form10k_111210.htm
 
 
 


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


 
Form 10-K




þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2010.
 
 
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:
None
 
 
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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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
£
 
Accelerated filer
þ
     

Non-accelerated filer
£
(Do not check if a smaller reporting company)
  Smaller reporting company
£

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 26, 2010, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $77.1 million, which was based upon the closing price of $5.85 per share as reported by the New York Stock Exchange.

As of November 1, 2010, the Registrant had 17,037,070 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 14, 2011, are incorporated by reference in Part III of this Form 10-K.


 
 



 



FranklinCovey Co.
 
PART I
   
 
Business
 
Risk Factors
 
Unresolved Staff Comments
 
Properties
 
Legal Proceedings
 
Reserved
PART II
   
 
Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
 
Selected Financial Data
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Quantitative and Qualitative Disclosures About Market Risk
 
Financial Statements and Supplementary Data
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
Controls and Procedures
 
Other Information
PART III
   
 
Directors, Executive Officers and Corporate Governance
 
Executive Compensation
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Certain Relationships and Related Transactions, and Director Independence
 
Principal Accountant Fees and Services
PART IV
   
 
Exhibits and Financial Statement Schedules
     
   


 
 

 
PART I

ITEM 1. BUSINESS

Disclosure Regarding Forward-Looking Statements

 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to our operations, results of operations, and other matters that are based on our current expectations, estimates, assumptions, and projections.  Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements.  These statements are not guarantees of future performance and involve risks, uncertainties, and as sumptions that are difficult to predict.  Forward-looking statements are based upon assumptions as to future events that might not prove to be accurate.  Actual outcomes and results could differ materially from what is expressed or forecast in these forward-looking statements.  Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to, the factors discussed below under the section entitled “Risk Factors.”

General

Franklin Covey Co. (the Company, we, us, our, or FranklinCovey) is a leading global provider of execution, leadership, and personal-effectiveness training with over 600 employees worldwide delivering principle-based curriculum and effectiveness tools to our customers.  Our consolidated net sales for the fiscal year ended August 31, 2010 totaled $136.9 million and our shares of common stock are traded on the New York Stock Exchange (NYSE) under the ticker symbol “FC.”

We operate globally with one common brand and business model designed to enable us to provide clients around the world with the same high level of service.  To achieve this level of service we operate four regional sales offices in the United States; wholly owned subsidiaries in Australia, Japan, and the United Kingdom; and contract with licensee partners who deliver our curriculum and provide services in over 140 other countries and territories around the world.

Our business-to-business service utilizes our expertise in training, consulting, and technology that is designed to help our clients define great performance and execute at the highest levels.  We also provide clients with training in management skills, relationship skills, and individual effectiveness, and can provide personal-effectiveness literature and electronic educational solutions to our clients as needed.

Our fiscal year ends on August 31 of each year.  Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.

During fiscal 2010, we sold the product sales component of our wholly owned subsidiary in Japan to an unrelated Japan-based paper products company.  The sale closed on June 1, 2010 and the total sale price was JPY 305.0 million, or approximately $3.4 million.  In addition, the sale agreement provides for a three percent passive royalty on annual sales, which we believe will not be significant to our future operations.  We believe that the sale of this division will further align our Japanese operations with our overall strategic focus on training and consulting sales.  As a consequence of the sale, we determined that the operating results of the Japan product sales component qualified for discontinued operations presentation and we have presented the operating results of the Japan product sales comp onent as discontinued operations for all periods presented in this report on Form 10-K.

During the fourth quarter of fiscal 2008, we sold substantially all of the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed entity, Franklin Covey Products, LLC (Refer to Note 3 of our consolidated financial statements in Item 8 for further details on this transaction).  The CSBU was primarily responsible for the sale of our products such as planners, binders, software, totes, and related accessories.  Following the sale of the CSBU, our efforts have been focused on providing superior training, consulting, and other services that will enable our clients to achieve greatness.

 
1

 

Services Overview

Our mission is to enable greatness in people and organizations everywhere.  To that end, we have developed industry-leading content, tools, and methodologies to help organizations achieve four outcomes:

1.  
Sustained Superior Performance.  Great organizations succeed financially and operationally in both the short and long term relative to their market and strategic potential.
 
2.  
Intensely Loyal Customers.  Great organizations earn not only the “satisfaction” of their customers, but their true loyalty.

3.  
Highly Engaged and Loyal Employees.  The people who work in great organizations are energized and passionate about what they do.
 
4.  
Distinctive Contribution.  Great organizations do more than “business as usual”—they fulfill a unique mission that sets them apart from the crowd.

Our content, tools, and methodologies are organized into key practice areas or product lines, each offering targeted solutions that drive these four outcomes.  Our primary practice areas and product lines include:

1.  
Execution
2.  
Leadership
3.  
Individual Effectiveness
4.  
Winning Customer Loyalty
5.  
Trust
6.  
Sales Performance
7.  
Education Solutions
8.  
E-Learning
9.  
Custom Solutions
10.  
Media Publishing

The following is a description of our primary practice areas and curriculum.

1.  
Execution

Execution remains one of the toughest challenges organizations face today.  Our internal studies show that only 13 percent of public companies meet yearly financial expectations, 70 percent of strategic initiatives either fail or are abandoned, and only 19 percent of workers say they can effectively translate the company’s top goals into the work they do.

We believe our Execution practice addresses these challenges.  We work directly with leadership teams to help them clarify the “wildly important goals” that their strategy requires, identify key measures that lead to the achievement of these goals, create clear and compelling scoreboards, and build a culture and cadence of accountability so that the goals are achieved.  Our key execution offerings include:

The 4 Disciplines of Execution®: Manager Certification
The purpose of Manager Certification includes helping managers not only develop specific skills, but to also create actual work plans.  We help managers leave the session with clearly identified goals and measures, a draft scoreboard for their team, and an accountability plan to help everyone move forward on the goals.

The 4 Disciplines of Execution®: Skills Workshop and Team Work Session
The purpose of the one- or two-day work session is to help teams understand the methods and develop the skills of consistent execution.  We help teams clarify their goals, refine key measures, and generate new and better ways of achieving the goals through peer-to-peer accountability.

Execution Quotient® (xQ) Assessment
This offering allows organizations to measure their overall ability to execute their most important goals.  The xQ is a culture-wide assessment based on factors that contribute to consistent and successful execution.  This assessment helps leaders identify areas where their goals may be at risk.

What the CEO Wants You to Know: Building Business Acumen™
This training supports the Execution disciplines by helping individuals and teams better understand the financial engine of their business and how they can positively affect it.  The material is based on the popular book What the CEO Wants You to Know, by leading CEO and executive coach Ram Charan.

2.  
Leadership

Leadership has a profound impact on performance, and is a key lever that mobilizes teams to produce results.

We help organizations develop leaders who build great teams through these 4 imperatives:

1.  
Inspire Trust:  Build credibility as a leader so that people will contribute their highest efforts.
 
2.  
Clarify Purpose:  Define a clear and compelling purpose that motivates people to offer their best to achieve the organizational goals.

