form10ka_jan2009.htm
 
 
 
 


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


 
Form 10-K/A
(Amendment No. 1)
 



þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2008.
 
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO  ___ 



FranklinCovey Logo
         Franklin Covey Co.        

(Exact name of registrant as specified in its charter)
 

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


2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
(Address of principal executive offices, including zip code)

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

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


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

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

Series A Preferred Stock, no par value
Title of Class
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No þ

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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

Large accelerated filer
  o
Accelerated filer    x
     
Non-accelerated filer
  o
(Do not check if a smaller reporting company)
Smaller reporting company
  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No þ

As of February 29, 2008, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $124.1 million, which was based upon the closing price of $7.72 per share as reported by the New York Stock Exchange.

As of November 3, 2008, the Registrant had 16,879,498 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders, which is scheduled to be held on January 16, 2009, are incorporated by reference in Part III of this Form 10-K.

 
 



 


EXPLANATORY NOTE

In the Annual Report of Franklin Covey Co. on Form 10-K for the fiscal year ended August 31, 2008 (the Initial Report), management provided a report that concluded that our internal control over financial reporting (as defined by Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) and disclosure controls and procedures were effective as of August 31, 2008.  We subsequently have determined that our controls at our Japan subsidiary: i) to ensure the approval and appropriate accounting treatment of non-standard shipping terms on product sales and ii) over the calculation of inventory reserves were insufficient to prevent misstatements that could be material.  Accordingly, we have concluded that control deficiencies at our Japan subsidiary represented material weaknesses in our internal control over financial reporting at our Japan subsidiary at August 31, 2008.

These material weaknesses lead to errors in our historical financial statements that were discovered in the first quarter of fiscal 2009.  We assessed the materiality of the errors using the guidance found in Staff Accounting Bulletin (SAB) No. 108 and determined that these errors were immaterial to previously reported financial statements included in our Annual Report on Form 10-K.  Therefore, these immaterial errors will be corrected through the fiscal 2009 quarterly filings on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended August 31, 2009.

We are filing this Amendment No. 1 on Form 10-K/A (Amendment No. 1) for the fiscal year ended August 31, 2008 to:

·  
Restate Management’s Report on Internal Control Over Financial Reporting, and amend management’s assessment of the effectiveness of our disclosure controls and procedures; and

·  
File a restated Report of Independent Registered Public Accounting Firm related to internal control over financial reporting.

Our consolidated financial statements and the notes thereto, and the opinion of our Independent Registered Public Accounting Firm on the consolidated financial statements in Item 8 of this Amendment No. 1 are unchanged from the Initial Report, and no other information contained in the Initial Report is amended or updated by this Amendment No. 1.

Pursuant to Rule 12b-15 under the Exchange Act, Item 8 Financial Statements and Supplementary Data, and Item 9A, Controls and Procedures, of Part II of the Initial Report are hereby deleted in their entirety and are replaced with the Item 8 and Item 9A as included herein.  Item 15 of Part IV of the Initial Report is also hereby deleted in its entirety and replaced with the Item 15 included herein.

The information contained in this Amendment No. 1 does not reflect events occurring after the filing of the Initial Report and does not modify or update the disclosures therein, except as specifically identified above.  Significant developments with respect to those disclosures, as well as other changes in our business, have occurred and are described in filings we have made with the Securities and Exchange Commission after filing the Initial Report.


 
2

 

Part II

Item 8.  Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Franklin Covey Co.:
 

We have audited Franklin Covey Co.’s internal control over financial reporting as of August 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Franklin Covey Co.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A(b). 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.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to product sales and inventory reserves have been identified and included in management’s restated assessment.  We also have audited, in accordance with the standards of the Public Company Accounting

 
3

 

Oversight Board (United States), the consolidated balance sheets of Franklin Covey Co. and subsidiaries as of August 31, 2008 and 2007, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three year period ended August 31, 2008. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our opinion dated November 14, 2008, which expressed an unqualified opinion on those consolidated financial statements.

The assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting has been restated by FranklinCovey Co. management to disclose the aforementioned material weaknesses.

In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, Franklin Covey Co. has not maintained effective internal control over financial reporting as of August 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.


/s/ KPMG LLP



Salt Lake City, Utah
November 14, 2008, except as to the restatement of the assessment of effectiveness of internal control over financial reporting for the material weaknesses related to product sales and inventory reserves, which is as of January 28, 2009



 
4

 

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Franklin Covey Co.:
 
We have audited the accompanying consolidated balance sheets of Franklin Covey Co. and subsidiaries as of August 31, 2008 and 2007, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Franklin Covey Co. and subsidiaries as of August 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 2008, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Franklin Covey Co.’s internal control over financial reporting as of August 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 14, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 

 
/s/ KPMG LLP
 
Salt Lake City, Utah
 
November 14, 2008
 


 
5

 

FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS

AUGUST 31,
 
2008
   
2007
 
In thousands, except per share data
           
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 15,904     $ 6,126  
Accounts receivable, less allowance for doubtful accounts of $1,066 and $821
    28,019       27,239  
Inventories
    8,742       24,033  
Deferred income taxes
    2,472       3,635  
Receivable from equity method investee
    7,672       -  
Prepaid expenses and other assets
    5,102       9,070  
Total current assets
 
