, we completed the sale of our Consumer
Solutions Business Unit, which operated retail stores both domestically
and in certain international
locations.
|
|
·
|
In
connection with a restructuring plan initiated in the fourth quarter of
fiscal 2008, we closed one domestic regional sales office and intend to
close our Canadian facility in fiscal
2009.
|
ITEM 3. Legal
Proceedings
In August
2005, EpicRealm Licensing (EpicRealm) filed an action in the United States
District Court for the Eastern District of Texas against the Company for patent
infringement. The action alleged that the Company infringed upon two
of EpicRealm’s patents directed to managing dynamic web page requests from
clients to a web server that in turn uses a page server to generate a dynamic
web page from content retrieved from a data source. The Company
denied liability in the patent infringement and filed counter-claims related to
the case subsequent to the filing of the action in District
Court. However, during the fiscal year
ended
August 31, 2008, the Company paid EpicRealm a one-time license fee of $1.0
million for a non-exclusive, irrevocable, perpetual, and royalty-free license to
use any product, system, or invention covered by the disputed
patents. In connection with the purchase of the license, EpicRealm
and the Company agreed to dismiss their claims with prejudice and the Company is
released from further action regarding these patents.
The
Company is also the subject of certain other legal actions, which we consider
routine to our business activities. At August 31, 2008, we believe
that, after consultation with legal counsel, any potential liability to the
Company under such actions will not materially affect our financial position,
liquidity, or results of operations.
ITEM 4. Submission of Matters
to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the fourth quarter
of our fiscal year ended August 31, 2008.
PART
II
ITEM 5. Market for the
Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of
Equity Securities
FranklinCovey’s
common stock is listed and traded on the New York Stock Exchange (NYSE) under
the symbol “FC.” The following table sets forth the high and low sale
prices per share for our common stock, as reported on the NYSE, for the fiscal
years ended August 31, 2008 and 2007.
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended August 31, 2008:
|
||||||||
|
Fourth Quarter
|
$ | 9.32 | $ | 7.35 | ||||
|
Third Quarter
|
8.76 | 6.72 | ||||||
|
Second Quarter
|
8.00 | 6.86 | ||||||
|
First Quarter
|
7.75 | 5.91 | ||||||
|
Fiscal
Year Ended August 31, 2007:
|
||||||||
|
Fourth Quarter
|
$ | 8.99 | $ | 6.97 | ||||
|
Third Quarter
|
9.01 | 7.10 | ||||||
|
Second Quarter
|
8.15 | 5.66 | ||||||
|
First Quarter
|
6.18 | 4.96 | ||||||
On
November 3, 2008, our common stock closed at $5.25 per
share. Subsequent to our fiscal year end on August 31, 2008 the stock
market in the United States experienced increased volatility and suffered
significant losses primarily as a result of the credit and liquidity
crises. Due to the serious and unpredictable nature of these factors
affecting the stock market, we are unable to determine what, if any, impact
these external factors may have upon our stock price in future
periods.
We did
not pay or declare dividends on our common stock during the fiscal years ended
August 31, 2008 or 2007. We currently anticipate that we will retain
all available funds to
repay our
line of credit obligation, finance future growth and business opportunities, and
to purchase shares of our common stock. We do not intend to pay cash
dividends on our common stock in the foreseeable future.
As of
November 3, 2008, the Company had 16,879,498 shares of common stock outstanding,
which were held by 392 shareholders of record.
Purchases
of Common Stock
The
following table summarizes Company purchases of common stock during the fiscal
quarter ended August 31, 2008:
|
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)
|
||||||||||||
|
June
1, 2008 to
July 5, 2008
|
- | $ | - |
none
|
$ | 2,413 | ||||||||||
|
July
6, 2008 to
August 2, 2008
|
- | - |
none
|
2,413 | ||||||||||||
|
August
3, 2008 to
August 31, 2008
|
3,027,027 | (1) | 9.32 | 3,027,027 | 2,413 | (2) | ||||||||||
|
Total
Common
Shares
|
3,027,027 | $ | 9.32 | 3,027,027 | ||||||||||||
|
(1)
|
During
August 2008, we completed a modified “Dutch Auction” tender offer in which
we were able to purchase 3,027,027 shares of our common stock for $9.25
per share plus costs necessary to conduct the tender
offer.
|
|
(2)
|
In
January 2006, our Board of Directors approved the purchase of up to $10.0
million of our outstanding common stock. All previous
authorized common stock purchase plans were canceled. Following
the approval of this common stock purchase plan, we have purchased a total
of 1,009,300 shares of our common stock for $7.6 million through August
31, 2008 under the terms of this
plan.
|
Performance
Graph
The
following graph shows a comparison of cumulative total shareholder return
indexed to August 31, 2003, calculated on a dividend reinvested basis, for the
five fiscal years ended August 31, 2008, for Franklin Covey Co. common stock,
the S&P SmallCap 600 Index, and the S&P Diversified Commercial Services
Index. The Company was previously included in the S&P 600
SmallCap Index and was assigned to the S&P Diversified Commercial and
Professional Services Index within the S&P 600 SmallCap
Index. The Company believes that if it were included in an index it
would be included in the indices where it was previously listed. The
Diversified Commercial Services Index consists of 7 companies similar in size
and nature to Franklin Covey. The Company is no longer a part of the
S&P 600 SmallCap Index but believes that the S&P 600 SmallCap Index and
the Diversified
Commercial
Services Index continues to provide appropriate benchmarks with which to compare
our stock performance.
ITEM 6. Selected Financial
Data
The
selected consolidated financial data presented below should be read in
conjunction with the consolidated financial statements of Franklin Covey and the
related footnotes as found in Item 8 of this report on Form
10-K. During fiscal 2008, we sold substantially all of the assets of
our Consumer Solutions Business Unit (CSBU), which was primarily responsible for
the sale of our products to consumers. Based upon applicable
accounting guidance, the operations of CSBU did not qualify for discontinued
operations presentation and therefore no prior periods were adjusted to reflect
the sale of the CSBU assets.
|
August
31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
In
thousands, except per share data
|
||||||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 260,092 | $ | 284,125 | $ | 278,623 | $ | 283,542 | $ | 275,434 | ||||||||||
|
Income
(loss) from operations
|
16,760 | 18,084 | 14,046 | 8,443 | (9,064 | ) | ||||||||||||||
|
Net
income (loss) before income taxes
|
13,834 | 15,665 | 13,631 | 9,101 | (8,801 | ) | ||||||||||||||
|
Income
tax benefit (provision)(1)
|
(7,986 | ) | (8,036 | ) | 14,942 | 1,085 | (1,349 | ) | ||||||||||||
|
Net
income (loss)(1)
|
5,848 | 7,629 | 28,573 | 10,186 | (10,150 | ) | ||||||||||||||
|
Net
income (loss) available to common shareholders(1)
|
5,848 | 5,414 | 24,188 | (5,837 | ) | (18,885 | ) | |||||||||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | .30 | $ | .28 | $ | 1.20 | $ | (.34 | ) | $ | (.96 | ) | ||||||||
|
Diluted
|
$ | .29 | $ | .27 | $ | 1.18 | $ | (.34 | ) | $ | (.96 | ) | ||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Total
current assets
|
$ | 67,911 | $ | 70,103 | $ | 87,120 | $ | 105,182 | $ | 92,229 | ||||||||||
|
Other
long-term assets
|
11,768 | 14,542 | 12,249 | 9,051 | 7,305 | |||||||||||||||
|
Total
assets
|
178,927 | 196,631 | 216,559 | 233,233 | 227,625 | |||||||||||||||
|
Long-term
obligations
|
38,762 | 35,178 | 35,347 | 46,171 | 13,067 | |||||||||||||||
|
Total
liabilities
|
100,173 | 95,712 | 83,210 | 100,407 | 69,146 | |||||||||||||||
|
Preferred
stock(2)
|
- | - | 37,345 | 57,345 | 87,203 | |||||||||||||||
|
Shareholders’
equity
|
78,754 | 100,919 | 133,349 | 132,826 | 158,479 | |||||||||||||||
|
(1)
|
Net
income in fiscal 2006 includes the impact of deferred tax asset valuation
allowance reversals totaling $20.3
million.
|
|
(2)
|
During
fiscal 2007, we redeemed all remaining outstanding shares of Series A
preferred stock at its liquidation preference of $25 per share plus
accrued dividends.
|
ITEM 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Management’s
discussion and analysis contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These
statements are based upon management’s current expectations and are subject to
various uncertainties and changes in circumstances. Important factors
that could cause actual results to differ materially from those described in
forward-looking statements are set forth below under the heading “Safe Harbor
Statement Under the Private Securities Litigation Reform Act of
1995.”
The
Company suggests that the following discussion and analysis be read in
conjunction with the Consolidated Financial Statements and related notes as
presented in Item 8 of this report on Form 10-K.
INTRODUCTION
The
following management’s discussion and analysis is intended to provide a summary
of the principal factors affecting the results of operations, liquidity and
capital resources, contractual obligations, and the critical accounting policies
of Franklin Covey Co. (also referred to as the Company, we, us, our, and
FranklinCovey, unless otherwise indicated) and subsidiaries. This
discussion and analysis should be read together with our consolidated financial
statements and related notes, which contain additional information regarding the
accounting policies and estimates underlying the Company’s financial
statements. Our consolidated financial statements and related notes
are presented in Item 8 of this report on Form 10-K.
FranklinCovey
believes that great organizations consist of great people who form great teams
that produce great results. To achieve great results, we seek to
improve the effectiveness of organizations and individuals and we are a
worldwide leader in providing integrated learning and performance solutions to
organizations and individuals that are designed to enhance leadership, strategic
execution, productivity, sales force effectiveness, communications, and other
skills. Historically, our solutions included products and services
that encompassed training and consulting, assessment, and various application
tools that were generally available in electronic or paper-based
formats. Our products and services were available through
professional consulting services, public workshops, retail stores, catalogs, and
the Internet at www.franklincovey.com
and our best-known offerings in the marketplace included the FranklinCovey
Planner™, and a suite of individual-effectiveness and leadership-development
training products based on the best-selling book The 7 Habits of Highly Effective
People.
Over the
past several years, the strategic focus of both our Consumer Solutions Business
Unit (CSBU), which was focused primarily on sales of our products, and our
Organizational Solutions Business Unit (OSBU), which was focused on the
development and delivery of training, consulting, and related services, has
changed significantly. As a consequence of these changes in strategic
direction, we determined that the extent of overlap between our training and
consulting offerings and our products has diminished. After
significant analysis and deliberation, it became apparent that these business
units would be able to operate more effectively as separate companies, each with
clear and distinct strategic objectives, market definitions, and competitive
products and services. This conclusion persuaded us to sell
substantially all of the operations of the CSBU. During the fourth
quarter of our fiscal year ended August 31, 2008, we completed the sale of the
CSBU to a newly formed entity, Franklin Covey Products, LLC and reported a gain
of $9.1 million from the transaction. Franklin Covey Products, LLC
was formed with the objective of expanding the worldwide sales of Franklin Covey
products through proprietary channels and through third-party retailers as
governed by a comprehensive license agreement with the Company.
Following
the sale of the CSBU, we will be able to focus our full resources on the
continued expansion of our training, consulting, content-rich media, and thought
leadership businesses, which currently operate in 147 countries. Our
business will primarily consist of training, consulting, and assessment services
and products to help organizations and individuals achieve superior results by
focusing on and executing on top priorities, building the capability of
knowledge workers, and aligning business processes. Our training,
consulting, and assessment offerings include services based upon the popular
workshop The 7 Habits of
Highly Effective PeopleÒ; Leadership: Great
Leaders—Great Teams—Great
Resultsä; The 4 Disciplines of
ExecutionTM; FOCUS: Achieving Your Highest
Priorities; The 8
Habits of a Successful Marriage; Building Business
Acumen; Championing
Diversity; Leading at
the Speed of Trust;
Writing Advantage, and
Presentation Advantage. During fiscal 2008, we introduced a
new suite of services designed to help our clients improve their sales through
increased customer loyalty. We also consistently seek to create,
develop, and introduce new services and products that will help our clients
achieve greatness.
The key
factors that influence our operating results include the number of organizations
that are active customers; the number of people trained within those
organizations; the availability of budgeted training spending at our clients and
prospective clients, which is significantly influenced by general economic
conditions; and our ability to manage operating costs necessary to develop and
provide meaningful training and related products to our clients.
The sale
of the CSBU assets was completed with approximately two months left in our
fiscal year ended August 31, 2008, and based upon continuing involvement we will
not present the financial results of the CSBU in a discontinued operations
format. Refer to Note 2 of the Notes to the Consolidated Financial
Statements in Item 8 for a discussion of the components of the gain and the
accounting treatment of the sale of the CSBU assets. Since the CSBU
accounted for approximately 47 percent of our consolidated sales in fiscal 2007,
the sale of the CSBU had a significant impact on our fiscal 2008 financial
results and will have an even more pronounced comparative impact on our
financial statements in future periods.
Our
fiscal year ends on August 31, and unless otherwise indicated, fiscal 2008,
fiscal 2007, and fiscal 2006, refers to the twelve-month periods ended August
31, 2008, 2007, and 2006.
RESULTS
OF OPERATIONS
Overview
of the Fiscal Year ended August 31, 2008
Our
fiscal 2008 operating results were significantly affected by the fourth quarter
sale of our CSBU operations, which is described above. The sale of
our CSBU operations primarily affected our financial statements through reduced
product sales in the fourth quarter, a corresponding reduction in our gross
profit, reduced selling, general, and administrative expenses, and the
recognition of a $9.1 million gain. We used substantially all of the
net proceeds from the sale of the CSBU to purchase approximately 3.0 million
shares of our common stock for $28.2 million through a modified “Dutch Auction”
tender offer that was completed close to August 31, 2008. Since the
tender offer was completed so near the end of our fiscal year, it did not have a
significant impact on our weighted average shares outstanding or our calculation
of earnings per common share for the year.
For the
year ended August 31, 2008, our consolidated sales decreased to $260.1 million
compared to $284.1 million in fiscal 2007. The decrease in sales was
primarily due to the sale of CSBU combined with declining product sales during
the fiscal year, which were partially offset by improved training and consulting
service sales. For the year ended August 31, 2008, we reported income
from operations of $16.8 million, including the gain from the sale of CSBU,
compared to $18.1 million in fiscal 2007, and our income before taxes decreased
to $13.8 million compared to $15.7 million in the prior
year. However, with the favorable impact of reduced preferred
dividends resulting from the fiscal 2007 redemption of the remaining preferred
stock, our net income available to common shareholders increased to $5.8 million
compared to $5.4 million in fiscal 2007.
The
following information is intended to provide an overview of the primary factors
that influenced our financial results for the fiscal year ended August 31,
2008:
|
·
|
Sales
Performance –
Our consolidated sales decreased $24.0 million compared to the
prior year primarily due to the sale of CSBU and declining product sales
that occurred during fiscal 2008. Our training and consulting
services sales increased by $0.4 million compared to fiscal 2007, which
was primarily attributable to improvements in sales through our
international delivery
channels.
|
|
·
|
Gross
Profit – Consolidated gross profit decreased to $161.8 million
compared to $175.1 million in fiscal 2007. However, our gross
margin, which is gross profit stated as a percentage of sales, increased
to 62.2 percent compared to 61.6 percent in the prior year. The
increase in gross margin was due to increased training and consulting
services as a percent of total sales during fiscal 2008 since the majority
of our training and consulting services have higher gross margins than our
product sales.
|
|
·
|
Operating
Costs – Our operating costs, excluding the gain on the sale of CSBU
and the fiscal 2007 gain on the manufacturing facility, decreased by $4.1
million compared to fiscal 2007. The decrease in operating
costs was attributable to a $7.9 million decrease in selling, general, and
administrative expense, which was primarily due to the sale of CSBU, that
was partially offset by a $2.1 million restructuring charge, a $1.5
million impaired asset charge, and a $0.3 million increase in depreciation
expense.
|
Further
details regarding these items can be found in the comparative analysis of fiscal
2008 compared to fiscal 2007 as discussed in this management’s discussion and
analysis.
The
following table sets forth, for the fiscal years indicated, the percentage of
total sales represented by the line items through income before income taxes in
our consolidated income statements:
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Training
and consulting services sales
|
53.1 | % | 48.5 | % | 43.9 | % | ||||||
|
Product
sales
|
46.9 | 51.5 | 56.1 | |||||||||
|
Total
sales
|
100.0 | 100.0 | 100.0 | |||||||||
|
Training
and consulting services cost of sales
|
17.2 | 15.2 | 14.6 | |||||||||
|
Product
cost of sales
|
20.6 | 23.2 | 25.1 | |||||||||
|
Total
cost of sales
|
37.8 | 38.4 | 39.7 | |||||||||
|
Gross
profit
|
62.2 | 61.6 | 60.3 | |||||||||
|
Selling,
general, and administrative
|
54.3 | 52.5 | 52.0 | |||||||||
|
Gain
on sale of CSBU assets
|
(3.5 | ) | - | - | ||||||||
|
Gain
on sale of manufacturing facility
|
- | (0.4 | ) | - | ||||||||
|
Restructuring
costs
|
0.8 | - | - | |||||||||
|
Impairment
of assets
|
0.6 | - | - | |||||||||
|
Depreciation
|
2.2 | 1.8 | 1.9 | |||||||||
|
Amortization
|
1.4 | 1.3 | 1.4 | |||||||||
|
Total
operating expenses
|
55.8 | 55.2 | 55.3 | |||||||||
|
Income
from operations
|
6.4 | 6.4 | 5.0 | |||||||||
|
Interest
income
|
0.1 | 0.3 | 0.5 | |||||||||
|
Interest
expense
|
(1.2 | ) | (1.2 | ) | (0.9 | ) | ||||||
|
Recovery
from legal settlement
|
- | - | 0.3 | |||||||||
|
Income
before income taxes
|
5.3 | % | 5.5 | % | 4.9 | % | ||||||
Segment
Review
During
the majority of fiscal 2008 we had two operating segments: the
Organizational Solutions Business Unit (OSBU) and the Consumer Solutions
Business Unit (CSBU). However, during the fourth quarter of fiscal
2008, we completed the sale of substantially all of the assets of the CSBU,
which reduced amounts reported by that segment in fiscal 2008 by approximately
two monthly reporting periods. The following
is a
description of these segments, their primary operating components, and their
significant business activities during the periods reported:
Organizational
Solutions Business Unit – The OSBU is primarily responsible for the
development, marketing, sale, and delivery of strategic execution, productivity,
leadership, sales force performance, and communication training and consulting
solutions directly to organizational clients, including other companies, the
government, and educational institutions. The OSBU includes the
financial results of our domestic sales force, public programs, and certain
international operations. The domestic sales force is responsible for
the sale and delivery of our training and consulting solutions services in the
United States. Our international sales group includes the financial
results of our directly owned foreign offices and royalty revenues from
licensees.
Consumer
Solutions Business Unit – This business unit was primarily focused on
sales to individual customers and small business organizations and included the
results of our domestic retail stores, consumer direct operations (primarily
Internet sales and call center), wholesale operations, international product
channels in certain countries, and other related distribution channels,
including government product sales and domestic printing and publishing
sales. The CSBU results of operations also included the financial
results of our paper planner manufacturing operations. Although CSBU
sales primarily consisted of products such as planners, binders, software,
totes, and related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may have been purchased through
our CSBU channels.
The
following table sets forth sales data by category and for our operating segments
for the periods indicated. For further information regarding our
reporting segments and geographic information, refer to Note 19 to our
consolidated financial statements as found in Item 8 of this report on Form 10-K
(in thousands).
|
YEAR
ENDED
AUGUST
31,
|
2008
|
Percent
change from prior year
|
2007
|
Percent
change from prior year
|
2006
|
|||||||||||||||
|
Sales
by Category:
|
||||||||||||||||||||
|
Training
and consulting services
|
$ | 138,112 | - | $ | 137,708 | 12 | $ | 122,418 | ||||||||||||
|
Products
|
121,980 | (17 | ) | 146,417 | (6 | ) | 156,205 | |||||||||||||
| $ | 260,092 | (8 | ) | $ | 284,125 | 2 | $ | 278,623 | ||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||
|
Domestic
|
$ | 91,287 | (2 | ) | $ | 93,308 | 10 | $ | 84,904 | |||||||||||
|
International
|
59,100 | 2 | 57,674 | 18 | 48,984 | |||||||||||||||
| 150,387 | - | 150,982 | 13 | 133,888 | ||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||
|
Retail stores
|
42,167 | (22 | ) | 54,316 | (13 | ) | 62,156 | |||||||||||||
|
Consumer direct
|
38,662 | (19 | ) | 48,018 | (8 | ) | 52,171 | |||||||||||||
|
Wholesale
|
16,970 | (6 | ) | 17,991 | 1 | 17,782 | ||||||||||||||
|
CSBU International
|
7,295 | (1 | ) | 7,342 | (5 | ) | 7,716 | |||||||||||||
|
Other CSBU
|
4,611 | (16 | ) | 5,476 | 12 | 4,910 | ||||||||||||||
| 109,705 | (18 | ) | 133,143 | (8 | ) | 144,735 | ||||||||||||||
|
Total
net sales
|
$ | 260,092 | (8 | ) | $ | 284,125 | 2 | $ | 278,623 | |||||||||||
FISCAL
2008 COMPARED TO FISCAL 2007
Sales
Training and
Consulting Services –
We offer a variety of training courses, training related products, and
consulting services focused on leadership, productivity, strategy execution,
sales force performance, and effective communications that are provided both
domestically and internationally through the OSBU. Our consolidated
training and consulting service sales increased by $0.4 million compared to the
prior year. Training and consulting service sales performance in
fiscal 2008 was primarily influenced by the following factors in our domestic
and international OSBU operations:
|
·
|
Domestic –
Our domestic training sales decreased $2.0 million, or two percent,
compared to fiscal 2007, primarily due to lower sales from our sales
performance group, public programs, and our book and audio
divisions. Decreased sales from these groups were partially
offset by increased sales from our combined geographical and vertical
market sales offices and by increased sales from specialized seminar
events. During fiscal 2008, sales through our direct sales
offices improved over the prior year as acceptance of our core product
offerings, which includes The Seven Habits of Highly
Effective People, Leadership: Great Leaders, Great Teams, Great Results,
and The 4
Disciplines of Execution, continued to
strengthen.
|
Four of
our seven domestic offices generated increased year-over-year sales and sales of
our training materials to our client facilitators improved four percent compared
to the prior year. Revenue from the number of training and consulting
days delivered increased two percent over the prior year as our average revenue
per day received increased. The number of training days delivered,
however, declined three percent compared to fiscal 2007.
|
·
|
International –
International sales increased $1.4 million compared to the prior
year. Sales from our four remaining directly owned foreign
offices as well as from licensee royalty revenues increased $6.9 million,
or 14 percent, compared to the prior year as each of these units achieved
double-digit growth. Partially offsetting these increases
was the elimination of sales from our wholly owned subsidiary in Brazil
and our training operations located in Mexico. We sold these
operations to external licensees during fiscal 2007 and we now only
receive royalty revenue from their operations based upon gross
sales. The conversion of these operations to licensees had a
$5.4 million unfavorable impact on our international sales but improved
our income from these operations compared to the prior
year. The translation of foreign sales to United States dollars
had a $3.7 million favorable impact on our consolidated sales as foreign
currencies strengthened against the United States dollar during fiscal
2008.
|
Product
Sales –
Consolidated product sales, which primarily consist of planners, binders,
totes, software and related accessories that are primarily sold through our CSBU
channels, declined $24.4 million compared to the prior year. The
decline in overall product sales during fiscal 2008 was primarily due to the
sale of our CSBU operations in fiscal 2008 combined with the following
performance in CSBU delivery channels prior to the effective date of the
sale.
|
·
|
Retail Stores – Prior to
the sale of the CSBU operations, our retail sales decreased compared to
the prior year primarily due to reduced traffic in our retail locations,
which was partially due to a significant increase in the number of
wholesale outlets that sold our products and competed directly against our
retail stores, reduced demand for technology and related products, and
fewer store locations, which had a $2.5 million impact on retail
sales. Our retail store traffic, or the number of consumers
entering our retail locations, declined by approximately 18 percent on a
comparable basis (for stores which were open during the comparable
periods) and resulted in decreased sales of “core” products (e.g.
planners, binders, totes, and accessories). Due to declining
demand for electronic handheld planning products, during late fiscal 2007
we decided to exit the low-margin
handheld
|
device
and related electronics accessories business, which reduced retail sales by $0.9
million compared to the prior year. These factors combined to produce
a 7 percent decline in year-over-year comparable store sales versus the prior
year.
|
·
|
Consumer Direct – Sales
through our consumer direct channels (primarily the Internet and call
center) decreased primarily due to a decline in the number of customers
visiting our website and a decline in the number of orders that are being
processed through the call center. Visits to our website
decreased from the prior year by approximately 12
percent. Declining consumer orders through the call center
continues a long-term trend and decreased by approximately 14 percent
compared to the prior year, which we believe was partially the result
of a transition of customers to our other product
channels.
|
|
·
|
Wholesale – Sales
through our wholesale channel, which included sales to office superstores
and other retail chains, decreased primarily due to the transition of a
portion of our wholesale business to a new distributor and the timing of
sales as the new distributor built
inventories.
|
|
·
|
CSBU International –
This channel includes the product sales of our directly owned
international offices in Canada, the United Kingdom, Mexico, and
Australia. Product sales were flat through these channels
compared to the prior year before the sale of
CSBU.
|
|
·
|
Other CSBU – Other CSBU
sales consist primarily of domestic printing and publishing sales and
building sublease revenues. The decline in other CSBU sales was
primarily due to decreased external printing sales, which was partially
offset by a $0.3 million increase in sublease
revenue.
|
Following
completion of the sale of our CSBU assets to Franklin Covey Products, we expect
that our product sales will decline sharply as the majority of sales reported
through the above channels are transitioned to Franklin Covey
Products.
Gross
Profit
Gross
profit consists of net sales less the cost of goods sold or the cost of services
provided. Our cost of sales includes materials used in the production
of planners and related products, assembly and manufacturing labor costs, direct
costs of conducting seminars, freight, and certain other overhead
costs. Gross profit may be affected by, among other things, prices of
materials, labor rates, product sales mix, changes in product discount levels,
production efficiency, and freight costs.
We record
the costs associated with operating our retail stores, call center, and Internet
site as part of our consolidated selling, general, and administrative
expenses. Therefore, our consolidated gross profit may not be
comparable with the gross profit of other companies that include similar
costs in their cost of sales.
For
fiscal 2008, our consolidated gross profit decreased to $161.8 million compared
to $175.1 million in fiscal 2007. The decrease was primarily
attributable to the sale of CSBU and declining product sales during fiscal 2008
prior to the sale of CSBU. Our consolidated gross margin, which is
gross profit stated in terms of a percentage of sales, improved to 62.2 percent
of sales compared to 61.6 percent in fiscal 2007. The slight increase
in gross margin percentage was primarily attributable to the continuing shift
toward increased training and consulting sales, as a percent of total sales,
since training and consulting sales generally have higher margins than our
product sales. Training and consulting service sales increased to 53
percent of total sales during fiscal 2008 compared to 49 percent in the prior
year.
During
fiscal 2008, our training and consulting services gross margin decreased to 67.6
percent compared to 68.7 percent in the prior year. The slight
decrease was primarily attributable to increased amortization of capitalized
curriculum costs during the fiscal year, which was partially offset by increased
licensee royalty revenues, which have virtually no corresponding cost of
sales.
For the
fiscal year ended August 31, 2008, our gross margin on product sales was 56.1
percent of sales compared to 55.0 percent in the prior year.
Operating
Expenses
Selling, General
and Administrative –
Consolidated SG&A expenses decreased $7.9 million, or 5 percent,
compared to the prior year (excluding the gain on the sale of CSBU assets in
fiscal 2008 and a gain on the sale of a manufacturing facility in fiscal
2007). The decrease in SG&A expenses was primarily due to 1) the
fiscal 2008 sale of the CSBU, which reduced CSBU SG&A expenses by $9.7
million in the fourth quarter of fiscal 2008 compared to the prior year; 2) a
$1.7 million decrease in share-based compensation primarily due to the
determination that no shares will be awarded under our fiscal 2006 or fiscal
2007 long-term incentive plans and the corresponding reversal of share-based
compensation expense from those plans; 3) a $1.1 million decrease in bonuses and
commissions based on sales performance in the OSBU during the year; and 4)
smaller decreases in SG&A spending in various other areas of our
operations. These decreases were partially offset by 1) a $2.7
million increase in associate compensation primarily resulting from the payment
of awards and bonuses subsequent to the sale of CSBU; 2) a $1.4 million increase
in promotional costs in our OSBU, which were primarily comprised of increased
spending for “Greatness Summit” programs for our clients and increased spending
on public programs promotional materials; 3) a $0.9 million increase in legal
fees primarily related to the EpicRealm litigation; and 4) a $0.6 million
increase in retail store closure costs that were primarily incurred in
connection with the buyout of two leases.