3.  
Align Systems:  Create systems of success that support the purpose and goals of the organization, enable people to do their best work, operate independently of management, and sustain superior performance over time.

4.  
Unleash Talent: Develop a winning team, where people’s unique talents are leveraged against clear performance expectations in a way that encourages responsibility and growth.

Each of our Leadership offerings addresses these imperatives or provides in-depth training in one of these areas.

Leadership: Great Leaders, Great Teams, Great Results™
This comprehensive offering contains the entire core content of FranklinCovey’s Leadership practice.  During the program, leaders learn the 4 Imperatives of Great Leaders and take specific actions to carry them out.  The workshop features award-winning videos that present the latest on our own research and thinking, along with the best thinking of other leadership experts including:

·  
Jack Welch, Winning
·  
Fred Reichheld, The Ultimate Question
·  
Clayton Christensen, The Innovator’s Solution
·  
Stephen R. Covey, The 8th Habit
·  
Stephen M. R. Covey, The Speed of Trust
·  
Ram Charan, What the CEO Wants You to Know

Leadership Foundations™
Our Leadership Foundations workshop is designed to prepare emerging leaders to take on significant roles and responsibilities in the future.  Participants gain skills to improve trust and influence with peers and superiors, link their work to a clear and compelling team purpose, implement a system for executing critical priorities, and leverage the talents of peers and co-workers to achieve unprecedented results.

Leadership Modular Series™
Drawn from the content of our leadership-development program, the Leadership Modular Series comprises seven stand-alone modules that teach imperatives leaders can apply immediately to create a work environment that addresses the needs of the knowledge worker.  For leaders who cannot attend multiple days of training, the Leadership Modular Series lets them focus on one

specific leadership competency, three to four hours at a time.  The series includes the following instructor-led training modules:

1.  
The 4 Imperatives of Great Leaders™
2.  
Inspiring Trust
3.  
Clarifying Your Team’s Purpose and Strategy
4.  
Closing the Execution Gap
5.  
Building Process Excellence
6.  
Unleashing Talent
7.  
Leading Across Generations

The 7 Habits for Managers®
FranklinCovey’s The 7 Habits for Managers solution teaches the fundamentals of leading today’s mobile knowledge worker.  Both new and experienced managers acquire a set of tools to help them meet today’s management challenges, including conflict resolution, prioritization, performance management, accountability and trust, execution, collaboration, and team and employee development.  We help participants in our The 7 Habits for Managers program to:

·  
Increase resourcefulness and initiative.
·  
Define the contribution they want to make in their role as manager.
·  
Manage performance through a balance of accountability and trust.
·  
Give constructive feedback.
·  
Improve team decision-making skills by embracing diverse viewpoints.

Executive Coaching
We offer senior executives a coaching experience created in partnership with Columbia University, which includes methodologies approved by the International Coach Federation (ICF).  We leverage content, methodology, and tools to guide leaders in discovering and unleashing the potential they already possess.  In one-on-one or team sessions, our executive coaches help senior-level executives work through complex issues, helping them establish initiatives that are clear, defined, and actionable, and provide supportive accountability until their goals are reached.  We also offer one-on-one executive coaching in leadership development, strategy, goal execution, and personal work/life areas.

3.  
Individual Effectiveness

Effective organizations are characterized by highly effective individuals—individuals who take initiative, set and achieve important goals, manage themselves well and are highly productive, work well with others, solve problems, and create new and valuable ideas.

Individual effectiveness and resilience are particularly valuable in a difficult economic environment.  In such an environment, we believe that our approaches to personal and interpersonal effectiveness are perhaps more critical than ever.

The 7 Habits of Highly Effective People®—Signature Program
Based on the principles found in Dr. Stephen R. Covey’s best-selling business book, The 7 Habits of Highly Effective People, this program drives organizational success by helping participants gain the paradigms and behaviors of effective people.  Participants gain hands-on experience, applying principles that yield greater productivity, improved communication, strengthened relationships, increased influence, and focus on critical priorities.  Participants learn how to take initiative, identify and balance key priorities, improve interpersonal communication, leverage creative collaboration and problem solving, and build their personal resilience and capability.

The 7 Habits of Highly Effective People®: Introductory Workshop for Associates
This workshop for employees at all levels is designed to tap the best they have to give.  We help employees become empowered with new knowledge, skills, and tools to confront issues, work as a team, increase accountability, and raise the bar on what they can achieve.  Participants discover

how to maximize performance by avoiding dependence on others, gaining appropriate independence, and moving on to where real success lies: being successfully interdependent and collaborative with others.

FOCUS: Achieving Your Highest Priorities™
Our time-management workshop presents principles that help participants identify and clarify their values, set goals, and plan weekly and daily to accomplish what really counts.  We help participants discover how to clearly define goals and break them down into key tasks, eliminate unnecessary activities to reduce stress, balance work and life priorities, and master information management with a proven planning system.

FOCUS: Achieving Your Highest Priorities—Microsoft® Outlook® Edition
This practical workshop teaches participants to apply the principles from our productivity training while using Microsoft Outlook as their scheduling tool.  We teach them how to prioritize tasks, messages, and appointments to achieve what is most important to the organization and themselves.  In addition, we teach participants how to gain control of competing demands on their time from email, voice mail, meetings, and interruptions, plus we teach them a goal-setting process to become more motivated and productive.

FOCUS: Achieving Your Highest Priorities—IBM® Lotus Notes® Edition
The same as the workshop for Microsoft Outlook above, this workshop also teaches participants to apply the principles from our productivity training while using IBM Lotus Notes as their scheduling tool.  Participants learn to stay focused and effective by integrating IBM Lotus Notes, paper, and PDA-type productivity tools together; apply a planning process that gets better business results; reduce stress by recognizing and eliminating distractions and low-priority activities; and achieve balance and renewal, while avoiding burnout and frustration.

Project Management™ (One- and Two-Day Program)
Our Project Management solution teaches a four-step process for managing projects, large or small.  This approach helps project managers and their teams craft and deliver high-quality projects on time and within budget.  This solution is taught as a one- or two-day, facilitator-led process, and encourages attendees to focus on their own current projects for a hands-on experience.

Writing Advantage™
The FranklinCovey Writing Advantage program teaches participants how to set quality writing standards that help people increase productivity, resolve issues, avoid errors, and heighten credibility.  Participants learn a four-step process to improve their writing skills.  They learn how to write faster with more clarity, and gain skills for revising and fine-tuning every style of document.

Technical Writing Advantage™
FranklinCovey’s Technical Writing Advantage program teaches participants the skills to improve the quality, clarity, structure, and expected results of their technical communication.  This program teaches participants to take complex ideas and make them understandable and memorable in written form.

Presentation Advantage™
With our Presentation Advantage solution, participants learn how to craft presentations around essential objectives, present key concepts and ideas with power and enthusiasm, design and present effective visuals, and employ techniques for polishing and mastering presentation delivery.