   
67,911
 
     
70,103
 
 
Property and equipment, net
    26,928       36,063  
Intangible assets, net
    72,320       75,923  
Other long-term assets
    11,768       14,542  
    $ 178,927     $ 196,631  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of long-term debt and financing obligation
  $ 670     $ 629  
Line of credit
    -       15,999  
Accounts payable
    8,713       12,190  
Income taxes payable
    1,057       2,244  
Tender offer obligation
    28,222       -  
Accrued liabilities
    23,419       30,101  
Total current liabilities
 
   
62,081
 
     
61,163
 
 
Long-term debt and financing obligation, less current portion
    32,291       32,965  
Other liabilities
    1,229       1,019  
Deferred income tax liabilities
    4,572       565  
Total liabilities
    100,173       95,712  
                 
Commitments and contingencies (Notes 1, 8, 9, and 12)
               
                 
Shareholders’ equity:
               
Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued
    1,353       1,353  
Additional paid-in capital
    184,313       185,890  
Common stock warrants
    7,597       7,602  
Retained earnings
    25,337       19,489  
Accumulated other comprehensive income
    1,058       970  
Treasury stock at cost, 10,203 shares and 7,296 shares
    (140,904 )     (114,385 )
Total shareholders’ equity
    78,754       100,919  
    $ 178,927     $ 196,631  











See accompanying notes to consolidated financial statements.

 
6

 

FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

YEAR ENDED AUGUST 31,
 
2008
   
2007
   
2006
 
In thousands, except per share amounts
                 
                   
Net sales:
                 
Training and consulting services
  $ 138,112     $ 137,708     $ 122,418  
Products
    121,980       146,417       156,205  
      260,092       284,125       278,623  
                         
Cost of sales:
                       
Training and consulting services
    44,738       43,132       40,722  
Products
    53,565       65,915       69,940  
      98,303       109,047       110,662  
                         
Gross profit
    161,789       175,078       167,961  
                         
Selling, general, and administrative
    141,318       149,220       144,747  
Gain on sale of consumer solutions business unit
    (9,131 )     -       -  
Gain on sale of manufacturing facility
    -       (1,227 )     -  
Restructuring costs
    2,064       -       -  
Impairment of assets
    1,483       -       -  
Depreciation
    5,692       5,394       5,355  
Amortization
    3,603       3,607       3,813  
Income from operations
    16,760       18,084       14,046  
                         
Interest income
    157       717       1,334  
Interest expense
    (3,083 )     (3,136 )     (2,622 )
Recovery from legal settlement
    -       -       873  
Income before income taxes
    13,834       15,665       13,631  
                         
Income tax benefit (provision)
    (7,986 )     (8,036 )     14,942  
Net income
    5,848       7,629       28,573  
Preferred stock dividends
    -       (2,215 )     (4,385 )
Net income available to common shareholders
  $ 5,848     $ 5,414     $ 24,188  
                         
Net income available to common shareholders per share:
                       
Basic
  $ .30     $ .28     $ 1.20  
Diluted
  $ .29     $ .27     $ 1.18  
                         
Weighted average number of common shares:
                       
Basic
    19,577       19,593       20,134  
Diluted
    19,922       19,888       20,516  
                         
COMPREHENSIVE INCOME
                       
Net income
  $ 5,848     $ 7,629     $ 28,573  
Foreign currency translation adjustments
    88       458       97  
Comprehensive income
  $ 5,936     $ 8,087     $ 28,670  











See accompanying notes to consolidated financial statements.

 
7

 

FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED AUGUST 31,
 
2008
   
2007
   
2006
 
In thousands
                 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net income
  $ 5,848     $ 7,629     $ 28,573  
Adjustments to reconcile net income to net cash providedby operating activities:
                       
Depreciation and amortization
    9,533       10,030       10,289  
Gain on sale of consumer solutions business unit assets
    (9,131 )     -       -  
Deferred income taxes
    4,152       5,274       (15,435 )
Share-based compensation cost (benefit)
    (259 )     1,394       843  
Loss (gain) on disposals of assets
    460       (1,247 )     -  
Restructuring charges
    2,064       -       -  
Impairment of assets
    1,483       -       -  
Changes in assets and liabilities:
                       