Following
the sale of the CSBU, we expect SG&A spending to decrease in fiscal 2009
compared to the corresponding periods of fiscal 2008.
Gain on Sale of
CSBU Assets – During the fourth quarter of fiscal 2008, we sold
substantially all of the assets of our CSBU to Franklin Covey Products for $32.0
million in cash, subject to adjustments for working capital on the closing date
of the sale, which was effective July 6, 2008. On the date of the
sale closing, the Company invested approximately $1.8 million to purchase a 19.5
percent voting interest in Franklin Covey Products, made a $1.0 million priority
capital contribution with a 10 percent return, and will have the opportunity to
earn contingent license fees if Franklin Covey Products achieves specified
performance objectives. We recognized a gain of $9.1 million on the
sale of the CSBU assets and according to specific accounting guidance, we
deferred a portion of the gain equal to our investment in Franklin Covey
Products. We will recognize the deferred gain over the life of the
long-term assets acquired by Franklin Covey Products or when cash is received
for payment of the priority contribution. The gain on the sale of
CSBU assets also includes a $3.5 million note receivable for reimbursable
transaction costs and excess working capital that is due in January
2009. The note receivable bears interest at Franklin Covey Products’
effective borrowing rate, which was approximately 6.0 percent at August 31,
2008.
Restructuring
Costs – Following the sale of our CSBU, we initiated a restructuring plan
that reduces the number of our domestic regional sales offices, decentralizes
certain sales support functions, and significantly changes the operations of our
Canadian subsidiary. The restructuring plan is intended to strengthen
the remaining domestic sales offices and reduce our overall operating
costs. During fiscal 2008 we expensed $2.1 million for anticipated
severance costs necessary to complete the restructuring plan and we expect that
the restructuring plan will be substantially completed during fiscal
2009.
Impairment of
Assets – In the fourth quarter of fiscal 2008 we analyzed the expected
future revenues and corresponding cash flows expected to be generated from our
The 7 Habits of Highly Effective People
interactive program and concluded that the expected future revenues, less
direct costs, were insufficient to cover the carrying value of the capitalized
development costs. Accordingly, in the fourth quarter of fiscal 2008
we recorded a $1.5 million impairment charge to write this program down to its
net realizable value.
Depreciation and
Amortization –
Consolidated depreciation expense increased to $5.7 million compared to
$5.4 million in fiscal 2007. The increase in our depreciation expense
in fiscal 2008 was primarily due to the acceleration of $0.3 million of
depreciation on a payroll software module that had a revision to its estimated
useful life as we decided to outsource our payroll services and an impairment
charge totaling $0.3 million for software that did not function as anticipated
and was written off. Depreciation expense in the prior year also
included an impairment charge totaling $0.3 million that we recorded to reduce
the carrying value of one of our printing presses to be sold to its anticipated
sale price. Based upon the sale of CSBU assets and anticipated
capital spending in the remainder of fiscal 2008, we expect that total
depreciation expense in future periods will decrease compared to fiscal 2008
depreciation expense levels. During the fourth quarter of fiscal 2008
we determined that it was appropriate to reclassify depreciation expense on our
subleased corporate campus from cost of sales to depreciation
expense. The depreciation expense reclassified from product cost of
sales totaled $0.7 million, $0.7 million, and $0.6 million for the fiscal years
ended August 31, 2008, 2007, and 2006.
Amortization
expense from definite-lived intangible assets totaled $3.6 million for the
fiscal years ended August 31, 2008 and 2007. Absent any unforeseen
intangible asset impairments, we expect that intangible asset amortization
expense will total $3.6 million in fiscal 2009.
Following
completion of the sale of CSBU assets, we anticipate that our consolidated
operating expenses in future periods will decline compared to fiscal 2008
expense levels.
Interest
Income and Expense
Interest
Income – Our interest income decreased compared to the prior year
primarily due to reduced cash balances compared to the prior year and a
reduction of interest rates on our depository accounts.
Interest
Expense – Interest expense remained consistent with the prior year and
was reflective of borrowings on our line of credit facility and payments made on
our building lease (financing obligation) during fiscal 2008.
Income
Taxes
Our
income tax provision for the fiscal years ended August 31, 2008 and 2007 totaled
$8.0 million. Our effective tax rate for fiscal 2008 of approximately
58 percent was higher than statutory combined rates primarily due to the accrual
of taxable interest income on the management stock loan program and withholding
taxes on royalty income from foreign licensees. Since the Company is
currently utilizing net operating loss carryforwards, we are unable to reduce
our domestic tax liability through the use of foreign tax credits, which
normally result from the payment of foreign withholding
taxes. However, the utilization of domestic loss carryforwards has,
and will continue to, minimize cash outflows related to domestic income taxes
until they are exhausted.
On
September 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109 (Fin
48), which had an
immaterial impact on our financial statements. Refer to Note 17 in
the Notes to Consolidated Financial Statements for further details regarding our
income taxes.
Preferred
Stock Dividends
Our
preferred stock dividends declined $2.2 million compared to fiscal
2007. The decrease in preferred stock dividends was due to the
redemption of all remaining outstanding shares of preferred stock during the
third quarter of fiscal 2007.
FISCAL
2007 COMPARED TO FISCAL 2006
Sales
Training and
Consulting Services –
Our consolidated training and consulting service sales increased $15.3
million compared to the prior year and maintained the favorable momentum in
training and consulting sales that began in fiscal 2005. Training and
consulting service sales performance during fiscal 2007 was primarily influenced
by the following results in our OSBU divisions:
|
·
|
Domestic –
Our domestic training, consulting, and related sales reported
through the OSBU continued to show improvement over the prior year and
increased by $8.4 million, or 10 percent. The improvement was
primarily due to the December 2006 launch of our new course, Leadership: Great
Leaders, Great Teams, Great Results and increased sales in our
individual effectiveness product lines, which contain our signature course
based upon principles found in The 7 Habits of Highly
Effective People. Our execution product lines, which are
primarily based on our 4
Disciplines of Execution curriculum and our Helping Clients Succeed
sales training program also showed year-over-year improvements and
contributed to improved training and consulting service
sales.
|
Generally,
our training programs and consulting services continued to gain widespread
acceptance in the marketplace during fiscal 2007 and all five of our geographic
regions generated increased year-over-year sales. Furthermore, the
number of training and coaching days delivered increased 23 percent and the
average revenue per day received increased six percent. Sales of
training materials to our client facilitators also improved over the prior
year.
|
·
|
International –
International sales increased $8.7 million compared to fiscal
2006. Sales from our wholly-owned foreign offices and royalty
revenues from third-party licensees all grew compared to fiscal
2006. The translation of foreign sales to the United States
dollar also helped to improve reported sales and had a $0.6 million
favorable impact on our consolidated sales as certain foreign currencies
strengthened against the United States dollar during the year ended August
31, 2007. Our wholly-owned subsidiary in Japan generated the
largest year-over-year improvement, and grew its revenues 12 percent,
including the effects of foreign exchange, compared to the prior
year.
|
Product
Sales –
Consolidated product sales declined by $9.8 million, or six percent,
compared to fiscal 2006. The decline in overall product sales was
primarily due to continuing decreases in retail store sales and declining sales
through our consumer direct channels when compared to prior
periods. The following is a description of sales performance in our
various CSBU channels for the year ended August 31, 2007:
|
·
|
Retail Sales – The $7.8
million decline in retail sales was primarily due to the impact of closed
stores, reduced sales of technology and specialty products, and decreased
store traffic. Based upon various analyses, we closed certain
retail store locations in late fiscal 2006 and during fiscal 2007, which
had a $4.6 million unfavorable impact on our overall retail sales in
fiscal 2007. Due to declining demand for electronic handheld
planning products, we decided to exit the low margin handheld device and
accessories business, which reduced retail sales by $2.1 million compared
to the prior year. For the remaining retail stores, the decline
in sales was primarily due to reduced traffic, or consumers entering our
retail locations. Our retail store traffic declined by
approximately 12 percent from fiscal 2006 and resulted in decreased sales
of “core” products (e.g. planners, binders, totes, and accessories)
compared to the prior year. These factors combined to produce a
six percent decline in year-over-year comparable store sales in fiscal
2007 as compared to fiscal 2006. At August 31, 2007, we were
operating 87 domestic retail locations compared to 89 locations at August
31, 2006.
|
|
·
|
Consumer Direct – Sales
through our consumer direct channels decreased $4.2 million, primarily due
to a decline in the conversion rate of customers visiting our website,
decreased consumer traffic through the call center channel, and decreased
public seminar sales. Although visits to
our
|
website
increased from the prior year, the conversion of those visits to sales decreased
to 6.0 percent in fiscal 2007 compared from 6.8 percent in fiscal
2006. We believe that the increase in customer visits and decrease in
conversion rate is primarily a function of the increase in promotionally
oriented shoppers, or those who visit the website frequently, but only purchase
when desired products are on sale. Declining consumer traffic through
the call center channel continues a long-term trend and decreased by
approximately four percent, which we believe was primarily a result of the
transition of customers to our website.
|
·
|
Wholesale Sales – Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, were up approximately one percent over the prior
year. The increase was primarily due to an increase in the
number of retail outlets serviced through our wholesale channel and
increased demand for our products in those
locations.
|
|
·
|
CSBU International –
This channel includes the product sales of our directly owned
international offices in Canada, the United Kingdom, Mexico, and
Australia. Sales performance through these channels decreased
slightly compared with the prior year. We separated the product
sales operations from the OSBU in these international locations during
fiscal 2007 to utilize existing product sales and marketing expertise in
an effort to improve overall product sales performance at these
offices.
|
|
·
|
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 due to improved external domestic printing sales, which
increased $0.4 million compared to the prior year. The increase
was due to additional printing contracts obtained during fiscal
2007. In fiscal 2007, we reported $2.1 million of sublease
revenues as a component of product sales in our consolidated financial
statements compared to $1.9 million in the prior
year.
|
Gross
Profit
Our
consolidated gross profit totaled $175.1 million for fiscal 2007 compared to
$168.0 million in the prior year. The increase in our gross profit
was primarily attributable to increased training and consulting service sales
through our OSBU. Our consolidated gross margin, which is gross
profit stated in terms of a percentage of sales, was 61.6 percent of sales
compared to 60.3 percent in fiscal 2006. The improvement in gross
margin was primarily attributable to the continuing shift toward increased
training and consulting sales, which generally have higher margins than the
majority of our product sales. Training and consulting service sales
increased to 49 percent of total sales in fiscal 2007 compared to 44 percent in
the prior year.
During
fiscal 2007, our training and consulting services gross margin was 68.7 percent
compared to 66.7 percent in the prior year. The improvement in
training and consulting services gross margin was primarily due to changes in
the mix of training programs sold as certain programs and training courses have
higher gross margins than other programs.
Our gross
margin on product sales declined slightly to 55.0 percent compared to 55.2
percent in fiscal 2006.
Operating
Expenses
Selling, General,
and Administrative – Our consolidated SG&A expenses increased $4.5
million, or 3 percent, compared to the prior year. The increase in
SG&A expenses consisted primarily of 1) increased associate expenses; 2)
increased development costs; 3) increased legal fees; and 4) increased
accounting fees. Our associate expenses increased $3.2 million
primarily due to increased commissions and bonuses on improved OSBU sales and
additional OSBU sales personnel, which totaled $2.6 million, and increased
share-based compensation costs totaling $0.6 million, which was primarily
attributable to performance awards granted in fiscal 2007. We
spent an additional $0.8 million for non-capitalized curriculum development to
make adjustments and minor improvements to certain programs and courses during
fiscal
2007. Our
legal fees increased primarily due to the effects of a non-recurring benefit
recorded in fiscal 2006 from the WMA legal settlement and increased legal costs
for ongoing litigation that had a net impact on our operating expenses totaling
$0.7 million. During fiscal 2006, we were required to begin complying
with Section 404 of the Sarbanes Oxley Act of 2002 (SOX 404), which resulted in
$0.4 million of additional auditing and related consulting fees in fiscal 2007
compared with the prior year. These increases in SG&A expense
were partially offset by reduced costs in various other areas of the
Company.
Gain on Sale of
Manufacturing Facility – In August 2006, we initiated a project to
reconfigure our printing operations to improve our printing services’
efficiency, reduce operating costs, and improve our printing services’
flexibility to potentially increase external printing service
sales. Our reconfiguration plan included moving our printing
operations a short distance from its existing location to our corporate
headquarters campus and the sale of the manufacturing facility and certain
printing presses. During fiscal 2007, we completed the sale of the
manufacturing facility. The sale price was $2.5 million and, after
deducting customary closing costs, the net proceeds to the Company from the sale
totaled $2.3 million in cash. The carrying value of the manufacturing
facility at the date of sale was approximately $1.1 million and we recognized a
$1.2 million gain on the sale of the manufacturing facility during the year
ended August 31, 2007.
Depreciation and
Amortization –
Depreciation expense was essentially flat compared to the prior
year. During recent fiscal years our depreciation expense has
declined due to the full depreciation or disposal of certain property and
equipment (including retail stores) and the effects of significantly reduced
capital expenditures. However, these declines stabilized during
fiscal 2007 primarily due to increased capital expenditures for property and
equipment and an impairment charge totaling $0.3 million that we recorded during
fiscal 2007 to reduce the carrying value of one of our printing presses that was
sold to its anticipated sale price.
Amortization
expense from definite-lived intangible assets totaled $3.6 million compared to
$3.8 million in fiscal 2006. The decrease was due to certain
intangible assets becoming fully depreciated during the first two quarters of
fiscal 2006.
Interest
Income and Expense
Interest Income –
Our interest income decreased by $0.6 million primarily due to reduced
cash and cash equivalents held during the third and fourth quarters of fiscal
2007. During the third quarter of fiscal 2007, we used substantially
all of our available cash on hand combined with proceeds from a newly acquired
line of credit to redeem the remaining outstanding shares of Series A preferred
stock.
Interest Expense
– Interest expense increased $0.5 million compared to the prior year
primarily due to line of credit borrowings that were used in conjunction with
available cash to redeem the remaining shares of preferred stock in the third
quarter of fiscal 2007.
Income
Taxes
Our
income tax provision for fiscal 2007 totaled $8.0 million compared to a tax
benefit of $14.9 million in fiscal 2006. The comparability of our
fiscal 2007 income tax expense was primarily affected by the determination
during the fourth quarter of fiscal 2006 to reverse substantially all of the
valuation allowances on our deferred income tax assets. Prior to the
reversal of these valuation allowances, our income tax provisions were affected
by reductions in our deferred income tax valuation allowance as we utilized net
operating loss carryforwards. The fiscal 2006 income tax provision
was further reduced by the reversal of tax contingency reserves during the third
quarter of that year. No material corresponding reversals of
valuation allowance or tax contingency reserves occurred during fiscal
2007. Our effective tax rate for the year ended August 31, 2007 of
approximately 51 percent was higher than statutory combined rates primarily due
to the accrual of taxable interest income on the management stock loan program
and withholding taxes on royalty income from foreign licensees. Since
the Company is
currently
utilizing net operating loss carryforwards, we are unable to reduce our domestic
tax liability through the use of foreign tax credits, which normally result from
the payment of foreign withholding taxes.
Preferred
Stock Dividends
Our
preferred stock dividends totaled $2.2 million for fiscal 2007 compared to $4.4
million during the prior year. The decrease in preferred stock
dividends was due to fiscal 2006 preferred stock redemptions totaling $20.0
million and the redemption of all remaining outstanding shares of preferred
stock during the third quarter of fiscal 2007.
QUARTERLY
RESULTS
The
following tables set forth selected unaudited quarterly consolidated financial
data for the years ended August 31, 2008 and 2007. The quarterly
consolidated financial data reflects, in the opinion of management, all
adjustments necessary to fairly present the results of operations for such
periods. The information presented in the following table includes
the reclassification of depreciation expense on our subleased property from cost
of sales to depreciation expense as previously discussed. Results of
any one or more quarters are not necessarily indicative of continuing
trends.
Quarterly
Financial Information:
|
YEAR
ENDED AUGUST 31, 2008
|
||||||||||||||||
|
December
1
|
March
1
|
May
31
|
August
31
|
|||||||||||||
|
In
thousands, except per share amounts
|
||||||||||||||||
|
Net
sales
|
$ | 73,574 | $ | 75,127 | $ | 59,061 | $ | 52,330 | ||||||||
|
Gross
profit
|
46,127 | 46,870 | 35,939 | 32,853 | ||||||||||||
|
Selling,
general, and administrative expense
|
38,771 | 37,652 | 34,210 | 30,685 | ||||||||||||
|
Gain
on sale of consumer solutions business unit
|
- | - | - | (9,131 | ) | |||||||||||
|
Restructuring
costs
|
- | - | - | 2,064 | ||||||||||||
|
Impairment
of assets
|
- | - | - | 1,483 | ||||||||||||
|
Depreciation
|
1,380 | 1,532 | 1,679 | 1,101 | ||||||||||||
|
Amortization
|
899 | 901 | 902 | 901 | ||||||||||||
|
Income
(loss) from operations
|
5,077 | 6,785 | (852 | ) | 5,750 | |||||||||||
|
Income
(loss) before income taxes
|
4,176 | 6,039 | (1,522 | ) | 5,141 | |||||||||||
|
Net
income (loss)
|
2,059 | 3,082 | (1,511 | ) | 2,218 | |||||||||||
|
Earnings
(loss) per share available to common shareholders:
|
||||||||||||||||
|
Basic
|
$ | .11 | $ | .16 | $ | (.09 | ) | $ | .11 | |||||||
|
Diluted
|
$ | .10 | $ | .16 | $ | (.09 | ) | $ | .11 | |||||||
|
YEAR
ENDED AUGUST 31, 2007
|
||||||||||||||||
|
December
2
|
March
3
|
June
2
|
August
31
|
|||||||||||||
|
In
thousands, except per share amounts
|
||||||||||||||||
|
Net
sales
|
$ | 75,530 | $ | 76,876 | $ | 64,509 | $ | 67,210 | ||||||||
|
Gross
profit
|
46,573 | 47,364 | 39,811 | 41,330 | ||||||||||||
|
Selling,
general, and administrative expense
|
40,849 | 36,666 | 35,287 | 36,418 | ||||||||||||
|
Gain
on sale of manufacturing facility
|
- | (1,227 | ) | - | - | |||||||||||
|
Depreciation
|
1,212 | 1,541 | 1,235 | 1,406 | ||||||||||||
|
Amortization
|
902 | 900 | 906 | 899 | ||||||||||||
|
Income
from operations
|
3,610 | 9,484 | 2,383 | 2,607 | ||||||||||||
|
Income
before income taxes
|
3,150 | 9,166 | 1,640 | 1,709 | ||||||||||||
|
Net
income
|
1,416 | 4,714 | 887 | 612 | ||||||||||||
|
Preferred
stock dividends
|
(934 | ) | (934 | ) | (348 | ) | - | |||||||||
|
Income
available to common shareholders
|
482 | 3,780 | 539 | 612 | ||||||||||||
|
Earnings
per share available to common shareholders:
|
||||||||||||||||
|
Basic
|
$ | .02 | $ | .19 | $ | .03 | $ | .03 | ||||||||
|
Diluted
|
$ | .02 | $ | .19 | $ | .03 | $ | .03 | ||||||||
Our
quarterly results of operations reflect seasonal trends that are primarily the
result of customers who renew their FranklinCovey Planners on a calendar year
basis. Domestic training sales are moderately seasonal because of the
timing of corporate training, which is not typically scheduled as heavily during
holiday and vacation periods.
The
fourth quarter of fiscal 2008 reflects the sale of CSBU assets, which reduced
sales and corresponding costs associated with the operations of the
CSBU. We recognized a $9.1 million gain on the sale of the CSBU
assets, which had a favorable impact on that period’s operating
results. In future periods we expect that our quarterly sales will be
less seasonal since they will not include product sales that are sold primarily
during November, December, and January.
Quarterly
fluctuations may also be affected by other factors including the introduction of
new offerings, the addition of new organizational customers, and the elimination
of underperforming offerings.
LIQUIDITY
AND CAPITAL RESOURCES
Summary
At August
31, 2008 we had $15.9 million of cash and cash equivalents compared to $6.1
million at August 31, 2007 and our net working capital (current assets less
current liabilities) decreased to $5.8 million at August 31, 2008 compared to
$8.9 million at August 31, 2007. Our net working capital at August
31, 2008 was affected by proceeds received from the sale of CSBU assets during
the fourth quarter of fiscal 2008, which impacted available cash and other
remaining assets and liabilities, and the completion of a modified “Dutch
auction” tender offer near the end of the fiscal year that required us to record
a $28.2 million current liability at August 31, 2008 for shares of our common
stock acquired through the tender offer. The obligation for the
shares acquired through the tender offer was paid subsequent to August 31,
2008.
Our
primary sources of liquidity are cash flows from the sale of services in the
normal course of business and proceeds from our $25.0 million revolving line of
credit. In connection with the sale of the CSBU assets during the
fourth quarter of fiscal 2008, our line of credit agreements with our previous
lenders were modified (the Modified Credit Agreement). The Modified
Credit Agreement removed one lender from the credit facility, but continues to
provide a total of $25.0 million of borrowing capacity until June 30, 2009, when
the borrowing capacity will be reduced to $15.0 million. In addition,
the interest rate on the credit facility increased from LIBOR plus 1.10 percent
to LIBOR plus 1.50 percent (4.0 percent at August 31, 2008), which was effective
on the date of the modification agreement. The fiscal 2007 line of
credit obligation was classified as a component of current liabilities primarily
due to our intention to repay amounts outstanding before the agreement
expires. The Modified Credit Agreement expires on March 14, 2010 (no
change) and we may draw on the credit facilities, repay, and draw again, on a
revolving basis, up to the maximum loan amount available so long as no event of
default has occurred and is continuing. We may use the line of credit
facility for general corporate purposes as well as for other transactions,
unless prohibited by the terms of the Modified Credit Agreement. The
working capital line of credit also contains customary representations and
guarantees as well as provisions for repayment and liens.
In
addition to customary non-financial terms and conditions, our line of credit
requires us to be in compliance with specified financial covenants, including:
(i) a funded debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a
limitation on annual capital expenditures; and (iv) a defined amount of minimum
net worth. In the event of noncompliance with these financial
covenants and other defined events of default, the lenders are entitled to
certain remedies, including acceleration of the repayment of
amounts
outstanding on the line of credit. During fiscal 2008, we believe
that we were in compliance with the terms and financial covenants of our credit
facilities. At August 31, 2008, we did not have any borrowings
outstanding on the line of credit.
During
fiscal 2008, many banks in the United States and in foreign countries
experienced financial and solvency difficulties that lead to significant
reductions in the amount of available credit in the general
market. We believe that the lender on our line of credit facility is
financially sound and we expect to be able to borrow available amounts on the
line of credit. However, the availability of cash from our line of
credit lender is not within our control and additional borrowings may not be
available in future periods.
In
addition to our $25.0 million line of credit, we have a long-term variable rate
mortgage on our Canadian building and a long-term lease on our corporate campus
that is accounted for as a long-term financing obligation.
The
following table summarizes our cash flows from operating, investing, and
financing activities for the past three years (in thousands):
|
YEAR
ENDED AUGUST 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Total
cash provided by (used for):
|
||||||||||||
|
Operating
activities
|
$ | 7,828 | $ | 13,358 | $ | 17,009 | ||||||
|
Investing
activities
|
18,520 | (11,480 | ) | (8,267 | ) | |||||||
|
Financing
activities
|
(16,159 | ) | (26,376 | ) | (29,903 | ) | ||||||
|
Effect
of exchange rates on cash
|
(411 | ) | 37 | 58 | ||||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | 9,778 | $ | (24,461 | ) | $ | (21,103 | ) | ||||
The
following discussion is a description of the primary factors affecting our cash
flows and their effects upon our liquidity and capital resources during the
fiscal year ended August 31, 2008.
Cash
Flows from Operating Activities
Our
primary source of cash from operating activities was the sale of goods and
services to our customers in the normal course of business. The
primary uses of cash for operating activities were payments to suppliers for
materials used in products sold, payments for direct costs necessary to conduct
training programs, and payments for selling, general, and administrative
expenses. Our cash flows from operating activities were unfavorably
affected by cash spent to complete the CSBU asset sale and on behalf of Franklin
Covey Products, which generated a $7.7 million receivable that is expected to be
substantially collected by January 2009, a $7.2 million increase in our accounts
receivable resulting primarily from seasonally heavy training product sales in
August of each year, and a $1.5 million decrease in our accounts payable and
accrued liabilities. However, these uses of cash were partially
offset by cash generated through a $7.1 million decrease in other assets and a
$2.9 million decrease in our inventories. Following the sale of the
CSBU in fiscal 2008, we expect that our seasonal fluctuations in cash used for
and provided by operating activities will stabilize since we will not be
required to purchase and accumulate inventory for seasonally busy product sales
months of November, December, and January.
Cash
Flows from Investing Activities and Capital Expenditures
Our cash
flows provided by investing activities were primarily affected by cash received
from the sale of CSBU assets in the fourth quarter of fiscal 2008, which totaled
$28.2 million net of transaction costs and cash transferred to Franklin Covey
Products. Our primary uses of cash for investing activities were
purchases of property and equipment totaling $4.2 million and expenditures for
curriculum development totaling $4.0 million. Purchases of property
and equipment consisted primarily of payments for new computer hardware, new
computer software, and leasehold improvements in relocated retail stores (prior
to the sale of CSBU assets) and for subleases on our corporate campus
facility. We also invested $2.8 million in Franklin Covey Products to
purchase ownership rights and for a $1.0 million priority
contribution.
During
fiscal 2009, we expect to spend $2.3 million on purchases of property and
equipment and $1.4 million on curriculum development
activities. Purchases of property and equipment are expected to
consist primarily of new computer software, computer hardware, and in other
areas as deemed necessary. However, actual capital spending is based
upon a variety of factors and may differ from these estimates.
Cash
Flows from Financing Activities
Our
primary use and source of cash flows for financing activities were payments made
and proceeds obtained from our $25.0 million line of credit
facility. Primarily as a result of the sale of CSBU assets in the
fourth quarter of fiscal 2008, we were able to repay amounts outstanding on our
line of credit, which totaled $16.0 million during fiscal 2008. In
addition to payments on our line of credit, we made principal payments totaling
$0.6 million on our long-term debt and financing obligation and received
payments totaling $0.5 million from sales of our common stock, which primarily
consisted of proceeds received from participants in our employee stock purchase
plan.
As
previously mentioned, we completed a tender offer for shares of our common stock
near the end of the fourth quarter of fiscal 2008 and recorded a $28.2 million
current liability for the shares acquired. We paid for the shares
acquired through the tender offer subsequent to August 31, 2008.
Sources
of Liquidity
Going
forward, we will continue to incur costs necessary for the operation and
potential growth of the business. We anticipate using cash on hand,
cash provided by the sale of goods and services to our clients on the condition
that we can continue to generate positive cash flows from operating activities,
proceeds from our line of credit, and other financing alternatives, if
necessary, for these expenditures. We anticipate that our existing
capital resources should be adequate to enable us to maintain our operations for
at least the upcoming twelve months. However, our ability to maintain
adequate capital for our operations in the future is dependent upon a number of
factors, including sales trends, our ability to contain costs, purchases of our
common stock, levels of capital expenditures, collection of accounts receivable,
and other factors. Some of the factors that influence our operations
are not within our control, such as economic conditions and the introduction of
new technology and products by our competitors. We will continue to
monitor our liquidity position and may pursue additional financing alternatives,
if required, to maintain sufficient resources for future growth and capital
requirements. However, there can be no assurance such financing
alternatives will be available to us on acceptable terms, or at
all.
