UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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þ
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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, 2007.
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|
OR
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|
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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 oNo þ
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes o No
þ
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
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, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
|
oLarge
accelerated
filer
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þAccelerated
filer
|
oNon-accelerated
filer
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
þ
As
of
March 2, 2007, the aggregate market value of the Registrant's Common Stock
held
by non-affiliates of the Registrant was approximately $119.3 million, which
was
based upon the closing price of $7.49 per share as reported by the New York
Stock Exchange.
As
of
November 1, 2007, the Registrant had 19,476,426 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 18, 2008, are
incorporated by reference in Part III of this Form 10-K.
| PART I | |||
| Item 1. | Business | ||
| Item 1A. | Risk Factors | ||
| Item 1B. | Unresolved Staff Comments | ||
| Item 2. | Properties | ||
| Item 3. | Legal Proceedings | ||
| Item 4. | Submission of Matters to a Vote | ||
| PART II | |||
| Item 5. | Market For the Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities | ||
| Item 6. | Selected Financial Data | ||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | ||
| Item 8. | Financial Statements and Supplementary Data | ||
| Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure | ||
| Item 9A. | Controls and Procedures | ||
| PART III | |||
| Item 10. | Directors and Executive Officers of the Registrant | ||
| Item 11. | Executive Compensation | ||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||
| Item 13. | Certain Relationships and Related Transactions | ||
| Item 14. | Principal Accountant Fees and Services | ||
| PART IV | |||
| Item 15. | Exhibits and Financial Statement Schedules | ||
| SIGNATURES |
PART
I
General
Franklin
Covey Co. (the Company, we, us, our or FranklinCovey) enables greatness in
people and organizations everywhere by helping organizations, families and
individuals the world over achieve their own great purposes through teaching
the
principles and practices of effectiveness and by providing reinforcement
tools
like the FranklinCovey Planning System. Nearly 1,500 FranklinCovey
associates world-wide delivered timeless and universal curriculum and
effectiveness tools to millions of customers in fiscal 2007. We
strive to excel in this endeavor because we believe that:
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·
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People
are inherently capable, aspire to greatness, and
have the
power to choose.
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|
·
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Principles
are timeless and universal and are the foundation
to lasting
effectiveness.
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|
·
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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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|
·
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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.
|
The
Opportunity
Corporations,
organizations and individuals cumulatively purchased more than $13
billion(1)
in 2007 and it is estimated that they will purchase nearly $15 billion in
2008
of professional performance training curricula, books, tapes, CD’s and
other tools in an effort to improve their effectiveness and
productivity. The training industry is divided into two segments –
information technology training and performance skills training. The
performance skills training segment of the industry represented over $7 billion
in sales in 2007 and is expected to grow to exceed $8 billion in 2008 through
sales of hundreds of different curricula, delivered to both corporations
and
individual customers. In addition to training, the performance skills
industry includes a number of measurement methodologies and integrated
implementation tools. The measurement methodologies include return on
investment analysis and behavior modification
measurement. Implementation tools are designed to increase learning
retention and increase behavior modification. Many companies in the
industry specialize in only one or two of these areas.
(1)
Simba Information, Corporate Training Market 2007: Forecast and Analysis.
(2007)
FranklinCovey
is engaged in the performance skills segment of the training
industry. Our competitive advantage in this highly fragmented
industry stems from our fully integrated training curricula, measurement
methodologies and implementation tool offerings to help individuals and
organizations measurably improve their effectiveness. This advantage
allows FranklinCovey 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
2007, we provided products and services to 90 percent 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 provide training curricula, measurement
services and implementation tools internationally, either through directly
operated offices, or through licensed providers. On August 31, 2007,
we had direct operations in Australia, Canada, Japan and the United
Kingdom. We also had licensed operations in 87 countries and licensed
rights in more than 140 countries. Nearly 500,000 individuals world-wide
were
trained during the fiscal year ended August 31, 2007.
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.
FranklinCovey
Products
An
important principle taught in our productivity training is to have a single
personal productivity system and to have all of one’s information in that
system. Based upon that principle, we developed the FranklinCovey
Planning System with the original Franklin Planner as one of the basic tools
for
implementing the principles of our time management system. The
Franklin Planner consists of paper-based FranklinCovey Planning Pages, a
binder
in which to carry it, weekly, monthly and annual calendars as well as personal
management sections. We offer a broad line of renewal planning pages,
forms and binders in various sizes and styles. The FranklinCovey
Planning System broadened as we developed additional planning tools to address
the needs of more technology oriented workers as well as those who require
both
greater mobility and ready access to large quantities of data. For
those clients who use digital or electronic productivity systems, we offer
a
wide variety of electronic solutions incorporating the same planning
methodology.
FrankinCovey
Planning Pages. Paper planning pages are available for
the FranklinCovey Planning System in various sizes and styles and consist
of
daily or weekly formats, with Appointment Schedules, Prioritized Daily Task
Lists, Monthly Calendars, Daily Notes, and personal management pages for
an
entire year. FranklinCovey Planning Pages are offered in a number of
designs to appeal to various customer segments. The Starter Pack,
which includes personal management tabs and pages, a guide to using the planner,
a pagefinder and weekly compass cards, combined with a storage binder, completes
the basic FranklinCovey Planning System.
Binders
and Totes. To further customize the
FranklinCovey Planning System, we offer binders and business cases (briefcases,
portfolios, business totes, messenger bags, etc.) in a variety of materials,
styles and sizes. These materials include high quality leathers,
fabrics, synthetic materials and vinyl in a variety of color and design
options. Binder styles include zipper closures, snap closures, and
open formats with pocket configurations to accommodate credit cards, business
cards, checkbooks, electronic devices and writing instruments. Most
of the leather items are proprietary FranklinCovey designs. However,
we also offer products from leading manufacturers such as Kenneth
Cole.
Electronic
Solutions. We offer our time and life management
methodology in an electronic format within a complete Personal Information
Management (PIM) system through the FranklinCovey PlanPlusÔ Software
offerings. The software application can be used in conjunction with
planning pages, electronic handheld organizers, and smart phones or used
as a
stand-alone planning and information management system. The
FranklinCovey PlanPlusÔ Software
permits
users to generate and print data on FranklinCovey Planning Pages that can
be
inserted directly into the FranklinCovey Planner. The program
operates in the Windows® 95, 98, 2000, XP and Vista operating
systems. The FranklinCovey PlanPlusÔ Software
includes
all necessary software, related tutorials and reference
manuals. FranklinCovey PlanPlusÔ Software
is also
intended for our corporate clients that have already standardized on
MicrosoftÒ for
group scheduling, but wish to make the FranklinCovey Planning System available
to their employees without creating the need to support two separate
systems. As this kind of extension proves its value in the market,
the FranklinCovey Planning Software extension model may be expanded to other
platforms.
FranklinCovey
PlanPlusÔ is
now also available in a web-based system called PlanPlusÔ
Online. This latest offering allows customers to access the
FranklinCovey Planning System from any web browser in the world. It
also includes nearly all of the planning features found in our desktop software
products and some additional features, including sales management
tools. The software has both online planning tools and customer
relationship management (CRM) tools. This new online offering also
allows customers with smart phones to access key information from any smart
phone with a web browser, including the iPhone, Treo, Blackberry and Window
Mobile devices.
We
also
provide The 7 Habits of Highly Effective People® training course in
online and CD-ROM versions. This edition delivers the content from
the 3-day classroom workshop in a flexible self-paced version via the Internet
or CD-ROM that 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.
Personal
Development and Accessory Products. To supplement our principal
products, we offer a number of accessories and related products, including
third-party books, videotapes and audio cassettes focused on time management,
leadership, personal improvement and other topics. We also market a
variety of content–based personal development products. These
products include books, audio learning systems such as multi-tape, CDs and
workbook sets, CD-ROM software products, calendars and other specialty name
brand items. We offer numerous accessory forms through our Forms
Wizard software, which allows customization of our more popular forms, including
check registers, spreadsheets, stationery, mileage logs, maps, menu planners,
shopping lists, and other information management and project planning forms.
Our
accessory products and forms are generally available in all the FranklinCovey
Planner sizes.
Books. The
principles we teach in our curriculum have also been published in book,
audiotape and CD formats. 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, and the
latest book, Everyday Greatness, 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 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, as well
as
through our own catalog, e-commerce Internet site at
www.franklincovey.com and retail stores.
Training
and Consulting Services
We
offer
training and consulting services for organizations through a combination
of
assessment instruments, including the xQä (Execution
QuotientÔ)
Profile and the 7 Habits Profile, and training courses including FOCUS:
Achieving Your Highest Priorities; The 4 Disciplines of
Executionä;
The
4 Roles of
Leadershipä;
and The 7
Habits of Highly Effective PeopleÒ. We
measure the impact of training investments for our clients through pre- and
post- assessment profiles and return on investment analysis. These
services are marketed and delivered world-wide through our Organizational
Solutions Business Unit (OSBU), which consists of consultants, selected through
a competitive and demanding process, and sales professionals.
Training
and Education Programs. We offer a range of training
programs designed to measurably improve the effectiveness of individuals
and
organizations. Our programs are oriented to address personal,
interpersonal, managerial and organizational needs. In addition, we
believe that our learning process provides an engaging and behavior-changing
experience, which frequently generates additional business. During
fiscal 2007, approximately 500,000 individuals were trained using the Company’s
curricula in our single and multiple–day workshops and seminars. We
also offer assessment tools to help organizational clients determine the
effectiveness of implementing company goals. The xQ Survey is an
exclusive FranklinCovey assessment tool that gathers information, from an
employee perspective, on how well organizational goals are understood and
are
being carried out. The survey questions, administered through a
Web-based system, probe for details to uncover underlying focus and teamwork
barriers or issues.
Our
single–day FOCUS: Achieving Your Highest Priorities workshop teaches
productivity skills integrated with a planning system to help individuals
clarify, focus on, and execute their highest priorities, both personally
and
professionally. This seminar is conducted by our training consultants
in corporate and public seminars throughout the United States and in many
foreign countries. It is also delivered by our clients’ certified
in-house trainers for their employees. The single-day The 4
Disciplines of Execution workshop helps managers identify the highest
priorities for their teams and then lead those teams to execute tasks
day-after-day.
We
also
deliver multiple-day workshops, primarily in the leadership
area. Included in these offerings is the three–day 7 Habits workshop
based upon the material presented in The 7 Habits of Highly Effective
People®. The 7 Habits
workshop provides the foundation for continued client relationships and the
content and application tools are designed to be delivered deep into the
client’s organization. Additionally, a three–day 4 Roles of
Leadership course is offered, which focuses on the managerial aspects of
client needs. FranklinCovey Leadership Week consists of a five–day
session focused on materials from FranklinCovey's The 7 Habits of Highly
Effective People® and
The 4 Roles
of Leadership courses. FranklinCovey Leadership
Week is reserved for supervisory level management of our corporate
clients. As a part of the week's agenda, executive participants plan
and design strategies to successfully implement key organizational goals
or
initiatives.
In
addition to providing consultants and presenters, we also train and certify
client facilitators to teach selected FranklinCovey workshops within their
organizations. We believe client–facilitated training is important to
our fundamental strategy of creating pervasive on-going client impact and
revenue streams. After having been certified, client facilitators can
purchase manuals, profiles, planners and other products to conduct training
workshops within their organization, generally without repeating the sales
process. This creates programs which have an on-going impact on our
customers and which generate recurring revenues. This is aided by the
fact that curriculum content in one course leads the client to additional
participation in other Company courses. Since 1988, we have trained
more than 20,000 client facilitators. Client facilitators are
certified only after graduating from one of our certification workshops and
completing post–course certification requirements.
We
also
provide The 7 Habits of Highly Effective People® training
course in online and
CD-ROM versions. The need for reaching more employees faster and less
expensively are the key drivers behind the growth of e-learning in the
marketplace. The 7 Habits Online Edition addresses that need,
offering a flexible alternative to classroom training.
Segment
Information
To
help
us fulfill our mission of enabling greatness in people and organizations
everywhere, we have organized our business in two segments: (1) the Consumer
Solutions Business Unit (CSBU) designed to reach individual consumers and
small
businesses; and (2) the Organizational Solutions Business Unit (OSBU) designed
to serve organizational clients. The following table sets forth, for
the periods indicated, the Company's sales from external customers for each
of
its operating segments (in thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Consumer
Solutions Business Unit
|
||||||||||||
|
Retail
Stores
|
$ |
54,316
|
$ |
62,156
|
$ |
74,331
|
||||||
|
Consumer
Direct
|
59,790
|
65,480
|
62,873
|
|||||||||
|
Wholesale
|
17,991
|
17,782
|
17,936
|
|||||||||
|
CSBU
International
|
7,342
|
7,716
|
7,009
|
|||||||||
|
Other
|
5,565
|
4,910
|
3,757
|
|||||||||
|
Total
CSBU
|
145,004
|
158,044
|
165,906
|
|||||||||
|
Organizational
Solutions Business Unit
|
||||||||||||
|
Domestic
|
81,447
|
71,595
|
70,572
|
|||||||||
|
International
|
57,674
|
48,984
|
47,064
|
|||||||||
|
Total
OSBU
|
139,121
|
120,579
|
117,636
|
|||||||||
|
Total
|
$ |
284,125
|
$ |
278,623
|
$ |
283,542
|
||||||
We
market
products and services to organizations, schools and individuals both
domestically and internationally through FranklinCovey retail stores, our
consumer direct channel (which includes call center operations, our Internet
website at www.franklincovey.com, and public seminar programs), our
organizational and educational sales forces and other distribution
channels. 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. 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).
Consumer
Solutions Business Unit
We
sell
FranklinCovey products and other productivity tools to individual consumers
primarily through our retail stores, through FranklinCovey consumer direct
channels, through selected wholesale channels, and through international
operations.
Retail
Stores. Beginning in late 1985, we began a retail
strategy by opening retail stores in areas of high client
density. The initial stores were generally located in close proximity
to corporate clients. We revised our strategy by locating retail
stores in high-traffic retail centers, primarily large shopping centers and
malls, to serve existing clients and to attract increased numbers of walk-in
clients. Our retail stores average approximately 1,900 square
feet. Our retail strategy focuses on reinforcing the training
experience with high client service and consultative sales of planning tools.
We
believe this approach ensures longer-term usage and satisfaction with the
FranklinCovey Planning System.
We
believe that our retail stores have an upscale image consistent with our
marketing strategy. Products are attractively presented
and displayed with an emphasis on integration of related products and
accessories. Our retail sales associates have been trained to teach
the FranklinCovey Planning System, using the various tools and electronic
handheld devices and software we offer, enabling them to assist and advise
clients in the selection and use of our products.
Retail
store employees have also been engaged to proactively market to small businesses
in the cities where they are located. Their marketing efforts include
calling upon small (fewer than 100 employees) businesses to offer productivity
tools and training. This out-bound selling effort has helped to
stabilize declining revenues in the retail channel and provided access to
FranklinCovey training and products to a business segment not traditionally
marketed to through our sales force.
At
August
31, 2007, FranklinCovey had 87 domestic retail stores located in 33
states. We closed 2 retail stores in the United States during fiscal
year 2007. The Company anticipates that it may close additional
stores in fiscal year 2008. We also had 4 retail stores located in
countries where we maintain direct operations at year-end.
Consumer
Direct. We sell products and services through catalog
call center operations, Internet sales operations and public seminar
programs. We periodically mail catalogs to our clients, including a
fall catalog, holiday catalogs, spring and summer catalogs timed to coincide
with planner renewals. Catalogs may be targeted to specific
geographic areas or user groups as appropriate. Catalogs are
typically printed in full color with an attractive selling presentation
highlighting product benefits and features. We also market the
FranklinCovey Planning System through our e-commerce Internet site at
www.franklincovey.com. Customers may order catalogs and other
marketing materials as well as the Company’s product line through this Internet
portal.
During
fiscal 2001, we entered into a long-term contract with Electronic Data Systems
(EDS) of Dallas, Texas, to provide a large part of our customer relationship
management in servicing our Consumer Direct customers through our catalog
and
e-commerce operations. We use EDS to maintain a client service
department, which clients may call toll-free, from 6:00 a.m. to 7:00 p.m.
MST,
Monday through Friday, to inquire about a product or to place an
order. Through a computerized order entry system, client
representatives have access to client preferences, prior orders, billings,
shipments and other information on a real-time basis. The customer
service representatives have authority to immediately solve client service
problems. The integrated relationship management system provided by
EDS allows orders from our customers to be processed through its warehousing
and
distribution systems. Client information stored within the order
entry system is also used for additional purposes, including target marketing
of
specific products to existing clients. We believe that the order
entry system helps assure client satisfaction through both rapid delivery
and
accurate order shipment.
Public
seminars are planned and coordinated with training consultants by a staff
of
marketing and administrative personnel at our corporate
offices. Public seminars are delivered by our training consultants in
more than 100 major metropolitan cities throughout the United
States. These seminars provide training for organizations and the
general public and are also used as a marketing tool for attracting corporate
and other institutional clients. Corporate training directors are
often invited to attend public seminars to preview the seminar content prior
to
engaging FranklinCovey to train in-house employees. Smaller
institutional clients often enroll their employees in public seminars when
a
private seminar is not cost effective.
Wholesale.
We have created strategic alliances to sell our products through more than
9,900
retail office supply stores and department stores. MeadWestvaco
distributes our products to contract stationer businesses such as Office
Express, Office Depot, Office Max and Staples, which sell office products
through catalog order entry systems to businesses and
organizations. MeadWestvaco also represents FranklinCovey in the
office superstore category by wholesaling the FranklinCovey Planning System
to
Staples, Office Depot and OfficeMax and represents us with Target Stores,
for
which we designed a specialty line of paper planning products branded under
the
“365 by FranklinCovey” under-brand label which is sold exclusively in their
stores. We also have a similar distribution agreement with Heritage
Industries in which they manufacture, market and distribute selected products
into Sam’s Club, Costco, and an under-brand label “DayOne by FranklinCovey”
product line that is sold through WalMart stores.
CSBU
International. FranklinCovey also markets its products
to clients in four countries where it maintains wholly owned product sales
operations; Australia, Canada, Mexico and the United
Kingdom. Products are produced in styles and languages of the native
countries and are sold through retail stores, catalog operations and through
Internet portals.
Other
CSBU
Sales. Other
CSBU sales include sales of
printing services by FranklinCovey Printing, a wholly-owned subsidiary,
miscellaneous licensing rights of FranklinCovey products and brands to various
marketing customers, and sub-lease revenues from third-party tenants at our
corporate headquarters campus.
Organizational
Solutions Business Unit
Domestic
Training. We sell
effectiveness and productivity solutions to organizations and schools through
our own direct sales forces. We then deliver training services to
organizations, schools and individuals in one of four ways:
|
1.
|
FranklinCovey
consultants provide on-site consulting or training classes for
organizations and schools. In these situations, our consultant
can tailor the curriculum to our client’s specific business and
objectives.
|
|
|
2.
|
We
conduct public seminars in 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 catalog, e-commerce web-site, retail stores,
and
by direct mail.
|
|
|
3.
|
Our
programs are also designed to be facilitated by licensed professional
trainers and managers in client organizations, reducing dependence
on our
professional presenters, and creating continuing revenue through
royalties
and as participant materials are purchased for trainees by these
facilitators.
|
|
|
4.
|
We
also offer The 7 Habits of Highly Effective People®
training course in
online and CD-ROM formats. This self-paced e-learning
alternative provides the flexibility that many organizations need
to meet
the needs of various groups, managers or supervisors who may be
unable to
attend extended classroom training and executives who need a series
of
working sessions over several
weeks.
|
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 then entrusted with the actual delivery of
content, seminars, processes and other solutions. Consultants follow
up with client service teams, working with them to develop lasting client
impact
and ongoing business opportunities.
We
employ
111 sales professionals and business developers located in six major
metropolitan areas throughout the United States who sell integrated offerings
to
institutional clients. We also employ an additional 54 sales
professionals and business developers outside of the United States in four
countries. 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 also call upon line leaders. Our sales professionals
work closely with training consultants in their territories to schedule and
tailor seminars and workshops to meet specific objectives of institutional
clients. FranklinCovey currently employs 110 training consultants in major
metropolitan areas of the United States, with an additional 39 training
consultants outside of the United States. 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.
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. In December 2001, we sold
the
stock of Premier Agendas, a wholly owned subsidiary that previously delivered
our products and services to schools, to School Specialty. Pursuant
to a license from FranklinCovey, Premier Agendas is expected to continue
to
expose over 20 million K-12 students to FranklinCovey’s world-renowned 7
Habits content. We retained the educator leadership and
effectiveness training portion of Premier’s business.
International
Sales. We provide
products, training and printing services 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, Austria, Bangladesh, Belgium, Bermuda,
Brazil,
Bulgaria, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic, Cyprus,
Denmark, Dominican Republic, Egypt, El Salvador, Estonia, Finland, France,
Germany, Greece, Guatemala, Hong Kong, Hungary, India, Iceland, Indonesia,
Israel, Italy, Kenya, Latvia, Lebanon, Lithuania, Luxembourg, Malaysia, Mexico,
Nepal, Netherlands, Nicaragua, Nigeria, Norway, Panama, Peru, Philippines,
Poland, Portugal, Puerto Rico, Romania, Russia, Serbia, Singapore, Slovak
Republic, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden,
Switzerland, Taiwan, Thailand, Trinidad/Tobago, Turkey, UAE, Ukraine, Uruguay,
Venezuela, and Vietnam. There are also licensee retail operations in
Hong Kong and South Korea. Our seven 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 and The 7 Habits
of
Highly Effective Teens are currently published in multiple
languages. Financial information about our foreign operations
is contained in Note 19 to our consolidated financial statements.
Strategic
Distribution Alliances. We have created strategic alliances with
third-party organizations in an effort to develop effective distribution
of our
products and services. The principal distribution alliances currently
maintained by FranklinCovey are: Simon & Schuster and Saint
Martin’s Press in publishing books for the Company;
Nightingale–Conant to market and distribute audio and video tapes of the
Company's book titles; MeadWestvaco to market and distribute selected
FranklinCovey Planners and accessories to the commercial and retail office
supply channels and in to Target; PalmOneÔ
to serve as
the official training organization for its PalmOneÔ
products; Agilix
Labs in development of the PlanPlusÔ
Software;
Microsoft in conjunction with PlanPlusÔ
marketing;
and Heritage Travelware. Ltd. to manufacture, market and distribute
selected FranklinCovey products to the retail office supply channels as well
as
to Sams Club, Costco and WalMart.
Clients
We
have a
relatively broad base of institutional and individual clients. We
have more than 2,000 institutional clients consisting of corporations,
governmental agencies, educational institutions and other organizations.
We
believe our products, workshops and seminars encourage strong client
loyalty. Employees in each of our distribution channels focus on
providing timely and courteous responses to client requests and
inquiries. Institutional clients may choose to receive assistance in
designing and developing customized forms, tabs, pagefinders and binders
necessary to satisfy specific needs. As a result of the nature of
FranklinCovey’s business and distribution channels, the Company does not have,
nor has it had, a significant backlog of firm orders.
Competition
Training. 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 FranklinCovey's fiscal 2007 organizational
sales of approximately $139 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) (formerly Achieve Global and Zenger
Miller), Organizational Dynamics Inc., Provant, Forum Corporation, EPS Solutions
and the Center for Creative Leadership.
Products. The
paper-based time management and personal organization products market is
intensely competitive and subject to rapid change. FranklinCovey
competes directly with other companies that manufacture and market calendars,
planners, personal organizers, appointment books, diaries and related products
through retail, mail order and other sales channels. In this market,
several competitors have strong name recognition. We believe our principal
competitors include DayTimer, At–A–Glance and Day Runner. We also
compete with companies that market substitutes for paper-based products,
such as
electronic organizers, software, PIM’s and handheld computers. Many
FranklinCovey competitors, particularly those providing electronic organizers
or
cell-phones with electronic organization capabilities, software-based management
systems, and hand-held computers, have access to marketing, product development,
financial and other resources significantly in excess of those available
to
FranklinCovey. An emerging potential source of competition is the
appearance of calendars and event-planning services available at no charge
on
the Web. There is no indication that the current level of features
has proven to be attractive to the traditional FranklinCovey planner customer
as
a stand-alone service, but as these products evolve and improve, they could
pose
a competitive threat.