Meeting Advantage™
The FranklinCovey Meeting Advantage solution teaches participants to plan effectively by frontloading before a meeting, focusing productively during the meeting, and following through successfully after the meeting.

4.  
Winning Customer Loyalty®

Our Winning Customer Loyalty practice helps leaders of multiunit organizations create a culture where employees are engaged and equipped to deliver great customer experiences.  To do this,

customer loyalty specialists draw from an array of offerings to craft a solution that works with each company’s culture, operating environment, and strategic vision.  A typical solution includes these components:

·  
Customer scores.  Customer-satisfaction and loyalty scores for every unit, every month.
·  
Employee scores.  A targeted employee survey that gauges each unit’s “Execution Quotient” (xQ), or the conditions required for an engaged and focused workforce.
·  
Loyalty Portal.  A Web-based dashboard that allows every unit to see their scores, reach out to customers, and manage their team’s focus on the key activities that drive customer loyalty.
·  
“Lead measure” identification.  Our most senior consultants guide the senior team through a “lead measure” identification process where, through a combination of best practices and strategic assessments, key activities are identified that become the drivers of a memorable customer experience.
·  
Systems alignment.  We help the senior team to align compensation, training, and other systems around the most critical goals and remove operational barriers to execution.
·  
Manager certification.  Unit-level managers are certified to engage their teams around their scores, lead measures, and key activities.
·  
Frontline training.  We provide training in key areas such as scoreboarding, focus and execution, leadership, and creating a culture of service.  Much of this training, as well as supportive tools, is delivered to each unit through the Loyalty Portal.

5.
Trust

We believe that trust is the hallmark of effective leaders, teams, and organizations.  Trust-related problems like bureaucracy, fraud, and excessive turnover discourage productivity, divert resources, and chip away at a company’s brand.  On the other hand, leaders who make building trust an explicit goal of their job gain strategic advantages—accelerating growth, enhancing innovation, improving collaboration and execution, and increasing shareholder value.  Our Trust practice is built on The New York Times best-selling book, The Speed of Trust by Stephen M. R. Covey, and includes offerings to help leaders and team members develop the competencies to make trust a strategic advantage.

Leading at the Speed of Trust™
This program engages leaders at all levels in identifying and closing the trust gaps in their organization.  Instead of paying “trust taxes,” organizations can begin to realize “trust dividends.”  We believe that doing business at the “speed of trust” lowers costs, speeds up results, and increases profits and influence.  Our Leading at the Speed of Trust solution is designed to help leaders:

·  
Make building trust an explicit goal of their work.
·  
Learn how others perceive their trustworthiness from their personal tQ™ (Trust Quotient) Report.
·  
Understand the real, measurable “trust taxes” they may be paying without realizing it.
·  
Change “trust taxes” to “trust dividends,” which are the benefits that come from growing relationships of trust.
·  
Make action plans to build trust accounts with all key stakeholders.
·  
Begin using the language of trust as an important cultural lever.

Working at the Speed of Trust™—For Associates
This workshop helps individual contributors identify and address “trust gaps” in their personal credibility and in their relationships at work.  Using examples from their work and focusing on real-world issues, participants discover how to communicate transparently with peers and managers, improve their track record of keeping commitments, focus on improving internal “customer service” with others who depend on their work, and much more.  Our Working at the Speed of Trust solution is designed to help associates:

·  
Increase personal credibility.
·  
Exhibit behaviors that increase trust.
·  
Increase trust with key stakeholders.
·  
Create an environment of high trust that will increase creativity, innovation, and a greater commitment to achieving results.

 
6.
Sales Performance

We believe that sales performance is about helping clients succeed.  FranklinCovey provides an approach that delivers the “what to do” and “how to do” for mutual seller/buyer benefits.  Through consulting, training, and coaching, our Sales Performance practice helps sales leaders and salespeople act as genuine trusted business advisors who create value and help clients succeed.

Helping clients succeed is a mind-set, skill-set, and tool-set for becoming client-centered.  It is a way of thinking, being, and behaving.  We believe that it removes the stigmas that come with sales, and we believe that it removes the adversarial interplay between sellers and buyers.  It is also a process for creating candid dialogue, fresh thinking, innovative collaboration, insightful decision making, and robust execution—with clients and within an organization.

The acronym INORDER represents the underlying sales methodology we use in Helping Clients Succeed.  Each module in the methodology represents a different stage in the sales process, starting from the front end with Initiating New Opportunities (INO) and Qualifying Opportunities (ORD), then closing at the back end with Winning and Growing Opportunities (ER).  With our suite of consultative sales-training solutions, we believe clients can transform their salespeople into trusted business advisors who focus on helping their clients succeed, resulting in increased sales, shortened sales cycles, improved margins, and satisfied clients.

7.
Education Solutions

The FranklinCovey Education Solutions practice is dedicated to helping educational organizations build the culture that will produce great results. Our offerings address all grade levels and help faculty and students develop the critical leadership and effectiveness skills they will need to succeed in a knowledge-based, networked world.

Primary Education Solutions: The Leader in Me®
The Leader in Me process is designed to be integrated into a school’s core curriculum and everyday language.  The methodology is designed to become part of the culture, gain momentum, and help to produce improved results year after year.  We believe the methodology benefits schools and students in the following ways:

·  
Develops students who have the skills and self-confidence to succeed as leaders in the 21st century.
·  
Decreases discipline referrals.
·  
Teaches and develops character and leadership through existing core curriculum.
·  
Improves academic achievement.
·  
Raises levels of accountability and engagement among both parents and staff.

The Leader in Me process also helps create a common language within a school, built on principle-based leadership skills found in Dr. Stephen R. Covey’s best-selling book The 7 Habits of Highly Effective People, and is designed to produce a holistic school-wide experience for primary school teachers and their classrooms that proceeds in several phases:

Phase 1: Faculty Development
Through facilitated peer-to-peer discussion, videos, and learning exercises, teachers and administrators will:

·  
Explore and create a guiding vision for what “greatness” means within the culture of their school.
·  
Learn and internalize the 7 Habits and understand how to apply the principles in their classrooms.
·  
Study other schools that have integrated the 7 Habits and other leadership and quality tools.
·  
Become certified to deliver The 7 Habits of Highly Effective People® training as a means of ongoing professional development.

Phase 2: Implementation Training
In this phase, teachers and administrators will learn how to:

·  
Integrate the 7 Habits and other leadership principles into the school’s curriculum and culture.
·  
Apply The Leader in Me process to develop the specific 21st-century competencies students will need to succeed at school, in their future careers, and in life.

Phase 3: Classroom Implementation
The Leader in Me includes several tools to assist educators, students, and parents in implementation during the first year, as well as reinforcing the process in following years.