Contractual
Obligations
The
Company has not structured any special purpose or variable interest entities, or
participated in any commodity trading activities, which would expose us to
potential undisclosed liabilities or create adverse consequences to our
liquidity. Required contractual payments primarily consist of lease
payments resulting from the sale of our corporate campus (financing obligation);
payments to EDS for outsourcing services related to information systems,
warehousing, and distribution services; minimum rent payments for office and
warehouse space; mortgage payments on certain buildings and property; and
short-term purchase obligations for inventory items and other products and
services used in the ordinary course of business. Our expected
payments on these obligations over the next five fiscal years and thereafter are
as follows (in thousands):
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||||||||||
|
Contractual
Obligations
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Required
lease payments on corporate campus
|
$ | 3,045 | $ | 3,055 | $ | 3,116 | $ | 3,178 | $ | 3,242 | $ | 43,537 | $ | 59,173 | ||||||||||||||
|
Minimum
required payments to EDS for outsourcing services(1)
|
4,138 | 4,138 | 4,138 | 4,138 | 4,138 | 11,246 | 31,936 | |||||||||||||||||||||
|
Minimum
operating lease payments(2)
|
1,671 | 1,620 | 1,608 | 1,517 | 1,178 | 3,427 | 11,021 | |||||||||||||||||||||
|
Tender
offer obligation(3)
|
28,222 | - | - | - | - | - | 28,222 | |||||||||||||||||||||
|
Long-term
mortgage payments(4)
|
136 | 131 | 126 | 121 | 116 | 154 | 784 | |||||||||||||||||||||
|
Purchase
obligations
|
4,564 | - | - | - | - | - | 4,564 | |||||||||||||||||||||
|
Total
expected contractual
obligation
payments
|
$ | 41,776 | $ | 8,944 | $ | 8,988 | $ | 8,954 | $ | 8,674 | $ | 58,364 | $ | 135,700 | ||||||||||||||
|
(1)
|
Our
obligation for outsourcing services contains an annual escalation based
upon changes in the Employment Cost Index, the impact of which was not
estimated in the above table. We are also contractually allowed
to collect amounts from Franklin Covey Products that reduce the amounts
shown in the table above.
|
|
(2)
|
The
operating agreement with Franklin Covey Products provides for
reimbursement of a portion of the warehouse leasing costs, the impact of
which is not included in the lease obligations in the table
above.
|
|
(3)
|
We
completed a tender offer for shares of our common stock near the end of
the fourth quarter of fiscal 2008 and recorded a $28.2 million current
liability for the shares acquired. We paid for the shares
acquired through the tender offer subsequent to August 31,
2008.
|
|
(4)
|
Our
long-term variable-rate mortgage obligation includes interest payments at
4.8 percent, which was the applicable interest rate at August 31,
2008.
|
Our
contractual obligations presented above exclude unrecognized tax benefits under
FIN 48 of $4.2 million for which we cannot make a reasonably reliable estimate
of the amount and period of payment. For further information
regarding the adoption of FIN 48, refer to the Notes to the Consolidated
Financial Statements as presented in Item 8 of this report on Form
10-K.
Other
Items
The
Company is the creditor for a loan program that provided the capital to allow
certain management personnel the opportunity to purchase shares of our common
stock. For further information regarding our management common stock
loan program, refer to the notes to our consolidated financial statements as
found in Item 8 of this report on Form 10-K. The inability of the
Company to collect all, or a portion, of these receivables could have an adverse
impact upon our financial position and future cash flows compared to full
collection of the loans.
USE
OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America. The
significant accounting polices that we used to prepare our consolidated
financial statements are outlined in Note 1 to the consolidated financial
statements, which are presented in Part II, Item 8 of this Annual Report on Form
10-K. Some of those accounting policies require us to make
assumptions and use judgments that may affect the amounts reported in our
consolidated financial statements. Management regularly evaluates its
estimates and assumptions and bases those estimates and assumptions on
historical experience, factors that are believed to be reasonable under the
circumstances, and requirements under accounting principles generally accepted
in the United States of America. Actual results may differ from these
estimates under different assumptions or conditions, including changes in
economic and political conditions and other circumstances that are not in our
control, but which may have an impact on these estimates and our actual
financial results.
The
following items require the most significant judgment and often involve complex
estimates:
Revenue
Recognition
We derive
revenues primarily from the following sources:
|
·
|
Training and Consulting
Services – We provide training and consulting services to both
organizations and individuals in leadership, productivity, strategic
execution, goal alignment, sales force performance, and communication
effectiveness skills. These training programs and services are
primarily sold through our OSBU
channels.
|
|
·
|
Products – We sold
planners, binders, planner accessories, handheld electronic devices, and
other related products that were primarily sold through our CSBU channels
prior to the fourth quarter of fiscal
2008.
|
We
recognize revenue in accordance with SAB No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 104, Revenue
Recognition. Accordingly, we recognize revenue when: 1)
persuasive evidence of an agreement exists, 2) delivery of product has occurred
or services have been rendered, 3) the price to the customer is fixed or
determinable, and 4) collectibility is reasonably assured. For
product sales, these conditions are generally met upon shipment of the product
to the customer or by completion of the sales transaction in a retail
store. For training and service sales, these conditions are generally
met upon presentation of the training seminar or delivery of the consulting
services.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. For
transactions that contain more than one element, we recognize revenue in
accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. When fair value exists for all
contracted elements, the overall contract consideration is allocated among the
separate units of accounting based upon their relative fair
values. Revenue for these units is recognized in accordance with our
general revenue policies once it has been determined that the delivered items
have standalone value to the customer. If fair value does not exist
for all contracted elements, revenue for the delivered items is recognized using
the residual method, which generally means that revenue recognition is postponed
until the point is reached when the delivered items have standalone value and
fair value exists for the undelivered items. Under the residual
method, the amount of revenue considered for recognition under our general
revenue policies is the total contract amount, less the aggregate fair value of
the undelivered items. Fair value of the undelivered items is based
upon the normal pricing practices for our existing training programs, consulting
services, and other products, which are generally the prices of the items when
sold separately.
Our
international strategy includes the use of licensees in countries where we do
not have a wholly-owned operation. Licensee companies are unrelated
entities that have been granted a license to translate our content and
curriculum, adapt the content and curriculum to the local culture, and sell our
training seminars and products in a specific country or
region. Licensees are required to pay us royalties based upon a
percentage of the licensee’s sales. We recognize royalty income each
period based upon the sales information reported to the Company from the
licensee. Royalty revenue is reported as a component of training and
consulting service sales in our consolidated income statements.
Revenue
is recognized on software sales in accordance with SOP 97-2, Software Revenue Recognition
as amended by SOP 98-09. Statement 97-2, as amended, generally
requires revenue earned on software arrangements involving multiple elements
such as software products and support to be allocated to each element based on
the relative fair value of the elements based on vendor specific objective
evidence (VSOE). The majority of the Company’s software sales have
multiple elements, including a license and post contract customer support
(PCS). Currently we do not have VSOE for either the license or
support elements of our software sales. Accordingly, revenue is
deferred until the only undelivered element is PCS and the total arrangement fee
is recognized over the support period.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Share-Based
Compensation
During
fiscal 2006, we granted performance-based compensation awards to certain
employees in a Board of Director approved long-term incentive plan (the
LTIP). These performance-based share awards allow each participant
the right to receive a certain number of shares of common stock based upon the
achievement of specified financial goals at the end of a predetermined
performance period. The LTIP awards vest on August 31 of the third
fiscal year from the grant date, which corresponds to the completion of a
three-year performance cycle. For example, the LTIP awards granted in
fiscal 2006 vest on August 31, 2008. The number of shares that are
finally awarded to LTIP participants is variable and is based entirely upon the
achievement of a combination of performance objectives related to sales growth
and cumulative operating income during the performance period. Due to
the variable number of shares that may be issued under the LTIP, we reevaluated
the LTIP grants on a quarterly basis and adjust the number of shares expected to
be awarded for each grant based upon financial results of the Company as
compared to the performance goals set for the award. Adjustments to
the number of shares awarded, and to the corresponding compensation expense, are
based upon estimated future performance and are made on a cumulative basis at
the date of adjustment based upon the probable number of shares to be
awarded.
The
Compensation Committee initially granted awards for 378,665 shares (the Target
Award) of common stock under the LTIP during fiscal 2006. However,
based upon actual financial performance through December 1, 2007 and estimated
performance through the remaining service period of the fiscal 2006 LTIP grant,
the Company determined that no shares of common stock would be awarded under the
terms of the fiscal 2006 LTIP grant. We determined that our
anticipated sales growth in training and consulting sales would be insufficient
to offset forecast product sales declines, which were revised using actual
product sales levels late in our first fiscal quarter and early second fiscal
quarter, and the impact of eliminated sales resulting from the disposal and
conversion of our subsidiary in Brazil and our training operations in Mexico to
licensees. Although we expected sufficient levels of cumulative
operating income to be recognized for the fiscal 2006 award, anticipated sales
growth was below the minimum 7.5 percent threshold for shares to be awarded
under the plan. As a result of this determination, we recorded a
cumulative adjustment in the quarter ended December 1, 2007 that reduced our
selling, general, and administrative expenses by $0.7 million and no
compensation expense was recognized from the fiscal 2006 LTIP award during the
quarters ended March 1, 2008, May 31, 2008, or August 31, 2008. The
fiscal 2006 LTIP award expired on August 31, 2008 with no shares granted under
this award.
During
fiscal 2007, the Compensation Committee granted performance awards for 429,312
shares of common stock under the terms of the LTIP. The Company must
achieve minimum levels of sales growth and cumulative operating income in order
for participants to receive any shares under the fiscal 2007 LTIP
grant. The minimum sales growth for the fiscal 2007 LTIP was 10.0
percent (fiscal 2009 compared to fiscal 2007) and the minimum cumulative
operating income total during the service period was $41.3
million. We recorded compensation expense on the fiscal 2007 LTIP
using a 5 percent estimated forfeiture rate during the vesting
period. However, the total amount of compensation expense recorded
for the fiscal 2007 LTIP would have equaled the number of shares awarded
multiplied by $5.78 per share.
Based
upon our assessment of the fiscal 2007 LTIP at May 31, 2008, we determined that
no shares of common stock would be awarded to participants under the terms of
the fiscal 2007 LTIP grant. Consistent with the analysis of the
fiscal 2006 LTIP grant, we expected sufficient levels of operating income to be
recognized for the fiscal 2007 award, but expected sales growth was determined
to be insufficient for any shares to be awarded under this plan. The
revised sales projections included actual performance through May 31, 2008 and
estimated sales performance through fiscal 2009 based upon revised assumptions,
which were adversely affected by slowing economic conditions in the United
States and other countries in which the Company has operations. As a
result of this determination, we recorded cumulative adjustments totaling $0.6
million to reduce selling, general, and administrative expenses
during
the fiscal year ended August 31, 2008. We do not expect any shares to
vest under the terms of the fiscal 2007 LTIP award.
The
analysis of our LTIP plans contained uncertainties because we were required to
make assumptions and judgments about the eventual number of shares that would
vest in each LTIP grant. The assumptions and judgments that are
essential to the analysis include forecasted sales and operating income levels
during the LTIP service periods. The evaluation of LTIP performance
awards and corresponding use of estimated amounts produced additional volatility
in our consolidated financial statements as we recorded cumulative adjustments
to the estimated number of common shares to be awarded under the LTIP grants as
described above.
We
estimate the value of our stock option awards on the date of grant using the
Black-Scholes option pricing model. However, the Company did not
grant any stock options during the fiscal years ended August 31, 2008, 2007, or
2006, and we did not have any remaining unrecognized compensation expense
associated with unvested stock options at August 31, 2008.
Accounts
Receivable Valuation
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best
estimate of the amount of probable credit losses in the existing accounts
receivable balance. We determine the allowance for doubtful accounts
based upon historical write-off experience and current economic conditions and
we review the adequacy of our allowance for doubtful accounts on a regular
basis. Receivable balances over 90 days past due, which exceed a
specified dollar amount, are reviewed individually for
collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the probability
for recovery is considered remote. We do not have any off-balance
sheet credit exposure related to our customers.
Our
allowance for doubtful accounts calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding the
collectibility of customer accounts, which may be influenced by a number of
factors that are not within our control, such as the financial health of each
customer. We regularly review the collectibility assumptions of our
allowance for doubtful accounts calculation and compare them against historical
collections. Adjustments to the assumptions may either increase or
decrease our total allowance for doubtful accounts. For example, a 10
percent increase to our allowance for doubtful accounts at August 31, 2008 would
reduce our reported income from operations by approximately $0.1
million.
Inventory
Valuation
At August
31, 2008, following the sale of our CSBU, our inventories were comprised
primarily of training materials and related accessories. Inventories
are stated at the lower of cost or market with cost determined using the
first-in, first-out method. Inventories are reduced to their fair
market value through the use of inventory loss reserves, which are recorded
during the normal course of business.
Our
inventory loss reserve calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding a number of
factors, including future inventory demand requirements and pricing
strategies. During the evaluation process we consider historical
sales patterns and current sales trends, but these may not be indicative of
future inventory losses. While we have not made material changes to
our inventory reserves methodology during the past three years, our inventory
requirements may change based on projected customer demand, technological and
product life cycle changes, longer or shorter than expected usage periods, and
other factors that could affect the valuation of our inventories. If
our estimates regarding consumer demand and other factors are inaccurate, we may
be exposed to losses that may have a materially adverse impact upon our
financial position and results of operations. For instance, a 10
percent increase in our inventory loss reserves at August 31, 2008 would reduce
our income from operations by approximately $0.1 million.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized, but rather
are tested for impairment on an annual basis, or more often if events or
circumstances indicate that a potential impairment exists. The Covey
trade name intangible asset has been deemed to have an indefinite
life. This intangible asset is assigned to the OSBU and is tested for
impairment using the present value of estimated royalties on trade name related
revenues, which consist primarily of training seminars, international licensee
royalties, and related products. If the carrying value of the Covey
trade name exceeds the fair value of its discounted estimated royalties on trade
name related revenues, an impairment loss is recognized for the
difference. The adjusted basis becomes the carrying value until a
future impairment assessment determines that additional impairment charges are
necessary.
Our
impairment evaluation calculation for the Covey trade name contains
uncertainties because it requires us to make assumptions and apply judgment in
order to estimate future cash flows, to estimate an appropriate royalty rate,
and to select a discount rate that reflects the inherent risk of future cash
flows. Our valuation methodology for the Covey trade name was
developed by an independent valuation firm and has remained materially unchanged
during the past three years. However, if forecasts and assumptions
used to support the carrying value of our indefinite-lived intangible asset
change in future periods, significant impairment charges could result that would
have an adverse effect upon our results of operations and financial
condition. Based upon the fiscal 2008 evaluation of the Covey trade
name, our trade-name related revenues and licensee royalties would have to
suffer significant reductions before we would be required to impair the Covey
trade name.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an
estimate of undiscounted future net cash flows of the assets over their
remaining useful lives in determining whether the carrying value of the assets
is recoverable. If the carrying values of the assets exceed the
anticipated future cash flows of the assets, we calculate an impairment
loss. The impairment loss calculation compares the carrying value of
the asset to the asset’s estimated fair value, which may be based upon
discounted cash flows over the estimated remaining useful life of the
asset. If we recognize an impairment loss, the adjusted carrying
amount of the asset becomes its new cost basis, which is then depreciated or
amortized over the remaining useful life of the asset. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent from other groups of
assets.
Our
impairment evaluation calculations contain uncertainties because they require us
to make assumptions and apply judgment in order to estimate future cash flows,
forecast the useful lives of the assets, and select a discount rate that
reflects the risk inherent in future cash flows. Although we have not
made any material changes to our long-lived assets impairment assessment
methodology during the past three years, if forecasts and assumptions used to
support the carrying value of our long-lived tangible and definite-lived
intangible assets change in the future, significant impairment charges could
result that would adversely affect our results of operations and financial
condition.
Income
Taxes
We
regularly evaluate our United States federal and various state and foreign
jurisdiction income tax exposures. On September 1, 2007, we adopted
the provisions of FIN 48, which addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in
the financial statements. Under the provisions of FIN 48, we may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained upon examination by the
taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than 50 percent likelihood of being realized upon final
settlement. The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest, and penalties on income
taxes,
accounting
for income taxes in interim periods, and requires increased disclosure of
various income tax items. Taxes and penalties are components of our
overall income tax provision. Prior to the adoption of FIN 48,
interest on income tax items was recorded as a component of consolidated
interest expense. Beginning on September 1, 2007, in conjunction with
the adoption of FIN 48, interest on income taxes is included as a component of
overall income tax expense.
The
Company records previously unrecognized tax benefits in the financial statements
when it becomes more likely than not (greater than a 50 percent likelihood) that
the tax position will be sustained. To assess the probability of
sustaining a tax position, the Company considers all available
evidence. In many instances, sufficient positive evidence may not be
available until the expiration of the statute of limitations for audits by
taxing jurisdictions, at which time the entire benefit will be recognized as a
discrete item in the applicable period.
Our
unrecognized tax benefits result from uncertain tax positions about which we are
required to make assumptions and apply judgment to estimate the exposures
associated with our various tax filing positions. The calculation of
our income tax provision or benefit, as applicable, requires estimates of future
taxable income or losses. During the course of the fiscal year, these
estimates are compared to actual financial results and adjustments may be made
to our tax provision or benefit to reflect these revised
estimates. Our effective income tax rate is also affected by changes
in tax law and the results of tax audits by various
jurisdictions. Although we believe that our judgments and estimates
discussed herein are reasonable, actual results could differ, and we could be
exposed to losses or gains that could be material.
We
regularly assess the need for valuation allowances against our deferred income
tax assets, considering recent profitability, known trends and events, and
expected future transactions. For several years prior to the year
ended August 31, 2006, our history of significant operating losses precluded us
from demonstrating that it was more likely than not that the related benefits
from deferred income tax deductions and foreign tax carryforwards would be
realized. Accordingly, we recorded valuation allowances on the
majority of our deferred income tax assets.
In fiscal
2006 we reversed the majority of these valuation allowances. Due to
improved operating performance, business models, and expectations regarding
future taxable income, the Company has concluded that it is more likely than not
that the benefits of domestic operating loss carryforwards, together with the
benefits of other deferred income tax assets will be realized. Thus,
we reversed the valuation allowances on certain of our domestic deferred income
tax assets, except for $2.2 million related to foreign tax
credits. However, events and circumstances may change in future
periods, requiring us to record valuation allowances on our deferred income tax
assets. These deferred tax valuation allowances could have a material
impact upon our reported financial position and results of
operations.
ACCOUNTING
PRONOUNCEMENTS ISSUED NOT YET ADOPTED
Fair Value
Measures – In September 2006, the FASB issued SFAS No. 157, Fair Value
Measures. This statement establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value, and
requires additional disclosures about fair-value
measurements. Statement No. 157 only applies to fair-value
measurements that are already required or permitted by other accounting
standards except for measurements of share-based payments and measurements that
are similar to, but not intended to be, fair value. This statement is
effective for the specified fair value measures for financial statements issued
for fiscal years beginning after November 15, 2007, and will thus be effective
for the Company in fiscal 2009. We have not yet completed our
analysis of the impact of SFAS No. 157 on our financial statements.
Fair Value Option
for Financial Assets and Financial Liabilities – In February 2007, the
FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities including an
Amendment of FASB Statement No. 115. Statement No.159 permits
entities to choose to measure many
financial
instruments and certain other items at fair value. The provisions of
SFAS No. 159 will become effective for the Company in fiscal 2009 and we have
not yet completed our analysis of the impact of SFAS No. 159 on our financial
statements.
Business
Combinations – In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. These standards aim to
improve, simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The provisions of SFAS No. 141R and SFAS No.
160 are effective for our fiscal year beginning September 1, 2009. We
do not currently anticipate that these statements will have a material impact
upon our financial condition or results of operations.
Derivatives
Disclosures – In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. Statement No. 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. The provisions of SFAS No. 161 are
effective for our third quarter of fiscal 2009. The Company is
currently evaluating the impact of the provisions of SFAS No. 161, but due to
our limited use of derivative instruments we do not currently anticipate that
the provisions of SFAS No. 161 will have a material impact on our financial
statements.
REGULATORY
COMPLIANCE
The
Company is registered in states in which we do business that have a sales tax
and collects and remits sales or use tax on retail sales made through its stores
and catalog sales. Compliance with environmental laws and regulations
has not had a material effect on our operations.
INFLATION
AND CHANGING PRICES
Inflation
has not had a material effect on our operations. However, future
inflation may have an impact on the price of materials used in the production of
training products and related accessories, including paper and related raw
materials. We may not be able to pass on such increased costs to our
customers.
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain
written and oral statements made by the Company in this report are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934 as amended (the Exchange Act). Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate,
or imply future results, performance, or achievements, and may contain words
such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or
phrases of similar meaning. In our reports and filings we may make
forward looking statements regarding future training and consulting sales
activity, anticipated expenses, projected cost reduction and strategic
initiatives, our expectations about the effect of the sale of the CSBU on our
business, our expectations about our restructuring plan, expected levels of
depreciation expense, expectations regarding tangible and intangible asset
valuation expenses, the seasonality of future sales, the seasonal fluctuations
in cash used for and provided by operating activities, expected improvements in
cash flows from operating activities, the adequacy of our existing capital
resources, future compliance with the terms and conditions of our line of
credit, the ability to borrow on our line of credit, expected repayment of our
line of credit in future periods, estimated capital expenditures, the adequacy
of our existing capital resources, and cash flow estimates used to determine the
fair value of long-lived assets. These, and other forward-looking
statements, are subject to certain risks and uncertainties that may cause actual
results to differ materially from the forward-looking
statements.
These
risks and uncertainties are disclosed from time to time in reports filed by us
with the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such
risks and uncertainties include, but are not limited to, the matters discussed
in Item 1A of this report on Form 10-K for the fiscal year ended August 31,
2008, entitled “Risk Factors.” In addition, such risks and
uncertainties may include unanticipated developments in any one or more of the
following areas: unanticipated costs or capital expenditures;
difficulties encountered by EDS in operating and maintaining our information
systems and controls, including without limitation, the systems related to
demand and supply planning, inventory control, and order fulfillment; delays or
unanticipated outcomes relating to our strategic plans; dependence on existing
products or services; the rate and consumer acceptance of new product
introductions; competition; the number and nature of customers and their product
orders, including changes in the timing or mix of product or training orders;
pricing of our products and services and those of competitors; adverse
publicity; and other factors which may adversely affect our
business.
The risks
included here are not exhaustive. Other sections of this report may
include additional factors that could adversely affect our business and
financial performance. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors may emerge and it is
not possible for our management to predict all such risk factors, nor can we
assess the impact of all such risk factors on our business or the extent to
which any single factor, or combination of factors, may cause actual results to
differ materially from those contained in forward-looking
statements. Given these risks and uncertainties, investors should not
rely on forward-looking statements as a prediction of actual
results.
The
market price of our common stock has been and may remain volatile. In
addition, the stock markets in general have experienced increased
volatility. Factors such as quarter-to-quarter variations in revenues
and earnings or losses and our failure to meet expectations could have a
significant impact on the market price of our common stock. In
addition, the price of our common stock can change for reasons unrelated to our
performance. Due to our low market capitalization, the price of our
common stock may also be affected by conditions such as a lack of analyst
coverage and fewer potential investors.
Forward-looking
statements are based on management’s expectations as of the date made, and the
Company does not undertake any responsibility to update any of these statements
in the future except as required by law. Actual future performance
and results will differ and may differ materially from that contained in or
suggested by forward-looking statements as a result of the factors set forth in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in our filings with the SEC.
ITEM 7A. Quantitative and
Qualitative Disclosures About Market Risk
Market
Risk of Financial Instruments
We are
exposed to financial instrument market risk primarily through fluctuations in
foreign currency exchange rates and interest rates. To manage risks
associated with foreign currency exchange and interest rates, we make limited
use of derivative financial instruments. Derivatives are financial
instruments that derive their value from one or more underlying financial
instruments. As a matter of policy, our derivative instruments are
entered into for periods consistent with the related underlying exposures and do
not constitute positions that are independent of those exposures. In
addition, we do not enter into derivative contracts for trading or speculative
purposes, nor are we party to any leveraged derivative
instrument. The notional amounts of derivatives do not represent
actual amounts exchanged by the parties to the instrument, and, thus, are not a
measure of exposure to us through our use of
derivatives. Additionally, we enter into derivative agreements only
with highly rated counterparties and we do not expect to incur any losses
resulting from non-performance by other parties.
Foreign
Exchange Sensitivity
Due to
the global nature of our operations, we are subject to risks associated with
transactions that are denominated in currencies other than the United States
dollar, as well as the effects of translating amounts denominated in foreign
currencies to United States dollars as a normal part of the reporting
process. The objective of our foreign currency risk management
activities is to reduce foreign currency risk in the consolidated financial
statements. In order to manage foreign currency risks, we make
limited use of foreign currency forward contracts and other foreign currency
related derivative instruments. Although we cannot eliminate all
aspects of our foreign currency risk, we believe that our strategy, which
includes the use of derivative instruments, can reduce the impacts of foreign
currency related issues on our consolidated financial statements. The
following is a description of our use of foreign currency derivative
instruments.
Foreign Currency Forward
Contracts –
During the fiscal years ended August 31, 2008, 2007, and 2006, we
utilized foreign currency forward contracts to manage the volatility of certain
intercompany financing transactions and other transactions that are denominated
in foreign currencies. Because these contracts do not meet specific
hedge accounting requirements, gains and losses on these contracts, which expire
on a quarterly basis, are recognized currently and are used to offset a portion
of the gains or losses of the related accounts. The gains and losses
on these contracts were recorded as a component of SG&A expense in our
consolidated income statements and had the following net impact on the periods
indicated (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Losses
on foreign exchange
contracts
|
$ | (487 | ) | $ | (249 | ) | $ | (346 | ) | |||
|
Gains
on foreign exchange
contracts
|
36 | 119 | 415 | |||||||||
|
Net
gain (loss) on foreign
exchange contracts
|
$ | (451 | ) | $ | (130 | ) | $ | 69 | ||||
At August
31, 2008, the fair value of these contracts, which was determined using the
estimated amount at which contracts could be settled based upon forward market
exchange rates, approximated the notional amounts of the contracts due to the
proximity of the end of the contract to our fiscal year end on August 31,
2008. The notional amounts of our foreign currency sell contracts
that did not qualify for hedge accounting were as follows at August 31, 2008 (in
thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
||||||
|
British
Pounds
|
450 | $ | 809 | |||||
|
Japanese
Yen
|
27,000 | 254 | ||||||
|
Australian
Dollars
|
125 | 117 | ||||||
Interest
Rate Sensitivity
The
Company is exposed to fluctuations in interest rates primarily due to our line
of credit borrowings and long-term mortgage obligation in Canada. At
August 31, 2008, our debt obligations consisted primarily of a long-term lease
agreement (financing obligation) associated with the sale of our corporate
headquarters facility, a variable-rate line of credit arrangement, and a
variable rate long-term mortgage on certain of our buildings and property in
Canada. The addition of the variable-rate line of credit in fiscal
2007 increased our interest rate sensitivity and in the future our overall
interest rate sensitivity will be influenced by the amounts borrowed on the line
of credit and the prevailing interest rates, which may create additional expense
if interest rates increase in future periods. The financing
obligation has a payment structure equivalent to a long-term leasing arrangement
with a fixed interest rate of 7.7 percent.
The line
of credit had a weighted average interest rate of 6.6 percent at August 31, 2007
and our variable-rate mortgage has interest charged at the Canadian Prime Rate
(4.8 percent at August 31, 2008) and requires payments through January
2015. At borrowing levels following the payment of the $28.2 million
tender offer obligation, a one percent increase to the interest rates on our
variable rate line of credit and mortgage obligation would increase our interest
expense over the next year by approximately $0.2 million.
During
the fiscal years ended August 31, 2008, 2007, and 2006, we were not party to any
interest rate swap agreements or similar derivative
instruments.
ITEM 8. Financial Statements
and Supplementary Data
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Franklin
Covey Co.:
We have
audited Franklin Covey Co.’s internal control over financial reporting as of
August 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Franklin Covey Co.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Franklin Covey Co. maintained, in all material respects, effective
internal control over financial reporting as of August 31, 2008, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Franklin
Covey Co. and subsidiaries
as of August 31, 2008 and 2007, and the related consolidated statements of
income and comprehensive income, stockholders’ equity, and cash flows for each
of the years in the three-year period ended August 31, 2008, and our report
dated November 14, 2008 expressed an unqualified opinion on those consolidated
financial statements.