Given
the
relative ease of entry in FranklinCovey's product and training markets, the
number of competitors could increase, many of whom may imitate existing methods
of distribution, products and seminars, or offer similar products and seminars
at lower prices. Some of these companies may have greater financial
and other resources than us. We believe that the FranklinCovey
Planning System and related products compete primarily on the basis of user
appeal, client loyalty, design, product breadth, quality, price, functionality
and client service. We also believe that the FranklinCovey Planning
System has obtained market acceptance primarily as a result of the concepts
embodied in it, the high quality of materials, innovative design, our attention
to client service, and the strong loyalty and referrals of our existing
clients. We believe that our integration of training services with
products has become a competitive advantage. Moreover, we believe that we
are a
market leader in the United States among a small number of integrated providers
of productivity and time management 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
The
manufacturing operations of FranklinCovey consist primarily of printing,
collating, assembling and packaging components used in connection with our
paper
product lines. We operate our central manufacturing services out of
Salt Lake City, Utah. We have also developed partner printers, both
domestically and internationally, who can meet our quality standards, thereby
facilitating efficient delivery of product in a global market. We
believe this has positioned us for greater flexibility and growth
capacity. Automated production, assembly and material handling
equipment are used in the manufacturing process to ensure consistent quality
of
production materials and to control costs and maintain efficiencies. By operating in this
fashion, we have gained greater control of production costs, schedules and
quality control of printed materials.
During
fiscal 2001, we entered into a long-term contract with EDS to provide
warehousing and distribution services for our product line. EDS
maintains a facility at the Company’s headquarters as well as at other locations
throughout North America.
Binders
and totes are produced using leather, simulated leather, fabrics, and other
synthetic materials. These binders and totes are produced by multiple product
suppliers. We currently enjoy good relations with our suppliers and
vendors and do not anticipate any difficulty in obtaining the required binders,
totes and materials needed for our business. We have implemented
special procedures to ensure a high standard of quality for our products,
most
of which are manufactured by suppliers in the United States, Europe, Canada,
Korea, Mexico and China.
We
also
purchase numerous accessories, including pens, books, videotapes, calculators
and other products, from various suppliers for resale to our
clients. These items are manufactured by a variety of outside
contractors located in the United States and abroad. We do not
believe that we are materially dependent on any one or more of such contractors
and consider our relationships with such suppliers to be good.
Research
and Development
FranklinCovey
believes that the development of new products and curricula 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 focus our product
design efforts on both improving our existing products and developing new
products. We intend to continue to employ a customer focused design approach
to
provide innovative products and curricula that respond to and anticipate
customer needs for functionality, productivity and effectiveness.
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 $3.3 million, $2.3 million, and $2.2 million
in
fiscal years 2007, 2006, and 2005 respectively, and we capitalized certain
development costs totaling $5.1 million, $4.0 million, and $2.2 million
respectively, for the same years.
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 128
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, the programs contained
within FranklinCovey Planner Software and its instructional materials, and
our
software and electronic products, including audio tapes and video
tapes. We license, rather than sell, all 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,
FranklinCovey enters 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
As
of
August 31, 2007, FranklinCovey had approximately 1,425 full and part-time
associates, including 835 in sales, marketing and training; 315 in customer
service and retail; 90 in production operations and distribution; and 185
in
administration and support staff. During fiscal 2002, the Company outsourced
a
significant part of its 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 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.
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.
We
operate in intensely competitive industries
The
training and consulting industry and personal organizer industry are intensely
competitive with relatively easy entry. Competitors continually
introduce new programs and products 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 and successfully deliver client work or
products.
We
have experienced net losses in recent fiscal years and we may not be able
to
maintain consistent profitability
Although
we reported net income in fiscal 2007 and fiscal 2006, we have experienced
significant net losses in recent years and we cannot assure you that we will
maintain consistently profitable operations.
During
previous years we have faced numerous challenges that have affected our
operating results. Specifically, we have experienced, and may
continue to experience the following:
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Declining
traffic in our retail stores and consumer direct channel
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Risk
of excess and obsolete inventories
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Operating
expenses that, as a percentage of sales, have exceeded our desired
business model
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Costs
associated with exiting unprofitable or underperforming retail
stores
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In
addition, if we are unable to maintain profitable operations we may be required
to reestablish valuation allowances on our deferred tax assets if it becomes
more likely than not that we would not be able to realize the benefits of
those
assets. The reestablishment of deferred tax assets would have an
unfavorable impact upon our reported net income.
If
we do not achieve the appropriate cost structure our profitability could
decrease
Our
future success and profitability depend in part on our ability to achieve
the
appropriate cost structure and be efficient in the highly competitive training,
consulting, and personal organizer industries. 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, reconfiguration
of our
printing operations, 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 costs and processes to achieve additional efficiencies, our
competitiveness and profitability could decrease.
Our
results of operations are materially affected by economic conditions, levels
of
business activity, and other changes experienced by our
clients
Uncertain
economic conditions may affect our clients’ businesses and their budgets for
training, consulting, and related products. Such economic conditions
and budgeted spending are influenced by a wide range of factors that are
beyond
our control and that we have no comparative advantage in
forecasting. These conditions include:
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The
overall demand for training, consulting, and our related
products
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Conditions
and trends in the training and consulting industry
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General
economic and business conditions
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General
political developments, such as the war on terrorism, and their
impacts
upon our business both domestically and internationally
|
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Natural
or man-made disasters
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A
prolonged economic downturn, particularly in the United States, could increase
these effects on our business.
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.
Our
product sales may continue to decline and result in changes to our
profitability
In
recent
years, our product sales have declined. These product sales, which
are primarily delivered through our retail stores, consumer direct channels
(primarily catalog call center and eCommerce), wholesale, and government
product
channels, have historically been very profitable for us. However, due
to recent sales declines, we have reevaluated our product business and have
taken steps to restore its profitability. These initiatives have
included retail store closures, active efforts to transition catalog customers
to our eCommerce site, outsourcing our government products channel, and
increasing our business through wholesale channels. However, these
initiatives may also result in decreased gross margins on our product sales
if
lower-margin wholesale sales increase. If product sales continue to
decline or gross margins on these sales decline, our product sales strategies
may not be adequate to return our product delivery channels to past
profitability levels.
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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Government
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 these 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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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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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.
|
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.
We
may not be able to compensate for lower sales or unexpected cash outlays
with
cost reductions significant enough to generate positive net
income
Although
we have initiated cost-cutting efforts that have included headcount reductions,
retail store closures, consolidation of administrative office space, and
changes
in our advertising and marketing strategy, if we are not able to prevent
further
sales declines or achieve our growth objectives, we will need to further
reduce
our costs. An unintended consequence of additional cost reductions
may be reduced sales. If we are not able to effectively reduce our
costs and expenses commensurate with, or at the same pace as, any further
deterioration in our sales, we may not be able to generate positive net income
or cash flows from operations. An inability to maintain or continue
to increase cash flows from operations may have an adverse impact upon
our
liquidity and ability to operate the business. For example, we may
not be able to obtain additional financing or raise additional capital on
terms
that would be acceptable to us.
Our
cash balances have significantly decreased, which may reduce our ability
to
adequately respond to future adverse changes in our business and
operations
During
the year ended August 31, 2007, we utilized substantially all of our available
cash on hand combined with proceeds from a newly acquired line of credit
to
redeem all of the remaining outstanding shares of Series A preferred
stock. As a consequence of this transaction, our cash balances have
significantly decreased, which may reduce our ability to adequately respond
to
future adverse changes in our business and operations, whether anticipated
or
unanticipated.
Failure
to comply with the terms and conditions of our credit facility may have an
adverse effect upon our business and operations
Our
newly
acquired 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 lenders 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
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, Mexico, 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 $65.0 million, or 23 percent of total
sales, for the year ended August 31, 2007. 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.
Legislation
related to certain non-U.S. corporations has been enacted in various
jurisdictions in the United States. Additional legislative proposals
remain under consideration in various legislatures which, if enacted, could
limit or even prohibit our eligibility to be awarded state or Federal government
contracts in the United States in the future. Changes in laws and
regulations applicable to foreign corporations could also mandate significant
and costly changes to the way we implement our services and
solutions. These changes could threaten our ability to continue to
serve certain markets.
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,
subcontractors 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.
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.
Our
profitability will suffer if we are not able to maintain our pricing and
utilization rates and control our costs
Our
profit margin on training services 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
|
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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Our
ability to manage attrition
|
Our
training program profitability is also a function of our ability to control
costs and improve our efficiency in the delivery of our services. Our
cost-cutting initiatives, which focus on reducing both fixed and variable
costs,
may not be sufficient to deal with downward pressure on pricing or utilization
rates. As we introduce new programs and seek to increase the number
of our training professionals, we may not be able to manage a significantly
larger and more diverse workforce, control our costs, or improve our
efficiency.
Our
new training programs and products may not be widely accepted in the
marketplace
In
an
effort to improve our sales performance, we have made significant investments
in
new training and consulting offerings. Additionally, we have invested
in our existing programs in order to refresh these programs and keep them
relevant in the marketplace, including certain programs based on the newly
revised The 7 Habits of Highly Effective People
curriculum. If our clients’ demand for these new programs and
products does not develop as we expect, or if our sales and marketing strategies
for these programs are not effective, our financial results could be adversely
impacted and we may need to significantly change our business
strategy.
Our
training contracts could be unprofitable if our pricing structures do not
accurately anticipate the cost and complexity of performing our
work
We
negotiate pricing terms with our clients utilizing a range of pricing structures
and conditions. Depending on the particular contract, 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 or used
ineffectively. If we do not accurately estimate the costs and timing
for completing projects, our contracts could prove unprofitable for us or
yield
lower profit margins than anticipated. In particular, any increased
or unexpected costs, delays or failures to achieve anticipated cost savings
in
connection with the performance of such work, including delays caused by
factors
outside our control, could make our training contracts less profitable or
unprofitable, which would have an adverse effect on our profit
margin.
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
Due
to
our reliance on customer satisfaction, our overall success and ability to
grow
are dependent, in part, on our ability to hire, retain, and motivate sufficient
numbers of talented people with the necessary skills needed to serve clients
and
grow our business. The inability to attract qualified employees in
sufficient numbers to meet particular demands or the loss of a significant
number of our employees could have a serious adverse effect on us, including
our
ability to obtain and successfully complete important client engagements
and
thus maintain or increase our sales.
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.
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
training methodologies, product designs, 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
projects.
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, information systems, and call center
operations. Under terms of the outsourcing contract and its
addendums, EDS operates our primary call center, 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.
Certain
components of the outsourcing agreement contain minimum activity levels that
we
must meet or we will be required to pay penalty charges. If these
activity levels are not achieved, we may not realize anticipated benefits
from
the EDS outsourcing agreement in these areas.
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, 2007 we had $75.9 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 profit margin.
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 alliance partners or otherwise breach obligations
to
clients, or if our subcontractors dispute the terms of our agreements with
them,
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 solutions and services, 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.
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:
|
·
|
Fluctuations
in our quarterly results of operations and cash flows
|
|
·
|
Variations
between our actual financial results and market expectations
|
|
·
|
Changes
in our key balances, such as cash and cash equivalents
|
|
·
|
Currency
exchange rate fluctuations
|
|
·
|
Unexpected
asset impairment charges
|
|
·
|
Lack
of analyst coverage
|
In
addition, the stock market has experienced substantial price and volume
fluctuations over the past several years that has had some impact upon our
stock
and other stock issues in the market. These factors, as well as
general investor concerns regarding the credibility of corporate financial
statements and the accounting profession, may have a material adverse effect
upon our stock 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:
|
·
|
Develop
new services, programs, or products
|
|
·
|
Take
advantage of opportunities, including expansion of the
business
|
|
·
|
Respond
to competitive pressures
|
We
may be
unable to obtain the necessary capital on terms or conditions that are favorable
to us.
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 Note 10 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.
A
natural or man-made disaster could have a material adverse effect on our
business
We
have
products and training materials manufactured at numerous sites located around
the world. However, a significant portion of our products (especially
paper products) 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 would
be
forced to rely solely on third-party manufacturers. Such an event
could disrupt our ability to produce and ship products which could lead to
a
material adverse impact on our business prospects, results of operations,
and
financial condition.
None.
FranklinCovey’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 (6 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
Consumer
Solutions Business Unit
Retail
Stores:
United
States (87 locations in 33
states) – all leased
Mexico
(3 locations) – all
leased
Canada
(1 location) - owned
Manufacturing
Facilities:
Salt
Lake City, Utah (at corporate
headquarters) – leased
International
Administrative/Sales Office:
Mexico
(1 location) –
leased
International
Distribution Facility:
Mexico
(1 location) –
leased
A
significant portion of our corporate headquarters campus is subleased to several
unrelated entities.
We
lease
space for retail locations in areas of high shopper density and where we believe
that our operations will attract customers. Our domestic retail
stores average 1,900 square feet each to provide a comfortable shopping
experience for our clients. We also lease space for regional and
international administrative and sales offices in locations that are conducive
for such operations. 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.
Significant
developments related to our properties during fiscal 2007 consisted of the
following:
|
·
|
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.
|
|
·
|
During
fiscal 2007, we closed 2 domestic retail store locations and may
close
additional retail locations during fiscal 2008 and future
periods.
|
|
·
|
We
sold our wholly-owned subsidiary in Brazil and our training operations
in
Mexico during the fourth quarter of fiscal 2007 and exited certain
leased
space in those countries. Our product sales business in Mexico
was transferred to the Consumer Solutions Business Unit during fiscal
2007
and continues to operate under our direction.
|
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 alleges that FranklinCovey 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
denies the patent infringement and believes that the EpicRealm claims are
invalid. The claim filed by EpicRealm has not specified relief or
damages at this time. This litigation is still in the discovery phase
and the Company continues to vigorously defend this matter.
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 in the quarter ended February 25,
2006. We also recorded a $0.3 million reduction in selling, general
and, administrative expenses for recovered legal expenses.
The
Company is also the subject of certain other legal actions, which we consider
routine to our business activities. At August 31, 2007, 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.
No
matters were submitted to a vote of security holders during the fourth quarter
of our fiscal year ended August 31, 2007.
PART
II
FranklinCovey’s
common stock is listed and traded on the New York Stock Exchange (NYSE) under
the symbol “FC.” The following table sets forth, for the periods
indicated, the high and low sale prices for our common stock, as reported on
the
NYSE Composite Tape, for the fiscal years ended August 31, 2007 and
2006.
|
High
|
Low
|
|
|
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
|
|
Fiscal
Year Ended August 31, 2006:
|
||
|
Fourth
Quarter
|
$ 8.37
|
$ 5.16
|
|
Third
Quarter
|
9.79
|
7.00
|
|
Second
Quarter
|
7.79
|
6.00
|
|
First
Quarter
|
7.35
|
6.42
|
We
did
not pay or declare dividends on our common stock during the fiscal years ended
August 31, 2007 and 2006. 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 1, 2007, the Company had 19,476,426 shares of common stock outstanding,
which were held by 413 shareholders of record.
Purchases
of Common Stock
The
following table summarizes Company purchases of common stock during the fiscal
quarter ended August 31, 2007:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Dollar Value of Shares That May Yet Be Purchased Under the Plans
or
Programs
(in
thousands)
|
|||||||||
|
Common
Shares:
|
|||||||||||||
|
June
3, 2007 to July 7, 2007
|
-
|
$ |
-
|
none
|
$ |
2,413
|
|||||||
|
July
8, 2007 to August 4, 2007
|
7,396 | (2) |
8.62
|
none
|
2,413
|
||||||||
|
August
5, 2007 to August 31, 2007
|
-
|
-
|
none
|
2,413 | (1) | ||||||||
|
Total
Common Shares
|
7,396
|
$ |
8.62
|
none
|
|||||||||
|
Total
Preferred Shares
|
none(3)
|
none
|
|||||||||||
|
(1)
|
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, 2007.
|
|
(2)
|
Shares
were received from an employee of the Company as consideration to
exercise
stock options and were valued based upon the closing share price
of our
common stock on the date of exercise.
|
|
(3)
|
On
April 4, 2007, we redeemed all of the remaining outstanding shares
of
Series A preferred stock at the liquidation preference of $25.00
per share
plus accrued dividends through the redemption date. Following
this redemption of preferred stock, we have no shares of Series A
or
Series B preferred stock outstanding and no further preferred stock
dividend obligations.
|
Performance
Graph
The
following graph shows a comparison of cumulative total shareholder return
indexed to August 31, 2002, calculated on a dividend reinvested basis, for
the
five fiscal years ended August 31, 2007, for Franklin Covey 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.
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.
|
August
31,
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
In
thousands, except per share data
|
||||||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Net
sales
|
$ |
284,125
|
$ |
278,623
|
$ |
283,542
|
$ |
275,434
|
$ |
307,160
|
||||||||||
|
Income
(loss) from operations
|
18,084
|
14,046
|
8,443
|
(9,064 | ) | (47,665 | ) | |||||||||||||
|
Net
income (loss) before income taxes
|
15,665
|
13,631
|
9,101
|
(8,801 | ) | (47,790 | ) | |||||||||||||
|
Income
tax benefit (provision)(1)
|
(8,036 | ) |
14,942
|
1,085
|
(1,349 | ) |
2,537
|
|||||||||||||
|
Net
income (loss)(1)
|
7,629
|
28,573
|
10,186
|
(10,150 | ) | (45,253 | ) | |||||||||||||
|
Net
income (loss) available to common shareholders(1)
|
5,414
|
24,188
|
(5,837 | ) | (18,885 | ) | (53,988 | ) | ||||||||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ |
.28
|
$ |
1.20
|
$ | (.34 | ) | $ | (.96 | ) | $ | (2.69 | ) | |||||||
|
Diluted
|
$ |
.27
|
$ |
1.18
|
$ | (.34 | ) | $ | (.96 | ) | $ | (2.69 | ) | |||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Total
current assets
|
$ |
70,103
|
$ |
87,120
|
$ |
105,182
|
$ |
92,229
|
$ |
110,057
|
||||||||||
|
Other
long-term assets
|
14,441
|
12,249
|
9,051
|
7,305
|
10,472
|
|||||||||||||||
|
Total
assets
|
196,631
|
216,559
|
233,233
|
227,625
|
262,146
|
|||||||||||||||
|
Long-term
obligations
|
35,178
|
35,347
|
46,171
|
13,067
|
15,743
|
|||||||||||||||
|
Total
liabilities
|
95,712
|
83,210
|
100,407
|
69,146
|
84,479
|
|||||||||||||||
|
Preferred
stock(2)
|
-
|
37,345
|
57,345
|
87,203
|
87,203
|
|||||||||||||||
|
Shareholders’
equity
|
100,919
|
133,349
|
132,826
|
158,479
|
177,667
|
|||||||||||||||
|
(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.
|
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. Each solution may include products and services that
encompass training and consulting, assessment, and various application tools
that are generally available in electronic or paper-based
formats. Our products and services are available through professional
consulting services, public workshops, retail stores, catalogs, and the Internet
at www.franklincovey.com. Historically, our best-known
offerings include 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. We also offer a range of training and assessment
products to help organizations achieve superior results by focusing and
executing on top priorities, building the capability of knowledge workers,
and
aligning business processes. These offerings include the popular workshop
FOCUS: Achieving Your Highest Priorities™, The 4 Disciplines of
Execution™, The 4 Roles of Leadership™, Building Business
Acumen: What the CEO Wants You to Know™, the Advantage Series communication
workshops, and the Execution Quotient (xQ™) organizational
assessment tool.
Our
fiscal year ends on August 31, and unless otherwise indicated, fiscal 2007,
fiscal 2006, and fiscal 2005, refers to the twelve-month periods ended August
31, 2007, 2006, and 2005.
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 sale of personal productivity tools (including FranklinCovey
Planners, binders, electronic planning devices, and other related products);
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 products to our clients.
RESULTS
OF OPERATIONS
Overview
of Fiscal 2007
Our
fiscal 2007 operating results reflected year-over-year improvement compared
to
fiscal 2006 and continued the trend of improving operating results that began
in
prior years. Our consolidated sales increased $5.5 million to $284.1
million, compared to $278.6 million in fiscal 2006. The increase in
sales was due to improved training and consulting service sales, which offset
declining product sales. For the year ended August 31, 2007, we
reported income from operations of $18.1 million compared to $14.0 million
in
fiscal 2006, and our income before taxes increased to $15.7 million compared
to
$13.6 million in fiscal 2006. However, due primarily to the reversal
of valuation allowances on our deferred income tax assets in fiscal 2006,
which
favorably impacted our reported income taxes by $20.4 million (refer to the
discussion below) and changes in our effective tax rate, our net income
available to shareholders declined to $5.4 million in fiscal 2007 compared
to
$24.2 million in the prior year. The changes in our effective income
tax rate offset reduced preferred stock dividends resulting from the redemption
of all remaining outstanding shares of preferred stock during the third quarter
of 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,
2007:
|
·
|
Sales
Performance– Our consolidated sales
increased $5.5 million compared to the prior year on the strength
of
improved training and consulting service sales. Our training
and consulting services sales increased by $15.3 million compared
to
fiscal 2006, which was attributable to improvements in both domestic
and
international delivery channels. Increased training and
consulting service sales were partially offset by continuing declines
in
product sales. Our overall product sales declined by $9.8
million, primarily due to performance in our retail stores and
consumer
direct channels.
|
|
·
|
Gross
Profit– Consolidated gross profit
increased $7.0 million to $174.4 million, compared to $167.4 million
in
fiscal 2006. The increase was due to increased training and
consulting services sales during fiscal 2007, which also favorably
affected our gross margin percentage compared to the prior
year.
|
|
·
|
Operating
Costs– Our operating costs increased by $4.2 million
compared to fiscal 2006, not including the impact of the sale of
a
manufacturing facility. The increase in operating costs was
attributable to a $4.5 million increase in selling, general, and
administrative expenses, which was primarily due to increased commissions
and related compensation expense from improved training and consulting
service sales. Increased SG&A costs were partially offset
by a $0.1 million decrease in depreciation expense, and a $0.2
million
decline in amortization expense. During fiscal 2007, we sold a
manufacturing facility that was previously used for printing operations
and recognized a $1.2 million gain from the sale, which improved
our
income from operations compared to the prior year.
|
|
·
|
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 current year 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 Redemption– During the third quarter of fiscal 2007,
we used substantially all of our cash on hand, combined with proceeds
from
a newly obtained $25.0 million line of credit, to redeem all of
our
remaining preferred stock. The final redemption of preferred
stock totaled $37.3 million and as a result of this redemption
we will
have no further preferred stock dividend obligation. We believe
that the redemption of our preferred stock and elimination of the
corresponding dividend obligation will improve our reported net
income and
cash flows in future periods.
|
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,
|
2007
|
2006
|
2005
|
|||||||||
|
Product
sales
|
51.5 | % | 56.1 | % | 59.0 | % | ||||||
|
Training
and consulting services sales
|
48.5
|
43.9
|
41.0
|
|||||||||
|
Total
sales
|
100.0
|
100.0
|
100.0
|
|||||||||
|
Product
cost of sales
|
23.4
|
25.3
|
27.2
|
|||||||||
|
Training
and consulting services cost of sales
|
15.2
|
14.6
|
13.3
|
|||||||||
|
Total
cost of sales
|
38.6
|
39.9
|
40.5
|
|||||||||
|
Gross
profit
|
61.4
|
60.1
|
59.5
|
|||||||||
|
Selling,
general, and administrative
|
52.5
|
52.0
|
52.3
|
|||||||||
|
Gain
on sale of manufacturing facility
|
(0.4 | ) |
-
|
-
|
||||||||
|
Depreciation
|
1.6
|
1.7
|
2.7
|
|||||||||
|
Amortization
|
1.3
|
1.4
|
1.5
|
|||||||||
|
Total
operating expenses
|
55.0
|
55.1
|
56.5
|
|||||||||
|
Income
from operations
|
6.4
|
5.0
|
3.0
|
|||||||||
|
Interest
income
|
0.3
|
0.5
|
0.3
|
|||||||||
|
Interest
expense
|
(1.2 | ) | (0.9 | ) | (0.3 | ) | ||||||
|
Recovery
from legal settlement
|
-
|
0.3
|
-
|
|||||||||
|
Gain
on disposal of investment in unconsolidated subsidiary
|
-
|
-
|
0.2
|
|||||||||
|
Income
before income taxes
|
5.5 | % | 4.9 | % | 3.2 | % | ||||||
Segment
Review
We
have
two reporting segments: the Consumer Solutions Business Unit (CSBU)
and the Organizational Solutions Business Unit (OSBU). The following
is a brief description of these segments and their primary operating
activities.