·  
The Leader in Me Web Community— www.TheLeaderInMe.org—features cross-curricular lesson plans, award-winning videos, assessments, and a forum for educators, as well as fun activities for students.
·  
Student Activity Guides for Lower/Upper Elementary and Annotated Teacher’s Editions.
·  
The 7 Habits of Happy Kids™ poster set.
·  
The 7 Habits of Happy Kids book by Sean Covey.
·  
The Leader in Me book by Stephen R. Covey.

Secondary Education Solutions: The 7 Habits of Highly Effective Teens®
The Introduction to The 7 Habits of Highly Effective Teens® workshop from FranklinCovey, based on the best-selling book of the same name by Sean Covey and the No. 1 best-selling business book The 7 Habits of Highly Effective People, gives young people a set of tools to deal with life’s challenges.  The training is a means for educators, administrators, and superintendents to help improve student performance; reduce conflicts, disciplinary problems, and truancy; and enhance cooperation and teamwork among parents, teens, and teachers.

The 7 Habits of Highly Effective Teens are essentially seven characteristics that many happy and successful teens the world over have in common.  The training provides students with a step-by-step framework for boosting self-image, building friendships, resisting peer pressure, achieving goals, improving communication and relationships with parents, and much more.  The habits build upon each other and foster behavioral change and improvement from the inside out.

We also offer a workshop built around the book The 6 Most Important Decisions You’ll Ever Make, also by Sean Covey.  This book helps students work through important and life-changing questions.  This workshop is designed to be flexible so it can fit a classroom or school-wide schedule.

Higher Education Solutions: Introduction to the 7 Habits of Highly Effective College Students™
We believe that undergraduates who start their freshman year with a plan are more likely to complete their education and have successful careers. The 7 Habits of Highly Effective College Students helps students succeed by discovering their personal mission, setting goals, prioritizing tasks, and teaming with others.

This workshop contains eight hours of instructional material, which can be taught in a one day or modular format.  Facilitators lead programs through instruction, multimedia presentations, and activities that provide students with a forum in which to reflect individually, apply the content, and get to know each other.  Clients can become licensed to train their own students onsite, or have our facilitators present a custom program on their campus.

8.
E-Learning

Our E-Learning practice brings the best of FranklinCovey to clients in innovative ways that transcend traditional e-learning solutions.  Clients get the quality experience they expect from FranklinCovey in ways that allow them to reach their employees throughout the world.

FranklinCovey InSights™
We believe that some of the best development happens when leaders teach their own teams.  FranklinCovey InSights represents a new paradigm of “Teach to Learn” leadership.  This library of bite-sized, Web-based learning modules is built around our award-winning video presentations that leaders can use to motivate their teams to improve performance.  Designed to address generational learning styles, the modules teach people to see and do things differently, enabling teams to produce better results and make changes over time.

LiveClicks™
LiveClicks is our webinar delivery platform that allows clients to reach more people at less cost with high-quality live training.  LiveClicks webinar workshops utilize our award-winning videos, interactive activities, and live instruction. LiveClick webinars are offered to the public with our consultants and client facilitators, who can also become certified to teach LiveClicks webinars inside their organizations.

The LiveClicks platform allows clients to train more people, reach remote workers, and attract a new generation of workers.  Finally, LiveClicks can help organizations stay green by reducing the carbon impact of travel.  Our LiveClicks titles include:

·  
Time Management for Microsoft® Outlook®: Increasing Your Productivity Through the Effective Use of Outlook™
·  
Time Management for IBM® Lotus Notes®: Increasing Your Productivity Through the Effective Use of IBM Lotus Notes™
·  
Resolving Generational Conflict: Understanding and Navigating Generational Differences at Work™
·  
The Diversity Advantage: Leveraging Differences at Work for Great Results™
·  
The Speed of Trust® Series—Relationship Trust
·  
The Speed of Trust® Series—Self Trust
·  
The 7 Habits® for Managers Series
·  
Be Proactive®: Using Your Resourcefulness and Initiative to Get Things Done
·  
The 7 Habits® for Managers Series
·  
Begin With the End in Mind®: Defining Your Contribution and Leading With Purpose
·  
Project Management Fundamentals: Managing Projects That Succeed™
·  
Business Writing Skills: Getting Your Point Across With Power and Influence™

The 7 Habits Interactive® Edition
The award-winning 7 Habits of Highly Effective People—Interactive Edition helps employees, regardless of work location, to increase their effectiveness and productivity and feel a stronger sense of cohesion. The 7 Habits Interactive Edition heightens learning by helping participants to apply principles that are designed to yield greater productivity, improved communication, strengthened relationships, increased influence, and an improved focus on critical priorities.  During the three-hour online instruction, participants engage in interactive exercises that illustrate how to use the 7 Habits in real work situations.  Participants can then test their new skills in a virtual simulation that shows the r eal-world triumphs and challenges associated with the choices they have made.  Participants can also join a live one-day application workshop to study the content in more depth, and practice what they have learned.

9.
Custom Solutions

Whether clients need a program customized, or require a new product developed for their organization, our Custom Client solutions has the process to build the solution.  Customization builds upon our existing content and clients’ unique content by using a specific process to deliver results.  Our five-step process, as outlined below, lowers development costs and strives to improve our clients’ return on investment:

Diagnose
·  
Identify key stakeholder needs.
·  
Identify challenges and logistics.
·  
Identify audience, culture, budget, timeline, and success measures.

Design
·  
Clarify learning objectives and priorities.
·  
Confirm audience and stakeholder needs.
·  
Brainstorm content alignment with learning objectives.

Develop
·  
Create content for all deliverables.
·  
Facilitate client reviews.
·  
Incorporate changes.
·  
Prepare final materials.

Deliver
·  
Training delivered by training professionals.

Learn
·  
Gather post-project feedback.
·  
Define areas of improvement and incorporate into the process.

10.
Media Publishing

Our Media Publishing practice extends our influence into both traditional publishing and new media channels.  FranklinCovey Media Publishing offers books, e-books, audio products, downloadable and paper-based tools, and content-rich software applications for smart phones and other handheld devices (like the Apple® iPhone®) to consumer and corporate markets.

Industry Information

According to the Training Magazine 2010 Training Industry Survey, the total size of the U.S. training industry is estimated to be $52.8 billion, which is up slightly compared to the prior year.  We are engaged in the performance skills segment of the training industry.  One of our competitive advantages in this highly fragmented industry stems from our fully integrated training curricula, measurement methodologies, and implementation tools to help organizations and individuals measurably improve their effectiveness.  This advantage allows us to deliver not only training to both corporations and individuals, but also to implement the training through the use of powerful behavior changing tools with the capability to then measure the impact of the deliver ed training and tools.

Over our history, we have provided products and services to 97 of the Fortune 100 companies and more than 75 percent of the Fortune 500 companies.  We also provide products and services to a number of U.S. and foreign governmental agencies, as well as numerous educational institutions.  In addition, we provide training curricula, measurement services and implementation tools internationally, either through directly operated offices, or through independent licensed providers.