KPMG
LLP
Salt Lake
City, UT
November
14, 2008
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Franklin
Covey Co.:
We have
audited the accompanying consolidated balance sheets of Franklin Covey Co. and
subsidiaries as of August 31, 2008 and 2007, and the related consolidated
statements of income and comprehensive income, stockholders’ equity, and cash
flows for each of the years in the three-year period ended August 31,
2008. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Covey Co. and
subsidiaries as of August 31, 2008 and 2007, and the results of their operations
and their cash flows for each of the years in the three-year period ended August
31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Franklin Covey Co.’s internal control over
financial reporting as of August 31, 2008, based on criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated November 14, 2008 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
KPMG
LLP
Salt Lake
City, UT
November
14, 2008
FRANKLIN
COVEY CO.
CONSOLIDATED
BALANCE SHEETS
|
AUGUST
31,
|
2008
|
2007
|
||||||
|
In
thousands, except per share data
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 15,904 | $ | 6,126 | ||||
|
Accounts
receivable, less allowance for doubtful accounts of $1,066 and
$821
|
28,019 | 27,239 | ||||||
|
Inventories
|
8,742 | 24,033 | ||||||
|
Deferred
income taxes
|
2,472 | 3,635 | ||||||
|
Receivable
from equity method investee
|
7,672 | - | ||||||
|
Prepaid
expenses and other assets
|
5,102 | 9,070 | ||||||
|
Total
current assets
|
67,911 | 70,103 | ||||||
|
Property
and equipment, net
|
26,928 | 36,063 | ||||||
|
Intangible
assets, net
|
72,320 | 75,923 | ||||||
|
Other
long-term assets
|
11,768 | 14,542 | ||||||
| $ | 178,927 | $ | 196,631 | |||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt and financing obligation
|
$ | 670 | $ | 629 | ||||
|
Line
of credit
|
- | 15,999 | ||||||
|
Accounts
payable
|
8,713 | 12,190 | ||||||
|
Income
taxes payable
|
1,057 | 2,244 | ||||||
|
Tender
offer obligation
|
28,222 | - | ||||||
|
Accrued
liabilities
|
23,419 | 30,101 | ||||||
|
Total
current liabilities
|
62,081 | 61,163 | ||||||
|
Long-term
debt and financing obligation, less current portion
|
32,291 | 32,965 | ||||||
|
Other
liabilities
|
1,229 | 1,019 | ||||||
|
Deferred
income tax liabilities
|
4,572 | 565 | ||||||
|
Total
liabilities
|
100,173 | 95,712 | ||||||
|
Commitments
and contingencies (Notes 1, 8, 9, and 12)
|
||||||||
|
Shareholders’
equity:
|
||||||||
|
Common
stock, $.05 par value; 40,000 shares authorized, 27,056 shares
issued
|
1,353 | 1,353 | ||||||
|
Additional
paid-in capital
|
184,313 | 185,890 | ||||||
|
Common
stock warrants
|
7,597 | 7,602 | ||||||
|
Retained
earnings
|
25,337 | 19,489 | ||||||
|
Accumulated
other comprehensive income
|
1,058 | 970 | ||||||
|
Treasury
stock at cost, 10,203 shares and 7,296 shares
|
(140,904 | ) | (114,385 | ) | ||||
|
Total
shareholders’ equity
|
78,754 | 100,919 | ||||||
| $ | 178,927 | $ | 196,631 | |||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
YEAR
ENDED AUGUST 31,
|
2008
|
2007
|
2006
|
|||||||||
|
In
thousands, except per share amounts
|
||||||||||||
|
Net
sales:
|
||||||||||||
|
Training and consulting
services
|
$ | 138,112 | $ | 137,708 | $ | 122,418 | ||||||
|
Products
|
121,980 | 146,417 | 156,205 | |||||||||
| 260,092 | 284,125 | 278,623 | ||||||||||
|
Cost
of sales:
|
||||||||||||
|
Training and consulting
services
|
44,738 | 43,132 | 40,722 | |||||||||
|
Products
|
53,565 | 65,915 | 69,940 | |||||||||
| 98,303 | 109,047 | 110,662 | ||||||||||
|
Gross
profit
|
161,789 | 175,078 | 167,961 | |||||||||
|
Selling,
general, and administrative
|
141,318 | 149,220 | 144,747 | |||||||||
|
Gain
on sale of consumer solutions business unit
|
(9,131 | ) | - | - | ||||||||
|
Gain
on sale of manufacturing facility
|
- | (1,227 | ) | - | ||||||||
|
Restructuring
costs
|
2,064 | - | - | |||||||||
|
Impairment
of assets
|
1,483 | - | - | |||||||||
|
Depreciation
|
5,692 | 5,394 | 5,355 | |||||||||
|
Amortization
|
3,603 | 3,607 | 3,813 | |||||||||
|
Income from
operations
|
16,760 | 18,084 | 14,046 | |||||||||
|
Interest
income
|
157 | 717 | 1,334 | |||||||||
|
Interest
expense
|
(3,083 | ) | (3,136 | ) | (2,622 | ) | ||||||
|
Recovery
from legal settlement
|
- | - | 873 | |||||||||
|
Income before income
taxes
|
13,834 | 15,665 | 13,631 | |||||||||
|
Income
tax benefit (provision)
|
(7,986 | ) | (8,036 | ) | 14,942 | |||||||
|
Net income
|
5,848 | 7,629 | 28,573 | |||||||||
|
Preferred
stock dividends
|
- | (2,215 | ) | (4,385 | ) | |||||||
|
Net income available to common
shareholders
|
$ | 5,848 | $ | 5,414 | $ | 24,188 | ||||||
|
Net
income available to common shareholders per share:
|
||||||||||||
|
Basic
|
$ | .30 | $ | .28 | $ | 1.20 | ||||||
|
Diluted
|
$ | .29 | $ | .27 | $ | 1.18 | ||||||
|
Weighted
average number of common shares:
|
||||||||||||
|
Basic
|
19,577 | 19,593 | 20,134 | |||||||||
|
Diluted
|
19,922 | 19,888 | 20,516 | |||||||||
|
COMPREHENSIVE
INCOME
|
||||||||||||
|
Net
income
|
$ | 5,848 | $ | 7,629 | $ | 28,573 | ||||||
|
Foreign
currency translation adjustments
|
88 | 458 | 97 | |||||||||
|
Comprehensive
income
|
$ | 5,936 | $ | 8,087 | $ | 28,670 | ||||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
YEAR
ENDED AUGUST 31,
|
2008
|
2007
|
2006
|
|||||||||
|
In
thousands
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net income
|
$ | 5,848 | $ | 7,629 | $ | 28,573 | ||||||
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
||||||||||||
|
Depreciation and
amortization
|
9,533 | 10,030 | 10,289 | |||||||||
|
Gain on sale of consumer
solutions business unit assets
|
(9,131 | ) | - | - | ||||||||
|
Deferred income
taxes
|
4,152 | 5,274 | (15,435 | ) | ||||||||
|
Share-based compensation cost
(benefit)
|
(259 | ) | 1,394 | 843 | ||||||||
|
Loss (gain) on disposals of
assets
|
460 | (1,247 | ) | - | ||||||||
|
Restructuring
charges
|
2,064 | - | - | |||||||||
|
Impairment of
assets
|
1,483 | - | - | |||||||||
|
Changes in assets and
liabilities:
|
||||||||||||
|
Increase in accounts receivable,
net
|
(7,204 | ) | (3,574 | ) | (1,919 | ) | ||||||
|
Decrease (increase) in
inventories
|
2,853 | (2,427 | ) | (845 | ) | |||||||
|
Increase in receivable from
investment in equity method investee
|
(7,672 | ) | - | - | ||||||||
|
Decrease in prepaid expenses and
other assets
|
7,109 | 514 | 1,458 | |||||||||
|
Decrease in accounts payable and
accrued liabilities
|
(1,512 | ) | (4,388 | ) | (3,697 | ) | ||||||
|
Increase (decrease) in income
taxes payable
|
255 | 304 | (2,081 | ) | ||||||||
|
Increase (decrease) in other
long-term liabilities
|
(151 | ) | (151 | ) | (177 | ) | ||||||
|
Net cash provided by operating
activities
|
7,828 | 13,358 | 17,009 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Proceeds from the sale of
consumer solutions business unit assets, net
|
28,241 | - | - | |||||||||
|
Purchases of property and
equipment
|
(4,164 | ) | (9,138 | ) | (4,350 | ) | ||||||
|
Capitalized curriculum
development costs
|
(4,042 | ) | (5,088 | ) | (4,010 | ) | ||||||
|
Investment in equity method
investee
|
(2,755 | ) | - | - | ||||||||
|
Proceeds from disposal of
consolidated subsidiaries
|
1,180 | 150 | - | |||||||||
|
Proceeds from sales of property
and equipment, net
|
60 | 2,596 | 93 | |||||||||
|
Net cash provided by (used for)
investing activities
|
18,520 | (11,480 | ) | (8,267 | ) | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Proceeds from line of credit
borrowing
|
69,708 | 50,951 | - | |||||||||
|
Payments on line of credit
borrowings
|
(85,707 | ) | (34,952 | ) | - | |||||||
|
Redemptions of Series A preferred
stock
|
- | (37,345 | ) | (20,000 | ) | |||||||
|
Change in restricted
cash
|
- | - | 699 | |||||||||
|
Principal payments on long-term
debt and financing obligation
|
(622 | ) | (605 | ) | (1,111 | ) | ||||||
|
Purchases of common stock for
treasury
|
- | (2,625 | ) | (5,167 | ) | |||||||
|
Proceeds from sales of common
stock from treasury
|
462 | 388 | 427 | |||||||||
|
Proceeds from management stock
loan payments
|
- | 27 | 134 | |||||||||
|
Payment of preferred stock
dividends
|
- | (2,215 | ) | (4,885 | ) | |||||||
|
Net cash used for financing
activities
|
(16,159 | ) | (26,376 | ) | (29,903 | ) | ||||||
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
(411 | ) | 37 | 58 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
9,778 | (24,461 | ) | (21,103 | ) | |||||||
|
Cash
and cash equivalents at beginning of the year
|
6,126 | 30,587 | 51,690 | |||||||||
|
Cash
and cash equivalents at end of the year
|
$ | 15,904 | $ | 6,126 | $ | 30,587 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash paid for income
taxes
|
$ | 3,549 | $ | 2,370 | $ | 2,615 | ||||||
|
Cash paid for
interest
|
3,146 | 2,973 | 2,662 | |||||||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Acquisition of treasury stock
from tender offer through liabilities
|
$ | 28,222 | $ | - | $ | - | ||||||
|
Accrued preferred stock
dividends
|
- | - | 934 | |||||||||
|
Promissory notes received from
sales of consolidated subsidiaries
|
- | 1,513 | - | |||||||||
|
Purchases of property and
equipment financed by accounts payable
|
314 | 895 | - | |||||||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
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)
|
Deferred
Compensa-tion
|
Accumulated
Other Comprehensive Income
|
Treasury
Stock Shares
|
Treasury
Stock Amount
|
||||||||||||||||||||||||||||||||||
|
In
thousands
|
||||||||||||||||||||||||||||||||||||||||||||
|
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
share award
|
(458 | ) | 27 | 458 | ||||||||||||||||||||||||||||||||||||||||
|
Share-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 | ) | |||||||||||||||||||||||
|
Preferred
stock dividends
|
(2,215 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Preferred
stock redemptions
|
(1,494 | ) | (37,345 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(708 | ) | 100 | 1,096 | ||||||||||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(345 | ) | (2,603 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Unvested
share award
|
(501 | ) | 32 | 501 | ||||||||||||||||||||||||||||||||||||||||
|
Share-based
compensation
|
1,394 | |||||||||||||||||||||||||||||||||||||||||||
|
Payments
on management common stock loans
|
27 | |||||||||||||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
458 | |||||||||||||||||||||||||||||||||||||||||||
|
Common
stock warrant activity
|
(13 | ) | (9 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Sale
of Brazil subsidiary
|
(141 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Net
income
|
7,629 | |||||||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2007
|
- | $ | - | 27,056 | $ | 1,353 | $ | 185,890 | $ | 7,602 | $ | 19,489 | $ | - | $ | 970 | (7,296 | ) | $ | (114,385 | ) | |||||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(746 | ) | 96 | 1,234 | ||||||||||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(12 | ) | (103 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Treasury
shares acquired through tender offer
|
(3,027 | ) | (28,222 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Unvested
share award
|
(572 | ) | 36 | 572 | ||||||||||||||||||||||||||||||||||||||||
|
Share-based
compensation
|
(259 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
88 | |||||||||||||||||||||||||||||||||||||||||||
|
Common
stock warrant activity
|
(5 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Net
income
|
5,848 | |||||||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2008
|
- | $ | - | 27,056 | $ | 1,353 | $ | 184,313 | $ | 7,597 | $ | 25,337 | $ | - | $ | 1,058 | (10,203 | ) | $ | (140,904 | ) | |||||||||||||||||||||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Franklin
Covey Co. (hereafter referred to as us, we, our, or the Company) believes that
great organizations consist of great people who form great teams that produce
great results. To enable organizations and individuals to achieve
great results, we provide integrated consulting, training, and performance
solutions focused on leadership, strategy execution, productivity, sales force
effectiveness, effective communication, and other areas. Our services
and products have historically been available through professional consulting
services, public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com
and our best-known offerings in the marketplace have included the FranklinCovey
Planner™, and a suite of individual-effectiveness and leadership-development
training products based on the best-selling book, The 7 Habits of Highly Effective
People.
During
the fourth quarter of fiscal 2008, we completed the sale of substantially all of
the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed
entity, Franklin Covey Products, LLC (Note 2). The CSBU was primarily
responsible for the sale of our products, including the FranklinCovey Planner™,
to consumers through retail stores, catalogs, and our Internet
site. Following the sale of the CSBU, our business primarily consists
of training, consulting, and assessment services and products to help
organizations achieve superior results by focusing on and executing on top
priorities, building the capability of knowledge workers, and aligning business
processes. Our training, consulting, and assessment offerings include
services based upon the popular workshop The 7 Habits of Highly Effective
PeopleÒ; Leadership: Great
Leaders—Great Teams—Great Results™ The 4 Disciplines of
Execution™ FOCUS:
Achieving Your Highest Priorities; The 8 Habits of a Successful
Marriage; Building
Business Acumen;
Championing Diversity;
Leading at the Speed of Trust; Writing Advantage, and Presentation
Advantage. During fiscal 2008, we introduced a new suite of
services designed to help our clients improve their sales through increased
customer loyalty. We also consistently seek to create, develop, and
introduce new services and products that will help our clients achieve
greatness.
Fiscal
Year
The
Company utilizes a modified 52/53-week fiscal year that ends on August 31 of
each year. Corresponding quarterly periods generally consist of
13-week periods that ended on December 1, 2007, March 1, 2008, and May 31, 2008
during fiscal 2008. Unless otherwise noted, references to fiscal
years apply to the 12 months ended August 31 of the specified year.
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the
Company and our subsidiaries, which consisted of Franklin Covey Printing,
Franklin Development Corp., and our wholly-owned operations in Canada, Japan,
the United Kingdom, Australia, and Mexico (product sales) during fiscal
2008. Intercompany balances and transactions are eliminated in
consolidation.
Pervasiveness
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial
statements,
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those
estimates.
Reclassifications
Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation. These reclassifications included
a change in the classification of building depreciation costs related to
subleased office space from product cost of sales to depreciation
expense. The depreciation expense reclassified from product cost of
sales totaled $0.7 million and $0.6 million for the fiscal years ended August
31, 2007 and 2006, respectively.
Cash
and Cash Equivalents
We
consider highly liquid investments with insignificant interest rate risk and
original maturities to the Company of three months or less to be cash
equivalents. We did not hold a significant amount of investments that
would be considered cash equivalent instruments at August 31, 2008 or
2007.
As of
August 31, 2008, we had demand deposits at various banks in excess of the
$250,000 limit for insurance by the Federal Deposit Insurance Corporation
(FDIC). Subsequent to August 31, 2008 we utilized substantially all
of our available cash to pay the $28.2 million tender offer
obligation.
Trade
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best
estimate of the amount of probable credit losses in the existing accounts
receivable balance. We determine the allowance for doubtful accounts
based upon historical write-off experience and current economic conditions and
review the adequacy of the allowance for doubtful accounts on a regular
basis. Receivable balances past due over 90 days, which exceed a
specified dollar amount, are reviewed individually for
collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. We do not have any off-balance
sheet credit exposure related to our customers.
Inventories
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method. Elements of cost in inventories generally
include raw materials, direct labor, and overhead. Cash flows from
the sales of inventory are included in cash flows provided by operating
activities in our consolidated cash flows statements. Following the
sale of our Consumer Solutions Business Unit in the fourth quarter of fiscal
2008, our inventories are comprised primarily of training materials, books, and
related accessories and were comprised of the following (in
thousands):
|
AUGUST
31,
|
2008
|
2007
|
||||||
|
Finished
goods
|
$ | 8,329 | $ | 20,268 | ||||
|
Work
in process
|
- | 743 | ||||||
|
Raw
materials
|
413 | 3,022 | ||||||
| $ | 8,742 | $ | 24,033 | |||||
Provision
is made to reduce excess and obsolete inventories to their estimated net
realizable value. At August 31, 2008 and 2007, our reserves for
excess and obsolete inventories totaled $1.1 million and $4.3
million. In assessing the realization of inventories, we make
judgments regarding future demand requirements and compare these estimates with
current and committed inventory levels. Inventory requirements may
change based on projected customer demand, training curriculum life-cycle
changes, longer- or shorter-than-expected usage periods, and other factors that
could affect the valuation of our inventories.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation expense, which
includes depreciation on our corporate campus that is accounted for as a
financing obligation (Note 3) and the amortization of assets recorded under
capital lease obligations, is calculated using the straight-line method over the
expected useful life of the asset. The Company generally uses the
following depreciable lives for our major classifications of property and
equipment:
|
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
|
Leasehold
improvements are amortized over the lesser of the useful economic life of the
asset or the contracted lease period. We expense costs for repairs
and maintenance as incurred. Gains and losses resulting from the sale
of property and equipment are recorded in current operations.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized, but rather
are tested for impairment on an annual basis, or more often if events or
circumstances indicate that a potential impairment exists. The Covey
trade name intangible asset (Note 4) has been deemed to have an indefinite
life. This intangible asset is assigned to the Organizational
Solutions Business Unit and is tested for impairment using the present value of
estimated royalties on trade name related revenues, which consist primarily of
training seminars and work sessions, international licensee sales, and related
products. No impairment charge to the Covey trade name was recorded
during the fiscal years ended August 31, 2008, 2007, or 2006.
Capitalized
Curriculum Development Costs and Impairment of Assets
During
the normal course of business, we develop training courses and related materials
that we sell to our customers. Capitalized curriculum development
costs include certain expenditures to develop course materials such as video
segments, course manuals, and other related materials. Generally,
curriculum costs are capitalized when a new offering is developed or when there
is a major revision to an existing course that requires a significant re-write
of the course materials or curriculum. Costs incurred to maintain
existing offerings are expensed when incurred. In addition,
development costs incurred in the research and development of new curriculum and
software products to be sold, leased, or otherwise marketed are expensed as
incurred until technological feasibility has been established in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, and Emerging Issues
Task Force (EITF) Issue 96-6, Accounting for the Film and Software
Costs Associated with Developing Entertainment and Educational Software
Products.
During
fiscal 2008, we capitalized certain costs incurred for the development of a new
customer loyalty offering, leadership offerings, including The Speed of Trust and The Leader in Me, as well as
other courses. Capitalized development costs are generally amortized
over a five-year life, which is based on numerous factors, including expected
cycles of major changes to curriculum. Capitalized curriculum
development costs are reported as a component of other long-term assets in our
consolidated balance sheets and totaled $6.8 million and $8.6 million at August
31, 2008 and 2007. Amortization of capitalized curriculum development
costs is reported as a component of cost of sales.
In fiscal
2008 we analyzed the expected future revenues and corresponding cash flows
expected to be generated from our The
7 Habits of Highly
Effective People interactive program and concluded that the expected
future revenues, less direct selling and maintenance costs, were insufficient to
cover the
carrying
value of the corresponding capitalized development
costs. Accordingly, we recorded a $1.5 million impairment charge in
the fourth quarter of fiscal 2008 to write the carrying value of this program
down to its net realizable value.
Restricted
Investments
The
Company’s restricted investments consist of insurance contracts and investments
in mutual funds that are held in a “rabbi trust” and are restricted for payment
to the participants of our deferred compensation plan (Note 16). We
account for our restricted investments in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. As required by SFAS No. 115,
the Company determines the proper classification of its investments at the time
of purchase and reassesses such designations at each balance sheet
date. For the periods presented in this report, our restricted
investments were classified as trading securities and consisted of insurance
contracts and mutual funds. The fair value of these restricted
investments totaled $0.5 million and $0.7 million at August 31, 2008 and 2007,
and were recorded as components of other long-term assets in the accompanying
consolidated balance sheets.
In
accordance with SFAS No. 115, our unrealized losses on restricted investments,
which were immaterial during fiscal years 2008, 2007, and 2006, were recognized
in the accompanying consolidated income statements as a component of selling,
general, and administrative expense.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an
estimate of undiscounted future net cash flows of the assets over the remaining
useful lives in determining whether the carrying value of the assets is
recoverable. If the carrying values of the assets exceed the
anticipated future cash flows of the assets, we recognize an impairment loss
equal to the difference between the carrying values of the assets and their
estimated fair values. Impairment of long-lived assets is assessed at
the lowest levels for which there are identifiable cash flows that are
independent from other groups of assets. The evaluation of long-lived
assets requires us to use estimates of future cash flows. If
forecasts and assumptions used to support the realizability of our long-lived
tangible and definite-lived intangible assets change in the future, significant
impairment charges could result that would adversely affect our results of
operations and financial condition.
Accrued
Liabilities
Significant
components of our accrued liabilities were as follows (in
thousands):
|
AUGUST
31,
|
2008
|
2007
|
||||||
|
Unearned
revenue
|
$ | 4,564 | $ | 4,709 | ||||
|
Outsourcing
contract costs payable
|
4,446 | 4,357 | ||||||
|
Accrued
compensation
|
4,152 | 6,807 | ||||||
|
Customer
credits
|
2,191 | 2,570 | ||||||
|
Restructuring
costs
|
2,055 | - | ||||||
|
Other
accrued liabilities
|
6,011 | 11,658 | ||||||
| $ | 23,419 | $ | 30,101 | |||||
Restructuring
Costs
Following
the sale of our CSBU in the fourth quarter of fiscal 2008, we initiated a
restructuring plan that reduces the number of our domestic regional sales
offices, decentralizes certain sales support functions, and significantly
changes the operations of our Canadian subsidiary. The restructuring
plan is intended to strengthen the remaining domestic sales offices and reduce
our overall operating costs. During fiscal 2008 we expensed $2.1
million for anticipated severance costs necessary to complete the
restructuring
plan, of
which $2.1 million was recorded as a component of accrued liabilities at August
31, 2008. The composition and utilization of the accrued
restructuring charge was as follows at August 31, 2008 (in
thousands):
|
Description
|
Accrued
Restructuring Costs
|
|||
|
Balance
at August 31, 2007
|
$ | - | ||
|
Restructuring
charges
|
2,064 | |||
|
Amounts
utilized – employee severance
|
(9 | ) | ||
|
Balance
at August 31, 2008
|
$ | 2,055 | ||
We intend
to complete the majority of the restructuring plan activities during the year
ending August 31, 2009.
Foreign
Currency Translation and Transactions
The
functional currencies of the Company’s foreign operations are the reported local
currencies. Translation adjustments result from translating our
foreign subsidiaries’ financial statements into United States
dollars. The balance sheet accounts of our foreign subsidiaries are
translated into United States dollars using the exchange rate in effect at the
balance sheet date. Revenues and expenses are translated using
average exchange rates for each month during the fiscal year. The
resulting translation gains or losses were recorded as a component of
accumulated other comprehensive income in shareholders’
equity. Foreign currency transaction losses totaled $0.1 million
during each of the fiscal years ended August 31, 2008, 2007, and 2006, and were
reported as a component of our selling, general, and administrative
expenses.
Derivative
Instruments
Derivative
instruments are accounted for in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as modified by SFAS No. 138, Accounting for Certain Derivative
and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. During the
normal course of business, we are exposed to risks associated with foreign
currency exchange rate and interest rate fluctuations. Foreign
currency exchange rate exposures result from the Company’s operating results,
assets, and liabilities that are denominated in currencies other than the United
States dollar. In order to limit our exposure to these elements, we
have made limited use of derivative instruments. Each derivative
instrument that is designated as a hedge instrument is recorded on the balance
sheet at its fair value. Changes in the fair value of derivative
instruments that qualify for hedge accounting are recorded in accumulated other
comprehensive income, which is a component of shareholders’
equity. Changes in the fair value of derivative instruments that are
not designated as hedge instruments are immediately recognized as a component of
selling, general, and administrative expense in our consolidated income
statements. At August 31, 2008 we were not party to any financial
instruments that qualified for hedge accounting.
Sales
Taxes
We
collect sales tax on qualifying transactions with customers based upon
applicable sales tax rates in various jurisdictions. The Company
accounts for its sales taxes collected using the net method as defined by EITF
Issue No. 06-03, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
and accordingly, we do not include sales taxes in net sales reported in
our consolidated financial statements.
Revenue
Recognition
We
recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in
Financial Statements, as amended by SAB No. 104, Revenue
Recognition. Accordingly,
we
recognize revenue when: 1) persuasive evidence of an agreement exists, 2)
delivery of product has occurred or services have been rendered, 3) the price to
the customer is fixed or determinable, and 4) collectibility is reasonably
assured. For training and service sales, these conditions are
generally met upon presentation of the training seminar or delivery of the
consulting services. For product sales, these conditions are
generally met upon shipment of the product to the customer or by completion of
the sales transaction in a retail store.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. For
transactions that contain more than one element, we recognize revenue in
accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. When fair value exists for all
contracted elements, the overall contract consideration is allocated among the
separate units of accounting based upon their relative fair
values. Revenue for these units is recognized in accordance with our
general revenue policies once it has been determined that the delivered items
have standalone value to the customer. If fair value does not exist
for all contracted elements, revenue for the delivered items is recognized using
the residual method, which generally means that revenue recognition is postponed
until the point is reached when the delivered items have standalone value and
fair value exists for the undelivered items. Under the residual
method, the amount of revenue considered for recognition under our general
revenue policies is the total contract amount, less the aggregate fair value of
the undelivered items. Fair value of the undelivered items is based
upon the normal pricing practices for our existing training programs, consulting
services, and other products, which are generally the prices of the items when
sold separately.
Our
international strategy includes the use of licensees in countries where we do
not have a wholly-owned operation. Licensee companies are unrelated
entities that have been granted a license to translate our content and
curriculum, adapt the content and curriculum to the local culture, and sell our
training seminars and products in a specific country or
region. Licensees are required to pay us royalties based upon a
percentage of their sales to clients. We recognize royalty income
each period based upon the sales information reported to us from our
licensees. Licensee royalty revenues are included as a component of
training sales and totaled $10.1 million, $7.6 million, and $6.1 million, for
the fiscal years ended August 31, 2008, 2007, and 2006.
Revenue
is recognized on software sales in accordance with Statement of Position (SOP)
97-2, Software Revenue
Recognition as amended by SOP 98-09. Statement 97-2, as
amended, generally requires revenue earned on software arrangements involving
multiple elements such as software products and support to be allocated to each
element based on the relative fair value of the elements based on vendor
specific objective evidence (VSOE). Nearly all of the Company’s
software sales consist of ready to use “off-the-shelf” software products that
have multiple elements, including a license and post contract customer support
(PCS). Currently we do not have VSOE for either the license or
support elements of our software sales. Accordingly, revenue is
deferred until the only undelivered element is PCS and the total arrangement fee
is recognized over the support period. During fiscal 2008, 2007, and
2006, we had software sales totaling $2.5 million, $3.2 million, and $3.3
million, which are included as a component of product sales in our consolidated
income statements.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Share-Based
Compensation
We
account for our share-based compensation costs according to the provisions of
SFAS No. 123 (Revised 2004) Share-Based Payment (SFAS No.
123R), which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. In general, SFAS No. 123R requires all share
based-payments to employees and non-employees, including grants of stock options
and the compensatory elements of employee stock purchase plans, to be recognized
in the income statement based upon their fair values.