Consumer
Solutions Business Unit– This business unit is
primarily focused on sales of products to individual customers and small
business organizations and includes the results of our domestic retail stores,
consumer direct operations (primarily eCommerce, call center, and public
programs), 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 include the financial results of our paper planner manufacturing
operations. Although CSBU sales primarily consist of products such as
planners, binders, software, totes, and related accessories, virtually any
component of our leadership, productivity, and strategy execution solutions
may
be purchased through our CSBU channels.
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 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 wholly-owned foreign offices and royalty revenues from
licensees.
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,
|
2007
|
Percent
change from prior year
|
2006
|
Percent
change from prior year
|
2005
|
|||||||||||||||
|
Sales
by Category:
|
||||||||||||||||||||
|
Products
|
$ |
146,417
|
(6 | ) | $ |
156,205
|
(7 | ) | $ |
167,179
|
||||||||||
|
Training
and consulting services
|
137,708
|
12
|
122,418
|
5
|
116,363
|
|||||||||||||||
| $ |
284,125
|
2
|
$ |
278,623
|
(2 | ) | $ |
283,542
|
||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||
|
Retail
stores
|
$ |
54,316
|
(13 | ) | $ |
62,156
|
(16 | ) | $ |
74,331
|
||||||||||
|
Consumer
direct
|
59,790
|
(9 | ) |
65,480
|
4
|
62,873
|
||||||||||||||
|
Wholesale
|
17,991
|
1
|
17,782
|
(1 | ) |
17,936
|
||||||||||||||
|
CSBU
International
|
7,342
|
(5 | ) |
7,716
|
10
|
7,009
|
||||||||||||||
|
Other
CSBU
|
5,565
|
13
|
4,910
|
31
|
3,757
|
|||||||||||||||
|
145,004
|
(8 | ) |
158,044
|
(5 | ) |
165,906
|
||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||
|
Domestic
|
81,447
|
14
|
71,595
|
1
|
70,572
|
|||||||||||||||
|
International
|
57,674
|
18
|
48,984
|
4
|
47,064
|
|||||||||||||||
|
139,121
|
15
|
120,579
|
3
|
117,636
|
||||||||||||||||
|
Total
net sales
|
$ |
284,125
|
2
|
$ |
278,623
|
(2 | ) | $ |
283,542
|
|||||||||||
FISCAL
2007 COMPARED TO FISCAL 2006
Sales
Product
Sales– Overall product
sales, which primarily consist of planners, binders, totes, software and
related
accessories that are generally sold through our CSBU channels, declined $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 (stores which were open during the comparable
periods)
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 $5.7
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 is primarily a result of the transition
of
customers to our website. Public seminar sales decreased $1.4
million due to fewer scheduled events and decreased participation
in those
seminars.
|
|
·
|
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.
|
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 $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 factors 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 $9.9 million, or 14 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 Seven 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 continue to gain
widespread
acceptance in the marketplace 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. Our current outlook for
fiscal 2008 remains strong. We believe that the introduction of
new programs and refreshed existing programs will continue to have
a
favorable impact on training and consulting service sales in future
periods. For instance, we have developed an interactive
training tool based on The Seven Habits of Highly Effective
People, which will be released to the general public during fiscal
2008.
|
|
·
|
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.
On
August 31, 2007, we finalized the sales and conversions of our
wholly-owned subsidiary in Brazil and the training and consulting
operations of our Mexico office into licensees. We sold these
operations to external licensee operations and we will receive
royalties
from their operations based upon gross sales. Although we
anticipate a decline in future International sales resulting from
the
conversion of these offices to licensees, we expect operating income
from
these countries to increase in future periods.
|
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 retailers that include similar
costs
in their cost of sales.
Our
consolidated gross profit totaled $174.4 million for fiscal 2007 compared
to
$167.4 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 61.4 percent of sales
compared to 60.1 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.
Our
gross
margin on product sales declined slightly to 54.5 percent compared to 54.9
percent in fiscal 2006.
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.
Operating
Expenses
Selling,
General, and Administrative– Our consolidated selling, general,
and administrative (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 decreased
$0.1 million, or 2 percent, 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. We anticipate that intangible asset amortization expense
will total $3.6 million in fiscal 2008.
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
effective tax rate has been unusual in recent years due to the effect of
operating losses and changes in valuation allowances. Absent
extraordinary, unforeseen events, we expect our effective income tax rate
in
future years to be approximately 51 percent, primarily due to the effect
of
permanent book versus tax differences and income from foreign
licensees. However, the utilization of domestic loss carryforwards
will minimize cash outflows related to domestic income taxes until they are
exhausted.
Refer
to
the discussion in the overview of fiscal 2007 for information regarding our
income tax provision and its impact upon our fiscal 2007 operations compared
to
the prior year.
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. We have no further
preferred stock dividend obligations following the redemption of the remaining
preferred stock.
FISCAL
2006 COMPARED TO FISCAL 2005
Sales
Product
Sales – Our consolidated product sales declined $11.0 million
compared to fiscal 2005. The decline in product sales was primarily
due to decreased retail store sales resulting from store closures that occurred
during fiscal 2006 and 2005. The following is a description of sales
performance in our CSBU delivery channels during the year ended August 31,
2006:
|
·
|
Retail
Sales– The decline in retail sales was primarily due to store
closures, which had a $12.5 million unfavorable impact on our retail
store
sales in fiscal 2006. Our retail stores also sold $1.7 million
less technology and specialty products when compared to the prior
year,
primarily due to declining demand for electronic handheld planning
products. Although store closures and reduced technology and
specialty product sales caused total retail sales to decline compared
to
the prior year, we recognized a 1 percent improvement in year-over-year
comparable store (stores which were open during the comparable
periods)
sales in fiscal 2006 as sales of “core” products (e.g. planners, binders,
totes, and accessories) increased compared to the prior
year. At August 31, 2006, we were operating 89 domestic retail
locations compared to 105 locations at August 31, 2005.
|
|
·
|
Consumer
Direct– Sales through our consumer direct segment increased
primarily due to increased public seminar sales and increased sales
of
core products. Increased public seminar sales resulted from
additional seminars held during fiscal 2006 and an increase in
the number
of participants attending these programs.
|
|
·
|
Wholesale
Sales – Sales through our wholesale channel, which includes sales
to office superstores and other retail chains, were essentially
flat
compared to the prior year.
|
|
·
|
CSBU
International – This channel includes the product sales of our
directly owned international offices in Canada, the United Kingdom,
Mexico, and Australia. Sales increased in these countries
primarily due to increased demand for products during the fiscal
year.
|
|
·
|
Other
CSBU Sales – The increase in other CSBU sales was primarily
attributable to increased sublease income from additional sublease
contracts obtained during fiscal 2006. We have subleased a
substantial portion of our corporate headquarters in Salt Lake
City, Utah
and have recognized $1.9 million of sublease revenue during fiscal
2006,
compared to $1.1 million in fiscal
2005.
|
Training
and Consulting Services Sales – Our consolidated training and
consulting service sales totaled $122.4 million in fiscal 2006, an increase
of
$6.1 million compared to fiscal 2005. The improvement in training
sales was reflected in both domestic and international training program and
consulting sales. The following is a description of our sales
performance in the OSBU channels:
|
·
|
Domestic
– Our domestic sales performance improved in nearly all
sales
regions and was primarily attributable to increased sales of the
refreshed
The 7 Habits of Highly Effective People training course and the
expansion of our sales force. Domestic sales also increased
$0.7 million as a result of additional Symposium conferences that
were
held during the third and fourth quarter of fiscal 2006. These
sales increases were partially offset by reduced sales force performance
training, due to decreased demand in fiscal 2006, and decreased
sales from
seminars presented by Dr. Stephen R. Covey. In fiscal 2005, Dr.
Covey presented more seminars to coincide with the publication
of his new
book, The 8th
Habit.
|
|
·
|
International
– Total international sales improved by $2.6 million, primarily
due to increased sales at our wholly-owned operations in Japan,
Canada,
and Brazil, as well as increased licensee royalty
revenues. International sales improvements from these sources
were partially offset by decreased sales in the United Kingdom
and Mexico,
unfavorable currency translation rates, and the correction of
misstatements at our Mexico subsidiary. During fiscal 2006,
certain foreign currencies, particularly the Japanese Yen, weakened
against the United States dollar, which had an unfavorable impact
on
reported sales. The unfavorable impact of currency translation
on reported international sales totaled $1.0 million for the fiscal
year
ended August 31, 2006. During the third quarter of fiscal 2006,
we determined that our Mexico subsidiary misstated its financial
results
in prior periods by recording improper sales transactions and not
recording all operating expenses in proper periods. We
determined that the misstatements occurred during fiscal 2002 through
fiscal 2006 in various amounts. The correction of these
misstatements, which primarily occurred in prior fiscal years,
resulted in
a $0.5 million decrease in international sales in fiscal
2006.
|
Gross
Profit
Our
consolidated gross profit decreased $3.6 million compared to fiscal 2005,
primarily due to decreased product sales. However, our consolidated
gross margin improved to 60.1 percent in fiscal 2006, compared to 59.5 percent
in the prior year. The gross margin improvement was primarily
attributable to improved margins on product sales, which was partially offset
by
declining margins on our training and consulting sales. Our gross
margin on product sales improved to 54.9 percent compared to 53.9 percent
in
fiscal 2005. The improvement in product sales gross margin was
primarily due to improved inventory management processes, which reduced
obsolescence, scrap, and other related charges, and changes in our product
mix
as sales of lower margin technology and specialty products continued to decline
while sales of higher margin core products increased compared to the prior
year.
Our
overall gross margin on training and consulting services declined to 66.7
percent of sales compared to 67.5 percent in the prior year. The
decrease in training and consulting services gross margin was primarily
attributable to increased sales of lower-margin Symposium conferences and
decreased sales of higher-margin sales performance training products during
fiscal 2006. These unfavorable gross margin items were partially
offset by decreased sales of lower-margin seminars presented by Dr. Covey
in the
fiscal year.
Operating
Expenses
Selling,
General, and Administrative– Our consolidated
SG&A expenses decreased $3.6 million compared to the prior
year. The decrease in SG&A expenses was primarily due to reduced
retail store costs resulting from operating fewer stores, reductions in
executive severance costs, reduced stock-based compensation costs, and the
favorable results of initiatives to reduce overall operating
costs. Our retail store SG&A expenses decreased $5.1 million
primarily due to store closures that occurred during fiscal 2006 and in prior
periods (refer to discussion below). During fiscal 2005 we incurred
and expensed $0.9 million of severance costs to our former general counsel
and
we did not incur any similar executive severance charges in fiscal
2006. Our stock-based compensation costs declined $0.4 million due to
a fully vested stock award granted to the CEO and accelerated vesting on
unvested stock awards during fiscal 2005. The overall decrease in
stock-based compensation cost was partially offset by expenses from our
long-term incentive plan (see discussion below) during fiscal
2006. In addition to these decreases, we continue to implement
strategies designed to reduce our overall operating costs. The
favorable impact of these efforts has resulted in reduced SG&A expenses in
many areas of the Company during the fiscal year ended August 31,
2006. These cost reductions were partially offset by additional
spending on growth initiatives that resulted in increased travel expenses
resulting from further employee training and sales leadership events, which
totaled $1.3 million, and increased OSBU associate costs totaling $1.1 million
resulting primarily from hiring additional sales personnel. We also
corrected misstated operating expenses at our Mexico subsidiary, which had
a
$0.5 million unfavorable impact on our SG&A expenses in fiscal
2006.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future
profitability. During this assessment process, judgments are made as
to whether under-performing or unprofitable stores should be
closed. As a result of this evaluation process, we closed 16 stores
during fiscal 2006. The costs associated with closing retail stores
are typically comprised of charges related to vacating the premises, which
may
include a provision for the remaining term on the lease, and severance and
other
personnel costs. These store closure costs totaled $0.5 million in
fiscal 2006 compared to $1.0 million in fiscal 2005, when we closed 30 retail
locations. Store closure costs are expensed as incurred and were
included as a component of our SG&A expense.
During
fiscal 2006 our shareholders approved a long-term incentive plan (LTIP) that
permits the grant of annual unvested share awards of common stock to certain
employees. These LTIP share awards granted during fiscal 2006 cliff
vest on August 31, 2008, which is the completion of a three-year performance
period. The number of shares that are finally awarded to participants
is variable and is based entirely upon the achievement of a combination of
performance objectives related to sales growth and operating income during
the
three-year performance period. The award was initially for 378,665
shares (target award) of common stock. The award shares were valued
at $6.60 per share, and the corresponding initial compensation cost totaled
$2.5
million. However, the number of shares that will ultimately vest
under the LTIP will vary depending on whether the performance criteria are
met
or exceeded. The award will be reviewed quarterly and the value may
be adjusted, depending on the performance of the Company compared to the
award
criteria. Based upon fiscal 2006 financial performance and estimated
performance through the remaining service period, the number of performance
awards granted during fiscal 2006 was reduced during the fourth quarter of
fiscal 2006 to 337,588 shares, which resulted in a cumulative adjustment
to our
fiscal 2006 operating results of $0.1 million. The compensation cost
of the award is being expensed over the three-year service period of the
award
and increased our stock-based compensation cost in fiscal 2006 by $0.5
million. The continued amortization of the fiscal 2006 award and any
future LTIP grants may increase our SG&A expense during the vesting
period.
On
September 1, 2005, we adopted 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. Statement No.
123R requires all share based-payments to 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. Although the additional compensation expense resulting from
the adoption of SFAS No. 123R was immaterial to our fiscal year ended August
31,
2006, our operating expenses may be unfavorably affected in future periods
if we
grant additional stock options or participation in our employee stock purchase
program increases.
Depreciation
and Amortization– Depreciation expense decreased
$3.0 million, or 39 percent, compared to fiscal 2005 primarily due to the
full
depreciation or disposal of certain property and equipment and the effects
of
significantly reduced capital expenditures during preceding fiscal
years.
Amortization
expense on definite-lived intangible assets totaled $3.8 million for fiscal
2006
compared to $4.2 million in the prior year. The decline was due to
the full amortization of certain intangible assets during fiscal 2006 and
in
prior periods. During fiscal 2006, we reduced the remaining estimated
useful life of customer lists acquired in the merger with the Covey Leadership
Center based upon expected future sales from these customers. This
change in accounting estimate increased our amortization expense in fiscal
2006
by $0.6 million.
Other
Income and Expense Items
Interest
Income– Our interest income increased $0.4 million
primarily due to increased interest rates on our interest-bearing cash
accounts.
Interest
Expense– Our interest expense increased $1.8 million
primarily due to the sale of our corporate headquarters facility and the
resulting interest component of the financing obligation in our lease payments
to the landlord.
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 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. 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, we 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.
Income
Taxes
The
increase in our income tax benefit in fiscal 2006 was due to the reversal
of the
majority of our valuation allowances on our deferred income tax assets, which
totaled $20.3 million. The fiscal 2006 income tax benefit was
partially offset by taxes withheld on royalties from foreign licensees and
taxes
paid in foreign jurisdictions by our profitable directly owned foreign
operations. The income tax benefit in fiscal 2005 was primarily due
to the reversal of accruals related to the resolution of certain tax matters
and
was partially offset by taxes withheld on royalties from foreign licensees
and
taxes paid in foreign jurisdictions resulting from profitable foreign
operations.
QUARTERLY
RESULTS
The
following tables set forth selected unaudited quarterly consolidated financial
data for the years ended August 31, 2007 and 2006. The quarterly
consolidated financial data reflects, in the opinion of management, all
adjustments necessary to fairly present the results of operations for such
periods. Results of any one or more quarters are not necessarily
indicative of continuing trends.
Quarterly
Financial Information:
|
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
|
46,398
|
47,189
|
39,636
|
41,154
|
||||||||||||
|
Selling,
general, and administrative expense
|
40,849
|
36,666
|
35,287
|
36,418
|
||||||||||||
|
Gain
on sale of manufacturing facility
|
-
|
(1,227 | ) |
-
|
-
|
|||||||||||
|
Depreciation
|
1,037
|
1,366
|
1,060
|
1,230
|
||||||||||||
|
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
(loss) per share available to common shareholders:
|
||||||||||||||||
|
Basic
|
$ |
.02
|
$ |
.19
|
$ |
.03
|
$ |
.03
|
||||||||
|
Diluted
|
$ |
.02
|
$ |
.19
|
$ |
.03
|
$ |
.03
|
||||||||
|
YEAR
ENDED AUGUST 31, 2006
|
||||||||||||||||
|
November
26
|
February
25
|
May
27
|
August
31
|
|||||||||||||
|
In
thousands, except per share amounts
|
||||||||||||||||
|
Net
sales
|
$ |
72,351
|
$ |
78,333
|
$ |
63,282
|
$ |
64,657
|
||||||||
|
Gross
profit
|
44,406
|
48,173
|
36,292
|
38,514
|
||||||||||||
|
Selling,
general, and administrative expense
|
37,767
|
35,488
|
35,629
|
35,863
|
||||||||||||
|
Depreciation
|
1,408
|
1,221
|
1,134
|
1,016
|
||||||||||||
|
Amortization
|
1,095
|
908
|
908
|
902
|
||||||||||||
|
Income
(loss) from operations
|
4,136
|
10,556
|
(1,379 | ) |
733
|
|||||||||||
|
Income
(loss) before income taxes
|
3,823
|
11,085
|
(1,735 | ) |
458
|
|||||||||||
|
Net
income
|
3,233
|
9,213
|
1,019
|
15,108
|
||||||||||||
|
Preferred
stock dividends
|
(1,379 | ) | (1,139 | ) | (934 | ) | (933 | ) | ||||||||
|
Income
available to common shareholders
|
1,854
|
8,074
|
85
|
14,175
|
||||||||||||
|
Earnings
per share available to common shareholders:
|
||||||||||||||||
|
Basic
|
$ |
.09
|
$ |
.40
|
$ |
.00
|
$ |
.71
|
||||||||
|
Diluted
|
$ |
.09
|
$ |
.39
|
$ |
.00
|
$ |
.70
|
||||||||
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.
Due
to
our modified 52/53-week fiscal calendar, our quarter ended December 2, 2007
had
five additional business days than the quarter ended November 26,
2006. Our quarter ended August 31, 2007 had a corresponding five
fewer business days than the quarter ended August 31, 2006.
During
the fourth quarter of fiscal 2006, we reversed valuation allowances on certain
deferred income tax assets which had a $20.3 million favorable impact on
our net
income and net income available to common shareholders for that
period.
During
the quarter ended May 27, 2006, we determined that our Mexico subsidiary
had
misstated its financial results in prior periods by recording improper sales
transactions and not recording all operating expenses in proper
periods. We determined that the misstatements occurred during fiscal
2002 through fiscal 2006 in various amounts. The Audit Committee
engaged an independent legal firm to investigate the misstatements and they
concluded that such misstatements were intentional. The Company
determined that the impact of these misstatements was immaterial to previously
issued financial statements and we recorded a $0.5 million decrease to
international sales and a $0.5 million increase in selling, general, and
administrative expenses during the quarter ended May 27, 2006 to correct
these
misstatements. We have taken actions as recommended by the
investigators to prevent future misstatements, which included enhancements
to
internal control over foreign operations.
Quarterly
fluctuations may also be affected by other factors including the introduction
of
new products or training seminars, the addition of new institutional customers,
the timing of large corporate orders, the elimination of unprofitable products
or training services, and the closure of retail stores.
LIQUIDITY
AND CAPITAL RESOURCES
Summary
At
August
31, 2007 we had $6.1 million of cash and cash equivalents compared to $30.6
million at August 31, 2006 and our net working capital (current assets less
current liabilities) decreased to $8.9 million at August 31, 2007 compared
to
$38.7 million at August 31, 2006. The decline in cash and working
capital was due to the redemption of all remaining shares of preferred stock
during the third quarter of fiscal 2007. We used substantially all of
our cash on hand combined with proceeds from a newly obtained line of credit
to
redeem the remaining outstanding shares of Series A preferred stock at its
liquidation preference of $25 per share plus accrued dividends. The
final preferred stock redemption totaled $37.3 million and we obtained a
$25.0
million line of credit to facilitate the transaction. Although we
will incur additional interest expense on line of credit borrowings, we believe
that the redemption of our remaining preferred stock and elimination of the
corresponding 10.0 percent dividend obligation will improve our cash flows
and
reported results of operations in future periods.
Our
debt
structure consists of a $25.0 million line of credit that may be used for
working capital and other general needs, 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 financing obligation. The $25.0 million line of
credit carries an interest rate equal to LIBOR plus 1.10 percent (weighted
average rate of 6.6 percent at August 31, 2007) expires on March 14,
2010. We may draw on the line of credit facility, 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
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 2007, we were in compliance with
the terms and financial covenants of our credit facilities. At August
31, 2007, we had $16.0 million outstanding on the line of credit, which was
classified as a current liability on our consolidated balance sheet primarily
due to our intention to repay the outstanding amount during fiscal
2008.
The
following table summarizes our cash flows from operating, investing, and
financing activities for the past three years (in thousands):
| Year Ended August 31, |
2007
|
2006
|
2005
|
|||||||||
|
Total
cash provided by (used for):
|
||||||||||||
|
Operating
activities
|
$ |
13,358
|
$ |
17,009
|
$ |
22,262
|
||||||
|
Investing
activities
|
(11,480 | ) | (8,267 | ) |
4,867
|
|||||||
|
Financing
activities
|
(26,376 | ) | (29,903 | ) | (5,957 | ) | ||||||
|
Effect
of exchange rates on cash
|
37
|
58
|
(656 | ) | ||||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | (24,461 | ) | $ | (21,103 | ) | $ |
20,516
|
||||
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, 2007.
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 favorably
affected by increased sales and improved operating income compared to fiscal
2006. However, the additional cash provided by improved operations
was offset by changes in working capital as cash was used to reduce accounts
payable and accrued liabilities by $4.4 million, used for purchases of
additional inventory items totaling $2.4 million, and used to finance the
impact
of $3.6 million of increased accounts receivable that were primarily the
result
of increased OSBU training and consulting sales during the fourth quarter
of
fiscal 2007.
Cash
Flows from Investing Activities and Capital Expenditures
Our
primary uses of cash for investing activities were purchases of property
and
equipment totaling $9.1 million and expenditures for curriculum development
totaling $5.1 million. Purchases of property and equipment consisted
primarily of payments for new printing presses and related printing equipment
resulting from the reconfiguration of our printing services, leasehold
improvements in relocated stores and at the corporate campus for sublease
tenants, new computer hardware, and additional computer
software. During fiscal 2007, we used cash for further investment in
curriculum development, primarily related to new online learning modules
and the
development of new interactive leadership curriculum based upon principles
found
in The 7 Habits of Highly Effective People. Partially
offsetting these uses of cash for investing activities was the receipt of
$2.6
million from sales of property and equipment. The proceeds from sales
of property and equipment were generated primarily from the sale of our printing
manufacturing facility and certain printing equipment in connection with
the
reconfiguration of our printing services.