Increase in accounts receivable, net
    (7,204 )     (3,574 )     (1,919 )
Decrease (increase) in inventories
    2,853       (2,427 )     (845 )
Increase in receivable from equity method investee
    (7,672 )     -       -  
Decrease in prepaid expenses and other assets
    7,109       514       1,458  
Decrease in accounts payable and accrued liabilities
    (1,512 )     (4,388 )     (3,697 )
Increase (decrease) in income taxes payable
    255       304       (2,081 )
Increase (decrease) in other long-term liabilities
    (151 )     (151 )     (177 )
Net cash provided by operating activities
    7,828       13,358       17,009  
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Proceeds from the sale of consumer solutions business unit assets, net
    28,241       -       -  
Purchases of property and equipment
    (4,164 )     (9,138 )     (4,350 )
Capitalized curriculum development costs
    (4,042 )     (5,088 )     (4,010 )
Investment in equity method investee
    (2,755 )     -       -  
Proceeds from disposal of consolidated subsidiaries
    1,180       150       -  
Proceeds from sales of property and equipment, net
    60       2,596       93  
Net cash provided by (used for) investing activities
    18,520       (11,480 )     (8,267 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from line of credit borrowing
    69,708       50,951       -  
Payments on line of credit borrowings
    (85,707 )     (34,952 )     -  
Redemptions of Series A preferred stock
    -       (37,345 )     (20,000 )
Change in restricted cash
    -       -       699  
Principal payments on long-term debt and financing obligation
    (622 )     (605 )     (1,111 )
Purchases of common stock for treasury
    -       (2,625 )     (5,167 )
Proceeds from sales of common stock from treasury
    462       388       427  
Proceeds from management stock loan payments
    -       27       134  
Payment of preferred stock dividends
    -       (2,215 )     (4,885 )
Net cash used for financing activities
    (16,159 )     (26,376 )     (29,903 )
Effect of foreign currency exchange rates on cash and cash equivalents
    (411 )     37       58  
Net increase (decrease) in cash and cash equivalents
    9,778       (24,461 )     (21,103 )
Cash and cash equivalents at beginning of the year
    6,126       30,587       51,690  
Cash and cash equivalents at end of the year
  $ 15,904     $ 6,126     $ 30,587  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid for income taxes
  $ 3,549     $ 2,370     $ 2,615  
Cash paid for interest
    3,146       2,973       2,662  
Non-cash investing and financing activities:
                       
Acquisition of treasury stock from tender offer through liabilities
  $ 28,222     $ -     $ -  
Accrued preferred stock dividends
    -       -       934  
Promissory notes received from sales of consolidated subsidiaries
    -       1,513       -  
Purchases of property and equipment financed by accounts payable
    314       895       -  



See accompanying notes to consolidated financial statements.

 
8

 

FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
   
Series A Preferred Stock Shares
   
Series A Preferred Stock Amount
   
 
Common Stock Shares
   
 
Common Stock Amount
   
 
Additional Paid-In Capital
   
 
Common Stock Warrants
   
Retained Earnings (Accumulated Deficit)
   
 
Deferred Compensa-tion
   
Accumulated Other Comprehensive Income
   
 
Treasury Stock Shares
   
 
Treasury Stock Amount
 
In thousands
                                                                 
Balance at August 31, 2005
    2,294     $ 57,345       27,056     $ 1,353     $ 190,760     $ 7,611     $ (14,498 )   $ (1,055 )   $ 556       (6,465 )   $ (109,246 )
Preferred stock dividends
                                    (4,385 )                                                
Preferred stock redemptions
    (800 )     (20,000 )                                                                        
Issuance of common stock from treasury
                                    (334 )                                     69       743  
Purchase of treasury shares
                                                                            (690 )     (5,167 )
Unvested share award
                                    (458 )                                     27       458  
Share-based compensation
                                    862                                                  
Reclassification of deferred compensation upon adoption of SFAS 123R
                                    (1,055 )                       1,055                          
Receipt of common stock as consideration for payment on management common stock loans
                                        301                                       (24 )     (167 )
Cumulative translation adjustments
                                                                    97                  
Net income
                                                    28,573                                  
Balance at August 31, 2006
    1,494     $ 37,345       27,056     $ 1,353     $ 185,691     $ 7,611     $ 14,075     $ -     $ 653       (7,083 )   $ (113,379 )
Preferred stock dividends
                                                    (2,215 )                                
Preferred stock redemptions
    (1,494 )     (37,345 )                                                                        
Issuance of common stock from treasury
                                    (708 )                                     100       1,096  
Purchase of treasury shares
                                                                            (345 )     (2,603 )
Unvested share award
                                    (501 )                                     32       501  
Share-based compensation
                                    1,394                                                  
Payments on management common stock loans
                                    27                                                  
Cumulative translation adjustments
                                                                    458                  
Common stock warrant activity
                                    (13 )     (9 )                                        
Sale of Brazil subsidiary
                                                                    (141 )                
Net income
                                                    7,629                                  
Balance at August 31, 2007
    -     $ -       27,056     $ 1,353     $ 185,890     $ 7,602     $ 19,489     $ -     $ 970       (7,296 )   $ (114,385 )
Issuance of common stock from treasury
                                    (746 )                                     96       1,234  
Purchase of treasury shares
                                                                            (12 )     (103 )
Treasury shares acquired through tender offer
                                                                            (3,027 )     (28,222 )
Unvested share award
                                    (572 )                                     36       572  
Share-based compensation
                                    (259 )                                                
Cumulative translation adjustments
                                                                    88                  
Common stock warrant activity
                                            (5 )                                        
Net income
                                                    5,848                                  
Balance at August 31, 2008
    -     $ -       27,056     $ 1,353     $ 184,313     $ 7,597     $ 25,337     $ -     $ 1,058       (10,203 )   $ (140,904 )

See accompanying notes to consolidated financial statements.