For more
information on our share-based compensation plans, refer to Note
13.
Shipping
and Handling Fees and Costs
All
shipping and handling fees billed to customers are recorded as a component of
net sales. All costs incurred related to the shipping and handling of
products are recorded in cost of sales.
Advertising
Costs
Costs for
newspaper, television, radio, and other advertising are expensed as incurred or
recognized over the period of expected benefit for direct response and catalog
advertising. Direct response advertising costs, which consist
primarily of printing and mailing costs for catalogs and seminar mailers, are
charged to expense over the period of projected benefit, which ranges from three
to 12 months. Advertising costs included in selling, general, and
administrative expenses totaled $15.5 million, $15.9 million, and $16.0 million,
for the fiscal years ended August 31, 2008, 2007, and 2006. Our
direct response advertising costs reported in other current assets totaled $0.5
million and $2.2 million at August 31, 2008 and 2007.
Research
and Development Costs
We
expense research and development costs as incurred. During the fiscal
years ended August 31, 2008, 2007, and 2006, we expensed $4.6 million, $3.3
million, and $2.3 million of research and development costs that were recorded
as components of cost of sales and selling, general, and administrative expenses
in our consolidated income statements.
Income
Taxes
Our
income tax provision has been determined using the asset and liability approach
of accounting for income taxes. Under this approach, deferred income
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The income
tax provision represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred income taxes
result from differences between the financial and tax bases of our assets and
liabilities and are adjusted for tax rates and tax laws when changes are
enacted. A valuation allowance is provided against deferred income
tax assets when it is more likely than not that all or some portion of the
deferred income tax assets will not be realized. We adopted the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), on
September 1, 2007. Following the adoption of FIN 48, interest and
penalties related to uncertain tax positions are recognized as components of
income tax expense.
The
Company provides for income taxes, net of applicable foreign tax credits, on
temporary differences in our investment in foreign subsidiaries, which consist
primarily of unrepatriated earnings.
Comprehensive
Income
Comprehensive
income includes changes to equity accounts that were not the result of
transactions with shareholders. Comprehensive income is comprised of
net income or loss and other comprehensive income and loss items. Our
comprehensive income and losses generally consist of changes in the cumulative
foreign currency translation adjustment.
Accounting
Pronouncements Issued Not Yet Adopted
Fair Value
Measures – In September 2006, the FASB issued SFAS No. 157, Fair Value
Measures. This statement establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value, and
requires additional disclosures about fair-value
measurements. Statement No. 157 only applies to fair-value
measurements that are already required or permitted by other accounting
standards except for measurements of share-based payments and measurements that
are similar to, but not intended
to be,
fair value. This statement is effective for the specified fair value
measures for financial statements issued for fiscal years beginning after
November 15, 2007, and will thus be effective for the Company in fiscal
2009. We have not yet completed our analysis of the impact of SFAS
No. 157 on our financial statements.
Fair Value Option
for Financial Assets and Financial Liabilities – In February 2007, the
FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities including an
Amendment of FASB Statement No. 115. Statement No.159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. The provisions of SFAS No. 159 will become effective
for the Company in fiscal 2009 and we have not yet completed our analysis of the
impact of SFAS No. 159 on our financial statements.
Business
Combinations – In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. These standards aim to
improve, simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The provisions of SFAS No. 141R and SFAS No.
160 are effective for our fiscal year beginning September 1, 2009. We
do not currently anticipate that these statements will have a material impact
upon our financial condition or results of operations.
Derivatives
Disclosures – In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. Statement No. 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. The provisions of SFAS No. 161 are
effective for our third quarter of fiscal 2009. The Company is
currently evaluating the impact of the provisions of SFAS No. 161, but due to
our limited use of derivative instruments we do not currently anticipate that
the provisions of SFAS No. 161 will have a material impact on our financial
statements.
|
2.
|
SALE
OF THE CONSUMER SOLUTIONS BUSINESS
UNIT
|
During
fiscal 2008, we joined with Peterson Partners to create a new company, Franklin
Covey Products, LLC (Franklin Covey Products). This new company
purchased substantially all of the assets of our Consumer Solutions Business
Unit (CSBU) with the objective of expanding the worldwide sales of Franklin
Covey products as governed by a comprehensive license agreement between us and
Franklin Covey Products. The CSBU was primarily responsible for sales
of our products to both domestic and international consumers through a variety
of channels, including retail stores, a call center, and the Internet (Note
19). Franklin Covey Products, which is controlled by Peterson
Partners, purchased the CSBU assets for $32.0 million in cash plus a $1.2
million adjustment for working capital delivered on the closing date of the
sale, which was effective July 6, 2008. We also incurred $3.7 million
of direct costs related to the sale of the CSBU assets, a portion of which is
reimbursable from Franklin Covey Products. At August 31, 2008, we
have a $3.5 million note receivable for these reimbursable transaction costs and
excess working capital that is due in January 2009. The note
receivable bears interest at Franklin Covey Products’ effective borrowing rate,
which was approximately 6.0 percent at August 31, 2008.
On the
date of the sale closing, the Company invested approximately $1.8 million to
purchase a 19.5 percent voting interest in Franklin Covey Products, made a $1.0
million priority capital contribution with a 10 percent return, and will have
the opportunity to earn contingent license fees if Franklin Covey Products
achieves specified performance objectives. We recognized a gain of
$9.1 million on the sale of the CSBU assets and according to guidance found in
EITF Issue No. 01-2, Interpretations of APB Opinion No.
29, we deferred a portion of the gain equal to our investment in Franklin
Covey Products. We will recognize the deferred gain over the life of
the long-term assets acquired by Franklin Covey Products or when cash is
received for payment of the priority contribution.
The
carrying amounts of the assets and liabilities of the CSBU that were sold to
Franklin Covey Products were as follows (in thousands):
|
Description
|
||||
|
Cash
and cash equivalents
|
$ | 38 | ||
|
Accounts
receivable, net
|
6,675 | |||
|
Inventories
|
12,665 | |||
|
Other
current assets
|
2,291 | |||
|
Property
and equipment, net
|
8,435 | |||
|
Other
assets
|
158 | |||
|
Total
assets sold
|
$ | 30,262 | ||
|
Accounts
payable
|
$ | 3,589 | ||
|
Accrued
liabilities
|
6,748 | |||
|
Total
liabilities sold
|
$ | 10,337 | ||
Based
upon the guidance found in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, EITF Issue No. 03-13, Applying the Conditions in Paragraph
42 of FASB Statement No. 144 in Determining Whether to Report Discontinued
Operations, and SAB 103, Topic 5Z4, Disposal of Operation with
Significant Interest Retained, we determined that the operations of CSBU
should not be reported as discontinued operations because we will continue to
have significant influence over the operations of Franklin Covey Products and
may participate in future cash flows. As a result of this
determination, we have not presented the financial results of the CSBU as
discontinued operations in the accompanying consolidated financial statements
and we do not anticipate discontinued operations presentation in future interim
and annual reporting periods.
As a
result of Franklin Covey Products’ structure as a limited liability company with
separate owner capital accounts and the guidance found in EITF Issue No. 03-16,
Accounting for Investments in
Limited Liability Companies and SOP 78-9, Accounting for Investments in Real
Estate Ventures, we determined that the Company’s investment in Franklin
Covey Products is more than minor and that we are required to account for our
investment in Franklin Covey Products using the equity method of
accounting. We record our share of Franklin Covey Products’ profit
and loss based upon specified allocations as defined in the associated operating
agreement. Our ownership interest may be diluted in future periods if
ownership shares of Franklin Covey Products granted to certain members of its
management vest.
The
following unaudited summary financial information for Franklin Covey Products is
presented as of and for the two months ending August 31, 2008 (in
thousands):
|
Balance
Sheet
|
||||
|
Total
assets
|
$ | 45,588 | ||
|
Total
liabilities
|
37,013 | |||
|
Income
Statement
|
||||
|
Sales
|
13,149 | |||
|
Net
loss
|
(1,437 | ) | ||
Following
the sale of the CSBU assets, we do not have any obligation to fund the losses of
Franklin Covey Products and therefore our portion of the net loss in fiscal 2008
was not recorded in our consolidated income statement. Under the
terms of the agreements associated with the sale of the CSBU assets, we are
entitled to receive reimbursement for certain operating costs, such as
warehousing and distribution costs, which are billed to the Company by third
party providers. At August 31, 2008 we had a $7.7 million receivable
from Franklin Covey Products, which consisted of $3.5 million of reimbursable
costs associated with the sale transaction as described above, and $4.2 million
of reimbursable operating costs.
|
3.
|
PROPERTY
AND EQUIPMENT
|
Our
property and equipment were comprised of the following (in
thousands):
|
AUGUST
31,
|
2008
|
2007
|
||||||
|
Land
and improvements
|
$ | 1,626 | $ | 1,639 | ||||
|
Buildings
|
34,573 | 34,536 | ||||||
|
Machinery
and equipment
|
2,969 | 29,026 | ||||||
|
Computer
hardware and software
|
20,010 | 45,623 | ||||||
|
Furniture,
fixtures, and leasehold improvements
|
9,640 | 32,579 | ||||||
| 68,818 | 143,403 | |||||||
|
Less
accumulated depreciation
|
(41,890 | ) | (107,340 | ) | ||||
| $ | 26,928 | $ | 36,063 | |||||
In
addition to the CSBU property and equipment that was sold to Franklin Covey
Products during the fourth quarter of fiscal 2008, we disposed of certain
computer hardware and software that was replaced or rendered obsolete during the
year. Substantially all of this computer hardware and software was
fully depreciated at the time of disposal. In addition, we also
transferred ownership of fully depreciated warehouse equipment to a third party
warehouse services provider (Note 9) as required by the outsourcing
contract.
During
fiscal 2007, we completed a project to reconfigure our printing operations to
improve our printing services’ efficiency, reduce operating costs, and improve
our printing services’ flexibility in order to increase external printing
service sales. Our reconfiguration plan included moving our printing
operations a short distance from its existing location to our corporate
headquarters campus and the sale of the manufacturing facility and certain
printing presses. We completed the sale of the manufacturing facility
during the second quarter of fiscal 2007. The sale price was $2.5
million and, after deducting customary closing costs, the net proceeds to the
Company from the sale totaled $2.3 million in cash. The carrying
value of the manufacturing facility at the date of sale was $1.1 million and
accordingly, we recognized a $1.2 million gain on the sale of the manufacturing
facility. The manufacturing facility assets sold were primarily
reported as a component of corporate assets for segment reporting
purposes. Due to a lower-than-expected sale price on one of the
printing presses to be sold, we recorded an impairment charge totaling $0.3
million to reduce the carrying value of the printing press to its anticipated
sale price. The impairment charge was included as a component of
depreciation expense in our consolidated income statement for the fiscal year
ended August 31, 2007.
In
connection with the fiscal 2005 sale of our corporate headquarters facility, we
entered into a 20-year master lease agreement with the purchaser, an unrelated
private investment group. The master lease agreement contains six
five-year renewal options, which will allow us to maintain our operations at our
current location for up to 50 years. Although the corporate
headquarters facility was formally sold and the Company has no legal ownership
of the property, SFAS No. 98, Accounting for Leases,
precluded us from recording the transaction as a sale since we have subleased
more than a minor portion of the property. Pursuant to this
accounting guidance, we have accounted for the sale as a financing transaction,
which required us to continue reporting the corporate headquarters facility as
an asset and to depreciate the property over the life of the master lease
agreement. We also recorded a financing obligation to the purchaser
(Note 7) for the sale price. At August 31, 2008, the carrying value
of the corporate headquarters facility was $19.1 million.
Certain
land and buildings are collateral for mortgage debt obligations (Note
7).
|
4.
|
INTANGIBLE
ASSETS
|
Our
intangible assets were comprised of the following (in thousands):
|
AUGUST
31, 2008
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||
|
Definite-lived
intangible assets:
|
||||||||||||
|
License
rights
|
$ | 27,000 | $ | (9,292 | ) | $ | 17,708 | |||||
|
Curriculum
|
58,237 | (29,896 | ) | 28,341 | ||||||||
|
Customer
lists
|
14,684 | (11,413 | ) | 3,271 | ||||||||
|
Trade
names
|
377 | (377 | ) | - | ||||||||
| 100,298 | (50,978 | ) | 49,320 | |||||||||
|
Indefinite-lived
intangible asset:
|
||||||||||||
|
Covey
trade name
|
23,000 | - | 23,000 | |||||||||
| $ | 123,298 | $ | (50,978 | ) | $ | 72,320 | ||||||
|
AUGUST
31, 2007
|
||||||||||||
|
Definite-lived
intangible assets:
|
||||||||||||
|
License
rights
|
$ | 27,000 | $ | (8,355 | ) | $ | 18,645 | |||||
|
Curriculum
|
58,230 | (28,361 | ) | 29,869 | ||||||||
|
Customer
lists
|
18,124 | (13,715 | ) | 4,409 | ||||||||
|
Trade
names
|
1,277 | (1,277 | ) | - | ||||||||
| 104,631 | (51,708 | ) | 52,923 | |||||||||
|
Indefinite-lived
intangible asset:
|
||||||||||||
|
Covey
trade name
|
23,000 | - | 23,000 | |||||||||
| $ | 127,631 | $ | (51,708 | ) | $ | 75,923 | ||||||
Our
intangible assets are amortized on a straight-line basis over the estimated
useful life of the asset. The range of remaining estimated useful
lives and weighted-average amortization period over which we are amortizing the
major categories of definite-lived intangible assets at August 31, 2008 were as
follows:
|
Category
of Intangible Asset
|
Range
of Remaining Estimated Useful Lives
|
Weighted
Average Amortization Period
|
||
|
License
rights
|
18
years
|
30
years
|
||
|
Curriculum
|
11
to 18 years
|
26
years
|
||
|
Customer
lists
|
3
years
|
14
years
|
Our
aggregate amortization expense from definite-lived intangible assets totaled
$3.6 million, $3.6 million, and $3.8 million, for fiscal years 2008, 2007, and
2006. Amortization expense for our intangible assets over the next
five years is expected to be as follows (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2009
|
$ | 3,601 | ||
|
2010
|
3,598 | |||
|
2011
|
3,456 | |||
|
2012
|
2,458 | |||
|
2013
|
2,449 | |||
5. TENDER
OFFER OBLIGATION
During
the fourth quarter of fiscal 2008, we conducted a modified “Dutch Auction”
tender offer to purchase up to $28.0 million of shares of our common stock at a
specified range of prices (Note 10).
The
tender offer closed on August 27, 2008 as intended and we announced the
preliminary results of the tender offer on August 28, 2008. The final
results of the tender offer were announced on September 5, 2008 and we completed
the payment process for the shares of common stock shortly
thereafter. Based upon guidance found in SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, we
believe that an obligation to purchase the tender offer shares had been created
prior to August 31, 2008. As a result of this determination, at
August 31, 2008 we recorded a $28.2 million liability in current liabilities for
the tender offer obligation, which includes $0.2 million of customary
transaction costs for broker fees, legal services, and printing services,
etc. We recorded a corresponding increase to treasury stock for the
shares acquired in the tender offer in our shareholders’ equity section of our
consolidated balance sheet.
|
6.
|
CURRENT
LINES OF CREDIT
|
During
fiscal 2007, we entered into secured revolving line-of-credit agreements with
JPMorgan Chase Bank N.A. and Zions First National Bank that provided a combined
total of $25.0 million of borrowing capacity to the Company. In
connection with the sale of the CSBU assets (Note 2), during the fourth quarter
of fiscal 2008, the credit agreements with these lenders were modified (the
Modified Credit Agreement). The Modified Credit Agreement removed
Zions First National Bank as a lender, but continues to provide a total of $25.0
million of borrowing capacity until June 30, 2009, when the borrowing capacity
will be reduced to $15.0 million. In addition, the interest rate on
the credit facility increased from LIBOR plus 1.10 percent to LIBOR plus 1.50
percent, effective on the date of the modification agreement (weighted average
rate of 4.0 percent and 6.6 percent at August 31, 2008 and 2007,
respectively). The Modified Credit Agreement expires on March 14,
2010 (no change) and we may draw on the credit facilities, repay, and draw
again, on a revolving basis, up to the maximum loan amount of $25.0 million so
long as no event of default has occurred and is continuing. The
Company may use the Credit Agreements for general corporate purposes as well as
for other transactions, unless prohibited by the terms of the Modified Credit
Agreement. The fiscal 2007 line of credit obligation was classified
as a component of current liabilities primarily due to our intention to repay
amounts outstanding before the agreement expires.
We
accounted for the Modified Credit Agreement using the guidance found in EITF
96-19, Debtor’s Accounting for
a Modification or Exchange of Debt Instruments and EITF 98-14, Debtor’s Accounting for Changes in
Line-of-Credit or Revolving Debt Arrangements and expensed unamortized
debt issuance costs in accordance with these pronouncements. The
additional expense was recorded as a component of interest expense in the fourth
quarter of fiscal 2008 and was immaterial to the Company’s consolidated
financial statements.
In
addition to customary non-financial terms and conditions, the Modified Credit
Agreement requires us to be in compliance with specified financial covenants,
which did not change for the original credit agreements, including: (i) a funded
debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a limitation
on annual capital expenditures; and (iv) a defined amount of minimum net
worth. In the event of noncompliance with these financial covenants
and other defined events of default, the lender is entitled to certain remedies,
including acceleration of the repayment of amounts outstanding on the Modified
Credit Agreement. The Modified Credit Agreement also contains
customary representations and guarantees as well as provisions for repayment and
liens. We believe that we were in compliance with the terms and
covenants of the Modified Credit Agreement at August 31, 2008.
In
connection with the original credit agreements, the Company entered into a
promissory note, a security agreement, repayment guaranty agreements, and a
pledge and security agreement. These agreements remain in place with
the remaining lender and pledge substantially all of the Company’s assets
located in the United States and a certain foreign location to the lender in the
Modified Credit Agreement.
In
addition to the line of credit described above, we obtained a CDN $500,000
(approximately $471,000) revolving line of credit with a Canadian Bank through
our wholly-owned Canadian subsidiary (the Canadian Line of Credit) during fiscal
2007. The Canadian Line of Credit bears interest at the
Canadian
prime
rate and is a revolving line of credit that may be repeatedly borrowed against
and repaid during the life of the agreement. The Canadian Line of
Credit may be used for general corporate purposes and requires our Canadian
subsidiary to maintain a specified financial covenant for minimum debt service
coverage or the payment of the loan may be accelerated. As of August
31, 2008 we had not yet drawn upon the Canadian Line of Credit.
|
7.
|
LONG-TERM
DEBT AND FINANCING OBLIGATION
|
Our
long-term debt and financing obligation were comprised of the following (in
thousands):
|
AUGUST
31,
|
2008
|
2007
|
||||||
|
Financing
obligation on corporate campus, payable in monthly installments of $254
for the first five years with two percent annual increases thereafter
(imputed interest at 7.7%), through June 2025
|
$ | 32,283 | $ | 32,807 | ||||
|
Mortgage
payable in monthly installments of $9 CDN ($9 USD at August 31, 2008),
plus interest at the CDN prime rate (4.8% at August 31, 2008) through
January 2015, secured by real estate
|
678 | 787 | ||||||
| 32,961 | 33,594 | |||||||
|
Less
current portion
|
(670 | ) | (629 | ) | ||||
|
Total
long-term debt and financing obligation, less current
portion
|
$ | 32,291 | $ | 32,965 | ||||
The
mortgage loan on our Canadian facility requires the Company to maintain certain
financial ratios at our wholly-owned Canadian operation.
Future
principal maturities of our long-term debt and financing obligation were as
follows at August 31, 2008 (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2009
|
$ | 670 | ||
|
2010
|
726 | |||
|
2011
|
839 | |||
|
2012
|
963 | |||
|
2013
|
1,097 | |||
|
Thereafter
|
28,666 | |||
| $ | 32,961 | |||
In
connection with the sale and leaseback of our corporate headquarters facility,
located in Salt Lake City, Utah, we entered into a 20-year master lease
agreement with the purchaser, an unrelated private investment
group. The 20-year master lease agreement also contains six five-year
renewal options that will allow us to maintain our operations at the current
location for up to 50 years. Although the corporate headquarters
facility was sold and the Company has no legal ownership of the property, SFAS
No. 98, Accounting for
Leases, precluded us from recording the transaction as a sale since we
have subleased a significant portion of the property that was
sold. Accordingly, we accounted for the sale as a financing
transaction, which required us to continue reporting the corporate headquarters
facility as an asset (Note 3) and to record a financing obligation for the sale
price. The future minimum payments under the financing obligation for
the initial 20 year lease term are as follows (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2009
|
$ | 3,045 | ||
|
2010
|
3,055 | |||
|
2011
|
3,116 | |||
|
2012
|
3,178 | |||
|
2013
|
3,242 | |||
|
Thereafter
|
43,537 | |||
|
Total
future minimum financing obligation payments
|
59,173 | |||
|
Less
interest
|
(28,202 | ) | ||
|
Present
value of future minimum financing obligation payments
|
$ | 30,971 | ||
The
difference between the carrying value of the financing obligation and the
present value of the future minimum financing obligation payments represents the
carrying value of the land sold in the financing transaction, which is not
depreciated. At the conclusion of the master lease agreement, the
remaining financing obligation and carrying value of the land will be written
off of our financial statements.
|
8.
|
OPERATING
LEASES
|
Lease
Expense
In the
normal course of business, we lease office space and warehouse and distribution
facilities under non-cancelable operating lease agreements. We rent
office space, primarily for international and domestic regional sales
administration offices, in commercial office complexes that are conducive to
sales and administrative operations. We also rent warehousing and
distribution facilities that are designed to provide secure storage and
efficient distribution of our products. These operating lease
agreements generally contain renewal options that may be exercised at our
discretion after the completion of the base rental term. In addition,
many of the rental agreements provide for regular increases to the base rental
rate at specified intervals, which usually occur on an annual
basis. At August 31, 2008, we had operating leases that have
remaining terms ranging from less than one year to approximately 8
years. Following the sale of our CSBU assets (Note 2), we no longer
lease retail store space and Franklin Covey Products is contractually obligated
to pay a portion of our minimum rental payments on certain warehouse and
distribution facilities. The following table summarizes our future
minimum lease payments under operating lease agreements and the lease amounts
receivable from Franklin Covey Products at August 31, 2008 (in
thousands):
|
YEAR
ENDING
AUGUST
31,
|
Required
Minimum Lease Payments
|
Receivable
from Franklin Covey Products
|
Net
Required Minimum Lease Payments
|
|||||||||
|
2009
|
$ | 1,671 | $ | (390 | ) | $ | 1,281 | |||||
|
2010
|
1,620 | (404 | ) | 1,216 | ||||||||
|
2011
|
1,608 | (422 | ) | 1,186 | ||||||||
|
2012
|
1,517 | (475 | ) | 1,042 | ||||||||
|
2013
|
1,178 | (529 | ) | 649 | ||||||||
|
Thereafter
|
3,427 | (1,751 | ) | 1,676 | ||||||||
| $ | 11,021 | $ | (3,971 | ) | $ | 7,050 | ||||||
We
recognize lease expense on a straight-line basis over the life of the lease
agreement. Contingent rent expense is recognized as it is
incurred. Total rent expense recorded in selling, general, and
administrative expense from operating lease agreements was $8.7 million, $10.8
million, and $11.2 million for the years ended August 31, 2008, 2007, and
2006. Additionally, certain retail store leases contained terms that
require additional, or contingent, rental payments based upon the realization of
certain sales thresholds. Our contingent rental payments under these
arrangements were insignificant during the fiscal years ended August 31, 2008,
2007, and 2006.
Lease
Income
We have
subleased a significant portion of our corporate headquarters office space
located in Salt Lake City, Utah to multiple, unrelated tenants as well as to
Franklin Covey Products. The cost basis of the office space available
for lease was $33.2 million and had a carrying value of $17.7 million at August
31,
2008. During
fiscal 2008, we also had sublease agreements on two retail store locations that
we have exited, but still have a remaining lease obligation. However,
this obligation, and future sublease income, was assumed by Franklin Covey
Products. Future minimum lease payments due to us from our sublease
agreements at August 31, 2008, are as follows (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2009
|
$ | 3,585 | ||
|
2010
|
2,897 | |||
|
2011
|
2,020 | |||
|
2012
|
2,085 | |||
|
2013
|
1,837 | |||
|
Thereafter
|
15,361 | |||
| $ | 27,785 | |||
Sublease
payments made to the Company totaled $2.7 million, $2.4 million, and $2.0
million, during the fiscal years ended August 31, 2008, 2007, and 2006 of which
$0.2 million, $0.3 million, and $0.3 million was recorded as a reduction of rent
expense associated with underlying lease agreements in our selling, general, and
administrative expense in fiscal 2008, 2007, and 2006. Sublease
income from the leases at our corporate headquarters was reported as a component
of product sales in our consolidated income statements and in other Consumer
Solutions Business Unit sales in our segment reporting (Note 19).
|
9.
|
COMMITMENTS
AND CONTINGENCIES
|
EDS
Outsourcing Contract
The
Company has an outsourcing contract with Electronic Data Systems (EDS) to
provide information technology system support and product warehousing and
distribution services. Subsequent to August 31, 2008, and primarily
as a result of the sale of CSBU assets, we amended the terms of the outsourcing
contract with EDS. Under terms of the amended outsourcing contract
with EDS: 1) the outsourcing contract and its addendums will continue to expire
on June 30, 2016; 2) Franklin Covey and Franklin Covey Products will have
separate information systems services support contracts; 3) we will no longer be
required to purchase specified levels of computer hardware technology; and 4)
our warehouse and distribution costs will consist of an annual fixed charge,
which is partially reimbursable by Franklin Covey Products, plus variable
charges for actual activity levels. The warehouse and distribution
fixed charge contains an annual escalation clause based upon changes in the
Employment Cost Index. The following schedule summarizes our
estimated minimum information systems support and fixed warehouse and
distribution charges, without the effect of estimated escalation charges, to EDS
for services over the remaining life of the outsourcing contract (in
thousands):
|
YEAR
ENDING
AUGUST
31,
|
Estimated
Gross Minimum and Fixed Charges
|
Receivable
from Franklin Covey Products
|
Estimated
Net Minimum and Fixed Charges
|
|||||||||
|
2009
|
$ | 4,138 | $ | (2,159 | ) | $ | 1,979 | |||||
|
2010
|
4,138 | (2,159 | ) | 1,979 | ||||||||
|
2011
|
4,138 | (2,159 | ) | 1,979 | ||||||||
|
2012
|
4,138 | (2,159 | ) | 1,979 | ||||||||
|
2013
|
4,138 | (2,159 | ) | 1,979 | ||||||||
|
Thereafter
|
11,246 | (6,114 | ) | 5,132 | ||||||||
| $ | 31,936 | $ | (16,909 | ) | $ | 15,027 | ||||||
Our
actual payments to EDS include a variable charge for certain warehousing and
distribution activities and may fluctuate in future periods based upon actual
sales and activity levels.
During
fiscal years 2008, 2007, and 2006, we expensed $26.7 million, $30.1 million, and
$30.6 million for services provided under terms of the EDS outsourcing
contract. The total amount expensed each year
under the
EDS contract includes freight charges, which are billed to the Company based
upon activity, that totaled $8.8 million, $9.6 million, and $9.8 million during
the years ended August 31, 2008, 2007, and 2006, respectively.
The
outsourcing contracts contain early termination provisions that the Company may
exercise under certain conditions. However, in order to exercise the
early termination provisions, we would have to pay specified penalties to EDS
depending upon the circumstances of the contract termination.
Purchase
Commitments
During
the normal course of business, we issue purchase orders to various external
vendors for products and services. At August 31, 2008, we had
purchase commitments totaling $4.6 million for products and services to be
delivered primarily in fiscal 2009. Other purchase commitments for
materials, supplies, and other items incident to the ordinary conduct of
business were immaterial, both individually and in aggregate, to the Company’s
operations at August 31, 2008.
Legal
Matters
In August
2005, EpicRealm Licensing (EpicRealm) filed an action in the United States
District Court for the Eastern District of Texas against the Company for patent
infringement. The action alleged that the Company infringed upon two
of EpicRealm’s patents directed to managing dynamic web page requests from
clients to a web server that in turn uses a page server to generate a dynamic
web page from content retrieved from a data source. The Company
denied liability in the patent infringement and filed counter-claims related to
the case subsequent to the filing of the action in District
Court. However, during the fiscal year ended August 31, 2008, the
Company paid EpicRealm a one-time license fee of $1.0 million for a
non-exclusive, irrevocable, perpetual, and royalty-free license to use any
product, system, or invention covered by the disputed patents. In
connection with the purchase of the license, EpicRealm and the Company agreed to
dismiss their claims with prejudice and the Company was released from further
action regarding these patents.