During
fiscal 2008, we expect to spend $4.4 million on purchases of property and
equipment and $3.0 million on curriculum development
activities. Purchases of property and equipment are expected to
consist of additional computer hardware and software, leasehold improvements
in
new stores, and in other areas as 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 uses of cash for financing activities included 1) the redemption
of our
remaining outstanding shares of Series A preferred stock for $37.3 million;
2)
purchases totaling 328,000 shares of our common stock for treasury through
our
Board of Director authorized plan for $2.5 million; 3) payment of preferred
stock dividends totaling $2.2 million; and 4) principal payments totaling
$0.6
million on our long-term debt and financing obligation.
These
uses of cash for financing activities were partially offset by proceeds obtained
through our line of credit facility obtained during fiscal 2007. Our
net proceeds from the new line of credit totaled $16.0 million for the year
ended August 31, 2007.
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.
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
payments to EDS for outsourcing services related to information systems,
warehousing and distribution, and call center operations; lease payments
resulting from the sale of our corporate campus (financing obligation); minimum
rent payments for retail store and sales office 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
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Minimum
required payments to EDS for outsourcing services
|
$ |
15,791
|
$ |
16,129
|
$ |
16,099
|
$ |
16,150
|
$ |
19,147
|
$ |
77,717
|
$ |
161,033
|
||||||||||||||
|
Required
lease payments on corporate campus
|
3,045
|
3,045
|
3,055
|
3,115
|
3,178
|
46,780
|
62,218
|
|||||||||||||||||||||
|
Minimum
operating lease payments
|
8,302
|
6,559
|
5,064
|
3,453
|
2,577
|
5,720
|
31,675
|
|||||||||||||||||||||
|
Line
of credit (1)
|
16,527
|
-
|
-
|
-
|
-
|
-
|
16,527
|
|||||||||||||||||||||
|
Long-term
mortgage payments(2)
|
153
|
146
|
139
|
133
|
126
|
277
|
974
|
|||||||||||||||||||||
|
Contractual
computer hardware purchases(3)
|
703
|
721
|
748
|
682
|
789
|
3,320
|
6,963
|
|||||||||||||||||||||
|
Purchase
obligations
|
15,099
|
-
|
-
|
-
|
-
|
-
|
15,099
|
|||||||||||||||||||||
|
Total
expected contractual
obligation
payments
|
$ |
59,620
|
$ |
26,600
|
$ |
25,105
|
$ |
23,533
|
$ |
25,817
|
$ |
133,814
|
$ |
294,489
|
||||||||||||||
|
(1)
|
Interest
expense on the line of credit payments was calculated at 6.6 percent,
which was the weighted-average interest rate on August 31,
2007. The obligation disclosure assumes that the August 31,
2007 line of credit balance and corresponding interest will be
repaid
evenly through the fiscal year ended August 31, 2008.
|
|
(2)
|
Our
long-term variable-rate mortgage obligation includes interest payments
at
6.3%, which was the applicable interest rate at August 31,
2007.
|
|
(3)
|
We
are contractually obligated by our EDS outsourcing agreement to
purchase
the necessary computer hardware to keep such equipment up to current
specifications. Amounts shown are estimated capital purchases
of computer hardware, which may change based upon systems related
projects, under terms of the EDS outsourcing agreement and its
amendments.
|
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 Note 10 in our consolidated financial
statements. 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 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:
|
·
|
Products–
We sell planners, binders, planner accessories, handheld electronic
devices, and other related products that are primarily sold through
our
CSBU channels.
|
|
·
|
Training
and Consulting Services– We provide training and consulting
services to both organizations and individuals in 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.
|
The
Company recognizes 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 and 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 sale 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. In
accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables, sales
arrangements with multiple deliverables are divided into separate units of
accounting if the deliverables in the sales contract meet the following
criteria: 1) the delivered training or product has value to the client on
a
standalone basis; 2) there is objective and reliable evidence of the fair
value
of undelivered items; and 3) delivery of any undelivered item is
probable. The overall contract consideration is allocated among the
separate units of accounting based upon their fair values, with the amount
allocated to the delivered item being limited to the amount that is not
contingent upon the delivery of additional items or meeting other specified
performance conditions. If the fair value of all undelivered elements
exits, but fair value does not exist for one or more delivered elements,
the
residual method is used. Under the residual method, the amount of
consideration allocated to the delivered items equals the total contract
consideration less the aggregate fair value of the undelivered
items. Fair value of the undelivered items is based upon the normal
pricing practices for the Company’s existing training programs, consulting
services, and other products, which are generally the prices of the items
when
sold separately.
Revenue
is recognized on software sales in accordance with Statement of Position
(SOP)
97-2, Software Revenue Recognition as amended by SOP
98-09. SOP 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 elements, including a license and
post contract customer support (PCS). Currently the Company does not
have VSOE for either the license or support elements of its software
sales. Accordingly, revenue is deferred until the only undelivered
element is PCS and the total arrangement fee is recognized ratably over the
support period.
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 the Company’s content and
curriculum, adapt the content and curriculum to the local culture, and sell
the
Company’s 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. The Company recognizes royalty
income each period based upon the sales information reported to the Company
from
the licensee.
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 reevaluate
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,
the actual number of shares finally awarded will range from zero shares,
if a
minimum level of performance is not achieved, to 200 percent of the target
award, if specifically defined performance criteria is achieved during the
three-year performance period. The minimum sales growth necessary for
participants to receive any shares under the fiscal 2006 LTIP is 7.5 percent
and
the minimum cumulative operating income is $36.2 million. The number
of shares finally awarded to LTIP participants under the fiscal 2006 LTIP
grant
is based upon the combination of factors as shown below:
|
Sales
Growth
|
Percent
of Target Shares Awarded
|
||||
|
30.0%
|
115%
|
135%
|
150%
|
175%
|
200%
|
|
22.5%
|
90%
|
110%
|
125%
|
150%
|
175%
|
|
15.0%
|
65%
|
85%
|
100%
|
125%
|
150%
|
|
11.8
%
|
50%
|
70%
|
85%
|
110%
|
135%
|
|
7.5%
|
30%
|
50%
|
65%
|
90%
|
115%
|
|
$36.20
|
$56.80
|
$72.30
|
$108.50
|
$144.60
|
|
|
Cumulative
Operating Income (millions)
|
|||||
Based
upon actual financial performance through August 31, 2007, the sale of our
Brazil and Mexico subsidiaries, and estimated performance through the remaining
service period of the fiscal 2006 LTIP grant (fiscal 2007 and 2008), the
number
of performance awards granted during fiscal 2006 was decreased to 182,779
shares, which resulted in cumulative adjustments to decrease our operating
expenses totaling $0.3 million during fiscal 2007. At August 31,
2007, there was a total of $0.5 million of unrecognized compensation cost
related to our fiscal 2006 LTIP grant. The total compensation cost of
the fiscal 2006 LTIP will be equal to the number of shares finally issued
multiplied by $6.60 per share, which was the fair value of the common shares
determined at the grant date.
During
fiscal 2007, the Compensation Committee granted performance awards for 429,312
shares of common stock under the terms of the LTIP. Consistent with
the fiscal 2006 LTIP grant, the Company must achieve minimum levels of sales
growth and cumulative operating income in order for participants to receive
any
shares under the LTIP grant. The minimum sales growth for the fiscal
2007 LTIP is 10.0 percent (fiscal 2009 compared to fiscal 2006) and the minimum
cumulative operating income total is $41.3 million. We will record
compensation expense using a 5 percent estimated forfeiture rate during the
vesting period. However, the total amount of compensation expense
recorded for the fiscal 2007 LTIP will equal the number of shares awarded
multiplied by $5.78 per share.
Based
primarily upon the sale of our Brazil and Mexico subsidiaries, and actual
operating performance in fiscal 2007, the number of performance awards granted
in connection with the fiscal 2007 grant was decreased to 357,617 shares,
which
resulted in cumulative adjustments to decrease our operating expenses by
$0.1
million during the year ended August 31, 2007. At August 31, 2007
there was $1.5 million of unrecognized compensation cost related to the fiscal
2007 LTIP grant. The number of shares finally awarded to LTIP
participants under the fiscal 2007 LTIP grant is based upon the combination
of
factors as shown below:
|
Sales
Growth
|
Percent
of Target Shares Awarded
|
||||
|
40.0%
|
115%
|
135%
|
150%
|
175%
|
200%
|
|
30.0%
|
90%
|
110%
|
125%
|
150%
|
175%
|
|
20.0%
|
65%
|
85%
|
100%
|
125%
|
150%
|
|
15.7%
|
50%
|
70%
|
85%
|
110%
|
135%
|
|
10.0%
|
30%
|
50%
|
65%
|
90%
|
115%
|
|
$41.30
|
$64.90
|
$82.60
|
$123.90
|
$165.20
|
|
|
Cumulative
Operating Income (millions)
|
|||||
The
analysis of our LTIP plans contains uncertainties because we are required
to
make assumptions and judgments about the eventual number of shares that will
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 may produce additional
volatility in our consolidated financial statements as we record cumulative
adjustments to the estimated number of common shares to be awarded under
the
LTIP grants. Actual results could differ, and differ materially, from
estimates made during the service, or vesting, period.
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 years ended August 31, 2007, 2006, or
2005
and the remaining cost associated with our unvested stock options at August
31,
2007 was insignificant.
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 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 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 calculation contains 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 are then based upon the
comparison, which 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, 2007 would reduce our reported
income from operations by approximately $0.1 million.
Inventory
Valuation
Our
inventories are comprised primarily of dated calendar products and other
non-dated products such as binders, stationery, training products, and other
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 reserve calculations 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, 2007 would
reduce
our income from operations by approximately $0.4 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 future cash
flows,
an impairment loss is recognized for the difference between the carrying
value
and the fair value of the discounted future cash flows. 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 2007 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 it 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. The tax benefits of tax exposure
items are not recognized in the provision for income taxes unless it is probable
that the benefits will be sustained, without regard to the likelihood of
tax
examination. A tax exposure reserve represents the difference between
the recognition of benefits related to exposure items for income tax reporting
purposes and financial reporting purposes. The tax exposure reserve
is classified as a component of the current income taxes payable
account. The Company adds interest and penalties, if applicable, each
period to the reserve. Taxes and penalties are a component of the
overall income tax provision. Interest on income tax items is
recorded as a component of consolidated interest expense. However,
upon adoption of FIN No. 48 in fiscal 2008, interest on income taxes will
included as a component of overall income tax expense.
The
Company recognizes the benefits of the tax exposure items in the financial
statements, that is, the reserve is reversed, when it becomes probable that
the
tax position will be sustained. To assess the probability of
sustaining a tax position, the Company considers all available positive
evidence. In many instances, sufficient positive evidence will not be
available until the expiration of the statute of limitations for Internal
Revenue Service audits, at which time the entire benefit will be recognized
as a
discrete item in the applicable period.
Our
tax
exposure reserve contains uncertainties because 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
Uncertain
Tax Positions– In July 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement No. 109. This interpretation prescribes a consistent
recognition threshold and measurement standard, as well as criteria for
subsequently recognizing, derecognizing, and measuring tax positions for
financial statement purposes. This interpretation also requires
expanded disclosure with respect to the uncertainties as they relate to income
tax accounting and is effective for fiscal years beginning after December
15,
2006. The Company will adopt the provisions of FIN No. 48 on
September 1, 2007 (fiscal 2008) and the cumulative effect from the adoption
of
FIN No. 48, if any, will be an adjustment to beginning retained earnings
in the
year of adoption. We do not expect the adoption of FIN No. 48 to have
a material impact on our consolidated financial statements.
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.
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
planners and related products, including paper and leather
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 or our representatives in
this
report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, internet web casts, or otherwise, 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 product and training sales activity,
anticipated expenses, projected cost reduction and strategic initiatives,
expected levels of depreciation expense, expectations regarding tangible
and
intangible asset valuation expenses, 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, expected
fiscal
2008 repayment of the line of credit, estimated capital expenditures, 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, 2007, 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, including the risk factors noted in Item 1A of this
report on Form 10-K. 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.
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, 2007, 2006, and 2005, 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,
|
2007
|
2006
|
2005
|
|||||||||
|
Losses
on foreign exchange contracts
|
$ | (249 | ) | $ | (346 | ) | $ | (437 | ) | |||
|
Gains
on foreign exchange contracts
|
119
|
415
|
127
|
|||||||||
|
Net
gain (loss) on foreign exchange contracts
|
$ | (130 | ) | $ |
69
|
$ | (310 | ) | ||||
At
August
31, 2007, 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, was insignificant. The notional amounts of our
foreign currency sell contracts that did not qualify for hedge accounting
were
as follows at August 31, 2007 (in thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
||||||
|
Mexican
Pesos
|
13,500
|
$ |
1,204
|
|||||
|
Japanese
Yen
|
100,000
|
864
|
||||||
|
Australian
Dollars
|
457
|
374
|
||||||
Net
Investment Hedges– During fiscal 2005 we entered into foreign
currency forward contracts that were designed to manage foreign currency
risks
related to the value of our net investment in wholly-owned operations located
in
Canada, Japan, and the United Kingdom. These three offices comprise
the majority of our net investment in foreign operations. These
foreign currency forward instruments qualified for hedge accounting and
corresponding gains and losses were recorded as a component of accumulated
other
comprehensive income in our consolidated balance sheet. During fiscal
2005 we recognized the following net losses on our net investment hedging
contracts (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2005
|
|||
|
Losses
on net investment hedge contracts
|
$ | (384 | ) | |
|
Gains
on net investment hedge contracts
|
66
|
|||
|
Net
losses on investment hedge contracts
|
$ | (318 | ) | |
As
of
August 31, 2005, we had settled our net investment hedge contracts and we
did
not utilize any net investment hedge contracts in fiscal 2007 or fiscal
2006. However, we may utilize net investment hedge contracts in
future periods as a component of our overall foreign currency risk
strategy.
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, 2007, 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 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 (6.3 percent at
August
31, 2007) and requires payments through January 2015. At August 31,
2007 borrowing levels, a one percent increase to the interest rates on our
variable rate debt would increase our interest expense over the next year
by
approximately $0.2 million.
During
the fiscal years ended August 31, 2007, 2006, and 2005, we were not party
to any
interest rate swap agreements or similar derivative
instruments.
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, 2007, 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, 2007, 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. as of August 31, 2007 and 2006, 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, 2007,
and
our report dated November 14, 2007 expressed an unqualified
opinion on those consolidated financial statements.
/s/
KPMG
LLP
Salt
Lake
City, Utah
November
14, 2007
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, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results
of their operations and their cash flows for each of the years in the three-year
period ended August 31, 2007, 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, 2007, 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, 2007 expressed an unqualified opinion on the effectiveness of
the
Company’s internal control over financial reporting.
/s/
KPMG
LLP
Salt
Lake
City, Utah
November
14, 2007
FRANKLIN
COVEY CO.
CONSOLIDATED
BALANCE SHEETS
|
AUGUST
31,
|
2007
|
2006
|
||||||
|
In
thousands, except per share data
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ |
6,126
|
$ |
30,587
|
||||
|
Accounts
receivable, less allowance for doubtful accounts of $821 and
$979
|
27,239
|
24,254
|
||||||
|
Inventories
|
24,033
|
21,790
|
||||||
|
Deferred
income taxes
|
3,635
|
4,130
|
||||||
|
Prepaid
expenses and other assets
|
9,070
|
6,359
|
||||||
|
Total
current assets
|
70,103
|
87,120
|
||||||
|
Property
and equipment, net
|
36,063
|
33,318
|
||||||
|
Intangible
assets, net
|
75,923
|
79,532
|
||||||
|
Deferred
income taxes
|
101
|
4,340
|
||||||
|
Other
long-term assets
|
14,441
|
12,249
|
||||||
| $ |
196,631
|
$ |
216,559
|
|||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt and financing obligation
|
$ |
629
|
$ |
585
|
||||
|
Line
of credit
|
15,999
|
-
|
||||||
|
Accounts
payable
|
12,190
|
13,769
|
||||||
|
Income
taxes payable
|
2,244
|
1,924
|
||||||
|
Accrued
liabilities
|
30,101
|
32,170
|
||||||
|
Total
current liabilities
|
61,163
|
48,448
|
||||||
|
Long-term
debt and financing obligation, less current portion
|
32,965
|
33,559
|
||||||
|
Other
liabilities
|
1,019
|
1,192
|
||||||
|
Deferred
income tax liabilities
|
565
|
11
|
||||||
|
Total
liabilities
|
95,712
|
83,210
|
||||||
|
Commitments
and contingencies (Notes 1, 6, 7, and 11)
|
||||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock – Series A, no par value; 4,000 shares authorized, zero and 1,494
shares issued and outstanding; liquidation preference totaling
zero and
$38,278
|
-
|
37,345
|
||||||
|
Common
stock, $.05 par value; 40,000 shares authorized, 27,056 shares
issued
|
1,353
|
1,353
|
||||||
|
Additional
paid-in capital
|
185,890
|
185,691
|
||||||
|
Common
stock warrants
|
7,602
|
7,611
|
||||||
|
Retained
earnings
|
19,489
|
14,075
|
||||||
|
Accumulated
other comprehensive income
|
970
|
653
|
||||||
|
Treasury
stock at cost, 7,296 shares and 7,083 shares
|
(114,385 | ) | (113,379 | ) | ||||
|
Total
shareholders’ equity
|
100,919
|
133,349
|
||||||
| $ |
196,631
|
$ |
216,559
|
|||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
YEAR
ENDED AUGUST 31,
|
2007
|
2006
|
2005
|
|||||||||
|
In
thousands, except per share amounts
|
||||||||||||
|
Net
sales:
|
||||||||||||
|
Products
|
$ |
146,417
|
$ |
156,205
|
$ |
167,179
|
||||||
|
Training
and consulting
services
|
137,708
|
122,418
|
116,363
|
|||||||||
|
284,125
|
278,623
|
283,542
|
||||||||||
|
Cost
of sales:
|
||||||||||||
|
Products
|
66,616
|
70,516
|
77,074
|
|||||||||
|
Training
and consulting
services
|
43,132
|
40,722
|
37,773
|
|||||||||
|
109,748
|
111,238
|
114,847
|
||||||||||
|
Gross
profit
|
174,377
|
167,385
|
168,695
|
|||||||||
|
Selling,
general, and administrative
|
149,220
|
144,747
|
148,305
|
|||||||||
|
Gain
on sale of manufacturing facility
|
(1,227 | ) |
-
|
-
|
||||||||
|
Depreciation
|
4,693
|
4,779
|
7,774
|
|||||||||
|
Amortization
|
3,607
|
3,813
|
4,173
|
|||||||||
|
Income
from
operations
|
18,084
|
14,046
|
8,443
|
|||||||||
|
Interest
income
|
717
|
1,334
|
944
|
|||||||||
|
Interest
expense
|
(3,136 | ) | (2,622 | ) | (786 | ) | ||||||
|
Recovery
from legal settlement
|
-
|
873
|
-
|
|||||||||
|
Gain
on disposal of investment in unconsolidated subsidiary
|
-
|
-
|
500
|
|||||||||
|
Income
before income
taxes
|
15,665
|
13,631
|
9,101
|
|||||||||
|
Income
tax benefit (provision)
|
(8,036 | ) |
14,942
|
1,085
|
||||||||
|
Net
income
|
7,629
|
28,573
|
10,186
|
|||||||||
|
Preferred
stock dividends
|
(2,215 | ) | (4,385 | ) | (8,270 | ) | ||||||
|
Loss
on recapitalization of preferred stock
|
-
|
-
|
(7,753 | ) | ||||||||
|
Net
income (loss) available to
common shareholders
|
$ |
5,414
|
$ |
24,188
|
$ | (5,837 | ) | |||||
|
Net
income available to common shareholders per share:
|
||||||||||||
|
Basic
|
$ |
.28
|
$ |
1.20
|
$ | (.34 | ) | |||||
|
Diluted
|
$ |
.27
|
$ |
1.18
|
$ | (.34 | ) | |||||
|
Weighted
average number of common shares:
|
||||||||||||
|
Basic
|
19,593
|
20,134
|
19,949
|
|||||||||
|
Diluted
|
19,888
|
20,516
|
19,949
|
|||||||||
|
COMPREHENSIVE
INCOME
|
||||||||||||
|
Net
income
|
$ |
7,629
|
$ |
28,573
|
$ |
10,186
|
||||||
|
Adjustment
for fair value of hedge derivatives
|
-
|
-
|
(318 | ) | ||||||||
|
Foreign
currency translation adjustments
|
458
|
97
|
(152 | ) | ||||||||
|
Comprehensive
income
|
$ |
8,087
|
$ |
28,670
|
$ |
9,716
|
||||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
YEAR
ENDED AUGUST 31,
|
2007
|
2006
|
2005
|
|||||||||
|
In
thousands
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ |
7,629
|
$ |
28,573
|
$ |
10,186
|
||||||
|
Adjustments
to reconcile net
income to net cash provided by operating activities:
|
||||||||||||
|
Depreciation
and
amortization
|
10,030
|
10,289
|
13,939
|
|||||||||
|
Gain
on disposal of investment in
unconsolidated subsidiary
|
-
|
-
|
(500 | ) | ||||||||
|
Restructuring
cost
reversal
|
-
|
-
|
(306 | ) | ||||||||
|
Deferred
income
taxes
|
5,274
|
(15,435 | ) | (410 | ) | |||||||
|
Compensation
cost of CEO
fully-vested stock grant
|
-
|
-
|
404
|
|||||||||
|
Share-based
compensation
cost
|
1,394
|
843
|
791
|
|||||||||
|
Gains
on disposals of
assets
|
(1,247 | ) |
-
|
-
|
||||||||
|
Changes
in assets and
liabilities:
|
||||||||||||
|
Increase
in accounts receivable,
net
|
(3,574 | ) | (1,919 | ) | (3,481 | ) | ||||||
|
Decrease
(increase) in
inventories
|
(2,427 | ) | (845 | ) |
2,813
|
|||||||
|
Decrease
(increase) in prepaid
expenses and other assets
|
514
|
1,458
|
(526 | ) | ||||||||
|
Increase
(decrease) in accounts
payable and accrued liabilities
|
(4,388 | ) | (3,697 | ) |
532
|
|||||||
|
Increase
(decrease) in income
taxes payable
|
304
|
(2,081 | ) | (1,832 | ) | |||||||
|
Increase
(decrease) in other
long-term liabilities
|
(151 | ) | (177 | ) |
652
|
|||||||
|
Net
cash provided by operating
activities
|
13,358
|
17,009
|
22,262
|
|||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Purchases
of property and
equipment
|
(9,138 | ) | (4,350 | ) | (4,179 | ) | ||||||
|
Purchases
of short-term
investments
|
-
|
-
|
(10,653 | ) | ||||||||
|
Sales
of short-term
investments
|
-
|
-
|
21,383
|
|||||||||
|
Capitalized
curriculum
development costs
|
(5,088 | ) | (4,010 | ) | (2,184 | ) | ||||||
|
Proceeds
from disposal of
consolidated subsidiary
|
150
|
-
|
-
|
|||||||||
|
Proceeds
from disposal of
unconsolidated subsidiary
|
-
|
-
|
500
|
|||||||||
|
Proceeds
from sale of property
and equipment, net
|
2,596
|
93
|
-
|
|||||||||
|
Net
cash provided by (used for)
investing activities
|
(11,480 | ) | (8,267 | ) |
4,867
|
|||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Proceeds
from line of credit
borrowing
|
50,951
|
-
|
-
|
|||||||||
|
Payments
on line of credit
borrowings
|
(34,952 | ) |
-
|
-
|
||||||||
|
Proceeds
from sale and financing
of corporate campus (net of restricted cash of $699)
|
-
|
-
|
32,422
|
|||||||||
|
Redemptions
of Series A preferred
stock
|
(37,345 | ) | (20,000 | ) | (30,000 | ) | ||||||
|
Change
in restricted
cash
|
-
|
699
|
-
|
|||||||||
|
Principal
payments on long-term
debt and financing obligation
|
(605 | ) | (1,111 | ) | (216 | ) | ||||||
|
Purchases
of common stock for
treasury
|
(2,625 | ) | (5,167 | ) | (91 | ) | ||||||
|
Proceeds
from sales of common
stock from treasury
|
388
|
427
|
109
|
|||||||||
|
Proceeds
from management stock
loan payments
|
27
|
134
|
839
|
|||||||||
|
Payment
of preferred stock
dividends
|
(2,215 | ) | (4,885 | ) | (9,020 | ) | ||||||
|
Net
cash used for financing
activities
|
(26,376 | ) | (29,903 | ) | (5,957 | ) | ||||||
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
37
|
58
|
(656 | ) | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(24,461 | ) | (21,103 | ) |
20,516
|
|||||||
|
Cash
and cash equivalents at beginning of the year
|
30,587
|
51,690
|
31,174
|
|||||||||
|
Cash
and cash equivalents at end of the year
|
$ |
6,126
|
$ |
30,587
|
$ |
51,690
|
||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid for income
taxes
|
$ |
2,370
|
$ |
2,615
|
$ |
1,549
|
||||||
|
Cash
paid for
interest
|
2,973
|
2,662
|
606
|
|||||||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Accrued
preferred stock
dividends
|
$ |
-
|
$ |
934
|
$ |
1,434
|
||||||
|
Promissory
notes received from
sales of consolidated subsidiaries
|
1,513
|
-
|
-
|
|||||||||
|
Purchases
of property and
equipment financed by accounts payable
|
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 (Loss)
|
Treasury
Stock Shares
|
Treasury
Stock Amount
|
||||||||||||||||||||||||||||||||||
|
In
thousands
|
||||||||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2004
|
873
|
$ |
87,203
|
27,056
|
1,353
|
205,585
|
-
|
(16,931 | ) | (732 | ) |
1,026
|
(7,028 | ) | (119,025 | ) | ||||||||||||||||||||||||||||
|
Preferred
stock dividends
|
(8,270 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Extinguishment
of previously existing Series A Preferred Stock
|
(873 | ) | (87,203 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Preferred
stock recapitalization
|
3,494
|
87,345
|
7,611
|
(7,753 | ) | |||||||||||||||||||||||||||||||||||||||
|
Preferred
stock redemption
|
(1,200 | ) | (30,000 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(257 | ) |
42
|
366
|
||||||||||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(23 | ) | (91 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Unvested
stock awards
|
(5,192 | ) | (1,114 | ) |
352
|
6,234
|
||||||||||||||||||||||||||||||||||||||
|
Amortization
of deferred compensation
|
791
|
|||||||||||||||||||||||||||||||||||||||||||
|
CEO
fully-vested stock award
|
(2,837 | ) |
187
|
3,241
|
||||||||||||||||||||||||||||||||||||||||
|
Non-qualified
deferred compensation plan treasury stock transactions
|
892
|
5
|
29
|
|||||||||||||||||||||||||||||||||||||||||
|
Payments
on management common stock loans
|
839
|
|||||||||||||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
(152 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Adjustment
for fair value of hedge derivatives
|
(318 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Net
income
|
10,186
|
|||||||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2005
|
2,294
|
$ |
57,345
|
27,056
|
$ |
1,353
|
$ |
190,760
|
$ |
7,611
|
$ | (14,498 | ) | $ | (1,055 | ) | $ |
556
|
(6,465 | ) | $ | (109,246 | ) | |||||||||||||||||||||
|
Preferred
stock dividends
|
(4,385 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Preferred
stock redemptions
|
(800 | ) | (20,000 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(334 | ) |
69
|
743
|
||||||||||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(690 | ) | (5,167 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Unvested
stock award
|
(458 | ) |
27
|
458
|
||||||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation
|
862
|
|||||||||||||||||||||||||||||||||||||||||||
|
Reclassification
of deferred compensation upon adoption of SFAS 123R
|
(1,055 | ) |
1,055
|
|||||||||||||||||||||||||||||||||||||||||
|
Receipt
of common stock as consideration for payment on management common
stock
loans
|
301
|
(24 | ) | (167 | ) | |||||||||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
97
|
|||||||||||||||||||||||||||||||||||||||||||
|
Net
income
|
28,573
|
|||||||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2006
|
1,494
|
$ |
37,345
|
27,056
|
$ |
1,353
|
$ |
185,691
|
$ |
7,611
|
$ |
14,075
|
$ |
-
|
$ |
653
|
(7,083 | ) | $ | (113,379 | ) | |||||||||||||||||||||||
|
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
stock award
|
(501 | ) |
32
|
501
|
||||||||||||||||||||||||||||||||||||||||
|
Stock-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 | ) | |||||||||||||||||||||||
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 communications, and other areas. Each
integrated solution may include components of training and consulting,
assessment, and other application tools that are generally available in
electronic or paper-based formats. Our services and products are
available through professional consulting services, public workshops, retail
stores, catalogs, and the Internet at
www.franklincovey.com. Our best-known offerings in the
marketplace include 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. We also offer a range of training and assessment
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. These offerings include the popular
workshop FOCUS: Achieving Your Highest Priorities™, The 4
Disciplines of Execution™, The 4 Roles of Leadership™,
Building Business Acumen: What the CEO Wants You to Know™, the
Advantage Series communication workshops, and the Execution
Quotient (xQ™) organizational assessment tool.