 
9

 

FRANKLIN COVEY CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Franklin Covey Co. (hereafter referred to as us, we, our, or the Company) believes that great organizations consist of great people who form great teams that produce great results.  To enable organizations and individuals to achieve great results, we provide integrated consulting, training, and performance solutions focused on leadership, strategy execution, productivity, sales force effectiveness, effective communication, and other areas.  Our services and products have historically been available through professional consulting services, public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com and our best-known offerings in the marketplace have included the FranklinCovey Planner™, and a suite of individual-effectiveness and leadership-development training products based on the best-selling book, The 7 Habits of Highly Effective People.

During the fourth quarter of fiscal 2008, we completed the sale of substantially all of the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed entity, Franklin Covey Products, LLC (Note 2).  The CSBU was primarily responsible for the sale of our products, including the FranklinCovey Planner™, to consumers through retail stores, catalogs, and our Internet site.  Following the sale of the CSBU, our business primarily consists of training, consulting, and assessment services and products to help organizations achieve superior results by focusing on and executing on top priorities, building the capability of knowledge workers, and aligning business processes.  Our training, consulting, and assessment offerings include services based upon the popular workshop The 7 Habits of Highly Effective PeopleÒ; Leadership: Great Leaders—Great  Teams—Great Results™; The 4 Disciplines of Execution™; FOCUS: Achieving Your Highest Priorities; The 8 Habits of a Successful Marriage; Building Business Acumen; Championing Diversity; Leading at the Speed of Trust; Writing Advantage, and Presentation Advantage.  During fiscal 2008, we introduced a new suite of services designed to help our clients improve their sales through increased customer loyalty.  We also consistently seek to create, develop, and introduce new services and products that will help our clients achieve greatness.

Fiscal Year

The Company utilizes a modified 52/53-week fiscal year that ends on August 31 of each year.  Corresponding quarterly periods generally consist of 13-week periods that ended on December 1, 2007, March 1, 2008, and May 31, 2008 during fiscal 2008.  Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and our subsidiaries, which consisted of Franklin Covey Printing, Franklin Development Corp., and our wholly-owned operations in Canada, Japan, the United Kingdom, Australia, and Mexico (product sales) during fiscal 2008.  Intercompany balances and transactions are eliminated in consolidation.

Pervasiveness of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

 
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Reclassifications

Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.  These reclassifications included a change in the classification of building depreciation costs related to subleased office space from product cost of sales to depreciation expense.  The depreciation expense reclassified from product cost of sales totaled $0.7 million and $0.6 million for the fiscal years ended August 31, 2007 and 2006, respectively.

Cash and Cash Equivalents

We consider highly liquid investments with insignificant interest rate risk and original maturities to the Company of three months or less to be cash equivalents.  We did not hold a significant amount of investments that would be considered cash equivalent instruments at August 31, 2008 or 2007.

As of August 31, 2008, we had demand deposits at various banks in excess of the $250,000 limit for insurance by the Federal Deposit Insurance Corporation (FDIC).  Subsequent to August 31, 2008 we utilized substantially all of our available cash to pay the $28.2 million tender offer obligation.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts represents our best estimate of the amount of probable credit losses in the existing accounts receivable balance.  We determine the allowance for doubtful accounts based upon historical write-off experience and current economic conditions and review the adequacy of the allowance for doubtful accounts on a regular basis.  Receivable balances past due over 90 days, which exceed a specified dollar amount, are reviewed individually for collectibility.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  We do not have any off-balance sheet credit exposure related to our customers.

Inventories

Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out method.  Elements of cost in inventories generally include raw materials, direct labor, and overhead.  Cash flows from the sales of inventory are included in cash flows provided by operating activities in our consolidated cash flows statements.  Following the sale of our Consumer Solutions Business Unit in the fourth quarter of fiscal 2008, our inventories are comprised primarily of training materials, books, and related accessories and were comprised of the following (in thousands):

AUGUST 31,
 
2008
   
2007
 
Finished goods
  $ 8,329     $ 20,268  
Work in process
    -       743  
Raw materials
    413       3,022  
    $ 8,742     $ 24,033  

Provision is made to reduce excess and obsolete inventories to their estimated net realizable value.  At August 31, 2008 and 2007, our reserves for excess and obsolete inventories totaled $1.1 million and $4.3 million.  In assessing the realization of inventories, we make judgments regarding future demand requirements and compare these estimates with current and committed inventory levels.  Inventory requirements may change based on projected customer demand, training curriculum life-cycle changes, longer- or shorter-than-expected usage periods, and other factors that could affect the valuation of our inventories.

 
11

 

Property and Equipment

Property and equipment are recorded at cost.  Depreciation expense, which includes depreciation on our corporate campus that is accounted for as a financing obligation (Note 3) and the amortization of assets recorded under capital lease obligations, is calculated using the straight-line method over the expected useful life of the asset.  The Company generally uses the following depreciable lives for our major classifications of property and equipment:

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

Leasehold improvements are amortized over the lesser of the useful economic life of the asset or the contracted lease period.  We expense costs for repairs and maintenance as incurred.  Gains and losses resulting from the sale of property and equipment are recorded in current operations.