Segment Information

Prior to the sale of CSBU in the fourth quarter of fiscal 2008, our business was organized in two segments: (1) the CSBU, which was designed to sell products to individual consumers and small businesses; and (2) the Organizational Solutions Business Unit (OSBU), which was designed to serve organizational clients.  Following the sale of CSBU, the Company’s operations are grouped into one operating segment.  The following table sets forth, for the fiscal periods indicated, the Company’s sales to external customers based on prior segments for comparability purposes (in thousands):

 
 
 
YEAR ENDED
AUGUST 31,
 
 
 
2010
   
Percent change from prior year
   
 
 
2009
   
Percent change from prior year
   
 
 
2008
 
Organizational Solutions Business Unit:
                             
Domestic
  $ 98,344       18     $ 83,193       (16 )   $ 99,308  
International
    35,309       (3 )     36,385       (16 )     43,060  
      133,653       12       119,578       (16 )     142,368  
                                         
Consumer Solutions Business Unit:
    -       -       -       (100 )     107,235  
Total operating units
    133,653       12       119,578       (52 )     249,603  
Leasing
    3,221       (9 )     3,556       44       2,471  
Consolidated sales
  $ 136,874       11     $ 123,134       (51 )   $ 252,074  

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 18).

Clients

We have a relatively broad base of organizational and individual clients.  Worldwide, we have more than 4,200 organizational clients consisting of corporations, governmental agencies, educational institutions, and other organizations.  We have additional organizational clients throughout the world, and we believe that our products, workshops, and seminars encourage strong client loyalty.  Employees in each of our domestic and international distribution channels focus on providing timely and courteous responses to client requests and inquiries.  Due to the nature of our business, we do not have a significant backlog of firm orders.

Competition

We operate in a highly competitive and rapidly changing global marketplace and compete with a variety of organizations that offer services comparable with those that we offer.  Competition in the performance skills training and education industry is highly fragmented with few large competitors.  Based upon our fiscal 2010 consolidated sales of $136.9 million, we believe that we are a leading competitor in the organizational training and education market.  Other significant competitors in the training market are Development Dimensions International, Institute for International Research (IIR), Organizational Dynamics Inc., American Management Association, Wilson Learning, Forum Corporation, EPS Solutions, and the Center for Creative Leadership.

We derive our revenues from a variety of companies with a broad range of sales volumes, governments, educational institutions, and other institutions.  We believe that the principal competitive factors in the industry in which we compete include the following:

·  
Quality of services and solutions
·  
Skills and capabilities of people
·  
Innovative training and consulting services combined with effective products
·  
Ability to add value to client operations
·  
Reputation and client references
·  
Price
·  
Availability of appropriate resources
·  
Global reach and scale

Given the relative ease of entry in our training market, the number of our competitors could increase, many of whom may imitate existing methods of distribution, or could offer similar products and seminars at lower prices.  Some of these competitors may have greater financial and other resources than us.  However, we believe our curriculum based upon best-selling books, which encompasses relevant high-quality video segments, has become a competitive advantage.  This

advantage is strengthened and enhanced by our ability to easily train individuals within organizations to become client facilitators who in turn can effectively relay our curriculum throughout their organization.  Moreover, we believe that we are a market leader in the United States in execution, leadership, and individual effectiveness training, consulting and products.  Increased competition from existing and future competitors could, however, have a material adverse effect on our sales and profitability.

Seasonality

Our quarterly results of operations reflect minor seasonal trends primarily because of the timing of corporate training, which is not typically scheduled as heavily during holiday and vacation periods.

Quarterly fluctuations may also be affected by other factors including the introduction of new offerings, the addition of new organizational customers, and the elimination of underperforming offerings.

Manufacturing and Distribution

Following the sale of CSBU in fiscal 2008, we no longer manufacture a significant portion of our products.  We purchase our training materials and related products from various vendors and suppliers located both domestically and internationally, and we are not dependent upon any one vendor for the production of our training and related materials as the raw materials for these products are readily available.  We currently believe that we have good relationships with our suppliers and contractors.

During fiscal 2001, we entered into a long-term contract with HP Enterprise Services (HP, formerly Electronic Data Services) to provide warehousing and distribution services for our training products and related accessories.  HP maintains a facility at our headquarters as well as at other locations throughout North America.

Trademarks, Copyrights, and Intellectual Property

Our success has resulted in part from our proprietary curriculum, methodologies, and other intellectual property rights.  We seek to protect our intellectual property through a combination of trademarks, copyrights, and confidentiality agreements.  We claim rights for over 270 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, PlanPlus, The 7 Habits, and The 8th Habit.  We consider our trademarks and other proprietary rights to be important and material to our business.

We own sole or joint copyrights on our planning systems, books, manuals, text and other printed information provided in our training seminars and other electronic media products, including audio tapes and video tapes.  We license, rather than sell, facilitator workbooks and other seminar and training materials in order to protect our intellectual property rights therein.  We place trademark and copyright notices on our instructional, marketing, and advertising materials.  In order to maintain the proprietary nature of our product information, we enter into written confidentiality agreements with certain executives, product developers, sales professionals, training consultants, other employees, and licensees.  Although we believe the protective measures with respect to our proprietary rights are impo rtant, there can be no assurance that such measures will provide significant protection from competitors.

Employees

One of our most important assets is our people.  The diverse and global makeup of our workforce allows us to serve a variety of clients on a worldwide basis.  We are committed to attracting, developing, and retaining quality personnel and actively strive to reinforce our employees’ commitments to our clients, culture, and values through creation of a motivational and rewarding work environment.

At August 31, 2010, we had over 600 full- and part-time associates located in the United States of America, Canada, Japan, the United Kingdom, and Australia.  During fiscal 2001, we outsourced a significant part of our information technology services, customer service, distribution and

warehousing operations to HP.  A number of our former employees involved in these operations are now employed by HP to provide those services to FranklinCovey.  None of our associates are represented by a union or other collective bargaining group.  Management believes that its relations with its associates are good and we do not currently foresee a shortage in qualified personnel needed to operate our business.

Available Information

The Company’s principal executive offices are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, and our telephone number is (801) 817-1776.

We regularly file reports with the Securities Exchange Commission (SEC).  These reports include, but are not limited to, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and security transaction reports on Forms 3, 4, or 5.  The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains electronic versions of the Company’s reports, proxy and information statements, and other information that the Company files with the SEC on its website at www.sec.go v.

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 is reasonably practicable after we file or furnish these reports with the SEC.


ITEM 1A.  RISK FACTORS

Our business environment, current domestic and international economic conditions, and other specific risks may affect our future business decisions and financial performance.  The matters discussed below may cause our future results to differ from past results or those described in forward-looking statements and could have a material adverse effect on our business, financial condition, liquidity, results of operations, and stock price, and should be considered in evaluating our Company.

The risks included here are not exhaustive.  Other sections of this report may include additional risk factors which could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing global environment.  New risk factors emerge from time to time and it is not possible for 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 factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

We operate in an intensely competitive industry and our competitors may develop courses that adversely affect our ability to sell our offerings.