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 2, 2006, March 3, 2007, and June 2,
2007
during fiscal 2007. 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 its subsidiaries, which consist of Franklin Covey Printing, Franklin
Development Corp., and our wholly-owned operations in Canada, Japan, the
United
Kingdom, Australia, and Mexico. 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 the gain on the sale of investment in an
unconsolidated subsidiary from operating income to non-operating income in
the
fiscal 2005 consolidated income statement.
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. Our cash equivalents consisted primarily of commercial
paper and money market funds that totaled $19.5 million at August 31,
2006. As a result of reduced cash balances, at August 31, 2007 we did
not hold a significant amount of investments that would be considered cash
equivalent instruments.
As
of
August 31, 2007, we had demand deposits at various banks in excess of the
$100,000 limit for insurance by the Federal Deposit Insurance Corporation
(FDIC).
Restricted
Cash
Our
restricted cash consisted of a portion of the proceeds from the fiscal 2005
sale
of our corporate campus that was held in escrow to repay the outstanding
mortgage on one of the buildings that was sold. The mortgage was
repaid in full during September 2005.
Short-Term
Investments
We
consider highly liquid investments with an effective maturity to the Company
of
more than three months and less than one year to be short-term
investments. We define effective maturity as the shorter of the
original maturity
to the Company or the effective maturity as a result of the periodic auction
of
our investments classified as available for sale. We determine the
appropriate classification of our investments at the time of purchase and
reevaluate such designations as of each balance sheet date.
Realized
gains and losses on the sale of available for sale short-term investments
were
insignificant for the periods presented. Unrealized gains and losses
on short-term investments were also insignificant for the periods
presented. We use the specific identification method to compute the
gains and losses on our short-term investments.
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. Our inventories
are comprised primarily of dated calendar products and other non-dated products
such as binders, stationery, training products, and other accessories and
were
comprised of the following (in thousands):
|
AUGUST
31,
|
2007
|
2006
|
||||||
|
Finished
goods
|
$ |
20,268
|
$ |
18,464
|
||||
|
Work
in process
|
743
|
706
|
||||||
|
Raw
materials
|
3,022
|
2,620
|
||||||
| $ |
24,033
|
$ |
21,790
|
|||||
Provision
is made to reduce excess and obsolete inventories to their estimated net
realizable value. At August 31, 2007 and 2006, our reserves for
excess and obsolete inventories totaled $4.3 million and $3.3
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, technological and product 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 2) 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 3) 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, 2007, 2006, or 2005.
Capitalized
Curriculum Development Costs
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. Curriculum
costs are only capitalized when a course is developed that will result in
future
benefits or when there is a major revision to a course or significant re-write
of the course materials or curriculum.
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, 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.
During
fiscal 2007, we capitalized certain costs incurred for the development of
a new
7 Habits of Highly Effective People interactive program as well as new
and continued development of projects related to leadership, goal alignment,
and
execution. 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 our other long-term assets in our
consolidated balance sheet and totaled $8.6 million and $5.9 million at August
31, 2007 and 2006. Amortization of capitalized curriculum development
costs is reported as a component of cost of sales.
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 $0.7
million and $1.2 million at August 31, 2007 and 2006, 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 2007, 2006, and 2005, 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,
|
2007
|
2006
|
||||||
|
Accrued
compensation
|
$ |
6,807
|
$ |
7,567
|
||||
|
Unearned
revenue
|
4,709
|
5,275
|
||||||
|
Outsourcing
contract costs payable
|
4,357
|
4,111
|
||||||
|
Customer
credits
|
2,570
|
2,632
|
||||||
|
Accrued
preferred stock dividends
|
-
|
934
|
||||||
|
Other
accrued liabilities
|
11,658
|
11,651
|
||||||
| $ |
30,101
|
$ |
32,170
|
|||||
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 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, $0.1 million, and $0.3 million,
during
fiscal years 2007, 2006, and 2005, respectively, 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.
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
Emerging Issues Task Force (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 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 and 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. In
accordance with EITF Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, sales arrangements with multiple
deliverables are divided into separate units of accounting if the deliverables
in the sales contract meet the following criteria: 1) the delivered training
or
product has value to the client on a standalone basis; 2) there is objective
and
reliable evidence of the fair value of undelivered items; and 3) delivery
of any
undelivered item is probable. The overall contract consideration is
allocated among the separate units of accounting based upon their fair
values. If the fair value of all undelivered elements exists, but
fair value does not exist for one or more delivered elements, the residual
method is used. Under the residual method, the amount of
consideration allocated to the delivered items equals the total contract
consideration 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.
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). 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. During fiscal 2007, 2006, and 2005, we had software sales
totaling $3.2 million, $3.3 million, and $4.6 million, which are included
as a
component of product sales in our consolidated income statements.
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. Licensee royalty revenues totaled $7.6 million, $6.1
million, and $5.2 million, for the fiscal years ended August 31, 2007, 2006,
and
2005.
Revenue
is recognized as the net amount to be received after deducting estimated
amounts
for discounts and product returns.
Share-Based
Compensation
At
the
beginning of fiscal 2006 we adopted 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. Generally,
this new statement follows the approach previously defined in SFAS No.
123. However, SFAS No. 123R requires all share based-payments to
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.
We
previously accounted for our share-based compensation using the intrinsic
method
as defined in APB Opinion No. 25 and accordingly, we have not recognized
any
expense for our stock option plans or employee stock purchase plan in our
consolidated financial statements for fiscal years prior to the adoption
of SFAS
No. 123R. We adopted SFAS No. 123R using the modified prospective
transition method. Under this method, share-based awards that are
granted, modified, or settled after the date of adoption are measured and
accounted for in accordance with Statement No. 123R and prior period financial
results are not retroactively adjusted. The accounting treatment for
unvested share awards remains essentially unchanged. The following
table presents the pro forma share-based compensation amounts that would
have
been included in our income statements for fiscal 2005 had share-based
compensation expense been determined in accordance with the fair value method
prescribed by SFAS No. 123 (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2005
|
|||
|
Net
loss attributable to common shareholders, as reported
|
$ | (5,837 | ) | |
|
Add:
Share-based compensation expense included in reported net income,
net of
related tax effects
|
791
|
|||
|
Deduct:
Stock-based compensation expense determined under the fair value
based
method for all awards, net of related tax effects
|
(3,019 | ) | ||
|
Net
loss attributable to common shareholders, pro forma
|
$ | (8,065 | ) | |
|
Basic
and diluted net loss per share, as reported
|
$ | (.34 | ) | |
|
Basic
and diluted net loss per share, pro forma
|
$ | (.46 | ) | |
In
connection with changes to our Chief Executive Officer’s (CEO) compensation
(Note 20), we accelerated the vesting on the CEO’s 1.6 million stock options
with an exercise price of $14.00 per share during fiscal 2005. The
accelerated vesting of these options increased the fair value of stock-based
compensation as shown in the table above by $1.9 million during fiscal
2005.
For
more
information on our share-based compensation plans, refer to Note
12.
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 $15.9
million, $16.0 million, and $16.2 million, for the fiscal years ended August
31,
2007, 2006, and 2005. Our direct response advertising costs reported
in other current assets totaled $2.2 million and $2.5 million at August 31,
2007
and 2006.
Research
and Development Costs
We
expense research and development costs as incurred. During the fiscal
years ended August 31, 2007, 2006, and 2005, we expensed $3.3 million, $2.3
million, and $2.2 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.
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 fair
value
of derivative instruments and changes in the cumulative foreign currency
translation adjustment.
Accounting
Pronouncements Issued Not Yet Adopted
Uncertain
Tax Positions– In July 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement No. 109. This interpretation prescribes a consistent
recognition threshold and measurement standard, as well as criteria for
subsequently recognizing, derecognizing, and measuring tax positions for
financial statement purposes. This interpretation also requires
expanded disclosure with respect to the uncertainties as they relate to income
tax accounting and is effective for fiscal years beginning after December
15,
2006. The Company will adopt the provisions of FIN No. 48 on
September 1, 2007 (fiscal 2008) and the cumulative effect from the adoption
of
FIN No. 48, if any, will be an adjustment to beginning retained earnings
in the
year of adoption. Based on our analysis, we do not expect the
adoption of FIN No. 48 to have a material impact on our consolidated financial
statements.
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.
|
2.
|
PROPERTY
AND EQUIPMENT
|
Our
property and equipment were comprised of the following (in
thousands):
|
AUGUST
31,
|
2007
|
2006
|
||||||
|
Land
and improvements
|
$ |
1,639
|
$ |
1,869
|
||||
|
Buildings
|
34,536
|
35,063
|
||||||
|
Machinery
and equipment
|
29,026
|
31,709
|
||||||
|
Computer
hardware and software
|
45,623
|
42,532
|
||||||
|
Furniture,
fixtures, and leasehold improvements
|
32,579
|
32,831
|
||||||
|
143,403
|
144,004
|
|||||||
|
Less
accumulated depreciation
|
(107,340 | ) | (110,686 | ) | ||||
| $ |
36,063
|
$ |
33,318
|
|||||
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
fiscal
2005, we completed the sale and leaseback of our corporate headquarters
facility, located in Salt Lake City, Utah. The sale price was $33.8
million in cash and after deducting customary closing costs, including
commissions and an amount held in escrow for payment of the remaining mortgage
on one of the buildings, we received net proceeds totaling $32.4
million. In connection with the transaction, 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 5) for the sale price. At August
31, 2007, the carrying value of the corporate headquarters facility was $20.3
million.
As
a
result of projected negative cash flows at certain retail stores, we recorded
impairment charges totaling $0.2 million during fiscal 2005 to reduce the
carrying values of these stores’ long-lived assets to their estimated fair
values. The impairment charges were related to assets that are to be
held and used by the Company and were included as a component of depreciation
expense in our consolidated income statement. We did not record any
impairment charges on our retail store property and equipment during the
fiscal
years ended August 31, 2007 or 2006.
Certain
land and buildings are collateral for mortgage debt obligations (Note
5).
|
3.
|
INTANGIBLE
ASSETS
|
Our
intangible assets were comprised of the following (in thousands):
|
AUGUST
31, 2007
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||
|
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
|
||||||
|
AUGUST
31, 2006
|
||||||||||||
|
Definite-lived
intangible assets:
|
||||||||||||
|
License
rights
|
$ |
27,000
|
$ | (7,417 | ) | $ |
19,583
|
|||||
|
Curriculum
|
58,229
|
(26,826 | ) |
31,403
|
||||||||
|
Customer
lists
|
18,774
|
(13,228 | ) |
5,546
|
||||||||
|
Trade
names
|
1,277
|
(1,277 | ) |
-
|
||||||||
|
105,280
|
(48,748 | ) |
56,532
|
|||||||||
|
Indefinite-lived
intangible asset:
|
||||||||||||
|
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||||
| $ |
128,280
|
$ | (48,748 | ) | $ |
79,532
|
||||||
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, 2007 were
as
follows:
|
Category
of
Intangible
Asset
|
Range
of Remaining Estimated Useful Lives
|
Weighted
Average Amortization Period
|
|
License
rights
|
19
years
|
30
years
|
|
Curriculum
|
12
to 19 years
|
26
years
|
|
Customer
lists
|
4
years
|
13
years
|
Our
aggregate amortization expense from definite-lived intangible assets totaled
$3.6 million, $3.8 million, and $4.2 million, for fiscal years 2007, 2006,
and
2005. Amortization expense for our intangible assets over the next
five years is expected to be as follows (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2008
|
$ |
3,602
|
||
|
2009
|
3,601
|
|||
|
2010
|
3,598
|
|||
|
2011
|
3,456
|
|||
|
2012
|
2,458
|
|||
|
4.
|
CURRENT
LINES OF CREDIT
|
During
the third quarter of fiscal 2007, we entered into secured revolving
line-of-credit agreements with JPMorgan Chase Bank N.A. and Zions First National
Bank (the Credit Agreements). The Credit Agreements provide a total
of $25.0 million of borrowing capacity to the Company at an interest rate
equal
to LIBOR plus 1.10 percent (weighted average rate of 6.6 percent at August
31,
2007). The Credit Agreements expire on March 14, 2010 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. Based primarily upon our intentions to repay
amounts outstanding on The Credit Agreements during fiscal 2008, we classified
the outstanding balance as a current liability at August 31,
2007. The Credit Agreements also contain customary representations
and guarantees as well as provisions for repayment and liens.
In
addition to customary non-financial terms and conditions, the Credit Agreements
require 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 Credit Agreements.
In
connection with the Credit Agreements, the Company entered into separate
promissory notes, a security agreement, repayment guaranty agreements, and
a
pledge and security agreement. These agreements pledge substantially
all of the Company’s assets located in the United States and a certain foreign
location to the lenders in the Credit Agreements.
The
Company may use the Credit Agreements for general corporate purposes and
during
fiscal 2007 we used a portion of the credit available through the Credit
Agreements to redeem the remaining shares of our outstanding Series A preferred
stock as described in Note 9.
In
addition to the lines of credit described above, we obtained a CDN $500,000
(approximately $473,000) 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, 2007 we had not yet drawn upon the Canadian Line of
Credit.
|
5.
|
LONG-TERM
DEBT AND FINANCING
OBLIGATION
|
Our
long-term debt and financing obligation were comprised of the following (in
thousands):
|
AUGUST
31,
|
2007
|
2006
|
||||||
|
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
|
$ |
32,807
|
$ |
33,291
|
||||
|
Mortgage
payable in monthly installments of $9 CDN ($9 USD at August 31,
2007),
plus interest at the CDN prime rate (6.3% at August 31, 2007) through
January 2015, secured by real estate
|
787
|
853
|
||||||
|
33,594
|
34,144
|
|||||||
|
Less
current portion
|
(629 | ) | (585 | ) | ||||
|
Total
long-term debt and financing obligation, less current
portion
|
$ |
32,965
|
$ |
33,559
|
||||
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, 2007 (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2008
|
$ |
629
|
||
|
2009
|
671
|
|||
|
2010
|
727
|
|||
|
2011
|
840
|
|||
|
2012
|
963
|
|||
|
Thereafter
|
29,764
|
|||
| $ |
33,594
|
|||
During
fiscal 2005, we completed the sale and leaseback of our corporate headquarters
facility, located in Salt Lake City, Utah. The sale price was $33.8
million in cash and after deducting customary closing costs, we received
net
proceeds totaling $32.4 million. In connection with the transaction,
we entered into a 20-year master lease agreement with the purchaser, an
unrelated private investment group. The 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 have accounted
for the sale as a financing transaction, which required us to continue reporting
the corporate headquarters facility as an asset (Note 2) 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,
|
||||
|
2008
|
$ |
3,045
|
||
|
2009
|
3,045
|
|||
|
2010
|
3,055
|
|||
|
2011
|
3,115
|
|||
|
2012
|
3,178
|
|||
|
Thereafter
|
46,780
|
|||
|
Total
future minimum financing obligation payments
|
62,218
|
|||
|
Less
interest
|
(30,723 | ) | ||
|
Present
value of future minimum financing obligation payments
|
$ |
31,495
|
||
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 our financial statements.
|
6.
|
OPERATING
LEASES
|
Lease
Expense
In
the
normal course of business, we lease office space, retail store locations,
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. The
majority of our retail stores are leased in locations that generally have
significant consumer traffic, such as shopping malls and other commercial
districts. We also rent warehousing and distribution facilities at
certain international locations that are designed to provide secure storage
and
efficient distribution of our products to areas outside of the United
States. 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, 2007, we had operating leases
that have remaining terms of one to 10 years. The following table
summarizes our future minimum lease payments under operating lease agreements
at
August 31, 2007 (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2008
|
$ |
8,302
|
||
|
2009
|
6,559
|
|||
|
2010
|
5,064
|
|||
|
2011
|
3,453
|
|||
|
2012
|
2,577
|
|||
|
Thereafter
|
5,720
|
|||
| $ |
31,675
|
|||
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 $10.8 million,
$11.2
million, and $13.5 million for the years ended August 31, 2007, 2006, and
2005. Additionally, certain retail store leases contain 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,
2007,
2006, and 2005.
Lease
Income
We
have
subleased a significant portion of our corporate headquarters office space
located in Salt Lake City, Utah to multiple, unrelated tenants. The
cost basis of the office space available for lease was $24.0 million and
had a
carrying value of $15.1 million at August 31, 2007. We also have
sublease agreements on two retail store locations that we have exited, but
still
have a remaining lease obligation. Future minimum lease payments due
to us from these sublease agreements at August 31, 2007, are as follows (in
thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2008
|
$ |
2,546
|
||
|
2009
|
2,488
|
|||
|
2010
|
1,667
|
|||
|
2011
|
1,026
|
|||
|
2012
|
1,037
|
|||
|
Thereafter
|
648
|
|||
| $ |
9,412
|
|||
Sublease
payments made to the Company totaled $2.4 million, $2.0 million, and $1.9
million in fiscal years 2007, 2006, and 2005 of which $0.3 million, $0.3
million, and $0.8 million was recorded as a reduction of rent expense associated
with underlying lease agreements in our selling, general, and administrative
expense in the years ended August 31, 2007, 2006, and 2005. 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).
|
7.
|
COMMITMENTS
AND CONTINGENCIES
|
EDS
Outsourcing Contract
The
Company has an outsourcing contract with Electronic Data Systems (EDS) to
provide warehousing, distribution, information systems, and call center
operations. Under terms of the outsourcing contract and its
addendums, EDS operates our primary call center, provides warehousing and
distribution services, and supports our software products and various
information systems. The outsourcing contract and its addendums
expire on June 30, 2016 and have remaining required minimum payments totaling
$161.0 million, which are payable over the life of the
contract. During fiscal 2006, we amended the terms of the outsourcing
agreement with EDS. One of the key provisions of this amendment is
reduced required minimum annual payments for information systems
support. Although we may pay more than the minimum required payments
due to actual usage and other factors, the contractually required minimum
annual
payments were reduced by a total of $84.2 million over the life of the
outsourcing agreement. During fiscal years 2007, 2006, and 2005, we
expensed $30.1 million, $30.6 million, and $30.4 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 $9.6 million, $9.8
million, and $9.6 million during the years ended August 31, 2007, 2006, and
2005, respectively. The following schedule summarizes our estimated
required minimum payments to EDS for services over the life of the outsourcing
contract and its addendums (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2008
|
$ |
15,791
|
||
|
2009
|
16,129
|
|||
|
2010
|
16,099
|
|||
|
2011
|
16,150
|
|||
|
2012
|
19,147
|
|||
|
Thereafter
|
77,717
|
|||
| $ |
161,033
|
|||
Our
estimated minimum payments are based on contractually negotiated amounts
and may
fluctuate in future periods based upon actual sales and activity
levels.