Indefinite-Lived Intangible Assets

Intangible assets that are deemed to have an indefinite life are not amortized, but rather are tested for impairment on an annual basis, or more often if events or circumstances indicate that a potential impairment exists.  The Covey trade name intangible asset (Note 4) has been deemed to have an indefinite life.  This intangible asset is assigned to the Organizational Solutions Business Unit and is tested for impairment using the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars and work sessions, international licensee sales, and related products.  No impairment charge to the Covey trade name was recorded during the fiscal years ended August 31, 2008, 2007, or 2006.

Capitalized Curriculum Development Costs and Impairment of Assets

During the normal course of business, we develop training courses and related materials that we sell to our customers.  Capitalized curriculum development costs include certain expenditures to develop course materials such as video segments, course manuals, and other related materials.  Generally, curriculum costs are capitalized when a new offering is developed or when there is a major revision to an existing course that requires a significant re-write of the course materials or curriculum.  Costs incurred to maintain existing offerings are expensed when incurred.  In addition, development costs incurred in the research and development of new curriculum and software products to be sold, leased, or otherwise marketed are expensed as incurred until technological feasibility has been established in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, and Emerging Issues Task Force (EITF) Issue 96-6, Accounting for the Film and Software Costs Associated with Developing Entertainment and Educational Software Products.

During fiscal 2008, we capitalized certain costs incurred for the development of a new customer loyalty offering, leadership offerings, including The Speed of Trust and The Leader in Me, as well as other courses.  Capitalized development costs are generally amortized over a five-year life, which is based on numerous factors, including expected cycles of major changes to curriculum.  Capitalized curriculum development costs are reported as a component of other long-term assets in our consolidated balance sheets and totaled $6.8 million and $8.6 million at August 31, 2008 and 2007.  Amortization of capitalized curriculum development costs is reported as a component of cost of sales.

In fiscal 2008 we analyzed the expected future revenues and corresponding cash flows expected to be generated from our The 7 Habits of Highly Effective People interactive program and concluded that the expected future revenues, less direct selling and maintenance costs, were insufficient to cover the

 
12

 

carrying value of the corresponding capitalized development costs.  Accordingly, we recorded a $1.5 million impairment charge in the fourth quarter of fiscal 2008 to write the carrying value of this program down to its net realizable value.

Restricted Investments

The Company’s restricted investments consist of insurance contracts and investments in mutual funds that are held in a “rabbi trust” and are restricted for payment to the participants of our deferred compensation plan (Note 16).  We account for our restricted investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.  As required by SFAS No. 115, the Company determines the proper classification of its investments at the time of purchase and reassesses such designations at each balance sheet date.  For the periods presented in this report, our restricted investments were classified as trading securities and consisted of insurance contracts and mutual funds.  The fair value of these restricted investments totaled $0.5 million and $0.7 million at August 31, 2008 and 2007, and were recorded as components of other long-term assets in the accompanying consolidated balance sheets.

In accordance with SFAS No. 115, our unrealized losses on restricted investments, which were immaterial during fiscal years 2008, 2007, and 2006, were recognized in the accompanying consolidated income statements as a component of selling, general, and administrative expense.

Impairment of Long-Lived Assets

Long-lived tangible assets and definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  We use an estimate of undiscounted future net cash flows of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable.  If the carrying values of the assets exceed the anticipated future cash flows of the assets, we recognize an impairment loss equal to the difference between the carrying values of the assets and their estimated fair values.  Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets.  The evaluation of long-lived assets requires us to use estimates of future cash flows.  If forecasts and assumptions used to support the realizability of our long-lived tangible and definite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.

Accrued Liabilities

Significant components of our accrued liabilities were as follows (in thousands):

AUGUST 31,
 
2008
   
2007
 
Unearned revenue
  $ 4,564     $ 4,709  
Outsourcing contract costs payable
    4,446       4,357  
Accrued compensation
    4,152       6,807  
Customer credits
    2,191       2,570  
Restructuring costs
    2,055       -  
Other accrued liabilities
    6,011       11,658  
    $ 23,419     $ 30,101  

Restructuring Costs

Following the sale of our CSBU in the fourth quarter of fiscal 2008, we initiated a restructuring plan that reduces the number of our domestic regional sales offices, decentralizes certain sales support functions, and significantly changes the operations of our Canadian subsidiary.  The restructuring plan is intended to strengthen the remaining domestic sales offices and reduce our overall operating costs.  During fiscal 2008 we expensed $2.1 million for anticipated severance costs necessary to complete the restructuring

 
13

 

plan, of which $2.1 million was recorded as a component of accrued liabilities at August 31, 2008.  The composition and utilization of the accrued restructuring charge was as follows at August 31, 2008 (in thousands):

 
 
Description
 
Accrued Restructuring Costs
 
Balance at August 31, 2007
  $ -  
Restructuring charges
    2,064  
Amounts utilized – employee severance
    (9 )
Balance at August 31, 2008
  $ 2,055  

We intend to complete the majority of the restructuring plan activities during the year ending August 31, 2009.