The training and consulting services industry is intensely competitive with relatively easy entry.  Competitors continually introduce new programs and services that may compete directly with our offerings or that may make our offerings uncompetitive or obsolete.  Larger and better capitalized competitors may have superior abilities to compete for clients and skilled professionals, reducing our ability to deliver quality work to our clients.  In addition, one or more of our competitors may develop and implement training courses or methodologies that may adversely affect our ability to sell our curricula and products to new clients.  Any one of these circumstances could have a material adverse effect on our ability to obtain new business and successfully deliver our services and solutions.

Our results of operations could be adversely affected by economic and political conditions and the effects of these conditions on our clients’ businesses and their levels of business activity.

Global economic and political conditions affect our clients’ businesses and the markets in which they operate.  Our financial results are somewhat dependent on the amount that current and prospective clients budget for training.  A serious and/or prolonged economic downturn (slow recovery) combined with a negative or uncertain political climate could adversely affect our clients’ financial condition and the amount budgeted for training by our clients.  These conditions may reduce the demand for our services and solutions or depress the pricing of those services and have a material adverse impact on our results of operations.  Changes in global economic conditions may also shift demand to services for which we do not have competitive advantages, and this could negatively affect the amount of business that we are able to obtain.  Such economic, political, and client spending conditions are influenced by a wide range of factors that are beyond our control and that we have no comparative advantage in forecasting.  If we are unable to successfully anticipate these changing conditions, we may be unable to effectively plan for and respond to those changes, and our business could be adversely affected.

Our business success also depends in part upon continued growth in the use of training and consulting services in business by our current and prospective clients.  In challenging economic environments, our clients may reduce or defer their spending on new services

and consulting solutions in order to focus on other priorities.  At the same time, many companies have already invested substantial resources in their current means of conducting their business and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel and/or processes.  If the growth in the general use of training and consulting services in business or our clients’ spending on these items declines, or if we cannot convince our clients or potential clients to embrace new services and solutions, our results of operations could be adversely affected.

In addition, our business tends to lag behind economic cycles and, consequently, the benefits of an economic recovery following a period of economic downturn may take longer for us to realize than other segments of the economy.

Our results of operations may be negatively affected if we cannot expand and develop our services and solutions in response to client demand or if newly developed or acquired services have increased costs.

Our success depends upon our ability to develop and deliver services and consulting solutions that respond to rapid and continuing changes in client needs.  We may not be successful in anticipating or responding to these developments on a timely basis, and our offerings may not be successful in the marketplace.  The implementation, acquisition, and introduction of new programs and solutions may reduce sales of our other existing programs and services and may entail more risk than supplying existing offerings to our clients.  Newly developed or acquired solutions may also require increased royalty payments or carry significant development costs that must be expensed.  In addition, the introduction of new or competing offerings by current or future competitors may render one or more of our offerings o bsolete.  Any one of these circumstances may have an adverse impact upon our business and results of operations.

Our business could be adversely affected if our clients are not satisfied with our services.

The success of our business model significantly depends on our ability to attract new work from our base of existing clients, as well as new work from prospective clients.  Our business model also depends on the relationships our senior executives and sales personnel develop with our clients so that we can understand our clients’ needs and deliver services and solutions that are specifically tailored to those needs.  If a client is not satisfied with the quality of work performed by us, or with the type of services or solutions delivered, then we may incur additional costs to remediate the situation, the profitability of that work might be decreased, and the client’s dissatisfaction with our services could damage our ability to obtain additional work from that client.  In particular, clients that are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date and could direct future business to our competitors.  In addition, negative publicity related to our client relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new contracts with current and prospective clients.

Our profitability could suffer if we are unable to control our operating costs.

Our future success and profitability depend in part on our ability to achieve an appropriate cost structure and to improve our efficiency in the highly competitive services industry in which we compete.  We regularly monitor our operating costs and develop initiatives and business models that impact our operations and are designed to improve our profitability.  Our recent initiatives have included revisions to existing processes and procedures, asset sales, headcount reductions, exiting non-core businesses, redemptions of preferred stock, and other internal initiatives designed to reduce our operating costs.  If we are unable to

achieve targeted business model cost levels and manage our costs and processes to produce additional efficiencies, our competitiveness and profitability could decrease.

Our profitability will suffer if we are not able to maintain our pricing and utilization rates.

Our profit margin on our services and solutions is largely a function of the rates we are able to recover for our services and the utilization, or chargeability, of our trainers, client partners, and consultants.  Accordingly, if we are unable to maintain sufficient pricing for our services or an appropriate utilization rate for our training professionals without corresponding cost reductions, our profit margin and overall profitability will suffer.  The rates that we are able to recover for our services are affected by a number of factors, including:

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

Our utilization rates are also affected by a number of factors, including:

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

During recently completed periods we have maintained favorable utilization rates.  However, there can be no assurance that we will be able to maintain favorable utilization rates in future periods.  Additionally, we may not achieve a utilization rate that is optimal for us.  If our utilization rate is too high, it could have an adverse effect on employee engagement and attrition.  If our utilization rate is too low, our profit margin and profitability may suffer.

If our pricing structures do not accurately anticipate the cost and complexity of performing our services, our contracts may become unprofitable.

We negotiate pricing terms with our clients utilizing a range of pricing structures and conditions. Depending on the particular contract and service to be provided, these terms include time-and-materials pricing, fixed-price pricing, and contracts with features of both of these pricing models.  Our pricing is highly dependent on our internal forecasts and predictions about our projects and the marketplace, which might be based on limited data and could turn out to be inaccurate.  If we do not accurately estimate the costs and time necessary to deliver our work, our contracts could prove unprofitable for us or yield lower profit margins than anticipated.  There is a risk that we may under price our contracts, fail to accurately estimate the costs of performing the work, or fail to accurately assess the risks a ssociated with potential contracts.  In particular, any increased or unexpected costs, delays or failures to achieve anticipated cost savings, or unexpected risks we encounter in connection with the performance of our work, including those caused by factors outside our control, could make these contracts less profitable or unprofitable, which could have an adverse effect on our profit margin.


Our results of operations and cash flows may be adversely affected if Franklin Covey Products LLC is unable to pay the working capital settlement, reimbursable acquisition costs, or reimbursable operating expenses.

According to the terms of the agreements associated with the sale of the Consumer Solutions Business Unit (CSBU) assets to Franklin Covey Products, LLC (Franklin Covey Products) that closed in the fourth quarter of fiscal 2008, we were entitled to receive a $1.2 million payment for working capital delivered on the closing date of the sale and to receive $2.3 million as reimbursement for specified costs necessary to complete the transaction.  Payment for these costs was originally due in January 2009, but we extended the due date of the payment at Franklin Covey Products’ request and obtained a promissory note from Franklin Covey Products for the amount owed, plus accrued interest.