Under
terms of the outsourcing agreement with EDS, we are contractually obligated
to
purchase the necessary computer hardware to keep such property and equipment
up
to certain specifications. Amounts shown below are estimated required
capital purchases of computer hardware under terms of the EDS outsourcing
agreement and its amendments (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2008
|
$ |
703
|
||
|
2009
|
721
|
|||
|
2010
|
748
|
|||
|
2011
|
682
|
|||
|
2012
|
789
|
|||
|
Thereafter
|
3,320
|
|||
| $ |
6,963
|
|||
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 (inventory) to be delivered at times that coincide with
our
seasonally busy months of November, December, and January as well as for
other
products and services during the fiscal year. At August 31, 2007, we
had purchase commitments totaling $15.1 million for products and services
to be
delivered in fiscal 2008. 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, 2007.
Legal
Matters
In
August
2005, EpicRealm Licensing (EpicRealm) filed an action against the Company
for
patent infringement. The action alleges that FranklinCovey 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 denies the patent infringement and believes that the EpicRealm claims
are invalid. This litigation is still in the discovery phase and the
Company continues to vigorously defend the matter.
The
Company is also the subject of certain legal actions, which we consider routine
to our business activities. At August 31, 2007, 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.
|
8.
|
PREFERRED
STOCK RECAPITALIZATION
|
Overview
At
the
Annual Meeting of Shareholders held on March 4, 2005 our shareholders approved
a
plan to recapitalize the Company’s preferred stock. Under terms of
the recapitalization plan, 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 was no
longer
convertible into common stock, and a warrant to purchase shares of common
stock. The new Series A preferred stock retained its
common-equivalent voting rights and 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 retained
substantially all other characteristics of the new Series A preferred
stock.
Each
previously existing Series A preferred shareholder received a warrant to
purchase a number of common shares equal to 71.43 shares for each $1,000
($14
per share) in aggregate liquidation value of Series A preferred shares
held immediately prior to the recapitalization transaction. The
exercise price of each warrant is $8.00 per share (subject to customary
anti-dilution and exercise features) and the warrants are exercisable over
an
eight-year term.
The
preferred stock recapitalization transaction enabled the Company
to:
|
·
|
Have
the conditional right to redeem shares of preferred stock;
|
|
·
|
Place
a limit on the period in which we may be required to issue common
stock. The new warrants to purchase shares of common stock
expire in eight years (March 2013), compared to the perpetual right
of
previously existing Series A preferred stock to convert to shares
of
common stock;
|
|
·
|
Increase
its ability to purchase shares of our common stock. Previous
purchases of common stock were limited and potentially subject
to the
approval of Series A preferred shareholders;
|
|
·
|
Create
the possibility that we may receive cash upon issuing additional
shares of
common stock to Series A preferred shareholders. The warrants
have an exercise price of $8.00 per share compared to the previously
existing right of Series A preferred shareholders to convert their
preferred shares into common shares without paying cash; and
|
|
·
|
Eliminate
the requirement to pay common stock dividends to preferred shareholders
on
an “as converted” basis.
|
In
accordance with terms and provisions of the preferred stock recapitalization,
we
have redeemed all outstanding shares of Series A preferred stock (Note
9). At August 31, 2007, there were no shares of Series A or Series B
preferred stock issued or outstanding.
New
Preferred Stock Rights
Upon
completion of the recapitalization transaction, Series A preferred rights
were
amended to prevent the conversion of Series A preferred stock to shares of
common stock. Series B preferred stock rights were amended to be
substantially equivalent to Series A rights, except for the eliminated voting
rights. The rights of the new Series A and Series B preferred stock
included the following:
|
·
|
Liquidation
Preference– Both Series A and Series B preferred stock have a
liquidation preference of $25.00 per share plus accrued unpaid
dividends,
which would have been paid in preference to the liquidation rights
of all
other equity classes.
|
|
·
|
Conversion
– Neither Series A nor Series B preferred stock was convertible
to
shares of common stock. Series A preferred stock converted into
shares of Series B preferred stock only upon the sale or transfer
of the
Series A shares. Series B preferred stock does not have any
conversion rights.
|
|
·
|
Dividends–
Both Series A and Series B preferred stock accrued dividends at
10.0
percent, which were payable quarterly, in preference to dividends
on all
other equity classes. If dividends would have been in arrears
for six or more quarters, the number of the Company’s Board of Directors
would have been increased by two and the Series A and Series B
preferred
shareholders would have had the ability to select these additional
directors. Series A and Series B preferred stock could not have
participated in dividends paid to common stockholders.
|
|
·
|
Redemption
– Under the original recapitalization agreements, we were only
permitted to redeem any of the Series A or Series B preferred shares
during the first year following the recapitalization at a price
per share
equal to 100 percent of the liquidation preference. Subsequent
to the first anniversary of the recapitalization and before the
fifth
anniversary of the transaction, we would have been allowed to purchase
preferred shares (up to $30.0 million in aggregate) only from Knowledge
Capital, which held the majority of our preferred stock, at a premium
that
increased one percentage point annually. After the sixth
anniversary of the recapitalization, we could have redeemed shares
of
preferred stock at 101 percent of the liquidation preference on
the date
of redemption.
At
our Annual Meeting of Shareholders held in January 2006, we obtained
shareholder approval of an amendment to our articles of incorporation
that
extended the period during which we had the right to redeem outstanding
shares of preferred stock at 100 percent of its liquidation
preference. The amendment extended the original redemption
deadline from March 8, 2006 to December 31, 2006 and also provided
the
right to extend the redemption period for an additional year to
December
31, 2007, if another $10.0 million of preferred stock is redeemed
before
December 31, 2006. On February 13, 2006 we redeemed $10.0
million of preferred stock, which satisfied the additional extension
provision and the Company redeemed all remaining preferred stock
prior to
December 31, 2007.
|
|
·
|
Change
in Control– In the event of any change in control of the Company,
Knowledge Capital, to the extent that it still held shares of Series
A
preferred stock, would have had the option to receive a cash payment
equal
to 101 percent of the liquidation preference of its Series A preferred
shares then held. The remaining Series A and Series B preferred
shareholders had no such option.
|
|
·
|
Voting
Rights– Although the new Series A preferred shareholders did not have
conversion rights, they were still entitled to voting
rights. The holder of each new share of Series A preferred
stock was entitled to the voting rights they would have had if
they held
two shares of common stock. The cumulative number of votes was
based upon the number of votes attributable to shares of Series
A held
immediately prior to the recapitalization transaction less any
transfers
of Series A shares to Series B shares or redemptions. In the
event that a Series A preferred shareholder exercised a warrant
to
purchase the Company’s common stock, their Series A voting rights would
have been reduced by the number of the common shares issued upon
exercise
of the warrant. This feature was designed to prevent the
holders of Series A preferred stock from increasing their voting
influence
through the acquisition of additional shares of common stock resulting
from the exercise of the warrants.
|
|
·
|
Registration
Rights– We were required to use our best efforts to register the
resale of all shares of common stock and shares of Series B preferred
stock issuable upon the transfer and conversion of the Series A
preferred
stock held by Knowledge Capital and certain permitted transferees
of
Knowledge Capital within 240 days following the initial filing
of the
registration statement covering such shares. The initial filing
of the registration statement was required to occur within 120
days
following the closing of the recapitalization
transaction. However, we obtained an extension on this filing
from Knowledge Capital and the registration statement was filed
and became
effective in September 2005.
|
Accounting
for the Recapitalization
In
order
to account for the various aspects of the preferred stock recapitalization
transaction, we considered guidance found in SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liability and
Equity, EITF Issue 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,
EITF Issue D-98 Classification and Measurement of Redeemable
Securities, and EITF Issue D-42, The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred
Stock. Based upon the relevant guidance found in these
pronouncements, we accounted for the various aspects of the preferred stock
recapitalization as follows:
New
Series A and Series B Preferred Stock– The new shares of preferred
stock continued to be classified as a component of shareholders’ equity since
their conversion into cash or common stock was solely within the Company’s
control as there were no provisions in the recapitalization documents that
would
have obligated us to redeem shares of the Series A or Series B preferred
stock. In addition, by virtue of the Utah Control Shares Act,
the
Company’s Bylaws, and the special voting rights of the preferred shareholders,
there were no circumstances under which a third party could have acquired
controlling voting power of the Company’s stock without consent of our Board of
Directors and thus trigger our obligation to redeem the shares of new preferred
stock. Due to the significant modifications to existing shares of
Series A and Series B preferred stock, we determined that the previously
outstanding preferred stock was replaced with new classes of preferred stock
and
common stock warrants. As a result, the new preferred stock was
recorded at its fair value on the date of modification and consistent with
other
equity instruments, the carrying value of the new preferred stock was not
subsequently adjusted to its fair market value at the end of any reporting
period.
We
engaged an independent valuation firm to determine the fair value of the
newly
issued shares of preferred stock prior to the March 8, 2005 recapitalization
closing date. The fair value of the new preferred stock under this
valuation was preliminarily determined to be $20.77 per share, or $4.23 per
share less than the preferred stock’s liquidation preference of $25.00 per
share. Based upon this valuation, we would have recorded a
recapitalization gain of approximately $7.7 million during the quarter in
which
the recapitalization transaction was completed and also would have recorded
losses in future periods for preferred stock redemptions made at the liquidation
preference.
Subsequent
to this valuation, we completed the sale of our corporate headquarters facility
and redeemed $30.0 million, or 1.2 million shares, of Series A preferred
stock
at its liquidation preference and were considering additional redemptions
of
preferred stock at the liquidation preference. Based upon these
considerations and other factors, including the improvements in our operating
results, we determined that the liquidation preference ($25.00 per share)
was
more indicative of the fair value of the preferred stock at the date of the
recapitalization transaction. Accordingly, we recorded a $7.8 million
loss from the recapitalization transaction since the aggregate fair value
of the
new shares of preferred stock and warrants (see warrant discussion below)
exceeded the carrying value of the old preferred stock.
Warrants–
EITF Issue 00-19 states that warrants should be classified as a component
of
shareholders’ equity if 1) the warrant contract requires physical settlement or
net-share settlement or 2) the warrant contract gives the Company a choice
of
net-cash settlement or settlement in its own shares. We determined
that the warrants should be accounted for as equity instruments because they
meet these requirements.
Accordingly,
we recorded the warrants at their fair value, as determined using a
Black-Scholes valuation model on the date of the transaction, as a component
of
shareholders’ equity. Subsequent changes in fair value will not be
recorded in our financial statements as long as the warrants remain classified
as shareholders’ equity in accordance with EITF Issue 00-19. At the
date of the recapitalization transaction, the warrants had a fair value of
$1.22
per share, or approximately $7.6 million in total. We issued 6.2
million common stock warrants in connection with the recapitalization
transaction. These warrants expire in March 2013.
Derivatives
- The modified preferred stock agreement contained a feature that allowed
us to
redeem preferred stock at its liquidation preference in the first year following
the recapitalization transaction and at 101 percent of the liquidation
preference after the sixth anniversary of the recapitalization
transaction. In accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, we have determined that this
embedded call feature was not a derivative because the contract was both
1)
indexed in our stock, and 2) was classified as a component of stockholders’
equity on our consolidated balance sheet.
A
separate agreement existed with Knowledge Capital, the entity that held the
majority of the Series A preferred stock, which contained a call option to
redeem $30.0 million of preferred stock at 100 percent to 103 percent of
the
liquidation preference as well as a “change in control” put option at 101
percent of the liquidation preference. This agreement was a
derivative and met the criteria found in paragraph 11 of SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of
Both
Liabilities and Equity, to be separately accounted for as a
liability. However, the fiscal 2005 redemption of $30.0 million of
Knowledge Capital preferred stock extinguished the call option in the
recapitalization agreement and the corresponding liability
derivative. Therefore, the incremental change of control feature (the
amount in excess of 100 percent of liquidation
preference in the change of control put option) was valued at fair value
based
upon the likelihood of exercise and the expected incremental amount to be
paid
upon the change of control provision of the agreement. This
derivative-based liability was required to be adjusted to fair value at each
reporting period and had an initial value of zero on the date of the
recapitalization transaction. The fair value of this derivative-based
liability was zero through the final redemption of outstanding preferred
stock.
|
9.
|
SHAREHOLDERS’
EQUITY
|
Preferred
Stock
Series
A– In accordance with the terms and provisions
of
the preferred stock recapitalization (Note 8), 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. The 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,
2007, there were 4.0 million shares of Series B preferred stock authorized
and
no shares of Series B preferred stock 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, 2007
and 2006, common stock warrant activity was immaterial.
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. At August 31,
2007,
$2.4 million was 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 as shown below (in thousands, except for
share
amounts):
|
Fiscal
Year
|
Shares
Issued to ESPP Participants
|
Shares
Issued from the Exercise of Stock Options
|
Total
Treasury Shares Issued
|
Cash
Proceeds Received from the Issuance of Treasury Shares
|
||||||||||||
|
2007
|
55,513
|
37,500
|
93,013
|
$ |
321
|
|||||||||||
|
2006
|
32,993
|
38,821
|
71,814
|
424
|
||||||||||||
|
2005
|
27,263
|
15,000
|
42,263
|
108
|
||||||||||||
In
addition to the treasury shares shown above, we issued 31,500; 27,000; and
563,090 shares of our common stock held in treasury in connection with unvested
and fully-vested stock awards during fiscal years 2007, 2006, and 2005 (Note
12).
|
10.
|
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. During fiscal 2005 the Company
collected $0.8 million, which represented payment in full, from an officer
and
members of the Board of Directors that were required to repay their loans
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 will waive
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 recognized 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 are
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 will increase from 3.16 percent compounded annually to
4.72
percent compounded annually.
|
|
Redemption
of Management Loan Program Shares– The Company will have 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.
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 will
be 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.
As
a
result of these loan program modifications, the Company hopes to increase
the
total value received from loan participants; however, 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.
|
11.
|
FINANCIAL
INSTRUMENTS
|
Fair
Value of Financial Instruments
The
book
value of our financial instruments at August 31, 2007 and 2006 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, 2007 or 2006, 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, 2007, our debt
obligations consisted of a variable-rate line of credit 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.
|
|
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.
Foreign
Currency Forward Contracts – During the fiscal years ended August 31, 2007,
2006, and 2005, 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,
|
2007
|
2006
|
2005
|
|||||||||
|
Losses
on foreign exchange contracts
|
$ | (249 | ) | $ | (346 | ) | $ | (437 | ) | |||
|
Gains
on foreign exchange contracts
|
119
|
415
|
127
|
|||||||||
|
Net
gain (loss) on foreign exchange contracts
|
$ | (130 | ) | $ |
69
|
$ | (310 | ) | ||||
At
August
31, 2007, 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, was insignificant. The notional amounts of our
foreign currency sell contracts that did not qualify for hedge accounting
were
as follows at August 31, 2007 (in thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
||||||
|
Mexican
Pesos
|
13,500
|
$ |
1,204
|
|||||
|
Japanese
Yen
|
100,000
|
864
|
||||||
|
Australian
Dollars
|
457
|
374
|
||||||
Net
Investment Hedges – During fiscal 2005, we entered into foreign currency
forward contracts that were designed to manage foreign currency risks related
to
the value of our net investment in wholly-owned operations located in Canada,
Japan, and the United Kingdom. These three offices comprise the
majority of our net investment in foreign operations. These foreign
currency forward instruments qualified for hedge accounting and corresponding
gains and losses were recorded as a component of other comprehensive income
in
our consolidated balance sheet. During fiscal 2005 we recognized the
following net loss on our net investment hedging contracts (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2005
|
|||
|
Losses
on net investment hedge contracts
|
$ | (384 | ) | |
|
Gains
on net investment hedge contracts
|
66
|
|||
|
Net
losses on investment hedge contracts
|
$ | (318 | ) | |
During
fiscal 2007 and fiscal 2006 we did not utilize any net investment hedge
contracts. However, we may utilize net investment hedge contracts in
future periods as a component of our overall foreign currency risk
strategy.
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 fiscal years ended August 31, 2007, 2006, and 2005.
|
12.
|
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, 2007, our stock option incentive plan, which
permits the granting of performance awards, unvested stock awards to employees,
and incentive stock options had approximately 1,386,000 shares available
for
granting (using August 31, 2007 performance award vesting expectations) and
our
2004 ESPP plan had approximately 901,000 shares authorized for purchase by
plan
participants. The total cost of our share-based compensation plans
for fiscal years 2007 and 2006 were as follows (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2007
|
2006
|
||||||
|
Performance
awards
|
$ |
835
|
$ |
503
|
||||
|
Unvested
share awards
|
481
|
296
|
||||||
|
Compensation
cost of ESPP
|
75
|
37
|
||||||
|
Stock
options
|
3
|
7
|
||||||
| $ |
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
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
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 will vest on August 31,
2009. Compensation expense will be recorded using a five percent and
zero percent estimated forfeiture rate during the vesting period for the
fiscal
2007 LTIP award and fiscal 2006 LTIP award, respectively. 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. The following information applies to our LTIP performance
awards at August 31, 2007 (in thousands, except share and per share
values):
|
Award
Date
|
Vesting
Date
|
Target
Award
|
Adjusted
Award
|
Grant
Date Fair Value per Share
|
Unrecognized
Compensation
|
||||||||||||
|
Fiscal
2006
|
August
31, 2008
|
378,665
|
182,779
|
$ |
6.60
|
$ |
467
|
||||||||||
|
Fiscal
2007
|
August
31, 2009
|
429,312
|
357,617
|
$ |
5.78
|
1,468
|
|||||||||||
|
807,977
|
540,396
|
$ |
1,935
|
||||||||||||||
During
fiscal 2007, we adjusted the expected number of shares to vest based upon
current year financial performance, estimated performance through the remaining
service period, and the sale of our Brazil subsidiary and Mexico training
operations. Due primarily to overall sales performance issues and the
expected impact from the sale of our Brazil and Mexico subsidiaries, we reduced
the number of performance awards expected to vest in our fiscal 2007 and
fiscal
2006 LTIP grants, which resulted in cumulative adjustments to reduce our
fiscal
2007 operating expenses totaling $0.4 million. During fiscal 2006 our
cumulative adjustments, which also reduced operating expenses, totaled $0.1
million. The recognized tax benefit from LTIP performance awards
totaled $0.3 million and $0.2 million for the fiscal years ended August 31,
2007
and 2006, respectively. The intrinsic value of our LTIP performance
awards was $4.0 million, which was based upon our closing stock price of
$7.49
per share on August 31, 2007.
Unvested
Stock Awards
The
fair
value of our unvested stock awards is calculated based on the number of shares
issued and 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– During January 2006, our shareholders approved
changes to our non-employee directors’ stock incentive plan (the Directors’
Plan). The Directors’ plan was 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. Under the previous
provisions of the Directors’ Plan, each non-employee director received an annual
unvested stock award with a value (based on the trading price of the Company’s
common stock on the date of the award) equal to $27,500. The primary
modification to the Directors’ plan approved by the shareholders changed the
annual unvested stock grant to 4,500 shares of common stock rather than the
dollar value previously defined in the plan. The amendment also
eliminated the limitation on the maximum dollar value of all awards made
under
the Directors’ Plan in any given year.
Under
the
provisions of the Directors’ Plan, we issued 31,500 shares, 27,000 shares, and
76,090 shares of our common stock to certain members of the Board of Directors
during the fiscal years ended August 31, 2007, 2006, and 2005. The
fair value of the shares awarded under the Directors’ Plan was $0.2 million per
fiscal year and was calculated on the grant date with the
corresponding compensation cost is 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 $0.5 million, $0.4 million, and
$1.3
million in fiscal years 2007, 2006, and 2005.
Employee
Awards– During fiscal 2005 and in prior periods,
we have granted unvested stock awards to certain employees as long-term
incentives. These unvested stock awards cliff vest five years from
the grant date or on an accelerated basis if we achieve 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 is expensed
on a straight-line basis over the vesting (service) period of the
awards. The recognition of compensation cost is accelerated when we
believe that it is probable that we will achieve the specified earnings
thresholds and the shares will vest.
In
connection with these unvested stock awards, the participants were eligible
to
receive a cash bonus for a portion of the income taxes resulting from the
grant. The participants could receive their cash bonus at the time of
grant or when the award shares vest. These cash bonuses totaled $0.5
million for awards granted in fiscal 2005, which was expensed as the bonuses
were paid to the participants on or around the grant date. 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 was accounted for as a modification of
an
award under the provisions of SFAS No. 123R during fiscal 2007. The
additional compensation expense from the acceleration of these awards totaled
$0.1 million. In the third quarter of fiscal 2005, we also achieved
specified earnings thresholds required to accelerate the vesting for one-half
of
the unvested stock awards granted to employees in fiscal 2004 and unvested
stock
awards granted to our CEO in December 2004. Accordingly, during
fiscal 2005 we expensed an additional $0.5 million of compensation cost related
to the accelerated vesting of these unvested employee stock awards.
The
unvested award shares granted to employees in fiscal 2005 were issued from
common stock held in treasury and had a cost basis of $5.2 million for the
awards granted. The difference between the fair value of the unvested
shares granted and their cost, which totaled $4.2 million, was recorded as
a
reduction to additional paid-in capital.
The
following information applies to our unvested stock awards granted to members
of
the Board of Directors under the Directors’ Plan and employees during fiscal
2007:
|
Number
of Shares
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|||||||
|
Unvested
stock awards at August 31, 2006
|
431,295
|
$ |
3.46
|
|||||
|
Granted
|
31,500
|
7.90
|
||||||
|
Forfeited
|
-
|
-
|
||||||
|
Vested
|
(52,125 | ) |
3.45
|
|||||
|
Unvested
stock awards at August 31, 2007
|
410,670
|
$ |
3.80
|
|||||
At
August
31, 2007, there was $0.8 million of total unrecognized compensation cost
related
to our unvested stock awards, which is expected to be recognized over the
weighted-average vesting period of approximately two years unless specified
accelerator thresholds are met. Compensation expense related to our
unvested stock awards totaled $0.5 million, $0.3 million, and $0.8 million
in
fiscal years 2007, 2006, and 2005 and the total recognized tax benefit from
unvested stock awards totaled $0.2 million, $0.1 million, and $0.3 million
for the fiscal years ended August 31, 2007, 2006, and 2005,
respectively. The intrinsic value of our unvested stock awards at
August 31, 2007 was $3.1 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, 2007, a
total of 55,513 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,
2007 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, 2006
|
2,153,688
|
$ |
12.39
|
|||||||||||||
|
Granted
|
-
|
|||||||||||||||
|
Exercised
|
(37,500 | ) |
1.70
|
|||||||||||||
|
Forfeited
|
(57,888 | ) |
7.43
|
|||||||||||||
|
Outstanding
at August 31, 2007
|
2,058,300
|
$ |
12.72
|
2.8
|
$ |
223.00
|
||||||||||
|
Options
vested and exercisable at August 31, 2007
|
2,045,800
|
$ |
12.79
|
2.8
|
$ |
150.00
|
||||||||||
We
expect
that all of our remaining unvested stock options will vest and be
exercisable.
The
Company did not grant any stock options during the fiscal years ended August
31,
2007, 2006 or 2005, and the remaining unamortized service cost on previously
granted stock options is insignificant in aggregate. Prior to the
adoption of SFAS No. 123R, a Black-Scholes option-pricing model was used
to
calculate the pro forma compensation expense from stock option activity and
the
weighted average fair value of options granted. The estimated fair
value of options granted was subject to the assumptions made in the
Black-Scholes option-pricing model and if the assumptions were to change,
the
estimated fair values of our stock options could be significantly
different.