Foreign Currency Translation and Transactions

The functional currencies of the Company’s foreign operations are the reported local currencies.  Translation adjustments result from translating our foreign subsidiaries’ financial statements into United States dollars.  The balance sheet accounts of our foreign subsidiaries are translated into United States dollars using the exchange rate in effect at the balance sheet date.  Revenues and expenses are translated using average exchange rates for each month during the fiscal year.  The resulting translation gains or losses were recorded as a component of accumulated other comprehensive income in shareholders’ equity.  Foreign currency transaction losses totaled $0.1 million during each of the fiscal years ended August 31, 2008, 2007, and 2006, and were reported as a component of our selling, general, and administrative expenses.

Derivative Instruments

Derivative instruments are accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as modified by SFAS No. 138, Accounting for Certain Derivative and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.  During the normal course of business, we are exposed to risks associated with foreign currency exchange rate and interest rate fluctuations.  Foreign currency exchange rate exposures result from the Company’s operating results, assets, and liabilities that are denominated in currencies other than the United States dollar.  In order to limit our exposure to these elements, we have made limited use of derivative instruments.  Each derivative instrument that is designated as a hedge instrument is recorded on the balance sheet at its fair value.  Changes in the fair value of derivative instruments that qualify for hedge accounting are recorded in accumulated other comprehensive income, which is a component of shareholders’ equity.  Changes in the fair value of derivative instruments that are not designated as hedge instruments are immediately recognized as a component of selling, general, and administrative expense in our consolidated income statements.  At August 31, 2008 we were not party to any financial instruments that qualified for hedge accounting.

Sales Taxes

We collect sales tax on qualifying transactions with customers based upon applicable sales tax rates in various jurisdictions.  The Company accounts for its sales taxes collected using the net method as defined by EITF Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) and accordingly, we do not include sales taxes in net sales reported in our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition.  Accordingly,

 
14

 

we recognize revenue when: 1) persuasive evidence of an agreement exists, 2) delivery of product has occurred or services have been rendered, 3) the price to the customer is fixed or determinable, and 4) collectibility is reasonably assured.  For training and service sales, these conditions are generally met upon presentation of the training seminar or delivery of the consulting services.  For product sales, these conditions are generally met upon shipment of the product to the customer or by completion of the sales transaction in a retail store.

Some of our training and consulting contracts contain multiple deliverable elements that include training along with other products and services.  For transactions that contain more than one element, we recognize revenue in accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.  When fair value exists for all contracted elements, the overall contract consideration is allocated among the separate units of accounting based upon their relative fair values.  Revenue for these units is recognized in accordance with our general revenue policies once it has been determined that the delivered items have standalone value to the customer.  If fair value does not exist for all contracted elements, revenue for the delivered items is recognized using the residual method, which generally means that revenue recognition is postponed until the point is reached when the delivered items have standalone value and fair value exists for the undelivered items.  Under the residual method, the amount of revenue considered for recognition under our general revenue policies is the total contract amount, less the aggregate fair value of the undelivered items.  Fair value of the undelivered items is based upon the normal pricing practices for our existing training programs, consulting services, and other products, which are generally the prices of the items when sold separately.

Our international strategy includes the use of licensees in countries where we do not have a wholly-owned operation.  Licensee companies are unrelated entities that have been granted a license to translate our content and curriculum, adapt the content and curriculum to the local culture, and sell our training seminars and products in a specific country or region.  Licensees are required to pay us royalties based upon a percentage of their sales to clients.  We recognize royalty income each period based upon the sales information reported to us from our licensees.  Licensee royalty revenues are included as a component of training sales and totaled $10.1 million, $7.6 million, and $6.1 million, for the fiscal years ended August 31, 2008, 2007, and 2006.

Revenue is recognized on software sales in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition as amended by SOP 98-09.  Statement 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements such as software products and support to be allocated to each element based on the relative fair value of the elements based on vendor specific objective evidence (VSOE).  Nearly all of the Company’s software sales consist of ready to use “off-the-shelf” software products that have multiple elements, including a license and post contract customer support (PCS).  Currently we do not have VSOE for either the license or support elements of our software sales.  Accordingly, revenue is deferred until the only undelivered element is PCS and the total arrangement fee is recognized over the support period.  During fiscal 2008, 2007, and 2006, we had software sales totaling $2.5 million, $3.2 million, and $3.3 million, which are included as a component of product sales in our consolidated income statements.

Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns.

Share-Based Compensation

We account for our share-based compensation costs according to the provisions of SFAS No. 123 (Revised 2004) Share-Based Payment (SFAS No. 123R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.  In general, SFAS No. 123R requires all share based-payments to employees and non-employees, including grants of stock options and the compensatory elements of employee stock purchase plans, to be recognized in the income statement based upon their fair values.

For more information on our share-based compensation plans, refer to Note 13.

 
15

 

Shipping and Handling Fees and Costs

All shipping and handling fees billed to customers are recorded as a component of net sales.  All costs incurred related to the shipping and handling of products are recorded in cost of sales.