The
Company is also the subject of certain legal actions, which we consider routine
to our business activities. At August 31, 2008, we believe that,
after consultation with legal counsel, any potential liability to the Company
under such actions will not materially affect our financial position, liquidity,
or results of operations.
|
10.
|
SHAREHOLDERS’
EQUITY
|
Preferred
Stock
Series
A – In accordance
with the terms and provisions of the preferred stock recapitalization approved
in fiscal 2005, we redeemed all remaining outstanding shares of Series A
preferred stock during the third quarter of fiscal 2007 at the liquidation
preference of $25 per share plus accrued dividends. In accordance
with the terms and provisions of the recapitalization, we redeemed the
outstanding shares of Series A preferred stock as shown below (in
thousands):
|
Fiscal
Year
|
Shares
of Preferred Stock Redeemed
|
Carrying
Value of Redeemed Preferred Shares
|
||||||
|
2007
|
1,494 | $ | 37,345 | |||||
|
2006
|
800 | 20,000 | ||||||
|
2005
|
1,200 | 30,000 | ||||||
| 3,494 | $ | 87,345 | ||||||
Series
B – The preferred
stock recapitalization completed in fiscal 2005 significantly changed the rights
and preferences of our Series B preferred stock. New shares of Series
A preferred stock would have automatically converted to shares of Series B
preferred stock if the holder of the original Series A
preferred
stock sold, or transferred, the preferred stock to another
party. Series B preferred stock does not have common-equivalent
voting rights, but retains substantially all other characteristics of the new
Series A preferred stock. At August 31, 2008, there were 4.0 million
shares of Series B preferred stock authorized, but no shares
outstanding.
Common
Stock Warrants
Pursuant
to the terms of the preferred stock recapitalization plan, in fiscal 2005 we
completed a one-to-four forward split of the existing Series A preferred stock
and then bifurcated each share of Series A preferred stock into a new share of
Series A preferred stock that is no longer convertible into common stock, and a
warrant to purchase shares of common stock. Accordingly, we issued
6.2 million common stock warrants with an exercise price of $8.00 per share
(subject to customary anti-dilution and exercise features), which will be
exercisable over an eight-year term that expires in March 2013. These
common stock warrants were recorded at fair value on the date of the
recapitalization, as determined by a Black-Scholes valuation methodology, which
totaled $7.6 million. During the fiscal years ended August 31, 2008
and 2007, our common stock warrant activity was insignificant.
Treasury
Stock
Following
the completion of the sale of CSBU assets (Note 2), we used substantially all of
the net proceeds from the sale to conduct a modified “Dutch Auction” tender
offer (the Tender Offer) to purchase up to $28.0 million of our common stock at
a price not less than $9.00 per share or greater than $10.50 per
share. The Tender Offer closed fully subscribed on August 27,
2008 and we were able to purchase 3,027,027 shares of our common stock at $9.25
per share plus normal transaction costs that were added to the cost basis of the
shares. We recorded a $28.2 million current liability at August 31,
2008 for these shares (Note 5) with a corresponding increase in treasury
stock.
During
fiscal 2006, our Board of Directors authorized the purchase of up to $10.0
million of our currently outstanding common stock and canceled all previously
approved common stock purchase plans. Common stock purchases under
this approved plan are made at our discretion for prevailing market prices and
are subject to customary regulatory requirements and
considerations. The Company does not have a timetable for the
purchase of these common shares and the authorization by the Board of Directors
does not have an expiration date. During the fiscal years ended
August 31, 2007 and 2006 we purchased 328,000 and 681,300 shares of our common
stock under the terms of the fiscal 2006 plan for $2.5 million and $5.1 million,
respectively. We did not purchase any shares of our common stock
under this purchase plan during fiscal 2008 and at August 31, 2008, we had $2.4
million remaining for future purchases under the terms of this approved
plan. We also purchased 7,900 common shares for $0.1 million during
fiscal 2006 for exclusive distribution to participants in our employee stock
purchase plan.
We have
issued shares of treasury stock to participants in our employee stock purchase
plan (ESPP) and for stock options and warrants as shown below (in thousands,
except for share amounts):
|
Fiscal
Year
|
Shares
Issued to ESPP Participants
|
Shares
Issued from the Exercise of Stock Options and Warrants
|
Total
Treasury Shares Issued for Stock Options, Warrants and
ESPP
|
Cash
Proceeds Received from the Issuance of Treasury Shares
|
||||||||||||
|
2008
|
68,702 | 15,371 | 84,073 | $ | 462 | |||||||||||
|
2007
|
55,513 | 37,500 | 93,013 | 321 | ||||||||||||
|
2006
|
32,993 | 38,821 | 71,814 | 424 | ||||||||||||
In
addition to the treasury shares shown above, we issued 36,000; 31,500; and
27,000 shares of our common stock held in treasury in connection with unvested
and fully-vested stock awards during fiscal years 2008, 2007, and 2006 (Note
13).
|
11.
|
MANAGEMENT
COMMON STOCK LOAN PROGRAM
|
During
fiscal 2000, certain of our management personnel borrowed funds from an external
lender, on a full-recourse basis, to acquire shares of our common
stock. The loan program closed during fiscal 2001 with 3.825 million
shares of common stock purchased by the loan participants for a total cost of
$33.6 million, which was the market value of the shares acquired and distributed
to loan participants. The Company initially participated on these
management common stock loans as a guarantor to the lending
institution. However, in connection with a new credit facility
obtained during fiscal 2001, we acquired the loans from the external lender at
fair value and are now the creditor for these loans. The loans in the
management stock loan program initially accrued interest at 9.4 percent
(compounded quarterly), are full-recourse to the participants, and were
originally due in March 2005. Although interest continues to accrue
on the outstanding balance over the life of the loans to the participants, the
Company ceased recording interest receivable (and related interest income)
related to these loans during the third quarter of fiscal 2002.
In May
2004, our Board of Directors approved modifications to the terms of the
management stock loans. While these changes had significant
implications for most management stock loan program participants, the Company
did not formally amend or modify the stock loan program
notes. Rather, the Company chose to forego certain of its rights
under the terms of the loans and granted participants the modifications
described below in order to potentially improve their ability to pay, and the
Company’s ability to collect, the outstanding balances of the
loans. These modifications to the management stock loan terms applied
to all current and former employees whose loans do not fall under the provisions
of the Sarbanes-Oxley Act of 2002. Loans to the Company’s officers
and directors (as defined by the Sarbanes-Oxley Act of 2002) were not affected
by the approved modifications and loans held by those persons, which totaled
$0.8 million, were repaid on the original due date of March 30,
2005.
The May
2004 modifications to the management stock loan terms included the
following:
Waiver of Right
to Collect – The
Company waived its right to collect the outstanding balance of the loans prior
to the earlier of (a) March 30, 2008, or (b) the date after March 30, 2005 on
which the closing price of the Company’s stock multiplied by the number of
shares purchased equals the outstanding principal and accrued interest on the
management stock loans (the Breakeven Date).
Lower Interest
Rate – Effective
May 7, 2004, the Company prospectively waived collection of all interest on the
loans in excess of 3.16 percent per annum, which was the “Mid-Term Applicable
Federal Rate” for May 2004.
Use of the
Company’s Common Stock to Pay Loan Balances – The Company may consider
receiving shares of our common stock as payment on the loans, which were
previously only payable in cash.
Elimination of
the Prepayment Penalty –
The Company will waive its right to charge or collect any prepayment
penalty on the management common stock loans.
These
modifications, including the reduction of the loan program interest rate, were
not applied retroactively and participants remain obligated to pay interest
previously accrued using the original interest rate. Also during
fiscal 2005, our Board of Directors approved loan modifications for a former
executive officer and a former director substantially similar to loan
modifications previously granted to other loan participants in the management
stock loan program as described above.
Prior to
the May 2004 modifications, the Company accounted for the loans and the
corresponding shares using a loan-based accounting model that included guidance
found in SAB 102, Selected
Loan Loss Allowance Methodology and Documentation Issues; SFAS No. 114,
Accounting by Creditors for
Impairment of A Loan - an Amendment of FASB Statements No. 5 and 15; and
SFAS No. 5, Accounting
for
Contingencies. However, due to the nature of the May 2004
modifications, the Company reevaluated its accounting for the management stock
loan program. Based upon guidance found in EITF Issue 00-23, Issues Related to the Accounting for
Stock Compensation under APB Opinion No. 25 and FASB Interpretation No.
44, and EITF Issue 95-16, Accounting for Stock Compensation
Agreements with Employer Loan Features under APB Opinion No. 25, we
determined that the management common stock loans should be accounted for as
non-recourse stock compensation instruments. While this accounting
treatment does not alter the legal rights associated with the loans to the
employees as described above, the modifications to the terms of the loans were
deemed significant enough to adopt the non-recourse accounting model as
described in EITF 00-23. As a result of this accounting treatment,
the remaining carrying value of the notes and interest receivable related to
financing common stock purchases by related parties, which totaled $7.6 million
prior to the loan term modifications, was reduced to zero with a corresponding
reduction in additional paid-in capital. Since the Company was unable
to control the underlying management common stock loan shares, the loan program
shares continued to be included in Basic earnings per share (EPS) following the
May 2004 modifications.
We
currently account for the management common stock loans as equity-classified
stock option arrangements. Under the provisions of SFAS No. 123R,
which we adopted on September 1, 2005, additional compensation expense will be
recognized only if the Company takes action that constitutes a modification
which increases the fair value of the arrangements. This accounting
treatment also precludes us from reversing the amounts expensed as additions to
the loan loss reserve, totaling $29.7 million, which were recorded in prior
periods.
During
fiscal 2006, the Company offered participants in the management common stock
loan program the opportunity to formally modify the terms of their loans in
exchange for placing their shares of common stock purchased through the loan
program in an escrow account that allows the Company to have a security interest
in the loan program shares. The key modifications to the management
common stock loans for the participants accepting the fiscal 2006 offer were as
follows:
Modification of
Promissory Note – The management stock loan due date was changed to be
the earlier of (a) March 30, 2013, or (b) the Breakeven Date as defined by the
May 2004 modifications. The interest rate on the loans increased from
3.16 percent compounded annually to 4.72 percent compounded
annually.
Redemption of
Management Loan Program Shares – The Company has the right to redeem the
shares on the due date in satisfaction of the promissory notes as
follows:
|
·
|
On
the Breakeven Date, the Company has the right to purchase and redeem from
the loan participants the number of loan program shares necessary to
satisfy the participant’s obligation under the promissory
note. The redemption price for each such loan program share
will be equal to the closing price of the Company’s common stock on the
Breakeven Date.
|
|
·
|
If
the Company’s stock has not closed at or above the breakeven price on or
before March 30, 2013, the Company has the right to purchase and redeem
from the participants all of their loan program shares at the closing
price on that date as partial payment on the participant’s
obligation.
|
The
fiscal 2006 modifications were intended to give the Company a measure of control
of the outstanding loan program shares and to facilitate payment of the loans
should the market value of the Company’s stock equal the principal and accrued
interest on the management stock loans. If a loan participant
declines the offer to modify their management stock loan, their loan will
continue to have the same terms and conditions that were previously approved in
May 2004 by the Company’s Board of Directors and their loans will be due at the
earlier of March 30, 2008 or the Breakeven Date. Consistent with the
May 2004 modifications, stock loan participants will be unable to realize a gain
on the loan program shares unless they pay cash to satisfy the promissory note
obligation prior to the due date. As of the closing date of the
extension offer, which was substantially completed in June 2006, management
stock loan participants holding approximately 3.5 million shares, or 94 percent
of the remaining loan
shares,
elected to accept the extension offer and placed their management stock loan
shares into the escrow account. The Company is currently in the
process of collecting amounts due from participants that declined to place their
shares in the escrow account during fiscal 2006.
As a
result of this modification, the Company reevaluated its accounting treatment
regarding the loan shares and their inclusion in Basic EPS. Since the
management stock loan shares held in the escrow account continue to have the
same income participation rights as other common shareholders, the Company has
determined that the escrowed loan shares are participating securities as defined
by EITF 03-06, Participating
Securities and the Two-Class Method under FASB Statement No.
128. As a result, the management loan shares are included in
the calculation of Basic EPS in periods of net income and excluded from Basic
EPS in periods of net loss beginning in the fourth quarter of fiscal 2006, which
was the completion of the escrow agreement modification.
During
fiscal 2008, the effective interest rate on the management stock loans was
reduced to 2.87 percent, compounded annually, which was the “Mid-Term Applicable
Federal Rate” on the date of the interest rate change.
The
inability of the Company to collect all, or a portion, of these receivables
could have an adverse impact upon our financial position and future cash flows
compared to full collection of the loans.
|
12.
|
FINANCIAL
INSTRUMENTS
|
Fair
Value of Financial Instruments
The book
value of our financial instruments at August 31, 2008 and 2007 approximates
their fair values. The assessment of the fair values of our financial
instruments is based on a variety of factors and
assumptions. Accordingly, the fair values may not represent the
actual values of the financial instruments that could have been realized at
August 31, 2008 or 2007, or that will be realized in the future, and do not
include expenses that could be incurred in an actual sale or
settlement. The following methods and assumptions were used to
determine the fair values of our financial instruments, none of which were held
for trading or speculative purposes:
Cash and Cash
Equivalents – The
carrying amounts of cash and cash equivalents approximate their fair values due
to the liquidity and short-term maturity of these instruments.
Accounts
Receivable – The
carrying value of accounts receivable approximate their fair value due to the
short-term maturity and expected collection of these instruments.
Other
Assets – Our
other assets, including notes receivable, were recorded at the net realizable
value of estimated future cash flows from these instruments.
Debt
Obligations – At
August 31, 2008, our debt obligations consisted of a variable-rate line of
credit, a tender offer obligation, and a variable-rate mortgage on our Canadian
facility. Further information regarding the fair value of these
liability instruments is provided below.
Variable-Rate Line of Credit
– The interest rate on our line of credit obtained in fiscal 2007 is variable
and is adjusted to reflect current market interest rates that would be available
to us for a similar instrument. As a result, the carrying value of
the outstanding balance on the line of credit approximates its fair
value.
Tender Offer Obligation – Due
to the very short-term nature of the tender offer obligation, which was paid in
September 2008, the carrying value of the obligation approximates its fair value
at August 31, 2008.
Variable-Rate Debt – The
carrying value of our variable-rate mortgage in Canada approximated its fair
value since the prevailing interest rate is adjusted to reflect market rates
that would be available to us for a similar debt instrument with a corresponding
remaining maturity.
Derivative
Instruments
During
the normal course of business, we are exposed to fluctuations in foreign
currency exchange rates due to our international operations and interest
rates. To manage risks associated with foreign currency exchange and
interest rates, we make limited use of derivative financial
instruments. Derivatives are financial instruments that derive their
value from one or more underlying financial instruments. As a matter
of policy, our derivative instruments are entered into for periods that do not
exceed the related underlying exposures and do not constitute positions that are
independent of those exposures. In addition, we do not enter into
derivative contracts for trading or speculative purposes, nor are we party to
any leveraged derivative instrument. The notional amounts of
derivatives do not represent actual amounts exchanged by the parties to the
instrument and thus, are not a measure of exposure to the Company through its
use of derivatives. Additionally, we enter into derivative agreements
only with highly rated counterparties.
Foreign Currency
Exposure – Due to the global nature of our operations, we are subject to
risks associated with transactions that are denominated in currencies other than
the United States dollar, as well as the effects of translating amounts
denominated in foreign currencies to United States dollars as a normal part of
the reporting process. The objective of our foreign currency risk
management activities is to reduce foreign currency risk in the consolidated
financial statements. In order to manage foreign currency risks, we
make limited use of foreign currency forward contracts and other foreign
currency related derivative instruments. Although we cannot eliminate
all aspects of our foreign currency risk, we believe that our strategy, which
includes the use of derivative instruments, can reduce the impacts of foreign
currency related issues on our consolidated financial statements.
During
the fiscal years ended August 31, 2008, 2007, and 2006, we utilized foreign
currency forward contracts to manage the volatility of certain intercompany
financing transactions and other transactions that are denominated in foreign
currencies. Because these contracts do not meet specific hedge
accounting requirements, gains and losses on these contracts, which expire on a
quarterly basis, are recognized currently and are used to offset a portion of
the gains or losses of the related accounts. The gains and losses on
these contracts were recorded as a component of selling, general, and
administrative expense in our consolidated income statements and had the
following impact on the periods indicated (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Losses
on foreign exchange contracts
|
$ | (487 | ) | $ | (249 | ) | $ | (346 | ) | |||
|
Gains
on foreign exchange contracts
|
36 | 119 | 415 | |||||||||
|
Net
gain (loss) on foreign exchange contracts
|
$ | (451 | ) | $ | (130 | ) | $ | 69 | ||||
At August
31, 2008, the fair value of these contracts, which was determined using the
estimated amount at which contracts could be settled based upon forward market
exchange rates, approximated the notional amounts of the contracts due to the
proximity of the end of the contract to our fiscal year end on August 31,
2008. The notional amounts of our foreign currency sell contracts
that did not qualify for hedge accounting were as follows at August 31, 2008 (in
thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
||||||
|
British
Pounds
|
450 | $ | 809 | |||||
|
Japanese
Yen
|
27,000 | 254 | ||||||
|
Australian
Dollars
|
125 | 117 | ||||||
Interest Rate
Risk Management –
Due to the limited nature of our interest rate risk, we do not make regular use
of interest rate derivatives and we were not a party to any interest rate
derivative instruments during the fiscal years ended August 31, 2008, 2007, and
2006.
13. SHARE-BASED
COMPENSATION PLANS
Overview
We
utilize various share-based compensation plans as integral components of our
overall compensation and associate retention strategy. Our
shareholders have approved various stock incentive plans that permit us to grant
performance awards, unvested stock awards, employee stock purchase plan (ESPP)
shares, and stock options. In addition, our Board of Directors and
shareholders may, from time to time, approve fully vested stock
awards. At August 31, 2008, our stock option incentive plan, which
permits the granting of performance awards, unvested stock awards to employees,
and incentive stock options had approximately 1,944,000 shares available for
granting (including the impact of the cancellation of all long-term performance
awards as of August 31, 2008) and our 2004 ESPP plan had approximately 832,000
shares authorized for purchase by plan participants. The total cost
of our share-based compensation plans for the fiscal years ended August 31,
2008, 2007, and 2006 were as follows (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Performance
awards
|
$ | (1,338 | ) | $ | 835 | $ | 503 | |||||
|
Unvested
share awards
|
969 | 481 | 296 | |||||||||
|
Compensation
cost of the ESPP
|
79 | 75 | 37 | |||||||||
|
Stock
options
|
31 | 3 | 7 | |||||||||
| $ | (259 | ) | $ | 1,394 | $ | 843 | ||||||
The
compensation cost of our share-based compensation plans was included in selling,
general, and administrative expenses in the accompanying consolidated income
statements and no share-based compensation was capitalized during fiscal years
2008, 2007 or 2006. The Company generally issues shares of common
stock for its share-based compensation plans from shares held in
treasury. The following is a description of our share-based
compensation plans.
Performance-Based
Awards
During
fiscal 2006, our shareholders approved a share-based long-term incentive plan
(the LTIP) that permits an annual grant of performance-based share awards to
certain executive and managerial personnel as directed by the Compensation
Committee of the Board of Directors. The LTIP performance awards
cliff vest, and are exchanged for shares of our common stock, on August 31
following the completion of a three-year measurement period. For
example, performance awards granted in fiscal 2007 may have vested on August 31,
2009. Each fiscal year LTIP award provides for a target number of
shares to be awarded if specified financial goals based on a combination of
sales growth and cumulative operating income are achieved. However,
the number of shares that are finally awarded to LTIP participants is variable
and may range from zero shares, if a minimum level of performance is
not
achieved,
to 200 percent of the target award, if the specifically defined performance
criteria is exceeded during the three-year performance period.
The LTIP
performance awards are valued at the closing price of our common stock on the
grant date. The corresponding compensation cost of each LTIP award is
expensed ratably over the measurement period of the award, which is
approximately three years. Since the number of shares that may be
issued under the LTIP is variable, we reevaluate the LTIP awards on a quarterly
basis and adjust the number of shares expected to be awarded based upon
financial results of the Company as compared to the performance goals set for
the award. Adjustments to the number of shares awarded, and to the
corresponding compensation expense, are made on a cumulative basis at the date
of adjustment based upon the estimated probable number of shares to be
awarded.
As we
completed our evaluations of the LTIP awards during fiscal 2008, we reduced the
number of shares expected to be awarded under the fiscal 2007 and fiscal 2006
LTIP grants based on current financial performance and expected future financial
performance. As a result of these evaluations, we determined that no
shares of common stock were expected to be awarded under any LTIP grant and all
previously recognized share-based compensation expense, which totaled $1.3
million, was reversed during fiscal 2008. On August 31, 2008, the
fiscal 2006 LTIP award expired with no shares granted to participants and we do
not expect any shares to vest under the fiscal 2007 LTIP
award. Adjustments to decrease share-based compensation resulting
from the regular evaluation of LTIP awards totaled $0.4 million in fiscal 2007
and $0.1 million in fiscal 2006 and all previously recognized tax benefits,
which totaled $0.3 million and $0.2 million for the fiscal years ended August
31, 2007 and 2006, were reversed in fiscal 2008. There were no awards
granted under the terms of the LTIP during the fiscal year ended August 31,
2008.
Unvested
Stock Awards
The fair
value of our unvested stock awards is calculated by multiplying the number of
shares awarded by the closing market price of our common stock on the date of
the grant. The corresponding compensation cost of unvested stock
awards is amortized to selling, general, and administrative expense on a
straight-line basis over the vesting period of the award, which generally ranges
from three to five years. The following is a description of our
unvested stock awards granted to certain members of our Board of Directors and
to our employees.
Board of Director
Awards – The non-employee directors’ stock incentive plan (the Directors’
Plan) is designed to provide non-employee directors of the Company, who are
ineligible to participate in our employee stock incentive plan, an opportunity
to acquire an interest in the Company through the acquisition of shares of
common stock. The Directors’ plan, as approved by our shareholders,
allows for an annual unvested stock grant of 4,500 shares of common stock to
each eligible member of our Board of Directors.
Under the
provisions of the Directors’ Plan, we issued 36,000 shares, 31,500 shares, and
27,000 shares of our common stock to eligible members of the Board of Directors
during the fiscal years ended August 31, 2008, 2007, and 2006. The
fair value of the shares awarded under the Directors’ Plan was $0.3 million,
$0.2 million, and $0.2 million during fiscal 2008, 2007, and 2006, and was
calculated on the grant date with the corresponding compensation cost being
recognized over the vesting period of the awards, which is three
years. The cost of the common stock issued from treasury stock for
these awards was $0.6 million, $0.5 million, and $0.4 million in fiscal years
2008, 2007, and 2006.
Employee
Awards – During
fiscal 2005 and in prior periods, we granted unvested stock awards to certain
employees as long-term incentives. These unvested stock awards
originally cliff vested five years from the grant date or on an accelerated
basis if we achieved specified earnings levels. The compensation cost
of these unvested stock awards was based on the fair value of our common shares
on the grant date and was expensed on a straight-line basis over the vesting
(service) period of the awards. The recognition of compensation cost
was accelerated when we believed that it was probable that we would achieve the
specified earnings thresholds and the shares would vest.
In the
fourth quarter of fiscal 2008, our Board of Directors accelerated the vesting of
all remaining outstanding unvested share awards previously granted to
employees. Based upon guidance in SFAS No. 123R, we determined that
the accelerated vesting of these awards constituted modifications to the awards
that required separate analysis for awards granted to CSBU employees and for
awards granted to Organizational Solutions Business Unit (OSBU) and corporate
employees. Since the unvested share awards granted to CSBU employees
would not have vested under the original terms of the award (due to the sale of
CSBU assets), the CSBU awards were revalued on the date of the
modification. The fair value of our common stock was higher on the
modification date than on the grant date, which resulted in $0.4 million of
additional share-based compensation expense in the fourth quarter of fiscal
2008. We determined that OSBU and corporate awards would have vested
under the original award terms and based upon SFAS No. 123R, we accelerated the
remaining unrecognized compensation cost, which increased share-based
compensation by $0.2 million during the fourth quarter of fiscal
2008. Following the accelerated vesting of these awards, we do not
have any remaining unrecognized compensation cost for unvested share awards
granted to employees.
During
the fourth quarter of fiscal 2007, the financial performance goals were reached
for certain employees and one-half of their awards were
accelerated. Other awards were vested during fiscal 2007 in
connection with the termination of certain management employees. The
accelerated vesting of these awards were accounted for as modifications under
the provisions of SFAS No. 123R during fiscal 2007. The additional
share-based compensation expense resulting from these modifications totaled $0.1
million.
The
following information applies to our unvested stock awards for the fiscal year
ended August 31, 2008:
|
Number
of Shares
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|||||||
|
Unvested
stock awards at August 31, 2007
|
410,670 | $ | 3.80 | |||||
|
Granted
|
36,000 | 7.50 | ||||||
|
Forfeited
|
- | - | ||||||
|
Vested
|
(352,170 | ) | 3.13 | |||||
|
Unvested
stock awards at August 31, 2008
|
94,500 | $ | 7.73 | |||||
At August
31, 2008, there was $0.4 million of total unrecognized compensation cost related
to unvested stock awards granted to our Board of Directors, which is expected to
be recognized over the weighted-average vesting period of approximately two
years. Compensation expense related to our unvested stock awards
totaled $1.0 million, $0.5 million, and $0.3 million, in fiscal years 2008,
2007, and 2006, and the total recognized tax benefit from unvested stock awards
totaled $0.4 million, $0.2 million, and $0.1 million for the fiscal years ended
August 31, 2008, 2007, and 2006, respectively. The intrinsic value of
our unvested stock awards at August 31, 2008 was $0.8 million.
Employee
Stock Purchase Plan
We have
an employee stock purchase plan (Note 16) that offers qualified employees the
opportunity to purchase shares of our common stock at a price equal to 85
percent of the average fair market value of the Company’s common stock on the
last trading day of the calendar month in each fiscal quarter. Based
upon guidance in SFAS No. 123R, we determined that the discount offered to
employees under the ESPP is compensatory and the amount is therefore expensed at
each grant date. During the fiscal year ended August 31, 2008, a
total of 68,702 shares were issued to participants in the ESPP.
Stock
Options
The
Company has an incentive stock option plan whereby options to purchase shares of
our common stock are issued to key employees at an exercise price not less than
the fair market value of the
Company’s
common stock on the date of grant. The term, not to exceed ten years,
and exercise period of each incentive stock option awarded under the plan are
determined by a committee appointed by our Board of Directors.
Information
related to stock option activity during the fiscal year ended August 31, 2008 is
presented below:
|
Number
of Stock Options
|
Weighted
Avg. Exercise Price Per Share
|
Weighted
Avg. Remaining Contractual Life (Years)
|
Aggregate
Intrinsic Value (thousands)
|
|||||||||||||
|
Outstanding
at August 31, 2007
|
2,058,300 | $ | 12.72 | |||||||||||||
|
Granted
|
- | |||||||||||||||
|
Exercised
|
(12,500 | ) | 1.70 | |||||||||||||
|
Forfeited
|
(18,000 | ) | 9.69 | |||||||||||||
|
Outstanding
at August 31, 2008
|
2,027,800 | $ | 12.82 | 1.8 | $ | 439 | ||||||||||
|
Options
vested and exercisable at August 31, 2008
|
2,027,800 | $ | 12.82 | 1.8 | $ | 439 | ||||||||||
Company
policy generally allows terminated employees 90 days from the date of
termination to exercise vested stock options. However, in connection
with the sale of our CSBU (Note 2) during fiscal 2008, we granted extensions to
former CSBU employees, who had vested stock options, which allow the stock
options to be exercised up to the original expiration date. We
determined that these extensions were modifications to the stock options under
the guidance found in SFAS No. 123R. The incremental compensation
expense resulting from the modification of these stock options was calculated
through the use of a Black-Scholes valuation model and totaled approximately
$31,000, which was expensed during the fourth quarter of fiscal 2008 since the
modified stock options were fully vested prior to the modification
date.