At the time we received the promissory note from Franklin Covey Products, we believed that we could obtain payment for the amounts owed, based on prior year performance and forecasted financial performance in 2009.  However, the financial position of Franklin Covey Products deteriorated significantly late in fiscal 2009 and the deterioration accelerated subsequent to August 31, 2009 and continued throughout fiscal 2010.  As a result of its deteriorating financial position, we reassessed the collectibility of the promissory note.  Based on revised expected cash flows and other operational issues, we determined that the promissory note should be impaired at August 31, 2009.  Accordingly, we recorded a $3.6 million impaired asset charge and reversed $0.1 million of interest income that was recorded dur ing fiscal 2009 from the working capital settlement and reimbursable transaction cost receivables.

We receive reimbursement for certain operating costs, such as warehousing and distribution costs, which are billed to us by third party providers.  At August 31, 2010 and 2009 we had $3.4 million and $2.0 million receivable from Franklin Covey Products, which have been classified in other current assets.  If Franklin Covey Products fails to reimburse us for these costs, and we fail to obtain payment on the promissory note, our future cash flows will be adversely affected.

Our results of operations and cash flows may be adversely affected if Franklin Covey Products LLC is unable to pay its retail store leases.
 
Based on the terms of the agreements associated with the sale of the CSBU assets, we assigned the benefits and obligations relating to the leases of our retail stores to Franklin Covey Products, an entity in which we own approximately 19 percent.  However, we remain secondarily liable for these leases and may have to fulfill the obligations contained in the lease agreements, including making lease payments, if Franklin Covey Products is unable to fulfill its obligations pursuant to the terms of the lease agreements.  Any default by Franklin Covey Products in its lease payment obligations could provide us with certain remedies against Franklin Covey Products, including potentially allowing us to terminate the Master License Agreement.  If Franklin Covey Products is unable to satisfy the obligations contained i n the lease agreements and we are unable to obtain adequate remedies, our results of operations and cash flows may be adversely affected.

If we are unable to attract, retain, and motivate high-quality employees, including training consultants and other key training representatives, we will not be able to compete effectively and will not be able to grow our business.

Our success and ability to grow are dependent, in part, on our ability to hire, retain, and motivate sufficient numbers of talented people with the increasingly diverse skills needed to serve our clients and grow our business.  Competition for skilled personnel is intense at all

levels of experience and seniority.  To address this competition, we may need to further adjust our compensation practices, which could put upward pressure on our costs and adversely affect our profit margins.  At the same time, the profitability of our business model is partially dependent on our ability to effectively utilize personnel with the right mix of skills and experience to effectively deliver our programs and content.  There is a risk that at certain points in time and in certain geographical regions, we will find it difficult to hire and retain a sufficient number of employees with the skills or backgrounds we require, or that it will prove difficult to retain them in a competitive labor market.  If we are unable to hire and retain talented employees with the skills, and in the locations , we require, we might not be able to deliver our content and solutions services.  If we need to re-assign personnel from other areas, it could increase our costs and adversely affect our profit margins.

In order to retain key personnel, we continue to offer a variable component of compensation, the payment of which is dependent upon our sales performance and profitability.  We adjust our compensation levels and have adopted different methods of compensation in order to attract and retain appropriate numbers of employees with the necessary skills to serve our clients and grow our business.  We may also use equity-based performance incentives as a component of our executives’ compensation, which may affect amounts of cash compensation.  Variations in any of these areas of compensation may adversely impact our operating performance.

We depend on key personnel, the loss of whom could harm our business.

Our future success will depend, in part, on the continued service of key executive officers and personnel.  The loss of the services of any key individuals could harm our business.  Our future success also depends on our ability to identify, attract, and retain additional qualified senior personnel.  Competition for such individuals in our industry is intense, and we may not be successful in attracting and retaining such personnel.

Our 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, Japan, and the United Kingdom.  We also have licensed operations in numerous other foreign countries.  As a result of these foreign operations and their impact upon our results of operations, we are subject to a number of risks, including:

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

We may experience foreign currency gains and losses.

Our sales outside of the United States totaled $39.6 million, or 28.9 percent of total sales, for the year ended August 31, 2010.  If our international operations 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 ou r clients that we have not performed our contractual obligations.  Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws might be insufficient to protect our rights.

In many parts of the world, including countries in which we operate, practices in the local business community might not conform to international business standards and could violate anticorruption regulations, including the United States Foreign Corrupt Practices Act, which prohibits giving anything of value intended to influence the awarding of government contracts.  Although we have policies and procedures to ensure legal and regulatory compliance, our employees, licensee operators, and agents could take actions that violate these requirements.  Violations of these regulations could subject us to criminal or civil enforcement actions, including fines and suspension or disqualification from United States federal procurement contracting, any of which could have a material adverse effect on our business.

We have only a limited ability to protect our intellectual property rights, which are important to our success.

Our financial success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property.  The existing laws of some countries in which we provide services might offer only limited protection of our intellectual property rights.  To protect our intellectual property, we rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements, as well as 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 i n foreign jurisdictions.

The loss of proprietary methodologies or the unauthorized use of our intellectual property may create greater competition, loss of revenue, adverse publicity, and may limit our ability to reuse that intellectual property for other clients.  Any limitation on our ability to provide a service or solution could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future engagements.


Our 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 governmental contracting process.  These risks include, but are not limited to, the following:

·  
Governmental entities typically fund projects through appropriated monies.  While these projects are often planned and executed as multi-year projects, the governmental entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and at their discretion.  Changes in governmental priorities or other political developments could result in changes in scope or in termination of our projects.

·  
Governmental entities often reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and investigations of our business practices with respect to our government contracts. If the governmental entity finds that the costs are not reimbursable, then we will not be allowed to bill for those costs or the cost must be refunded to the client if it has already been paid to us. Findings from an audit also may result in our being required to prospectively adjust previously agreed upon rates for our work, which may affect our future margins.

·  
If a governmental 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.

·  
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 governmental 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, governmental projects may present a heightened risk to our reputation.  Any of these factors could have a material adverse effect on our business or our results of operations.

Our strategy to focus on training and consulting services may not be successful and may not lead to the desired financial results.

During the fourth quarter of fiscal 2008, we sold substantially all of the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed entity, Franklin Covey Products.  Although we believe the sale of the CSBU assets will allow us to focus our resources and abilities on our services and solutions offerings, many of the aspects of this plan, including future economic conditions and the business strength of our clients, are not within our control, and we may not achieve our expected financial results within our anticipated timeframe.


If we are unable to collect our accounts receivable on a timely basis, our results of operations and cash flows could be adversely affected.

Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for services performed.  We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles.  We maintain allowances against our receivables and unbilled services that we believe are adequate to reserve for potentially uncollectible amounts.  However, actual losses on client balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances.  In addition, there is no guarantee that we will accurately assess the creditworthiness of our clients.  Macroeconomic conditions could also result in financial difficulties for our clients, and as a result could cause clients to delay payments to us, r equest modifications to their payment arrangements that could increase our receivables balance, or not pay their obligations to us.  Timely collection of client balances also depends on our ability to complete our contractual commitments and bill and collect our invoiced revenues.  If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected.  In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.