Advertising Costs

Costs for newspaper, television, radio, and other advertising are expensed as incurred or recognized over the period of expected benefit for direct response and catalog advertising.  Direct response advertising costs, which consist primarily of printing and mailing costs for catalogs and seminar mailers, are charged to expense over the period of projected benefit, which ranges from three to 12 months.  Advertising costs included in selling, general, and administrative expenses totaled $15.5 million, $15.9 million, and $16.0 million, for the fiscal years ended August 31, 2008, 2007, and 2006.  Our direct response advertising costs reported in other current assets totaled $0.5 million and $2.2 million at August 31, 2008 and 2007.

Research and Development Costs

We expense research and development costs as incurred.  During the fiscal years ended August 31, 2008, 2007, and 2006, we expensed $4.6 million, $3.3 million, and $2.3 million of research and development costs that were recorded as components of cost of sales and selling, general, and administrative expenses in our consolidated income statements.

Income Taxes

Our income tax provision has been determined using the asset and liability approach of accounting for income taxes.  Under this approach, deferred income taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid.  The income tax provision represents income taxes paid or payable for the current year plus the change in deferred taxes during the year.  Deferred income taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for tax rates and tax laws when changes are enacted.  A valuation allowance is provided against deferred income tax assets when it is more likely than not that all or some portion of the deferred income tax assets will not be realized.  We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), on September 1, 2007.  Following the adoption of FIN 48, interest and penalties related to uncertain tax positions are recognized as components of income tax expense.

The Company provides for income taxes, net of applicable foreign tax credits, on temporary differences in our investment in foreign subsidiaries, which consist primarily of unrepatriated earnings.

Comprehensive Income

Comprehensive income includes changes to equity accounts that were not the result of transactions with shareholders.  Comprehensive income is comprised of net income or loss and other comprehensive income and loss items.  Our comprehensive income and losses generally consist of changes in the cumulative foreign currency translation adjustment.

Accounting Pronouncements Issued Not Yet Adopted

Fair Value Measures – In September 2006, the FASB issued SFAS No. 157, Fair Value Measures.  This statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements.  Statement No. 157 only applies to fair-value measurements that are already required or permitted by other accounting standards except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value.  This statement is effective for the specified fair value measures for financial statements

 
16

 

issued for fiscal years beginning after November 15, 2007, and will thus be effective for the Company in fiscal 2009.  We have not yet completed our analysis of the impact of SFAS No. 157 on our financial statements.

Fair Value Option for Financial Assets and Financial Liabilities – In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115.  Statement No.159 permits entities to choose to measure many financial instruments and certain other items at fair value.  The provisions of SFAS No. 159 will become effective for the Company in fiscal 2009 and we have not yet completed our analysis of the impact of SFAS No. 159 on our financial statements.

Business Combinations – In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.  These standards aim to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements.  The provisions of SFAS No. 141R and SFAS No. 160 are effective for our fiscal year beginning September 1, 2009.  We do not currently anticipate that these statements will have a material impact upon our financial condition or results of operations.

Derivatives Disclosures – In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities.  Statement No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows.  The provisions of SFAS No. 161 are effective for our third quarter of fiscal 2009.  The Company is currently evaluating the impact of the provisions of SFAS No. 161, but due to our limited use of derivative instruments we do not currently anticipate that the provisions of SFAS No. 161 will have a material impact on our financial statements.


2.
SALE OF THE CONSUMER SOLUTIONS BUSINESS UNIT

During fiscal 2008, we joined with Peterson Partners to create a new company, Franklin Covey Products, LLC (Franklin Covey Products).  This new company purchased substantially all of the assets of our Consumer Solutions Business Unit (CSBU) with the objective of expanding the worldwide sales of Franklin Covey products as governed by a comprehensive license agreement between us and Franklin Covey Products.  The CSBU was primarily responsible for sales of our products to both domestic and international consumers through a variety of channels, including retail stores, a call center, and the Internet (Note 19).  Franklin Covey Products, which is controlled by Peterson Partners, purchased the CSBU assets for $32.0 million in cash plus a $1.2 million adjustment for working capital delivered on the closing date of the sale, which was effective July 6, 2008.  We also incurred $3.7 million of direct costs related to the sale of the CSBU assets, a portion of which is reimbursable from Franklin Covey Products.  At August 31, 2008, we have a $3.5 million note receivable for these reimbursable transaction costs and excess working capital that is due in January 2009.  The note receivable bears interest at Franklin Covey Products’ effective borrowing rate, which was approximately 6.0 percent at August 31, 2008.

On the date of the sale closing, the Company invested approximately $1.8 million to purchase a 19.5 percent voting interest in Franklin Covey Products, made a $1.0 million priority capital contribution with a 10 percent return, and will have the opportunity to earn contingent license fees if Franklin Covey Products achieves specified performance objectives.  We recognized a gain of $9.1 million on the sale of the CSBU assets and according to guidance found in EITF Issue No. 01-2, Interpretations of APB Opinion No. 29, we deferred a portion of the gain equal to our investment in Franklin Covey Products.  We will recognize the deferred gain over the life of the long-term assets acquired by Franklin Covey Products or when cash is received for payment of the priority contribution.