The
following additional information applies to our stock options outstanding
at
August 31, 2007:
|
Range
of
Exercise
Prices
|
Number
Outstanding at August 31, 2007
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Options
Exercisable at August 31, 2007
|
Weighted
Average Exercise Price
|
|
$1.70
– $7.00
|
148,800
|
2.7
|
$5.99
|
136,300
|
$6.39
|
|
$7.75
– $9.69
|
302,500
|
2.1
|
9.17
|
302,500
|
9.17
|
|
$14.00
– $14.00
|
1,602,000
|
3.0
|
14.00
|
1,602,000
|
14.00
|
|
$17.69
– $17.69
|
5,000
|
1.3
|
17.69
|
5,000
|
17.69
|
The
Company received proceeds totaling $0.1 million, $0.2 million, and $26,000
in fiscal 2007, fiscal 2006, and fiscal 2005 from the exercise of common
stock options. The intrinsic value of stock options exercised was $0.3
million, $0.1 million, and $34,300 for the fiscal years ended August 31,
2007,
2006, and 2005 and the fair value of options that vested during those periods
totaled $9,375, $9,375, and $5.0 million, respectively. The fair
value of stock options vested in fiscal 2005 included 1.6 million options
that
were granted to the CEO in fiscal 2001, which were vested as a result of
changes
to the CEO’s compensation plan (Note 20).
Fully-Vested
Stock Award
In
connection with changes to our CEO’s compensation plan (Note 20), the CEO was
granted 187,000 shares of fully-vested common stock during the second quarter
of
fiscal 2005. The fully-vested stock award was valued at $2.16 per
share, which was the closing market price of our common stock on the measurement
date and resulted in $0.4 million of expense that was included as a component
of
selling, general, and administrative expense in fiscal 2005. The cost
of the common stock issued from treasury was $3.2 million and the difference
between the cost of the treasury stock and fair value of the award, which
totaled $2.8 million, was recorded as a reduction of additional paid-in
capital.
|
13.
|
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 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 held for sale
|
$ |
1,260
|
$ |
790
|
$ |
2,050
|
||||||
|
Accounts
payable
|
$ |
127
|
$ |
-
|
$ |
127
|
||||||
|
Accrued
liabilities
|
260
|
-
|
260
|
|||||||||
|
Total
liabilities held for sale
|
$ |
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 is due during fiscal 2008 and
is
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.
|
14.
|
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.
|
15.
|
GAIN
ON DISPOSAL OF INVESTMENT IN UNCONSOLIDATED
SUBSIDIARY
|
During
fiscal 2003, the Company purchased approximately 20 percent of the capital
stock
(subsequently diluted to approximately 12 percent ownership) of Agilix Labs,
Inc. (Agilix), a Delaware corporation, for cash payments totaling $1.0
million. Agilix is a development stage enterprise that develops
software applications, including the majority of our software applications
that
are available for sale to external customers. We used the equity
method of accounting for our investment in Agilix, as the Company appointed
a
member to Agilix’s board of directors and had the ability to exercise
significant influence over the operations of Agilix. Although we
continue to sell software developed by Agilix, uncertainties in Agilix’s
business plan developed during our fiscal quarter ended March 1, 2003 and
their
potential adverse effects on Agilix’s operations and future cash flows were
significant. Based on these factors, we determined that our ability
to recover the carrying value of our investment in Agilix was
remote. Accordingly, we impaired and expensed our remaining
investment in Agilix of $0.9 million during fiscal 2003.
During
fiscal 2005, certain affiliates of Agilix purchased the shares of capital
stock
held by the Company for $0.5 million in cash, which was reported as a gain
on
disposal of investment in unconsolidated subsidiary. In fiscal 2006,
we reclassified the gain on the sale of our interest in Agilix from operating
income to a component of other income and expense on the fiscal 2005 income
statement. Following the sale of the Agilix capital stock, we have no
remaining ownership interest in Agilix, no representative on their board
of
directors, or any remaining obligations associated with our investment in
Agilix.
|
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, $1.3 million, and $0.8 million during the fiscal years
ended August 31, 2007, 2006, and 2005.
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 55,513; 32,993; and
27,263 shares were issued under the ESPP during the fiscal years ended August
31, 2007, 2006, and 2005, which had a corresponding cost basis of $0.5 million,
$0.2 million, and $0.1 million, respectively. The Company received
cash proceeds from the ESPP participants totaling $0.3 million, $0.2 million,
and $0.1 million, for fiscal years 2007, 2006, and 2005.
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 $0.7 million
and $1.2 million at August 31, 2007 and 2006, while the plan’s liabilities
totaled $0.9 million and $1.1 million at August 31, 2007 and 2006. At
August 31, 2007, 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, $0.1 million, and $0.8 million during
each of the fiscal years ended August 31, 2007, 2006, and 2005 related to
insurance premiums and external administration costs for our deferred
compensation plan. Due to increases in the market value of our common
stock held by the deferred compensation plan during fiscal 2005 which increased
the plan liability to participants without a corresponding increase in plan
assets, we recorded increased expenses associated with our deferred compensation
plan. To reduce expenses from the plan in future periods, we modified
the deferred compensation plan to require participants who hold shares of
our
common stock to receive distributions in common stock rather than
cash. Accordingly, $0.9 million of the plan liability at the date of
the modification was reclassified to additional paid-in capital.
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,
|
2007
|
2006
|
2005
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (350 | ) | $ |
1,433
|
$ |
1,857
|
|||||
|
State
|
(135 | ) | (23 | ) | (2 | ) | ||||||
|
Foreign
|
(2,318 | ) | (1,903 | ) | (1,180 | ) | ||||||
| (2,803 | ) | (493 | ) |
675
|
||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
$ | (4,880 | ) | $ | (4,380 | ) | $ | (2,132 | ) | |||
|
State
|
(433 | ) | (376 | ) | (285 | ) | ||||||
|
Foreign
|
49
|
(132 | ) |
378
|
||||||||
|
Change
in valuation allowance
|
31
|
20,323
|
2,449
|
|||||||||
| (5,233 | ) |
15,435
|
410
|
|||||||||
| $ | (8,036 | ) | $ |
14,942
|
$ |
1,085
|
||||||
Income
from operations before income taxes consisted of the following (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2007
|
2006
|
2005
|
|||||||||
|
United
States
|
$ |
11,914
|
$ |
10,881
|
$ |
6,094
|
||||||
|
Foreign
|
3,751
|
2,750
|
3,007
|
|||||||||
| $ |
15,665
|
$ |
13,631
|
$ |
9,101
|
|||||||
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,
|
2007
|
2006
|
2005
|
|||||||||
|
Federal
statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal effect
|
3.6
|
2.9
|
3.2
|
|||||||||
|
Deferred
tax valuation allowance
|
-
|
(149.1 | ) | (26.9 | ) | |||||||
|
Foreign
jurisdictions tax differential
|
1.6
|
2.2
|
(2.9 | ) | ||||||||
|
Tax
differential on income subject to both U.S. and foreign
taxes
|
4.2
|
1.5
|
5.1
|
|||||||||
|
Resolution
of tax matters
|
(0.9 | ) | (9.4 | ) | (29.6 | ) | ||||||
|
Tax
on management stock loan interest
|
5.0
|
4.5
|
-
|
|||||||||
|
Other
|
2.8
|
2.8
|
4.2
|
|||||||||
| 51.3 | % | (109.6 | )% | (11.9 | )% | |||||||
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
2007, 2006, and 2005. However, no domestic foreign tax credits were
available to offset the foreign withholding taxes during those
years.
Various
income tax matters were resolved during fiscal 2007, 2006, and 2005, 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 10). 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,
|
2007
|
2006
|
||||||
|
Deferred
income tax assets:
|
||||||||
|
Sale
and financing of corporate headquarters
|
$ |
12,078
|
$ |
12,193
|
||||
|
Net
operating loss carryforward
|
9,818
|
14,321
|
||||||
|
Impairment
of investment in Franklin Covey Coaching, LLC
|
2,249
|
2,787
|
||||||
|
Foreign
income tax credit carryforward
|
2,246
|
2,246
|
||||||
|
Inventory
and bad debt reserves
|
1,515
|
1,391
|
||||||
|
Vacation
and other accruals
|
1,432
|
1,524
|
||||||
|
Deferred
compensation
|
912
|
685
|
||||||
|
Alternative
minimum tax carryforward
|
863
|
701
|
||||||
|
Sales
returns and contingencies
|
468
|
689
|
||||||
|
Intangible
asset amortization and impairment
|
-
|
571
|
||||||
|
Other
|
810
|
843
|
||||||
|
Total
deferred income tax assets
|
32,391
|
37,951
|
||||||
|
Less:
valuation allowance
|
(2,591 | ) | (2,622 | ) | ||||
|
Net
deferred income tax assets
|
29,800
|
35,329
|
||||||
|
Deferred
income tax liabilities:
|
||||||||
|
Intangibles
and property and equipment step-ups – definite lived
|
(12,821 | ) | (13,902 | ) | ||||
|
Intangibles
and property and equipment step-ups – indefinite lived
|
(8,633 | ) | (8,595 | ) | ||||
|
Property
and equipment depreciation
|
(3,574 | ) | (3,848 | ) | ||||
|
Intangible
asset impairment and amortization
|
(893 | ) |
-
|
|||||
|
Unremitted
earnings of foreign subsidiaries
|
(630 | ) | (291 | ) | ||||
|
Other
|
(78 | ) | (234 | ) | ||||
|
Total
deferred income tax liabilities
|
(26,629 | ) | (26,870 | ) | ||||
|
Net
deferred income taxes
|
$ |
3,171
|
$ |
8,459
|
||||
Deferred
income tax amounts are recorded as follows in our consolidated balance sheets
(in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2007
|
2006
|
||||||
|
Current
assets
|
$ |
3,635
|
$ |
4,130
|
||||
|
Long-term
assets
|
101
|
4,340
|
||||||
|
Deferred
income tax liability
|
(565 | ) | (11 | ) | ||||
|
Net
deferred income tax asset
|
$ |
3,171
|
$ |
8,459
|
||||
A
federal
net operating loss of $33.3 million was generated in fiscal 2003. In
fiscal 2007, 2006, and 2005, a total of $27.3 million of the fiscal 2003
loss
carryforward was utilized, leaving a remaining loss carryforward from fiscal
2003 of $6.0 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
$0.8 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 $27.3 million in fiscal 2007, 2006, and 2005
for a
net carryforward amount of $6.0 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, 2007 and deductible against future years’ taxable income are subject to
limitations imposed by Section 382 of the Internal Revenue Code and similar
state statutes. As a result of Section 382 limitations, our loss
limitations are estimated to be $15.7 million for fiscal 2008 and $9.5 million
per year in subsequent years.
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 10). 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.
To
realize the benefit of our deferred income tax assets, we must generate total
taxable income of approximately $94 million over the next 20
years. Taxable income of approximately $66 million results from the
reversal of temporary taxable differences. The remaining taxable
income of approximately $28 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, 2007, 2006, and 2005 (in thousands).
|
YEAR
ENDED
AUGUST
31,
|
2007
|
2006
|
2005
|
|||||||||
|
Domestic
pre-tax book income
|
$ |
11,914
|
$ |
10,881
|
$ |
6,094
|
||||||
|
Sale
of corporate headquarters
|
-
|
-
|
11,386
|
|||||||||
|
Interest
on management common stock loans
|
2,253
|
1,771
|
1,683
|
|||||||||
|
Amortization/write-off
of intangible assets
|
(2,814 | ) | (1,944 | ) | (5,402 | ) | ||||||
|
Property
and equipment depreciation and dispositions
|
1,152
|
(3,114 | ) |
545
|
||||||||
|
Changes
in accrued liabilities
|
(928 | ) | (4,096 | ) | (625 | ) | ||||||
|
Other
book versus tax differences
|
(126 | ) | (698 | ) | (277 | ) | ||||||
| $ |
11,451
|
$ |
2,800
|
$ |
13,404
|
|||||||
To
achieve improved operating results, we have worked extensively on developing
formal business models, which provides for improved budgeting, better fiscal
discipline, and an improved ability to adjust to changes in the business
environment. Due to improved operating performance 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. Accordingly, in fiscal 2006 we reversed the valuation
allowances on certain domestic deferred tax assets, except for $2.2 million
related to foreign tax credits.
As
discussed in Note 2, we completed the sale and financing of our corporate
headquarters facility during fiscal 2005. For financial reporting
purposes, the sale of the facility was treated as a financing transaction
and no
gain was recognized on the sale. However, for tax purposes, the
transaction was accounted for as a sale, resulting in a taxable gain of $11.4
million.
Our
foreign income tax credit carryforward of $2.2 million that was generated
during
fiscal 2002 expires on August 31, 2012.
|
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. Following the preferred stock recapitalization (Note 8)
in fiscal 2005, our preferred stock was no longer convertible or entitled
to
participate in dividends payable to holders of common
stock. Accordingly, we ceased accounting for the conversion and
common dividend rights of the preferred stock using the two-class method
of
calculating EPS as defined in SFAS No. 128, Earnings Per Share, and
EITF Issue 03-6, Participating Securities and the Two-Class Method under
FASB Statement No. 128, for periods subsequent to February 26,
2005. However, due to modifications to our management stock loan
program (Note 10) made during fiscal 2006, we determined that the shares
of
management stock loan participants
that accepted the offer and were placed in an escrow account are participating
securities as defined by EITF Issue 03-6 because they continue to have
equivalent common stock dividend rights. As a result of this
determination, the management stock loan shares held in escrow 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,
|
2007
|
2006
|
2005
|
|||||||||
|
Net
income
|
$ |
7,629
|
$ |
28,573
|
$ |
10,186
|
||||||
|
Non-convertible
preferred stock dividends
|
(2,215 | ) | (4,385 | ) | (3,903 | ) | ||||||
|
Convertible
preferred stock dividends
|
-
|
-
|
(4,367 | ) | ||||||||
|
Loss
on recapitalization of preferred stock
|
-
|
-
|
(7,753 | ) | ||||||||
|
Net
income (loss) available to common shareholders
|
$ |
5,414
|
$ |
24,188
|
$ | (5,837 | ) | |||||
|
Undistributed
income through February 26, 2005
|
$ |
-
|
$ |
-
|
$ |
4,244
|
||||||
|
Common
stock ownership on an “as converted” basis
|
-
|
-
|
76 | % | ||||||||
|
Common
shareholder interest in undistributed income through February 26,
2005
|
-
|
-
|
3,225
|
|||||||||
|
Undistributed
income (loss) in fiscal year indicated
|
5,414
|
$ |
24,188
|
$ | (10,081 | ) | ||||||
|
Common
shareholder interest in undistributed income (loss)
|
$ |
5,414
|
$ |
24,188
|
$ | (6,856 | ) | |||||
|
Weighted
average common shares outstanding – Basic
|
19,593
|
20,134
|
19,949
|
|||||||||
|
Effect
of dilutive securities(1):
|
||||||||||||
|
Stock
options
|
29
|
52
|
-
|
|||||||||
|
Unvested
stock awards
|
266
|
281
|
-
|
|||||||||
|
Common
stock warrants (2)
|
-
|
49
|
-
|
|||||||||
|
Weighted
average common shares outstanding – Diluted
|
19,888
|
20,516
|
19,949
|
|||||||||
|
Basic
EPS
|
$ |
.28
|
$ |
1.20
|
$ | (.34 | ) | |||||
|
Diluted
EPS
|
$ |
.27
|
$ |
1.18
|
$ | (.34 | ) | |||||
|
(1)
|
For
the fiscal year ended August 31, 2005, conversion of common share
equivalents is not assumed because conversion of such securities
would be
anti-dilutive.
|
|
(2)
|
For
the fiscal years ended August 31, 2007 and 2005, the conversion
of 6.2
million common stock warrants is not assumed because such conversion
would
be anti-dilutive.
|
At
August
31, 2007, 2006, and 2005, we had 1.9 million, 2.0 million, and 2.0 million
stock
options outstanding (Note 12) which 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. In connection with the preferred stock recapitalization
(Note 8), we issued 6.2 million common stock warrants during fiscal 2005
with an
exercise price of $8.00 per share. These warrants, which expire in
March 2013, and the out of the money stock options described above will have
a
dilutive impact on our EPS calculation in future periods if the market price
of
our common stock increases.
Reportable
Segments
The
Company has two segments: the Consumer Solutions Business Unit (CSBU)
and the Organizational Solutions Business Unit (OSBU). The following
is a description of our segments, their primary operating components, and
their
significant business activities:
|
Consumer
Solutions Business Unit– This business unit is primarily
focused on sales to individual customers and small business organizations
and includes the results of our domestic retail stores, consumer
direct
operations (primarily eCommerce, call center, and public programs),
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 include the financial results of our
paper
planner manufacturing operations. Although CSBU sales primarily
consist of products such as planners, binders, software, totes,
and
related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may be purchased
through
our CSBU channels.
|
|
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 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
wholly-owned foreign offices and royalty revenues from
licensees.
|
The
Company’s chief operating decision maker is the CEO, and each of the segments
has a president who reports directly to the CEO. The primary
measurement tool used in 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, and the gain from the sale of our manufacturing
facility.
In
the
normal course of business, we may make structural and cost allocation revisions
to our segment information to reflect new reporting responsibilities within
the
organization. During fiscal 2007 we transferred the international
product channels in certain countries from OSBU to CSBU, and have made other
less significant organizational changes throughout the fiscal year ended
August
31, 2007. 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, 2007
|
Sales
to External Customers
|
Gross
Profit
|
EBITDA
|
Depreciation
|
Amortization
|
Segment
Assets
|
Capital
Expenditures
|
|||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
$ |
54,316
|
$ |
31,932
|
$ |
4,666
|
$ |
735
|
$ |
-
|
$ |
8,607
|
$ |
1,761
|
||||||||||||||
|
Consumer
direct
|
59,790
|
35,356
|
26,905
|
196
|
-
|
620
|
358
|
|||||||||||||||||||||
|
Wholesale
|
17,991
|
10,087
|
9,475
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
CSBU
International
|
7,342
|
4,373
|
894
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Other
CSBU
|
5,565
|
341
|
(28,925 | ) |
1,304
|
-
|
9,052
|
5,503
|
||||||||||||||||||||
|
Total
CSBU
|
145,004
|
82,089
|
13,015
|
2,235
|
-
|
18,279
|
7,622
|
|||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
81,447
|
52,722
|
7,704
|
652
|
3,599
|
81,526
|
6,166
|
|||||||||||||||||||||
|
International
|
57,674
|
39,566
|
13,280
|
839
|
8
|
22,588
|
655
|
|||||||||||||||||||||
|
Total
OSBU
|
139,121
|
92,288
|
20,984
|
1,491
|
3,607
|
104,114
|
6,821
|
|||||||||||||||||||||
|
Total
operating segments
|
284,125
|
174,377
|
33,999
|
3,726
|
3,607
|
122,393
|
14,443
|
|||||||||||||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(8,842 | ) |
967
|
-
|
74,238
|
678
|
||||||||||||||||||||
|
Consolidated
|
$ |
284,125
|
174,377
|
25,157
|
4,693
|
3,607
|
196,631
|
15,121
|
||||||||||||||||||||
|
Fiscal
Year Ended
August
31, 2006
|
||||||||||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
$ |
62,156
|
$ |
36,059
|
$ |
4,953
|
$ |
1,270
|
$ |
-
|
$ |
6,616
|
$ |
855
|
||||||||||||||
|
Consumer
direct
|
65,480
|
39,003
|
30,473
|
56
|
-
|
538
|
517
|
|||||||||||||||||||||
|
Wholesale
|
17,782
|
8,820
|
8,240
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
CSBU
International
|
7,716
|
4,682
|
1,131
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Other
CSBU
|
4,910
|
794
|
(29,352 | ) |
1,283
|
57
|
6,107
|
1,520
|
||||||||||||||||||||
|
Total
CSBU
|
158,044
|
89,358
|
15,445
|
2,609
|
57
|
13,261
|
2,892
|
|||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
71,595
|
45,953
|
4,569
|
359
|
3,747
|
83,292
|
4,614
|
|||||||||||||||||||||
|
International
|
48,984
|
32,074
|
9,337
|
1,197
|
9
|
21,860
|
701
|
|||||||||||||||||||||
|
Total
OSBU
|
120,579
|
78,027
|
13,906
|
1,556
|
3,756
|
105,152
|
5,315
|
|||||||||||||||||||||
|
Total
operating segments
|
278,623
|
167,385
|
29,351
|
4,165
|
3,813
|
118,413
|
8,207
|
|||||||||||||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(6,713 | ) |
614
|
-
|
98,146
|
153
|
||||||||||||||||||||
|
Consolidated
|
$ |
278,623
|
$ |
167,385
|
$ |
22,638
|
$ |
4,779
|
$ |
3,813
|
$ |
216,559
|
$ |
8,360
|
||||||||||||||
|
Fiscal
Year Ended
August
31, 2005
|
||||||||||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
$ |
74,331
|
$ |
42,455
|
$ |
4,703
|
$ |
2,586
|
$ |
-
|
$ |
7,992
|
$ |
996
|
||||||||||||||
|
Consumer
direct
|
62,873
|
37,340
|
23,843
|
528
|
-
|
90
|
72
|
|||||||||||||||||||||
|
Wholesale
|
17,936
|
8,543
|
7,944
|
1
|
-
|
2
|
-
|
|||||||||||||||||||||
|
CSBU
International
|
7,009
|
4,491
|
2,096
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Other
CSBU
|
3,757
|
(1,388 | ) | (27,093 | ) |
2,516
|
344
|
5,495
|
689
|
|||||||||||||||||||
|
Total
CSBU
|
165,906
|
91,441
|
11,493
|
5,631
|
344
|
13,579
|
1,757
|
|||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
70,572
|
44,971
|
6,772
|
308
|
3,816
|
86,910
|
2,683
|
|||||||||||||||||||||
|
International
|
47,064
|
32,283
|
10,678
|
1,295
|
7
|
21,183
|
742
|
|||||||||||||||||||||
|
Total
OSBU
|
117,636
|
77,254
|
17,450
|
1,603
|
3,823
|
108,093
|
3,425
|
|||||||||||||||||||||
|
Total
operating segments
|
283,542
|
168,695
|
28,943
|
7,234
|
4,167
|
121,672
|
5,182
|
|||||||||||||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(8,553 | ) |
540
|
6
|
111,561
|
1,181
|
||||||||||||||||||||
|
Consolidated
|
283,542
|
168,695
|
20,390
|
7,774
|
4,173
|
233,233
|
6,363
|
|||||||||||||||||||||
Capital
expenditures in our OSBU domestic segment include $5.1 million, $4.0 million,
and $2.2 million of spending on capitalized curriculum during the fiscal
years
ended August 31, 2007, 2006 and 2005, respectively.