The
Company did not grant any stock options during the fiscal years ended August 31,
2008, 2007 or 2006, and has no remaining unamortized service cost related to
granted stock options.
The
following additional information applies to our stock options outstanding at
August 31, 2008:
|
Range
of
Exercise
Prices
|
Number
Outstanding at August 31, 2008
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Options
Exercisable at August 31, 2008
|
Weighted
Average Exercise Price
|
|||||||||||||||||
| $ | 2.78 – $8.19 | 226,300 |
1.6
|
$ | 7.01 | 226,300 | $ | 7.01 | ||||||||||||||
| $ | 9.69 – $9.69 | 194,500 | 0.7 | 9.69 | 194,500 | 9.69 | ||||||||||||||||
| $ | 14.00 – $14.00 | 1,602,000 | 2.0 | 14.00 | 1,602,000 | 14.00 | ||||||||||||||||
| $ | 17.69 – $17.69 | 5,000 | 0.3 | 17.69 | 5,000 | 17.69 | ||||||||||||||||
| 2,027,800 | 2,027,800 | |||||||||||||||||||||
The
Company received proceeds totaling approximately $21,000, $0.1 million, and $0.2
million in fiscal 2008, fiscal 2007, and fiscal 2006 from the exercise of common
stock options. The intrinsic value of stock options exercised was
$0.1 million, $0.3 million, and $0.1 million for the fiscal years ended August
31, 2008, 2007, and 2006 and the fair value of options that vested during those
periods totaled $9,375 each year.
14. SALE OF
OPERATIONS IN BRAZIL AND MEXICO
During
the fourth quarter of fiscal 2007 we completed the sales of our wholly-owned
subsidiary located in Brazil and the training operations of our wholly-owned
subsidiary in Mexico. These operations were sold to third-party
entities that will continue to conduct business in Brazil and Mexico as
licensees and
will be
required to pay the Company royalties consistent with other foreign
licensees. Since we will continue to participate in the cash flows of
these subsidiaries through royalty payments, which are based primarily upon the
sales recorded by the licensees, and we expect to have significant continuing
involvement in the operations of the licensees, we determined that the financial
results of these subsidiaries should not be reported as discontinued operations
in our consolidated income statements in accordance with guidance found in SFAS
No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The financial
results of these subsidiaries were previously reported in the international
segment of the Organizational Solutions Business Unit.
The sales
of the Brazil and Mexico subsidiaries were structured such that the net assets
of the subsidiaries were sold at their carrying values plus reimbursement of
severance costs paid in Mexico. The carrying amounts of the assets
and liabilities of our Brazil subsidiary and training operations of Mexico,
which were sold during the quarter ended August 31, 2007 were as follows (in
thousands):
|
Description
|
Brazil
|
Mexico
|
Total
|
|||||||||
|
Cash
|
$ | 95 | $ | - | $ | 95 | ||||||
|
Accounts
receivable, net
|
374 | 210 | 584 | |||||||||
|
Inventories
|
155 | 134 | 289 | |||||||||
|
Other
current assets
|
220 | 28 | 248 | |||||||||
|
Property
and equipment, net
|
365 | 43 | 408 | |||||||||
|
Other
assets
|
51 | 375 | 426 | |||||||||
|
Total
assets sold
|
$ | 1,260 | $ | 790 | $ | 2,050 | ||||||
|
Accounts
payable
|
$ | 127 | $ | - | $ | 127 | ||||||
|
Accrued
liabilities
|
260 | - | 260 | |||||||||
|
Total
liabilities sold
|
$ | 387 | $ | - | $ | 387 | ||||||
Certain
assets and liabilities that were previously held for sale in Mexico were
retained by the Company and were reclassified as assets to be held and used at
August 31, 2007. We received promissory notes for the sales prices
totaling $1.5 million, of which $1.2 million was due during fiscal 2008 and was
reported as a component of other current assets at August 31,
2007. Due to the disposition of these subsidiaries, we recorded a
$0.1 million benefit from the cumulative translation adjustment related to
assets and liabilities sold, which was offset by expenses necessary to complete
the transaction. The net costs to complete the sales transactions
resulted in an immaterial loss that was included in consolidated selling,
general and administrative expenses for the year ended August 31,
2007.
|
15.
|
LEGAL
SETTLEMENT
|
In fiscal
2002, we filed legal action against World Marketing Alliance, Inc., a Georgia
corporation (WMA), and World Financial Group, Inc., a Delaware corporation and
purchaser of substantially all assets of WMA, for breach of
contract. The case proceeded to trial and the jury rendered a verdict
in our favor and against WMA on November 1, 2004 for the entire unpaid contract
amount of approximately $1.1 million. In addition to the verdict, we
recovered legal fees totaling $0.3 million and pre- and post-judgment interest
of $0.3 million from WMA. During our fiscal quarter ended May 28,
2005, we received payment in cash from WMA for the total verdict amount,
including legal fees and interest. However, shortly after paying the
verdict amount, WMA appealed the jury decision to the 10th Circuit Court of
Appeals and we recorded receipt of the verdict amount plus legal fees and
interest with a corresponding increase to accrued liabilities and deferred the
gain until the case was finally resolved. On December 30, 2005, the
Company entered into a settlement agreement with WMA. Under the terms
of the settlement agreement, WMA agreed to dismiss its appeal. As a
result of this settlement agreement and dismissal of WMA’s appeal, we recorded a
$0.9 million gain from the legal settlement during fiscal 2006. We
also recorded a $0.3 million reduction in selling, general and, administrative
expenses during fiscal 2006 for recovered legal expenses.
|
16.
|
EMPLOYEE
BENEFIT PLANS
|
Profit
Sharing Plans
We have
defined contribution profit sharing plans for our employees that qualify under
Section 401(k) of the Internal Revenue Code. These plans provide
retirement benefits for employees meeting minimum age and service
requirements. Qualified participants may contribute up to 75 percent
of their gross wages, subject to certain limitations. These plans
also provide for matching contributions to the participants that are paid by the
Company. The matching contributions, which were expensed as incurred,
totaled $1.5 million, $1.5 million, and $1.3 million during the fiscal years
ended August 31, 2008, 2007, and 2006. The Company does not have any
defined benefit pension plans.
Employee
Stock Purchase Plan
The
Company has an employee stock purchase plan (ESPP) that offers qualified
employees the opportunity to purchase shares of our common stock at a price
equal to 85 percent of the average fair market value of our common stock on the
last trading day of each quarter. A total of 68,702; 55,513; and
32,993 shares were issued under the ESPP during the fiscal years ended August
31, 2008, 2007, and 2006, which had a corresponding cost basis of $0.9 million,
$0.5 million, and $0.2 million, respectively. The Company received
cash proceeds from the ESPP participants totaling $0.4 million, $0.3 million,
and $0.2 million, for fiscal years 2008, 2007, and 2006.
Deferred
Compensation Plan
We have a
non-qualified deferred compensation plan that provided certain key officers and
employees the ability to defer a portion of their compensation until a later
date. Deferred compensation amounts used to pay benefits are held in
a “rabbi trust,” which invests in insurance contracts, various mutual funds, and
shares of the Company’s common stock as directed by the plan
participants. The trust assets, which consist of the investments in
insurance contracts and mutual funds, are recorded in our consolidated balance
sheets because they are subject to the claims of our creditors. The
corresponding deferred compensation liability represents the amounts deferred by
plan participants plus or minus any earnings or losses on the trust
assets. The deferred compensation plan’s assets totaled $0.5 million
and $0.7 million at August 31, 2008 and 2007, while the plan’s liabilities
totaled $0.7 million and $0.9 million at August 31, 2008 and 2007. At
August 31, 2008, the rabbi trust also held shares of our common stock with a
cost basis of $0.5 million. The assets and liabilities of the
deferred compensation plan were recorded in other long-term assets, treasury
stock, additional paid-in capital, and long-term liabilities, as appropriate, in
the accompanying consolidated balance sheets.
We
expensed charges totaling $0.1 million during each of the fiscal years ended
August 31, 2008, 2007, and 2006 related to insurance premiums and external
administration costs for our deferred compensation plan.
Due to
legal changes resulting from the American Jobs Creation Act of 2004, the Company
determined to cease compensation deferrals to this deferred compensation plan
after December 31, 2004. Other than the cessation of compensation
deferrals and the requirement to distribute investments in Company stock with
shares of stock, the plan will continue to operate and make payments to
participants under the same rules as in prior periods.
|
17.
|
INCOME
TAXES
|
The
benefit (provision) for income taxes consisted of the following (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (39 | ) | $ | (350 | ) | $ | 1,433 | ||||
|
State
|
(248 | ) | (135 | ) | (23 | ) | ||||||
|
Foreign
|
(3,346 | ) | (2,318 | ) | (1,903 | ) | ||||||
| (3,633 | ) | (2,803 | ) | (493 | ) | |||||||
|
Deferred:
|
||||||||||||
|
Federal
|
$ | (4,276 | ) | $ | (4,880 | ) | $ | (4,380 | ) | |||
|
State
|
(205 | ) | (433 | ) | (376 | ) | ||||||
|
Foreign
|
12 | 49 | (132 | ) | ||||||||
|
Change
in valuationallowance
|
116 | 31 | 20,323 | |||||||||
| (4,353 | ) | (5,223 | ) | 15,435 | ||||||||
| $ | (7,986 | ) | $ | (8,036 | ) | $ | 14,942 | |||||
Income
from operations before income taxes consisted of the following (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
United
States
|
$ | 8,857 | $ | 11,914 | $ | 10,881 | ||||||
|
Foreign
|
4,977 | 3,751 | 2,750 | |||||||||
| $ | 13,834 | $ | 15,665 | $ | 13,631 | |||||||
The
differences between income taxes at the statutory federal income tax rate and
income taxes reported in our consolidated income statements were as
follows:
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Federal
statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal effect
|
3.3 | 3.6 | 2.9 | |||||||||
|
Deferred
tax valuation allowance
|
- | - | (149.1 | ) | ||||||||
|
Foreign
jurisdictions tax differential
|
3.8 | 1.6 | 2.2 | |||||||||
|
Tax
differential on income subject to both U.S. and foreign
taxes
|
8.0 | 4.2 | 1.5 | |||||||||
|
Uncertain
tax positions
|
(1.5 | ) | (0.9 | ) | (9.4 | ) | ||||||
|
Tax
on management stock loan interest
|
5.0 | 5.0 | 4.5 | |||||||||
|
Non-deductible
executive compensation
|
2.1 | - | 0.6 | |||||||||
|
Other
|
2.0 | 2.8 | 2.2 | |||||||||
| 57.7 | % | 51.3 | % | (109.6 | )% | |||||||
Due to
improved operating performance and the availability of expected future taxable
income, we have concluded that it is more likely than not that the benefits of
deferred income tax assets will be realized. Accordingly, we reversed
the valuation allowances on the majority of our net deferred income tax assets
during the fourth quarter of fiscal 2006 (see further discussion
below).
We paid
significant amounts of withholding tax on foreign royalties during fiscal years
2008, 2007, and 2006. However, no domestic foreign tax credits were
available to offset the foreign withholding taxes during those
years.
Various
uncertain tax positions were resolved during the fiscal years ended August 31,
2008, 2007, and 2006, which resulted in net tax benefits to the
Company. The tax benefit recognized in fiscal 2006 was partially
offset by an assessment paid in a foreign tax jurisdiction.
The
Company accrues taxable interest income on outstanding management common stock
loans (Note 11). Consistent with the accounting treatment for these
loans, the Company is not recognizing interest income for book purposes, thus
resulting in a permanent book versus tax difference.
The
significant components of our deferred tax assets and liabilities were comprised
of the following (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
||||||
|
Deferred
income tax assets:
|
||||||||
|
Sale
and financing of corporate headquarters
|
$ | 11,912 | $ | 12,078 | ||||
|
Net
operating loss carryforward
|
7,815 | 9,818 | ||||||
|
Investment
in Franklin Covey Products
|
2,986 | - | ||||||
|
Foreign
income tax credit carryforward
|
2,159 | 2,246 | ||||||
|
Impairment
of investment in Franklin Covey Coaching, LLC
|
1,701 | 2,249 | ||||||
|
Bonus
and other accruals
|
1,135 | 1,432 | ||||||
|
Alternative
minimum tax carryforward
|
881 | 863 | ||||||
|
Inventory
and bad debt reserves
|
832 | 1,515 | ||||||
|
Deferred
compensation
|
503 | 912 | ||||||
|
Sales
returns and contingencies
|
414 | 468 | ||||||
|
Other
|
559 | 810 | ||||||
|
Total
deferred income tax assets
|
30,897 | 32,391 | ||||||
|
Less:
valuation allowance
|
(2,475 | ) | (2,591 | ) | ||||
|
Net
deferred income tax assets
|
28,422 | 29,800 | ||||||
|
Deferred
income tax liabilities:
|
||||||||
|
Intangibles
step-ups – definite lived
|
(11,863 | ) | (12,821 | ) | ||||
|
Intangibles
step-ups – indefinite lived
|
(8,647 | ) | (8,633 | ) | ||||
|
Property
and equipment depreciation
|
(7,294 | ) | (3,574 | ) | ||||
|
Intangible
asset impairment and amortization
|
(2,018 | ) | (893 | ) | ||||
|
Unremitted
earnings of foreign subsidiaries
|
(586 | ) | (630 | ) | ||||
|
Other
|
(85 | ) | (78 | ) | ||||
|
Total
deferred income tax liabilities
|
(30,493 | ) | (26,629 | ) | ||||
|
Net
deferred income taxes
|
$ | (2,071 | ) | $ | 3,171 | |||
Deferred
income tax amounts are recorded as follows in our consolidated balance sheets
(in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
||||||
|
Current
assets
|
$ | 2,472 | $ | 3,635 | ||||
|
Long-term
assets
|
29 | 101 | ||||||
|
Long-term
liabilities
|
(4,572 | ) | (565 | ) | ||||
|
Net
deferred income tax asset (liability)
|
$ | (2,071 | ) | $ | 3,171 | |||
A federal
net operating loss of $33.3 million was generated in fiscal
2003. During fiscal years 2005 through 2008, a total of $30.2 million
of the fiscal 2003 loss carryforward was utilized, leaving a remaining loss
carryforward from fiscal 2003 of $3.1 million, which expires on August 31,
2023. The federal net operating loss carryforward generated in fiscal
2004 totaled $20.8 million and expires on August 31, 2024. The total
loss carryforward includes $1.3 million of deductions applicable to additional
paid-in capital that will be credited once all loss carryforward amounts are
utilized.
The state
net operating loss carryforward of $33.3 million generated in fiscal 2003 was
reduced by the utilization of $30.2 million during fiscal years 2005 through
2008 for a net carryforward amount of $3.1 million, which primarily expires
between August 31, 2008 and August 31, 2018. The state net operating
loss carryforward of $20.8 million generated in fiscal 2004 primarily expires
between August 31, 2008 and August 31, 2019.
The
amount of federal and state net operating loss carryforwards remaining at August
31, 2008 and deductible against future years’ taxable income are subject to
limitations imposed by Section 382 of the Internal Revenue Code and similar
state statutes. Under Section 382, we estimate that deductible losses
will be limited to $22.3 million for fiscal 2009 and $9.5 million per year in
subsequent years, not to exceed the remaining loss carryforward amounts as of
the beginning of each year.
Our
foreign income tax credit carryforward of $2.2 million that was generated during
fiscal 2002 expires on August 31, 2012.
Valuation
Allowance on Deferred Tax Assets
Our
deferred income tax asset valuation allowance decreased by $35.6 million during
fiscal 2006. In connection with the reduction in our valuation
allowance, we removed $15.2 million in deferred income tax assets and the
corresponding valuation allowance on the management common stock loans, given
the change in the accounting treatment of the management stock loan program
(Note 11). The remaining reduction in our deferred income tax asset
valuation allowance resulted in a tax benefit of $20.4 million in fiscal
2006. Because of the accounting treatment of the management stock
loans, if any tax benefit is eventually realized on these loans it will be
recorded as an increase to additional paid-in capital, rather than reducing our
income tax expense.
We
concluded that the realization of our U.S. domestic deferred tax assets, except
for foreign tax credit carryforwards, was more likely than not at August 31,
2006. Before August 31, 2006, we were precluded from reversing
valuation allowances on our deferred tax assets, because we had a cumulative
U.S. domestic pre-tax loss for the preceding three years. However, as
of August 31, 2006, we had positive cumulative U.S. pre-tax income for the
preceding three years, thus allowing us to consider reversing valuation
allowances on our deferred tax assets.
We
determined that projected future taxable income at the budget, more likely than
not, and probable levels would be more than adequate to allow for realization of
all U.S. domestic deferred tax assets, except for those related to foreign tax
credits. We considered sources of taxable income described in SFAS
No. 109, paragraph 21, including future reversals of taxable temporary
differences, future taxable income exclusive of reversing temporary differences
and carryforwards, and reasonable, practical tax-planning strategies to generate
additional taxable income. We also noted that the Company had nearly
met or had exceeded budgeted financial targets for the past two years and that
Company leaders had worked extensively and successfully on developing a formal
business model, allowing for more reliable budgeting, better fiscal discipline,
and more timely ability to identify and resolve problems.
Based on
the factors described above, we concluded that realization of our domestic
deferred tax assets, except for foreign tax credit carryforwards, was more
likely than not at August 31, 2006. Accordingly, we reversed
valuation allowances on the applicable deferred tax assets. Since
fiscal 2006, we have
continued
to be profitable, and we have utilized a significant portion of the deferred
income tax assets existing at August 31, 2006, particularly net operating loss
carryforwards.
To
realize the benefit of our deferred income tax assets, we must generate total
taxable income of approximately $77 million over the next 19
years. Taxable income of approximately $60 million results from the
reversal of temporary taxable differences. The remaining taxable
income of approximately $17 million must be generated by the operations of the
Company. The table below presents the pre-tax book income,
significant book versus tax differences, and taxable income for the years ended
August 31, 2008, 2007, and 2006 (in thousands).
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Domestic
pre-tax book income
|
$ | 8,857 | $ | 11,914 | $ | 10,881 | ||||||
|
Deferred
taxable loss on sale of assets to Franklin Covey Products
|
5,203 | - | - | |||||||||
|
Deferred
gain for book purposes on sale of assets to Franklin Covey
Products
|
2,755 | - | - | |||||||||
|
Interest
on management common stock loans
|
1,968 | 2,243 | 1,771 | |||||||||
|
Property
and equipment depreciation and dispositions
|
(10,459 | ) | 1,170 | (3,114 | ) | |||||||
|
Amortization/write-off
of intangible assets
|
(2,028 | ) | (2,814 | ) | (1,944 | ) | ||||||
|
Changes
in accrued liabilities
|
(2,373 | ) | (1,217 | ) | (4,096 | ) | ||||||
|
Share-based
compensation
|
(1,144 | ) | 933 | 599 | ||||||||
|
Other
book versus tax differences
|
(541 | ) | (468 | ) | (1,297 | ) | ||||||
| $ | 2,238 | $ | 11,761 | $ | 2,800 | |||||||
Adoption
of FIN 48
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109. This
interpretation addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under the provisions of FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement. Interpretation No. 48 also
provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting for income taxes in interim periods, and requires
increased disclosure of various income tax items.
We
adopted the provisions of FIN 48 on September 1, 2007 and the implementation of
FIN 48 did not result in a material change to our previous liability for
unrecognized tax benefits. A reconciliation of the beginning and
ending amount of gross unrecognized tax benefits is as follows (in
thousands):
|
Description
|
||||
|
Balance
at September 1, 2007
|
$ | 4,349 | ||
|
Additions
based on tax positions related to fiscal 2008
|
267 | |||
|
Additions
for tax positions in prior years
|
31 | |||
|
Reductions
for tax positions of prior years resulting from the lapse of applicable
statute of limitations
|
(292 | ) | ||
|
Other
reductions for tax positions of prior years
|
(123 | ) | ||
|
Balance
at August 31, 2008
|
$ | 4,232 | ||
The total
amount of unrecognized tax benefits that, if recognized, would affect the
effective tax rate is $3.0 million. Included in the ending balance of
gross unrecognized tax benefits is $3.1 million related to individual states’
net operating loss carryforwards. Interest and penalties related to
uncertain tax positions are recognized as components of income tax
expense. The net accruals and reversals of interest and penalties
reduced income tax expense by a total of $0.1 million during fiscal
2008. The balance of interest and penalties included on the balance
sheet at August 31, 2008 is $0.1 million. The Company does not expect
significant increases or decreases in unrecognized tax benefits during the next
12 months.
We file
United States federal income tax returns as well as income tax returns in
various states and foreign jurisdictions. The tax years that remain
subject to examinations for the Company’s major tax jurisdictions are shown
below. Additionally, any net operating losses that were generated in
prior years and utilized in these years may be subject to
examination.
|
2001-2008
|
Canada
|
|
2003-2008
|
Japan,
United Kingdom
|
|
2004-2008
|
United
States – state and local income tax
|
|
2005-2008
|
United
States – federal income tax
|
|
18.
|
EARNINGS
PER SHARE
|
Basic
earnings or loss per share (EPS) is calculated by dividing net income or loss
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is calculated by dividing net
income or loss available to common shareholders by the weighted-average number
of common shares outstanding plus the assumed exercise of all dilutive
securities using the treasury stock method or the “as converted” method, as
appropriate. Due to modifications to our management stock loan
program (Note 11), we determined that the shares of management stock loan
participants that were placed in the escrow account are participating securities
as defined by EITF Issue No. 03-6, Participating Securities and the
Two-Class Method under FASB Statement No. 128, because they continue to
have equivalent common stock dividend rights. Accordingly, these
management stock loan shares are included in our basic EPS calculation during
periods of net income and excluded from the basic EPS calculation in periods of
net loss.
The
following table presents the computation of our EPS for the periods indicated
(in thousands, except per share amounts):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Net
income
|
$ | 5,848 | $ | 7,629 | $ | 28,573 | ||||||
|
Preferred
stock dividends
|
- | (2,215 | ) | (4,385 | ) | |||||||
|
Net
income available to common shareholders
|
$ | 5,848 | $ | 5,414 | $ | 24,188 | ||||||
|
Weighted
average common shares outstanding – Basic
|
19,577 | 19,593 | 20,134 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options
|
10 | 29 | 52 | |||||||||
|
Unvested
stock awards
|
213 | 266 | 281 | |||||||||
|
Common
stock warrants(1)
|
122 | - | 49 | |||||||||
|
Weighted
average common shares outstanding – Diluted
|
19,922 | 19,888 | 20,516 | |||||||||
|
Basic
EPS
|
$ | .30 | $ | .28 | $ | 1.20 | ||||||
|
Diluted
EPS
|
$ | .29 | $ | .27 | $ | 1.18 | ||||||
|
|
(1)
|
For
the fiscal year ended August 31, 2007, the conversion of 6.2 million
common stock warrants is not assumed because such conversion would be
anti-dilutive.
|
At August
31, 2008, 2007, and 2006, we had 1.8 million, 1.9 million, and 2.0 million stock
options outstanding (Note 13) that were not included in the calculation of
diluted weighted average shares outstanding for those periods because the
options’ exercise prices were greater than the average market price of our
common stock. We also have 6.2 million common stock warrants
outstanding that have an exercise price of $8.00 per share (Note
10). These warrants, which expire in March 2013, and the
out-of-the-money stock options described above will have a more pronounced
dilutive impact on our EPS calculation in future periods if the market price of
our common stock increases.
|
19.
|
SEGMENT
INFORMATION
|
Reportable
Segments
During
the majority of fiscal 2008 we had two segments: the Organizational
Solutions Business Unit (OSBU) and the Consumer Solutions Business Unit
(CSBU). However, during the fourth quarter of fiscal 2008, we
completed the sale of substantially all of the assets of the CSBU (Note 2),
which reduced amounts reported by that segment in fiscal 2008. The
following is a description of these segments, their primary operating
components, and their significant business activities during the periods
reported:
Organizational
Solutions Business Unit – The OSBU is primarily responsible for the
development, marketing, sale, and delivery of strategic execution, productivity,
leadership, sales force performance, and communication training and consulting
solutions directly to organizational clients, including other companies, the
government, and educational institutions. The OSBU includes the
financial results of our domestic sales force, public programs, and certain
international operations. The domestic sales force is responsible for
the sale and delivery of our training and consulting services in the United
States. Our international sales group includes the financial results
of our directly owned foreign offices and royalty revenues from
licensees.
Consumer
Solutions Business Unit – This business unit was primarily focused on
sales to individual customers and small business organizations and included the
results of our domestic retail stores, consumer direct operations (primarily
Internet sales and call center), wholesale operations, international product
channels in certain countries, and other related distribution channels,
including government product sales and domestic printing and publishing
sales. The CSBU results of operations also included the financial
results of our paper planner manufacturing operations. Although CSBU
sales primarily consisted of products such as planners, binders, software,
totes, and related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may have been purchased through
the CSBU channels.
The
Company’s chief operating decision maker is the Chief Executive Officer and the
primary measurement tool used in our business unit performance analysis is
earnings before interest, taxes, depreciation, and amortization (EBITDA), which
may not be calculated as similarly titled amounts calculated by other
companies. For segment reporting purposes, our consolidated EBITDA
can be calculated as income from operations excluding depreciation expense,
amortization expense, the gain from the sale of CSBU assets, and the gain from
the sale of our manufacturing facility in fiscal 2007. The fiscal
2008 restructuring charge, which totaled $2.1 million, was allocated $1.1
million to OSBU domestic and $1.0 million to OSBU international. The
$1.5 million asset impairment was attributed to OSBU domestic financial results
in the following segment information.
In the
normal course of business, the Company may make structural and cost allocation
revisions to our segment information to reflect new reporting responsibilities
within the organization. During fiscal 2008, we transferred our
public programs operations from CSBU to OSBU and made other less significant
organizational changes. All prior period segment information has been
revised to conform to the most recent classifications and organizational
changes. We account for our segment information on the same basis as
the accompanying consolidated financial statements.