 
17

 

The carrying amounts of the assets and liabilities of the CSBU that were sold to Franklin Covey Products were as follows (in thousands):

Description
     
Cash and cash equivalents
  $ 38  
Accounts receivable, net
    6,675  
Inventories
    12,665  
Other current assets
    2,291  
Property and equipment, net
    8,435  
Other assets
    158  
Total assets sold
  $ 30,262  
         
Accounts payable
  $ 3,589  
Accrued liabilities
    6,748  
Total liabilities sold
  $ 10,337  

Based upon the guidance found in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations, and SAB 103, Topic 5Z4, Disposal of Operation with Significant Interest Retained, we determined that the operations of CSBU should not be reported as discontinued operations because we will continue to have significant influence over the operations of Franklin Covey Products and may participate in future cash flows.  As a result of this determination, we have not presented the financial results of the CSBU as discontinued operations in the accompanying consolidated financial statements and we do not anticipate discontinued operations presentation in future interim and annual reporting periods.

As a result of Franklin Covey Products’ structure as a limited liability company with separate owner capital accounts and the guidance found in EITF Issue No. 03-16, Accounting for Investments in Limited Liability Companies and SOP 78-9, Accounting for Investments in Real Estate Ventures, we determined that the Company’s investment in Franklin Covey Products is more than minor and that we are required to account for our investment in Franklin Covey Products using the equity method of accounting.  We record our share of Franklin Covey Products’ profit and loss based upon specified allocations as defined in the associated operating agreement.  Our ownership interest may be diluted in future periods if ownership shares of Franklin Covey Products granted to certain members of its management vest.

The following unaudited summary financial information for Franklin Covey Products is presented as of and for the two months ending August 31, 2008 (in thousands):

Balance Sheet
     
Total assets
  $ 45,588  
Total liabilities
    37,013  
         
Income Statement
       
Sales
    13,149  
Net loss
    (1,437 )

Following the sale of the CSBU assets, we do not have any obligation to fund the losses of Franklin Covey Products and therefore our portion of the net loss in fiscal 2008 was not recorded in our consolidated income statement.  Under the terms of the agreements associated with the sale of the CSBU assets, we are entitled to receive reimbursement for certain operating costs, such as warehousing and distribution costs, which are billed to the Company by third party providers.  At August 31, 2008 we had a $7.7 million receivable from Franklin Covey Products, which consisted of $3.5 million of reimbursable costs associated with the sale transaction as described above, and $4.2 million of reimbursable operating costs.



 
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3.
PROPERTY AND EQUIPMENT

Our property and equipment were comprised of the following (in thousands):

AUGUST 31,
 
2008
   
2007
 
Land and improvements
  $ 1,626     $ 1,639  
Buildings
    34,573       34,536  
Machinery and equipment
    2,969       29,026  
Computer hardware and software
    20,010       45,623  
Furniture, fixtures, and leasehold improvements
    9,640       32,579  
      68,818       143,403  
Less accumulated depreciation
    (41,890 )     (107,340 )
    $ 26,928     $ 36,063  

In addition to the CSBU property and equipment that was sold to Franklin Covey Products during the fourth quarter of fiscal 2008, we disposed of certain computer hardware and software that was replaced or rendered obsolete during the year.  Substantially all of this computer hardware and software was fully depreciated at the time of disposal.  In addition, we also transferred ownership of fully depreciated warehouse equipment to a third party warehouse services provider (Note 9) as required by the outsourcing contract.

During fiscal 2007, we completed a project to reconfigure our printing operations to improve our printing services’ efficiency, reduce operating costs, and improve our printing services’ flexibility in order to increase external printing service sales.  Our reconfiguration plan included moving our printing operations a short distance from its existing location to our corporate headquarters campus and the sale of the manufacturing facility and certain printing presses.  We completed the sale of the manufacturing facility during the second quarter of fiscal 2007.  The sale price was $2.5 million and, after deducting customary closing costs, the net proceeds to the Company from the sale totaled $2.3 million in cash.  The carrying value of the manufacturing facility at the date of sale was $1.1 million and accordingly, we recognized a $1.2 million gain on the sale of the manufacturing facility.  The manufacturing facility assets sold were primarily reported as a component of corporate assets for segment reporting purposes.  Due to a lower-than-expected sale price on one of the printing presses to be sold, we recorded an impairment charge totaling $0.3 million to reduce the carrying value of the printing press to its anticipated sale price.  The impairment charge was included as a component of depreciation expense in our consolidated income statement for the fiscal year ended August 31, 2007.

In connection with the fiscal 2005 sale of our corporate headquarters facility, we entered into a 20-year master lease agreement with the purchaser, an unrelated private investment group.  The master lease agreement contains six five-year renewal options, which will allow us to maintain our operations at our current location for up to 50 years.  Although the corporate headquarters facility was formally sold and the Company has no legal ownership of the property, SFAS No. 98, Accounting for Leases, precluded us from recording the transaction as a sale since we have subleased more than a minor portion of the property.  Pursuant to this accounting guidance, we have accounted for the sale as a financing transaction, which required us to continue reporting the corporate headquarters facility as an asset and to depreciate the property over the life of the master lease agreement.  We also recorded a financing obligation to the purchaser (Note 7) for the sale price.  At August 31, 2008, the carrying value of the co