A
reconciliation of reportable segment EBITDA to consolidated income (loss)
before
taxes is provided below (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2007
|
2006
|
2005
|
|||||||||
|
Reportable
segment EBITDA
|
$ |
33,999
|
$ |
29,351
|
$ |
28,943
|
||||||
|
Corporate
expenses
|
(8,842 | ) | (6,713 | ) | (8,553 | ) | ||||||
|
Consolidated
EBITDA
|
25,157
|
22,638
|
20,390
|
|||||||||
|
Gain
on sale of manufacturing facility
|
1,227
|
-
|
-
|
|||||||||
|
Depreciation
|
(4,693 | ) | (4,779 | ) | (7,774 | ) | ||||||
|
Amortization
|
(3,607 | ) | (3,813 | ) | (4,173 | ) | ||||||
|
Consolidated
income from operations
|
18,084
|
14,046
|
8,443
|
|||||||||
|
Interest
income
|
717
|
1,334
|
944
|
|||||||||
|
Interest
expense
|
(3,136 | ) | (2,622 | ) | (786 | ) | ||||||
|
Legal
settlement
|
-
|
873
|
-
|
|||||||||
|
Gain
on disposal of investment in unconsolidated subsidiary
|
-
|
-
|
500
|
|||||||||
|
Income
before income taxes
|
$ |
15,665
|
$ |
13,631
|
$ |
9,101
|
||||||
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,
|
2007
|
2006
|
2005
|
|||||||||
|
Reportable
segment assets
|
$ |
122,393
|
$ |
118,413
|
$ |
121,672
|
||||||
|
Corporate
assets
|
76,047
|
99,763
|
112,955
|
|||||||||
|
Intercompany
accounts receivable
|
(1,809 | ) | (1,617 | ) | (1,394 | ) | ||||||
| $ |
196,631
|
$ |
216,559
|
$ |
233,233
|
|||||||
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,
|
2007
|
2006
|
2005
|
|||||||||
|
Net
sales:
|
||||||||||||
|
United
States
|
$ |
219,152
|
$ |
221,880
|
$ |
229,469
|
||||||
|
Japan
|
24,166
|
21,569
|
20,905
|
|||||||||
|
United
Kingdom
|
9,843
|
8,587
|
9,707
|
|||||||||
|
Canada
|
8,400
|
8,197
|
6,910
|
|||||||||
|
Mexico
|
4,362
|
3,799
|
4,181
|
|||||||||
|
Brazil/South
America
|
4,314
|
3,078
|
2,053
|
|||||||||
|
Australia
|
4,016
|
3,439
|
3,377
|
|||||||||
|
Korea
|
1,377
|
1,403
|
1,232
|
|||||||||
|
Singapore
|
1,306
|
1,072
|
985
|
|||||||||
|
Indonesia/Malaysia
|
710
|
624
|
567
|
|||||||||
|
Others
|
6,479
|
4,975
|
4,156
|
|||||||||
| $ |
284,125
|
$ |
278,623
|
$ |
283,542
|
|||||||
The
Company has wholly-owned offices in Japan, Canada, the United Kingdom, Australia
and product sales operations in Mexico. Our long-lived assets held in
these locations were as follows for the periods indicated (in
thousands):
|
AUGUST
31,
|
2007
|
2006
|
2005
|
|||||||||
|
Long-lived
assets:
|
||||||||||||
|
United
States
|
$ |
121,279
|
$ |
124,208
|
$ |
122,937
|
||||||
|
Americas
|
2,433
|
2,661
|
2,620
|
|||||||||
|
Japan
|
1,453
|
1,489
|
1,527
|
|||||||||
|
United
Kingdom
|
976
|
735
|
641
|
|||||||||
|
Australia
|
387
|
346
|
326
|
|||||||||
| $ |
126,528
|
$ |
129,439
|
$ |
128,051
|
|||||||
Inter-segment
sales were immaterial and are eliminated in consolidation.
|
20.
|
CEO
COMPENSATION
AGREEMENT
|
During
fiscal 2005, our Board of Directors approved and enacted changes to a number
of
items in the CEO’s employment agreement. At the request of the CEO,
this new compensation arrangement includes the following:
|
·
|
The
previously existing CEO employment agreement, which extended until
2007,
was canceled and the CEO became an “at-will” employee.
|
|
·
|
The
CEO signed a waiver forgoing claims on past compensation not
taken.
|
|
·
|
The
CEO agreed to be covered by change in control and severance policies
provided for other Company executives rather than the “golden parachute”
severance package in his previously existing agreement.
|
|
·
|
In
accordance with the provisions of the Sarbanes-Oxley Act of 2002,
the CEO
will not be entitled to obtain a loan in order to exercise his
stock
options.
|
In
return
for these changes to the CEO’s compensation structure and in recognition of the
CEO’s leadership in achieving substantial improvements in our operating results,
the following compensation terms were approved:
|
·
|
The
CEO’s cash compensation, both base compensation and incentive
compensation, remained essentially unchanged.
|
|
·
|
The
vesting period of the CEO’s 1.6 million stock options with an exercise
price of $14.00 per share was accelerated.
|
|
·
|
A
grant of 225,000 shares of unvested stock was awarded as a long-term
incentive consistent with the unvested stock awards made to other
key
employees in January 2004. In addition, the Company granted the
CEO 187,000 shares of fully vested common stock. The
compensation cost of both of these awards totaled $0.9 million,
of which
$0.4 million was expensed on the date of grant with the remainder
being
amortized over five years, subject to accelerated vesting if certain
financial performance thresholds are met (Note 12).
|
|
·
|
The
Company will provide life insurance and disability coverage in
an amount
equal to 2.5 times the CEO’s cash compensation, using insurance policies
that are similar to those approved for other executives.
|
|
21.
|
EXECUTIVE
SEPARATION
AGREEMENT
|
During
fiscal 2005, Val J. Christensen, Executive Vice-President, General Counsel,
and
Secretary of the Company, terminated his service as an executive officer
and
employee of the Company. Under the terms of the corresponding
separation agreement, we paid Mr. Christensen a lump-sum severance amount
totaling $0.9 million, less applicable withholdings. In addition, he
received the cash performance bonus he would have been entitled to for the
current fiscal year as if he had remained employed in his prior position
and his
performance objectives for the year were met, which totaled $0.2
million. In addition to these payments, his shares of unvested stock
were fully vested and he received a bonus of $0.1 million, which was equivalent
to other bonuses awarded in the January 2004 unvested stock award, to offset
a
portion of the income taxes resulting from the vesting of this
award. The Company also waived the requirement that his fully-vested
stock options be exercised within 90 days of his termination and allowed
the
options to be exercised through the term of the option agreement. We
accounted for the stock option modifications under APB Opinion 25 and related
pronouncements and did not recognize additional compensation expense in our
financial statements as the fair value of our stock was less than the exercise
price of the modified stock options on the re-measurement
date. However, the fair value of these stock option modifications
using guidance in SFAS No. 123 was approximately $0.1 million and was included
in the pro forma stock-based compensation expense reported in Note
1.
Subsequent
to his separation, the Board of Directors approved modifications to his
management stock loan substantially similar to the modifications granted
to
other loan participants by the Board of Directors in May 2004 under which
the
Company will forego certain of its rights under the terms of the loans in
order
to potentially improve the participants’ ability to pay, and our ability to
collect, the outstanding balances of the loans (Note 10).
Subsequent
to entering into the separation agreement, the Company and Mr. Christensen
entered into a Legal Services Agreement that was effective on March 29,
2005. Under terms of the Legal Services Agreement, we retained Mr.
Christensen as independent legal counsel to provide services for a minimum
of
1,000 hours per year. The Legal Services Agreement allowed the
Company to benefit from Mr. Christensen’s extensive institutional knowledge and
experience gained from serving as our General Counsel as well as his experience
representing us as external counsel for several years prior to joining the
Company. By mutual agreement, the Legal Services Agreement was
terminated during fiscal 2006 and Mr. Christensen no longer provides legal
services to the Company.
|
22.
|
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, 2007, 2006, and
2005, we expensed charges totaling $2.0 million, $1.6 million, and $3.0 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 2007, 2006, and 2005, we
expensed $0.2 million, $0.2 million, and $0.5 million for royalty payments
made
to the Vice-Chairman and former Vice-Chairman under these
agreements. At August 31, 2007 and 2006, we had accrued $0.3 million
and $1.6 million payable to the Vice-Chairman and former Vice-Chairman under
the
forgoing agreements. These amounts were included in accrued
liabilities in our consolidated balance sheets.
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,
2007. In addition, two affiliates of the private investor were named
to our Board of Directors. In connection with the preferred stock
offering, we paid an affiliate of the investor $0.1 million, $0.2 million,
and
$0.4 million during the years ended August 31, 2007, 2006, and 2005 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.
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, 2007, 2006, and 2005, we expensed $0.4 million,
$0.3 million, and $0.2 million to the son of the Vice-Chairman for these
royalty
payments and had $0.1 million accrued at August 31, 2007 and 2006 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
$0.2 million and $0.1 million during fiscal 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,
|
||||
|
2008
|
$ |
75
|
||
|
2009
|
100
|
|||
|
2010
|
100
|
|||
|
2011
|
150
|
|||
| $ |
425
|
|||
|
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 2007, 2006, and 2005.
The
Company, under a long-term agreement, leased office space in buildings that
were
owned by partnerships, the majority interest of which were owned by the
Vice-Chairman of the Board of Directors and certain other employees and former
employees of the Company. During fiscal 2005 we exercised an option,
available under our master lease agreement, to purchase, and simultaneously
sell, the office facility to the current tenant, an unrelated
party. The negotiated purchase price with the landlord was $14.0
million and the tenant agreed to purchase the property for $12.5
million. These prices were within the range of estimated fair values
of the buildings as determined by an independent appraisal obtained by the
Company. We paid the difference between the sale and purchase prices,
plus other closing costs, which were previously expensed and
accrued. We paid rent and related building expenses to the
partnership totaling $0.5 million for the fiscal year ended August 31,
2005. Following completion of the sale of these buildings, we have no
further obligations to the related partnerships.
None.
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, 2007
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
There
was
no information to be disclosed in a current Report on Form 8-K during fourth
quarter of fiscal 2007 that was not previously reported.
PART
III
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 18, 2008. 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.
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 18, 2008.
|
Plan
Category
|
[a]
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
|
[b]
Weighted-average
exercise price of outstanding options, warrants, and
rights
|
[c]
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)(3)
|
2,599
|
$ |
12.72
|
1,386
|
||||||||
|
(1)
|
Includes
540,396 performance share awards that are expected to be awarded
under the
terms of a Board of Director approved long-term incentive plan
(LTIP). The number of shares eventually awarded to LTIP
participants is variable and is based upon the achievement of
specified
financial performance targets in sales growth and cumulative
operating
income. The weighted average exercise price of outstanding
equity awards presented in column [b] does not take these awards
into
account. For further information regarding our equity based
compensation plans, refer to Note 12 to our consolidated financial
statements presented in Item 8 of this report on form 10-K.
|
|
(2)
|
Excludes
410,670 shares of unvested (restricted) stock awards that are
subject to
forfeiture.
|
|
(3)
|
The
number of securities remaining available for future issuance
presented in
column [c] considers the expected number of LTIP shares expected
to be
awarded at August 31, 2007 and may change in future periods based
upon
actual and estimated financial performance.
|
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 18, 2008.
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 18, 2008.
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
18, 2008.
PART
IV
(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, 2007, are as follows:
|
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets at August 31, 2007 and 2006
Consolidated
Income Statements and Statements of Comprehensive Income (Loss) for the
years
ended August 31, 2007, 2006, and 2005
Consolidated
Statements of Shareholders’ Equity for the years ended August 31, 2007, 2006,
and 2005
Consolidated
Statements of Cash Flows for the years ended August 31, 2007, 2006, and
2005
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
|
|
3.1
|
Articles
of Restatement dated March 4, 2005 amending and restating the
Company’s
Articles of Incorporation
|
(9)
|
|
|
3.2
|
Amendment
to Amended and Restated Articles of Incorporation of Franklin
Covey
(Appendix C)
|
(14)
|
|
|
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
|
(9)
|
|
|
4.5
|
Restated
Registration Rights Agreement, dated as of March 8, 2005, between
the
Company and Knowledge Capital Investment Group
|
(9)
|
|
|
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
|
(17)
|
|
|
10.4*
|
Amended
and Restated 1992 Stock Incentive Plan
|
(4)
|
|
|
10.5*
|
First
Amendment to Amended and Restated 1992 Stock Incentive
Plan
|
(18)
|
|
|
10.6*
|
Third
Amendment to Amended and Restated 1992 Stock Incentive
Plan
|
(19)
|
|
|
10.7*
|
Fifth
amendment to the Franklin Covey Co. Amended and Restated 1992
Stock
Incentive Plan (Appendix A)
|
(14)
|
|
|
10.8*
|
Forms
of Nonstatutory Stock Options
|
(1)
|
|
|
10.9
|
Lease
Agreements, as amended and proposed to be amended, by and between
Covey
Corporate Campus One, L.L.C. and Covey Corporate Campus Two,
LLC
(Landlord) and Covey Leadership Center, Inc. (Tenant) which
were assumed
by Franklin Covey Co. in the Merger with Covey Leadership,
Inc.
|
(7)
|
|
|
10.10*
|
Amended
and Restated Option Agreement, dated December 8, 2004, by and
between the
Company and Robert A. Whitman
|
(8)
|
|
|
10.11*
|
Agreement
for the Issuance of Restricted Shares, dated as of December
8, 2004, by
and between Robert A. Whitman and the Company
|
(8)
|
|
|
10.12*
|
Letter
Agreement regarding the cancellation of Robert A. Whitman’s Employment
Agreement, dated December 8, 2004
|
(8)
|
|
|
10.13
|
Restated
Monitoring Agreement, dated as of March 8, 2005, between the
Company and
Hampstead Interests, LP
|
(9)
|
|
|
10.14
|
Warrant,
dated March 8, 2005, to purchase 5,913,402 shares of Common
Stock issued
by the Company to Knowledge Capital Investment Group
|
(9)
|
|
|
10.15
|
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
|
(9)
|
|
|
10.16*
|
Franklin
Covey Co. 2004 Non-Employee Directors’ Stock Incentive
Plan
|
(10)
|
|
|
10.17*
|
The
first amendment to the Franklin Covey Co. 2004 Non-Employee
Director Stock
Incentive Plan, (Appendix B)
|
(14)
|
|
|
10.18*
|
Form
of Option Agreement for the 2004 Non-Employee Directors Stock
Incentive
Plan
|
(10)
|
|
|
10.19*
|
Form
of Restricted Stock Agreement for the 2004 Non-Employees Directors
Stock
Incentive Plan
|
(10)
|
|
|
10.20*
|
Separation
Agreement between the Company and Val J. Christensen, dated
March 29,
2005
|
(11)
|
|
|
10.21*
|
Legal
Services Agreement between the Company and Val J. Christensen,
dated March
29, 2005
|
(11)
|
|
|
10.22
|
Master
Lease Agreement between Franklin SaltLake LLC (Landlord) Franklin
Development Corporation (Tenant)
|
(12)
|
|
|
10.23
|
Purchase
and Sale Agreement and Escrow Instructions between Levy Affiliated
Holdings, LLC (Buyer) and Franklin Development Corporation
(Seller) and
Amendments
|
(12)
|
|
|
10.24
|
Redemption
Extension Voting Agreement between Franklin Covey Co. and Knowledge
Capital Investment Group, dated October 20, 2005
|
(13)
|
|
|
10.25
|
Agreement
for Information Technology Services between each of Franklin
Covey Co.
Electronic Data Systems Corporation, and EDS Information Services
LLC,
dated April 1, 2001
|
(15)
|
|
|
10.26
|
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
|
(15)
|
|
|
10.27
|
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
|
(15)
|
|
|
10.28
|
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
|
(16)
|
|
|
10.29
|
Revolving
Line of Credit Agreement ($18,000,000) by and between JPMorgan
Chase Bank,
N.A. and Franklin Covey Co. dated March 14, 2007
|
(20)
|
|
|
10.30
|
Secured
Promissory Note between JPMorgan Chase Bank, N.A. and Franklin
Covey Co.
dated March 14, 2007
|
(20)
|
|
|
10.31
|
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
|
(20)
|
|
|
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 JPMorgan Chase Bank N.A., dated March
14,
2007
|
(20)
|
|
|
10.33
|
Pledge
and Security Agreement between Franklin Covey Co. and JPMorgan
Chase Bank,
N.A. and Zions First National Bank, dated March 14, 2007
|
(20)
|
|
|
10.34
|
Revolving
Line of Credit Agreement ($7,000,000) by and between Zions
First National
Bank and Franklin Covey Co. dated March 14, 2007
|
(20)
|
|
|
10.35
|
Secured
Promissory Note between Zions First National Bank and Franklin
Covey Co.
dated March 14, 2007
|
(20)
|
|
|
10.36
|
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
|
(20)
|
|
|
10.37
|
Credit
Agreement between Franklin Covey Canada, Ltd. and Toronto-Dominion
Bank
dated February 19, 2007
|
(20)
|
|
|
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,
2007, 2006, and 2005
|
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 Form 10-K filed December 1, 1997, for the year
ended
August 31, 1997.**
|
|
(8)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on December
14, 2005.**
|
|
(9)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on March 10,
2005.**
|
|
(10)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on March 25,
2005.**
|
|
(11)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on April 4,
2005.**
|
|
(12)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on June 27,
2005.**
|
|
(13)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on October
24, 2005.**
|
|
(14)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A
filed with the
Commission on December 12, 2005.**
|
|
(15)
|
Incorporated
by reference to Report on Form 10-Q filed July 10, 2001, for
the quarter
ended May 26, 2001.**
|
|
(16)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on April 5,
2006.**
|
|
(17)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A
filed with the
Commission on February 1, 2005.**
|
|
(18)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A
dated November
5, 1993.**
|
|
(19)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A
filed with the
Commission on December 3, 1999.**
|
|
(20)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on March 19,
2007.**
|
|
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, 2007.
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, 2007
|
|
Robert
A. Whitman
|
|
|
|
/s/
STEPHEN R. COVEY
|
Vice-Chairman
of the Board
|
November
14, 2007
|
|
Stephen
R. Covey
|
|
|
|
/s/ CLAYTON M. CHRISTENSEN
|
Director
|
November
14, 2007
|
|
Clayton
M. Christensen
|
|
|
|
/s/ ROBERT H. DAINES
|
Director
|
November
14, 2007
|
|
Robert
H. Daines
|
|
|
|
/s/
E.J. "JAKE" GARN
|
Director
|
November
14, 2007
|
|
E.J.
“Jake” Garn
|
|
|
|
/s/ DENNIS G. HEINER
|
Director
|
November
14, 2007
|
|
Dennis
G. Heiner
|
|
|
|
/s/
DONALD J. MCNAMARA
|
Director
|
November
14, 2007
|
|
Donald
J. McNamara
|
|
|
|
/s/
JOEL C. PETERSON
|
Director
|
November
14, 2007
|
|
Joel
C. Peterson
|
|
|
|
/s/
E. KAY STEPP
|
Director
|
November
14, 2007
|
|
E.
Kay Stepp
|
|
|
FRANKLIN
COVEY CO. SUBSIDIARIES
Domestic:
Franklin
Covey Printing, Inc. (a Utah corporation)
Franklin
Development Corporation (a Utah corporation)/
Franklin
Covey Travel, Inc. (a Utah corporation)
Franklin
Covey Catalog Sales, Inc. (a Utah corporation)
Franklin
Covey Client Sales, Inc. (a Utah corporation)
Franklin
Covey Product Sales, Inc. (a Utah corporation)
International:
Franklin
Covey Canada, Ltd. (a Canada corporation)
Franklin
Covey Europe, Ltd. (England, Wales)
Franklin
Covey Proprietary Limited (Queensland Australia)
Franklin
Covey Japan Co. Ltd. (Japan)
Exhibit
23
Consent
of Independent Registered Public
Accounting Firm
The
Board
of Directors
Franklin
Covey Co.:
We
consent to the incorporation by reference in the registration statements
(Nos.
333-139048, 333-131485, 333-123602, 333-128131, 333-38172, 333-34498, 333-89541,
033-73624, and 033-51314) on Forms S-3 and S-8 of Franklin Covey Co. of our
reports dated November 14, 2007, with respect to the consolidated balance
sheets
of Franklin Covey Co. as of August 31, 2007 and 2006, 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, 2007, and the related financial statement schedule, and the
effectiveness of internal control over financial reporting as of August 31,
2007, which reports appear in the August 31, 2007 annual report on Form 10-K
of
Franklin Covey Co.
/s/
KPMG
LLP
Salt
Lake
City, UT
November
14, 2007
Exhibit
31.1
SECTION
302 CERTIFICATION
I,
Robert
A. Whitman, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Franklin Covey
Co.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including
its
consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
b)
|
Designed
such internal control over financial reporting, or caused such
internal
control over financial reporting to be designed under our supervision,
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;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
|
a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
|
|
|
|
|
|
|
|
Date: November
14, 2007
|
||
|
|
/s/
ROBERT A.
WHITMAN
|
|
|
|
Robert
A. Whitman
President
and Chief Executive Officer
|
|
Exhibit
31.2
SECTION
302 CERTIFICATION
I,
Stephen D. Young, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Franklin Covey
Co.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including
its
consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
b)
|
Designed
such internal control over financial reporting, or caused such
internal
control over financial reporting to be designed under our supervision,
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;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
|
a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
|
|
|
|
|
|
|
|
Date: November
14, 2007
|
||
|
|
/s/
STEPHEN D.
YOUNG
|
|
|
|
Stephen
D. Young
Chief
Financial Officer
|
|
Exhibit
32
CERTIFICATION
In
connection with the annual report of Franklin Covey Co. (the “Company”) on Form
10-K for the period ended August 31, 2007, as filed with the Securities and
Exchange Commission (the “Report”), we, Robert A. Whitman, President and Chief
Executive Officer of the Company, and Stephen D. Young, Chief Financial Officer
of the Company, hereby certify as of the date hereof, solely for purposes
of
Title 18, Chapter 63, Section 1350 of the United States Code, that to the
best
of our knowledge:
|
1.
|
The
Report fully complies with the requirements of Section 13(a) or
15(d), as
applicable, of the Securities Exchange Act of 1934, and
|
|
2.
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
the Company
at the dates and for the periods
indicated.
|
This
Certification has not been, and shall not be deemed, “filed” with the Securities
and Exchange Commission.
|
|
|
|
|
|
|
|||
|
/s/
ROBERT A.
WHITMAN
|
|
|
/s/
STEPHEN D.
YOUNG
|
|
Robert
A. Whitman
President
and Chief Executive Officer
|
|
|
Stephen
D. Young
Chief
Financial Officer
|
|
Date:
November 14, 2007
|
Date:
November 14, 2007
|
Exhibit
99.1
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Franklin
Covey Co.:
Under
date of November 14, 2007, we reported on the consolidated balance sheets
of
Franklin Covey Co. and subsidiaries as of August 31, 2007 and 2006, 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, 2007, which are included in Franklin Covey Co.’s Annual
Report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule in the Annual Report on Form 10-K. This financial
statement schedule is the responsibility of the Company’s
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In
our
opinion, such financial statement schedule, when considered in relation to
the
basic consolidated financial statements taken as a whole, present fairly,
in all
material respects, the information set forth therein.
/s/
KPMG
LLP
Salt
Lake
City, Utah
November
14, 2007
Exhibit
99.2
SCHEDULE
II
FRANKLIN
COVEY CO.
VALUATION
AND QUALIFYING ACCOUNTS AND RESERVES
For
the Three Years Ended August 31, 2007
(Dollars
in Thousands)
|
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
||||||||||||||||
|
Additions
|
||||||||||||||||||||
|
Description
|
Balance
at Beginning of Period
|
Charged
to Costs and Expenses
|
Charged
to Other Accounts
|
Deductions
|
Balance
at End of Period
|
|||||||||||||||
|
Year
ended August 31, 2005:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ |
1,034
|
$ |
1,287
|
$ |
-
|
$ | (896 | )(1) | $ |
1,425
|
|||||||||
|
Allowances
for inventories
|
5,073
|
4,669
|
-
|
(4,418 | )(2) |
5,324
|
||||||||||||||
| $ |
6,107
|
$ |
5,956
|
$ |
-
|
$ | (5,314 | ) | $ |
6,749
|
||||||||||
|
Year
ended August 31, 2006:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ |
1,425
|
$ |
365
|
$ | 564 | (3) | $ | (1,375 | )(1) | $ |
979
|
||||||||
|
Allowance
for inventories
|
5,324
|
989
|
-
|
(2,990 | )(2) |
3,323
|
||||||||||||||
| $ |
6,749
|
$ |
1,354
|
$ |
564
|
$ | (4,365 | ) | $ |
4,302
|
||||||||||
|
Year
ended August 31, 2007:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ |
979
|
$ |
207
|
$ |
-
|
$ | (365 | )(1) | $ |
821
|
|||||||||
|
Allowance
for inventories
|
3,323
|
2,631
|
-
|
(1,702 | )(2) |
4,252
|
||||||||||||||
| $ |
4,302
|
$ |
2,838
|
$ |
-
|
$ | (2,067 | ) | $ |
5,073
|
||||||||||
(1)
Represents
a
write-off of accounts deemed uncollectible
(2) Reduction
in the allowance
is due to a write-off of obsolete inventories
(3)
Amount was
charged against balances recorded in accrued liabilities