SEGMENT
INFORMATION
|
(in
thousands)
|
||||||||||||||||||||||||||||
|
Fiscal
Year Ended
August
31, 2008
|
Sales
to External Customers
|
Gross
Profit
|
EBITDA
|
Depreciation
|
Amortization
|
Segment
Assets
|
Capital
Expenditures
|
|||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
$ | 91,287 | $ | 56,684 | $ | 259 | $ | 1,364 | $ | 3,596 | $ | 80,916 | $ | 4,782 | ||||||||||||||
|
International
|
59,100 | 42,517 | 16,892 | 754 | 7 | 21,540 | 535 | |||||||||||||||||||||
|
Total
OSBU
|
150,387 | 99,201 | 17,151 | 2,118 | 3,603 | 102,456 | 5,317 | |||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
42,167 | 25,474 | 2,849 | 697 | - | - | 263 | |||||||||||||||||||||
|
Consumer
direct
|
38,662 | 22,657 | 14,667 | 233 | - | - | 110 | |||||||||||||||||||||
|
Wholesale
|
16,970 | 9,266 | 8,788 | - | - | - | - | |||||||||||||||||||||
|
CSBU
International
|
7,295 | 3,837 | 1,279 | 40 | - | - | - | |||||||||||||||||||||
|
Other
CSBU
|
4,611 | 1,354 | (18,943 | ) | 1,188 | - | - | 912 | ||||||||||||||||||||
|
Total
CSBU
|
109,705 | 62,588 | 8,640 | 2,158 | - | - | 1,285 | |||||||||||||||||||||
|
Total
operating segments
|
260,092 | 161,789 | 25,791 | 4,276 | 3,603 | 102,456 | 6,602 | |||||||||||||||||||||
|
Corporate
and eliminations
|
- | - | (8,867 | ) | 1,416 | - | 76,471 | 401 | ||||||||||||||||||||
|
Consolidated
|
$ | 260,092 | $ | 161,789 | $ | 16,924 | $ | 5,692 | $ | 3,603 | $ | 178,927 | $ | 7,003 | ||||||||||||||
|
Fiscal
Year Ended
August
31, 2007
|
||||||||||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
$ | 93,308 | $ | 60,337 | $ | 10,161 | $ | 668 | $ | 3,599 | $ | 81,526 | $ | 6,166 | ||||||||||||||
|
International
|
57,674 | 39,566 | 13,280 | 839 | 8 | 22,588 | 655 | |||||||||||||||||||||
|
Total
OSBU
|
150,982 | 99,903 | 23,441 | 1,507 | 3,607 | 104,114 | 6,821 | |||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
54,316 | 31,932 | 4,666 | 735 | - | 8,607 | 1,761 | |||||||||||||||||||||
|
Consumer
direct
|
48,018 | 27,829 | 18,509 | 222 | - | 620 | 358 | |||||||||||||||||||||
|
Wholesale
|
17,991 | 10,087 | 9,475 | - | - | - | - | |||||||||||||||||||||
|
CSBU
International
|
7,342 | 4,373 | 894 | - | - | - | - | |||||||||||||||||||||
|
Other
CSBU
|
5,476 | 954 | (22,283 | ) | 1,963 | - | 9,052 | 5,503 | ||||||||||||||||||||
|
Total
CSBU
|
133,143 | 75,175 | 11,261 | 2,920 | - | 18,279 | 7,622 | |||||||||||||||||||||
|
Total
operating segments
|
284,125 | 175,078 | 34,702 | 4,427 | 3,607 | 122,393 | 14,443 | |||||||||||||||||||||
|
Corporate
and eliminations
|
- | - | (8,844 | ) | 967 | - | 74,238 | 678 | ||||||||||||||||||||
|
Consolidated
|
$ | 284,125 | $ | 175,078 | $ | 25,858 | $ | 5,394 | $ | 3,607 | $ | 196,631 | $ | 15,121 | ||||||||||||||
|
Fiscal
Year Ended
August
31, 2006
|
||||||||||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
$ | 84,904 | $ | 54,479 | $ | 7,828 | $ | 376 | $ | 3,747 | $ | 83,292 | $ | 4,614 | ||||||||||||||
|
International
|
48,984 | 32,074 | 9,337 | 1,197 | 9 | 21,860 | 701 | |||||||||||||||||||||
|
Total
OSBU
|
133,888 | 86,553 | 17,165 | 1,573 | 3,756 | 105,152 | 5,315 | |||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
62,156 | 36,059 | 4,953 | 1,270 | - | 6,616 | 855 | |||||||||||||||||||||
|
Consumer
direct
|
52,171 | 30,462 | 21,308 | 48 | - | 538 | 517 | |||||||||||||||||||||
|
Wholesale
|
17,782 | 8,820 | 8,240 | - | - | - | - | |||||||||||||||||||||
|
CSBU
International
|
7,716 | 4,682 | 1,131 | - | - | - | - | |||||||||||||||||||||
|
Other
CSBU
|
4,910 | 1,385 | (22,871 | ) | 1,850 | 57 | 6,107 | 1,520 | ||||||||||||||||||||
|
Total
CSBU
|
144,735 | 81,408 | 12,761 | 3,168 | 57 | 13,261 | 2,892 | |||||||||||||||||||||
|
Total
operating segments
|
278,623 | 167,961 | 29,926 | 4,741 | 3,813 | 118,413 | 8,207 | |||||||||||||||||||||
|
Corporate
and eliminations
|
- | - | (6,712 | ) | 614 | - | 98,146 | 153 | ||||||||||||||||||||
|
Consolidated
|
$ | 278,623 | $ | 167,961 | $ | 23,214 | $ | 5,355 | $ | 3,813 | $ | 216,559 | $ | 8,360 | ||||||||||||||
Capital
expenditures in our OSBU domestic segment include $4.0 million, $5.1 million,
and $4.0 million of spending on capitalized curriculum during the fiscal years
ended August 31, 2008, 2007 and 2006, respectively.
A
reconciliation of reportable segment EBITDA to consolidated income (loss) before
taxes is provided below (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Reportable
segment EBITDA
|
$ | 25,791 | $ | 34,702 | $ | 29,926 | ||||||
|
Corporate
expenses
|
(8,867 | ) | (8,844 | ) | (6,712 | ) | ||||||
|
Consolidated
EBITDA
|
16,924 | 25,858 | 23,214 | |||||||||
|
Gain
on sale of CSBU assets
|
9,131 | - | - | |||||||||
|
Gain
on sale of manufacturing facility
|
- | 1,227 | - | |||||||||
|
Depreciation
|
(5,692 | ) | (5,394 | ) | (5,355 | ) | ||||||
|
Amortization
|
(3,603 | ) | (3,607 | ) | (3,813 | ) | ||||||
|
Consolidated
income from operations
|
16,760 | 18,084 | 14,046 | |||||||||
|
Interest
income
|
157 | 717 | 1,334 | |||||||||
|
Interest
expense
|
(3,083 | ) | (3,136 | ) | (2,622 | ) | ||||||
|
Legal
settlement
|
- | - | 873 | |||||||||
|
Income
before income taxes
|
$ | 13,834 | $ | 15,665 | $ | 13,631 | ||||||
Interest
expense and interest income are primarily generated at the corporate level and
are not allocated to the segments. Income taxes are likewise
calculated and paid on a corporate level (except for entities that operate in
foreign jurisdictions) and are not allocated to segments for
analysis.
Corporate
assets, such as cash, accounts receivable, and other assets are not generally
allocated to business segments for business analysis
purposes. However, inventories, intangible assets, goodwill,
identifiable fixed assets, and certain other assets are classified by
segment. A reconciliation of segment assets to consolidated assets is
as follows (in thousands):
|
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Reportable
segment assets
|
$ | 102,456 | $ | 122,393 | $ | 118,413 | ||||||
|
Corporate
assets
|
78,010 | 76,047 | 99,763 | |||||||||
|
Intercompany
accounts receivable
|
(1,539 | ) | (1,809 | ) | (1,617 | ) | ||||||
| $ | 178,927 | $ | 196,631 | $ | 216,559 | |||||||
Enterprise-Wide
Information
Our
revenues are derived primarily from the United States. However, we
also operate wholly-owned offices or contract with licensees to provide products
and services in various countries throughout the world. Our
consolidated revenues were derived from the following countries (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Net
sales:
|
||||||||||||
|
United
States
|
$ | 197,181 | $ | 219,152 | $ | 221,880 | ||||||
|
Japan
|
26,510 | 24,166 | 21,569 | |||||||||
|
Canada
|
10,389 | 8,400 | 8,197 | |||||||||
|
United
Kingdom
|
10,174 | 9,843 | 8,587 | |||||||||
|
Australia
|
4,313 | 4,016 | 3,439 | |||||||||
|
Mexico
|
1,905 | 4,362 | 3,799 | |||||||||
|
Singapore
|
1,443 | 1,306 | 1,072 | |||||||||
|
Brazil/South
America
|
1,283 | 4,314 | 3,078 | |||||||||
|
Korea
|
1,234 | 1,377 | 1,403 | |||||||||
|
Indonesia/Malaysia
|
794 | 710 | 624 | |||||||||
|
Others
|
4,866 | 6,479 | 4,975 | |||||||||
| $ | 260,092 | $ | 284,125 | $ | 278,623 | |||||||
The
Company had wholly-owned offices in Japan, Canada, the United Kingdom, Australia
and product sales operations in Mexico during fiscal 2008. Our
long-lived assets held in these locations were as follows for the periods
indicated (in thousands):
|
AUGUST
31,
|
2008
|
2007
|
2006
|
|||||||||
|
Long-lived
assets:
|
||||||||||||
|
United States
|
$ | 106,878 | $ | 121,279 | $ | 124,208 | ||||||
|
Americas
|
2,230 | 2,433 | 2,661 | |||||||||
|
Japan
|
1,509 | 1,453 | 1,489 | |||||||||
|
United Kingdom
|
258 | 976 | 735 | |||||||||
|
Australia
|
141 | 387 | 346 | |||||||||
| $ | 111,016 | $ | 126,528 | $ | 129,439 | |||||||
Inter-segment
sales were immaterial and are eliminated in consolidation.
|
20.
|
RELATED
PARTY TRANSACTIONS
|
The
Company pays the Vice-Chairman and a former Vice-Chairman of the Board of
Directors a percentage of the proceeds received for seminars that they
present. During the fiscal years ended August 31, 2008, 2007, and
2006, we expensed charges totaling $2.9 million, $2.0 million, and $1.6 million,
to the Vice-Chairman and former Vice Chairman for their seminar
presentations. We also pay the Vice-Chairman and former Vice-Chairman
a percentage of the royalty proceeds received from the sale of certain books
that were authored by them. During fiscal 2008, 2007, and 2006, we
expensed $0.3 million, $0.2 million, and $0.2 million for royalty payments made
to the Vice-Chairman and former Vice-Chairman under these
agreements. At August 31, 2008 and 2007, we had accrued $0.6 million
and $0.3 million payable to the Vice-Chairman and former Vice-Chairman under the
forgoing agreements. These amounts were included as a component of
accrued liabilities in our consolidated balance sheets.
We pay a
son of the Vice-Chairman of the Board of Directors, who is also an employee of
the Company, a percentage of the royalty proceeds received from the sales of
certain books authored by the son of the Vice-Chairman. During the
fiscal years ended August 31, 2008, 2007, and 2006, we expensed $0.7 million,
$0.4 million, and $0.3 million to the son of the Vice-Chairman for these royalty
payments and had $0.1 million accrued at August 31, 2008 and 2007 as payable
under the terms of this arrangement. These amounts are included in
accrued liabilities in our consolidated balance sheets.
During
fiscal 2006, we signed a non-exclusive license agreement for certain
intellectual property with a son of the Vice-Chairman of the Board of Directors,
who was previously an officer of the Company and a member of our Board of
Directors. We are required to pay the son of the Vice-Chairman
royalties for the use of certain intellectual property developed by the son of
Vice-Chairman. Our payments to the son of the Vice-Chairman totaled
$0.3 million, $0.2 million, and $0.1 million during the fiscal years ended
August 31, 2008, 2007, and 2006, respectively. The license agreement
provides for minimum royalty payments during the term of the agreement, which
expires in fiscal 2011. The license agreement also contains a
provision that allows us to extend the term of the agreement for an additional
five years. The minimum royalties are payable as follows (in
thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2009
|
$ | 100 | ||
|
2010
|
100 | |||
|
2011
|
150 | |||
| $ | 350 | |||
|
Each
fiscal year of extended term
|
$ | 150 | ||
The
license agreement with the son of the Vice-Chairman also contains an option to
purchase the organizational channel business at specified periods. In
fiscal 2003, we issued a separate non-exclusive license agreement for certain
intellectual property to the same son of the Vice-Chairman. The
Company
received
a nominal amount to establish the license agreement and license payments
required to be paid under terms of this license agreement were insignificant
during fiscal years 2008, 2007, and 2006.
As part
of a preferred stock offering to a private investor, an affiliate of the
investor, who was then a director of the Company, was named as the Chairman of
the Board of Directors and was later elected as CEO. This individual
continues to serve as our Chairman of the Board and CEO at August 31,
2008. In addition, one of the affiliates of the private investor was
named to our Board of Directors and continues to serve in that
position. In connection with the preferred stock offering, we paid an
affiliate of the investor $0.1 million and $0.2 million during the years ended
August 31, 2007 and 2006 for monitoring fees, which were reduced by redemptions
of outstanding Series A preferred stock. Following the redemption of
all remaining preferred stock in fiscal 2007, we do not have any further
obligation to pay monitoring fees to the affiliate of the
investor.
ITEM 9. Changes in and
Disagreements With Accountants on Accounting and Financial
Disclosure
None.
ITEM 9A.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
An
evaluation was conducted under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as
of the end of the period covered by this report.
Based on
this evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
Management’s
Report on Internal Control Over Financial Reporting
The
management of Franklin Covey Co. is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company (including
its consolidated subsidiaries) and all related information appearing in the
Company’s annual report on Form 10-K. The Company’s internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal control
over financial reporting includes those policies and procedures
that:
|
1.
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
2.
|
provide
reasonable assurance that the transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with the authorization of management and/or
of our Board of Directors; and
|
|
3.
|
provide
reasonable assurance regarding the prevention or timely detection of any
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness in future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting using the
criteria set forth in
Internal Control—Integrated
Framework as issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based upon this evaluation, our
management concluded that our internal control over financial reporting was
effective as of the end of the period covered by this annual report on Form
10-K.
Our
independent registered public accounting firm, KPMG LLP, has audited the
consolidated financial statements included in this annual report on Form 10-K
and, as part of their audit, has issued an audit report, included herein, on the
effectiveness of our internal control over financial reporting. Their
report is included in Item 8 of this Report on Form 10-K.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f)) during the fourth quarter ended August 31, 2008
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
Item 9B. Other
Information
There was
no information to be disclosed in a current Report on Form 8-K during fourth
quarter of fiscal 2008 that was not previously
reported.
ITEM 10. Directors, Executive
Officers and Corporate Governance
Certain
information required by this Item is incorporated by reference to the sections
entitled “Nominees for Election to the Board of Directors,” “Directors Whose
Terms of Office Continue,” “Executive Officers,” “Section 16(a) Beneficial
Ownership Compliance,” “Corporate Governance,” and “Board of Director Meetings
and Committees” in our definitive Proxy Statement for the annual meeting of
shareholders, which is scheduled to be held on January 16, 2009. The
definitive Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended.
The Board
of Directors has determined that one of the Audit Committee members, Robert
Daines, is a “financial expert” as defined in Regulation S-K 407(d)(5) adopted
under the Securities Exchange Act of 1934, as amended. Our Board of
Directors has determined that Mr. Daines is an “independent director” as defined
by the New York Stock Exchange (NYSE).
We have
adopted a code of ethics for our senior financial officers that include the
Chief Executive Officer, the Chief Financial Officer, and other members of the
Company’s financial leadership team. This code of ethics is available
on our website at www.franklincovey.com. We
intend to satisfy the disclosure requirement regarding any amendment to, or a
waiver of, any provision of the Company’s code of ethics through filing a
current report on Form 8-K for such events if they occur.
ITEM 11. Executive
Compensation
The
information required by this Item is incorporated by reference to the sections
entitled “Compensation Discussion and Analysis,” “Compensation Committee
Interlocks and Insider Participation,” and “Compensation Committee Report” in
the Company’s definitive Proxy Statement for the annual meeting of shareholders,
which is scheduled to be held on January 19, 2009.
ITEM 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
|
[a]
|
[b]
|
[c]
|
||||
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants,
and rights
|
Weighted-average
exercise price of outstanding options, warrants, and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
[a])
|
|||
|
(in
thousands)
|
(in
thousands)
|
|||||
|
Equity
compensation plans approved by security holders(1)(2)
|
2,028
|
$12.82
|
1,944
|
|
(1)
|
Excludes 94,500 shares of unvested (restricted) stock awards that are
subject to forfeiture.
|
|
(2)
|
During the fourth quarter of fiscal 2008, we canceled all outstanding
long-term incentive plan (LTIP) awards granted in fiscal 2007 and fiscal
2006 and these previously granted awards have no impact upon
the amounts disclosed.
|
The
remaining information required by this Item is incorporated by reference to the
section entitled “Principal Holders of Voting Securities” in the Company’s
definitive Proxy Statement for the annual meeting of shareholders, which is
scheduled to be held on January 19, 2009.
ITEM 13. Certain Relationships
and Related Transactions, and Director Independence
The
information required by this Item is incorporated by reference to the section
entitled “Certain Relationships and Related Transactions” and “Corporate
Governance” in the Company’s definitive Proxy Statement for the annual meeting
of shareholders, which is scheduled to be held on January 19, 2009.
ITEM 14. Principal Accountant
Fees and Services
The
information required by this Item is incorporated by reference to the section
entitled “Principal Accountant Fees” in the Company’s definitive Proxy Statement
for the annual meeting of shareholders, which is scheduled to be held on January
19, 2009.
PART
IV
ITEM 15. Exhibits and
Financial Statement Schedules
(a) List
of documents filed as part of this report:
|
1.
|
Financial Statements.
The consolidated financial statements of the Company and Report of
Independent Registered Public Accounting Firm thereon included in the
Annual Report to Shareholders on Form 10-K for the year ended August 31,
2008, are as follows:
|
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets at August 31, 2008 and 2007
Consolidated
Income Statements and Statements of Comprehensive Income for the years ended
August 31, 2008, 2007, and 2006
Consolidated
Statements of Shareholders’ Equity for the years ended August 31, 2008, 2007,
and 2006
Consolidated
Statements of Cash Flows for the years ended August 31, 2008, 2007, and
2006
Notes to
Consolidated Financial Statements
|
2.
|
Financial
Statement Schedules.
|
Schedule
II – Valuation and Qualifying Accounts and Reserves (Filed as Exhibit 99.2 to
this Report on Form 10-K).
Other
financial statement schedules are omitted because they are not required or
applicable, or the required information is shown in the financial statements or
notes thereto, or contained in this report.
|
3.
|
Exhibit
List.
|
|
Exhibit
No.
|
Exhibit
|
Incorporated
By Reference
|
Filed
Herewith
|
|
2.1
|
Master
Asset Purchase Agreement between Franklin Covey Products, LLC and Franklin
Covey Co. dated May 22, 2008
|
(19)
|
|
|
2.2
|
Amendment
to Master Asset Purchase Agreement between Franklin Covey Products, LLC
and Franklin Covey Co. dated May 22, 2008
|
(20)
|
|
|
3.1
|
Articles
of Restatement dated March 4, 2005 amending and restating the Company’s
Articles of Incorporation
|
(8)
|
|
|
3.2
|
Amendment
to Amended and Restated Articles of Incorporation of Franklin Covey
(Appendix C)
|
(12)
|
|
3.3
|
Amended
and Restated Bylaws of the Registrant
|
(1)
|
|
|
4.1
|
Specimen
Certificate of the Registrant’s Common Stock, par value $.05 per
share
|
(2)
|
|
|
4.2
|
Stockholder
Agreements, dated May 11, 1999 and June 2, 1999
|
(5)
|
|
|
4.3
|
Registration
Rights Agreement, dated June 2, 1999
|
(5)
|
|
|
4.4
|
Restated
Shareholders Agreement, dated as of March 8, 2005, between the Company and
Knowledge Capital Investment Group
|
(8)
|
|
|
4.5
|
Restated
Registration Rights Agreement, dated as of March 8, 2005, between the
Company and Knowledge Capital Investment Group
|
(8)
|
|
|
10.1*
|
Amended
and Restated 1992 Employee Stock Purchase Plan
|
(3)
|
|
|
10.2*
|
Amended
and Restated 2000 Employee Stock Purchase Plan
|
(6)
|
|
|
10.3*
|
Amended
and Restated 2004 Employee Stock Purchase Plan
|
(15)
|
|
|
10.4*
|
Amended
and Restated 1992 Stock Incentive Plan
|
(4)
|
|
|
10.5*
|
First
Amendment to Amended and Restated 1992 Stock Incentive
Plan
|
(16)
|
|
|
10.6*
|
Third
Amendment to Amended and Restated 1992 Stock Incentive
Plan
|
(17)
|
|
|
10.7*
|
Fifth
Amendment to the Franklin Covey Co. Amended and Restated 1992 Stock
Incentive Plan (Appendix A)
|
(12)
|
|
|
10.8*
|
Forms
of Nonstatutory Stock Options
|
(1)
|
|
|
10.9*
|
Amended
and Restated Option Agreement, dated December 8, 2004, by and between the
Company and Robert A. Whitman
|
(7)
|
|
|
10.10*
|
Agreement
for the Issuance of Restricted Shares, dated as of December 8, 2004, by
and between Robert A. Whitman and the Company
|
(7)
|
|
|
10.11
|
Restated
Monitoring Agreement, dated as of March 8, 2005, between the Company and
Hampstead Interests, LP
|
(8)
|
|
|
10.12
|
Warrant,
dated March 8, 2005, to purchase 5,913,402 shares of Common Stock issued
by the Company to Knowledge Capital Investment Group
|
(8)
|
|
|
10.13
|
Form
of Warrant to purchase shares of Common Stock to be issued by the Company
to holders of Series A Preferred Stock other than Knowledge Capital
Investment Group
|
(8)
|
|
|
10.14*
|
Franklin
Covey Co. 2004 Non-Employee Directors’ Stock Incentive
Plan
|
(9)
|
|
|
10.15*
|
The
first amendment to the Franklin Covey Co. 2004 Non-Employee Director Stock
Incentive Plan, (Appendix B)
|
(12)
|
|
|
10.16*
|
Form
of Option Agreement for the 2004 Non-Employee Directors Stock Incentive
Plan
|
(9)
|
|
|
10.17*
|
Form
of Restricted Stock Agreement for the 2004 Non-Employees Directors Stock
Incentive Plan
|
(9)
|
|
10.18
|
Master
Lease Agreement between Franklin SaltLake LLC (Landlord) Franklin
Development Corporation (Tenant)
|
(10)
|
|
|
10.19
|
Purchase
and Sale Agreement and Escrow Instructions between Levy Affiliated
Holdings, LLC (Buyer) and Franklin Development Corporation (Seller) and
Amendments
|
(10)
|
|
|
10.20
|
Redemption
Extension Voting Agreement between Franklin Covey Co. and Knowledge
Capital Investment Group, dated October 20, 2005
|
(11)
|
|
|
10.21
|
Agreement
for Information Technology Services between each of Franklin Covey Co.
Electronic Data Systems Corporation, and EDS Information Services LLC,
dated April 1, 2001
|
(13)
|
|
|
10.22
|
Additional
Services Addendum No. 1 to Agreement for Information Technology Services
between each of Franklin Covey Co. Electronic Data Systems Corporation,
and EDS Information Services LLC, dated June 30, 2001
|
(13)
|
|
|
10.23
|
Amendment
No. 2 to Agreement for Information Technology Services between each of
Franklin Covey Co. Electronic Data Systems Corporation, and EDS
Information Services LLC, dated June 30, 2001
|
(13)
|
|
|
10.24
|
Amendment
No. 6 to the Agreement for Information Technology Services between each of
Franklin Covey Co., Electronic Data Systems Corporation, and EDS
Information Services L.L.C. dated April 1, 2006
|
(14)
|
|
|
10.25
|
Revolving
Line of Credit Agreement ($18,000,000) by and between JPMorgan Chase Bank,
N.A. and Franklin Covey Co. dated March 14, 2007
|
(18)
|
|
|
10.26
|
Secured
Promissory Note between JPMorgan Chase Bank, N.A. and Franklin Covey Co.
dated March 14, 2007
|
(18)
|
|
|
10.27
|
Security
Agreement between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey
Marketing, LTD., and JPMorgan Chase Bank, N.A. and Zions First National
Bank, dated March 14, 2007
|
(18)
|
|
|
10.28
|
Repayment
Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey
Marketing, LTD., and JPMorgan Chase Bank N.A., dated March 14,
2007
|
(18)
|
|
|
10.29
|
Pledge
and Security Agreement between Franklin Covey Co. and JPMorgan Chase Bank,
N.A. and Zions First National Bank, dated March 14, 2007
|
(18)
|
|
|
10.30
|
Revolving
Line of Credit Agreement ($7,000,000) by and between Zions First National
Bank and Franklin Covey Co. dated March 14, 2007
|
(18)
|
|
|
10.31
|
Secured
Promissory Note between Zions First National Bank and Franklin Covey Co.
dated March 14, 2007
|
(18)
|
|
10.32
|
Repayment
Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey
Marketing, LTD., and Zions First National Bank, dated March 14,
2007
|
(18)
|
|
|
10.33
|
Credit
Agreement between Franklin Covey Canada, Ltd. and Toronto-Dominion Bank
dated February 19, 2007
|
(18)
|
|
|
10.34
|
Master
License Agreement between Franklin Covey Co. and Franklin Covey Products,
LLC
|
(21)
|
|
|
10.35
|
Supply
Agreement between Franklin Covey Products, LLC and Franklin Covey Product
Sales, Inc.
|
(21)
|
|
|
10.36
|
Master
Shared Services Agreement between The Franklin Covey Products Companies
and the Shared Services Companies
|
(21)
|
|
|
10.37
|
Amended
and Restated Operating Agreement of Franklin Covey Products,
LLC
|
(21)
|
|
|
10.38
|
Sublease
Agreement between Franklin Development Corporation and Franklin Covey
Products, LLC
|
(21)
|
|
|
10.39
|
Sub-Sublease
Agreement between Franklin Covey Co. and Franklin Covey Products,
LLC
|
(21)
|
|
|
10.40
|
Loan
Modification Agreement between Franklin Covey Co. and JPMorgan Chase Bank,
N.A. dated July 8, 2008
|
(21)
|
|
|
General
Services Agreement between Franklin Covey Co. and Electronic Data Systems
(EDS) dated October 27, 2008
|
éé
|
||
|
Subsidiaries
of the Registrant
|
éé
|
||
|
Consent
of Independent Registered Public Accounting Firm
|
éé
|
||
|
Rule
13a-14(a) Certification of the Chief Executive Officer
|
éé
|
||
|
Rule
13a-14(a) Certification of the Chief Financial Officer
|
éé
|
||
|
Section
1350 Certifications
|
éé
|
||
|
Report
of KPMG LLP, Independent Registered Public Accounting Firm, on
Consolidated Financial Statement Schedule for the years ended August 31,
2008, 2007, and 2006
|
éé
|
||
|
Financial
Statement Schedule II – Valuation and Qualifying Accounts and
Reserves.
|
éé
|
|
(1)
|
Incorporated
by reference to Registration Statement on Form S-1 filed with the
Commission on April 17, 1992, Registration No.
33-47283.
|
|
(2)
|
Incorporated
by reference to Amendment No. 1 to Registration Statement on Form S-1
filed with the Commission on May 26, 1992, Registration No.
33-47283.
|
|
(3)
|
Incorporated
by reference to Report on Form 10-K filed November 27, 1992, for the year
ended August 31, 1992.
|
|
(4)
|
Incorporated
by reference to Registration Statement on Form S-1 filed with the
Commission on January 3, 1994, Registration No.
33-73728.
|
|
(5)
|
Incorporated
by reference to Schedule 13D (CUSIP No. 534691090 as filed with the
Commission on June 14, 1999). Registration No.
005-43123.
|
|
(6)
|
Incorporated
by reference to Report on Form S-8 filed with the Commission on May 31,
2000, Registration No. 333-38172.
|
|
(7)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on December
14, 2005.**
|
|
(8)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on March 10,
2005.**
|
|
(9)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on March 25,
2005.**
|
|
(10)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on June 27,
2005.**
|
|
(11)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on October
24, 2005.**
|
|
(12)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A filed with the
Commission on December 12, 2005.**
|
|
(13)
|
Incorporated
by reference to Report on Form 10-Q filed July 10, 2001, for the quarter
ended May 26, 2001.**
|
|
(14)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on April 5,
2006.**
|
|
(15)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A filed with the
Commission on February 1, 2005.**
|
|
(16)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A dated November
5, 1993.**
|
|
(17)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A filed with the
Commission on December 3, 1999.**
|
|
(18)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on March 19,
2007.**
|
|
(19)
|
Incorporated
by reference to Report on Form 8-K/A filed with the Commission on May 29,
2008.**
|
|
(20)
|
Incorporated
by reference to Report on Form 10-Q filed July 10, 2008, for the Quarter
ended May 31, 2008.**
|
|
(21)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on July 11,
2008.**
|
éé Filed
herewith and attached to this report.
* Indicates
a management contract or compensatory plan or agreement.
** Registration
No. 001-11107.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on November 14, 2008.
FRANKLIN
COVEY CO.
|
By:
|
/s/ Robert A. Whitman
|
|
Robert A. Whitman
|
|
|
Chairman and Chief Executive
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Robert A. Whitman
|
Chairman
of the Board and Chief Executive Officer
|
November
14, 2008
|
|
Robert
A. Whitman
|
||
|
/s/ Stephen R. Covey
|
Vice-Chairman
of the Board
|
November
14, 2008
|
|
Stephen
R. Covey
|
||
|
/s/Clayton M. Christensen
|
Director
|
November
14, 2008
|
|
Clayton
M. Christensen
|
||
|
/s/ Robert H. Daines
|
Director
|
November
14, 2008
|
|
Robert
H. Daines
|
||
|
/s/ E.J. “Jake” Garn
|
Director
|
November
14, 2008
|
|
E.J.
“Jake” Garn
|
||
|
/s/ Dennis G. Heiner
|
Director
|
November
14, 2008
|
|
Dennis
G. Heiner
|
||
|
/s/ Donald J. McNamara
|
Director
|
November
14, 2008
|
|
Donald
J. McNamara
|
||
|
/s/ Joel C. Peterson
|
Director
|
November
14, 2008
|
|
Joel
C. Peterson
|
||
|
/s/ E. Kay Stepp
|
Director
|
November
14, 2008
|
|
E.
Kay Stepp
|