Our strategy of outsourcing certain functions and operations may fail to reduce our costs for these services and may increase our risks.

We have an outsourcing contract with HP Enterprise Systems (HP and formerly Electronic Data Systems) to provide warehousing, distribution, and information system operations.  Under the terms of the outsourcing contract and its addendums, HP 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 HP employees in outsourced roles as our own employees.  As a result, the inherent risks associated with these outsourced areas of operation may be increased.

Our outsourcing contracts with HP 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 HP depending upon the circumstances of the contract termination.

We have significant intangible asset, goodwill, and long-term asset balances that may be impaired if cash flows from related activities decline.

At August 31, 2010 we had $65.2 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).  We also have goodwill and other long-term assets that may become impaired if the corresponding cash flows associated with these assets declines in future periods.  Although our current sales and cash flows are sufficient to support the carrying basis of these long-lived assets, if our sales and corresponding cash flows decline, we may be faced with significant asset impairment charges that would have an adverse impact upon our operating margin and overall results of operations.

In addition, our stock price is considered to be an indicator of the reliability or risks associated with future cash flows, and we may incur impairment charges on these intangible assets in future periods based upon our market capitalization.

Our business could be negatively affected if we incur legal liability in connection with providing our solutions and services.

If we fail to meet our contractual obligations, fail to disclose our financial or other arrangements with our business partners, or otherwise breach obligations to clients, we could be subject to legal liability.  We may enter into non-standard agreements because we perceive an important economic opportunity or because our personnel did not adequately adhere to our guidelines.  We may also find ourselves committed to providing services that we are unable to deliver or whose delivery will cause us financial loss.  If we cannot, or do not, perform our obligations, we could face legal liability, and our contracts might not always protect us adequately through limitations on the scope of our potential liability.  If we cannot meet our contractual obligations to provide services and solutions, and if our exposure is not adequately limited through the terms of our agreements, then we might face significant legal liability, and our business could be adversely affected.

Failure to comply with the terms and conditions of our credit facility may have an adverse effect upon our business and operations.

Our line of credit facility requires us to be in compliance with customary non-financial terms and conditions as well as specified financial ratios.  Failure to comply with these terms and conditions or maintain adequate financial performance to comply with specific financial ratios entitles the lender to certain remedies, including the right to immediately call due any amounts outstanding on the line of credit.  Such events would have an adverse effect upon our business and operations as there can be no assurance that we may be able to obtain other forms of financing or raise additional capital on terms that would be acceptable to us.

We may need additional capital in the future, and this capital may not be available to us on favorable terms or at all.

We may need to raise additional funds through public or private debt offerings or equity financings in order to:

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

At August 31, 2010 our line of credit has a remaining maturity of less than one year and is therefore classified as a current obligation on our consolidated balance sheet.  In order to obtain a more favorable interest rate on the line of credit facility, the credit facility requires an annual renewal.  We currently believe that we will be successful in obtaining a new or extended line of credit from our lender prior to the expiration of the current credit facility in March 2011 to ensure available liquidity in future periods.  Additional potential sources of liquidity include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources.  However, no assurance can be provided that we will obtain a new or extended line of credit or obtain additional financin g from other sources on terms that would be acceptable to us.  If necessary, we will evaluate all of these options and select

one or more of them depending on overall capital needs and the associated cost of capital.  If we are unsuccessful in obtaining a renewal or extension of our line of credit, or additional financing, we believe that cash flows from operations combined with a number of initiatives we would implement in the months preceding the due date will create sufficient liquidity to pay down the required outstanding balance on the line of credit.  These initiatives include deferral of capital purchases for externally developed curriculum and uncommitted capital expenditures; deferral of executive team compensation; deferral of certain related party contractual royalties and earnout payments; substantial reduction of associate salaries; reduction of operating expenses, including non-critical travel; and deferral of payments to other vendors in order to generate sufficient cash.  However, there can be no assurance that we will successfully implement these initiatives.

Any additional capital raised through the sale of equity could dilute current shareholders’ ownership percentage in us.  Furthermore, we may be unable to obtain the necessary capital on terms or conditions that are favorable to us, or at all.

We are the creditor for a management common stock loan program that may not be fully collectible.

We are the creditor for a loan program that provided the capital to allow certain management personnel the opportunity to purchase shares of our common stock.  For further information regarding our management common stock loan program, refer to the notes to our consolidated financial statements as found in Item 8 of this Annual Report on Form 10-K.  Our inability to collect all, or a portion, of these receivables could have an adverse impact upon our financial position and 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 routinely subject to audits by various taxing authorities.  Although we believe that our tax estimates are reasonable, we cannot guarantee that the final determination of these tax audits will not be different from what is reflected in our historical income tax provisions and accruals.  In addition, recently proposed legislation in the United States would change how U.S. multinational corporations are taxed on their foreign income.  If such legislation is enacted, it may have a material adverse impact on our tax rate and in turn, our profitability.

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 routinely audited by tax authorities with respect to these non-income taxes and may have exposure from additional non-income tax liabilities.

We could have liability or our reputation could be damaged if we do not protect client data or if our information systems are breached.

We are dependent on information technology networks and systems to process, transmit, and store electronic information and to communicate among our locations around the world and with our clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential

information.  We are also required at times to manage, utilize, and store sensitive or confidential client or employee data.  As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state laws governing the protection of health or other individually identifiable information.  If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines, and/or criminal prosecution.  Unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud, or m isappropriation could damage our reputation and cause us to lose clients.

International hostilities, terrorist activities, and natural disasters may prevent us from effectively serving our clients and thus adversely affect our operating results.

Acts of terrorist violence, armed regional and international hostilities, and international responses to these hostilities, natural disasters, global health risks or pandemics, or the threat of or perceived potential for these events, could have a negative impact on our directly owned or licensee operations.  These events could adversely affect our clients’ levels of business activity and precipitate sudden significant changes in regional and global economic conditions and cycles.  These events also pose significant risks to our people and to physical facilities and operations around the world, whether the facilities are ours or those of our alliance partners or clients.  By disrupting communications and travel and increasing the difficulty of obtaining and retaining highly skilled and qualified personn el, these events could make it difficult or impossible for us or our licensee partners to deliver services to clients.  Extended disruptions of electricity, other public utilities, or network services at our facilities, as well as system failures at, or security breaches in, our facilities or systems, could also adversely affect our ability to serve our clients.  While we plan and prepare to defend against each of these occurrences, we might be unable to protect our people, facilities, and systems against all such occurrences.  We generally do not have insurance for losses and interruptions caused by terrorist attacks, conflicts, and wars.  If these disruptions prevent us from effectively serving our clients, our operating results could be adversely affected.

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
·  
Increased overall market volatility
·  
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, or increased, analyst coverage

In addition, the stock market has recently experienced substantial price and volume fluctuations that have impacted our stock and other equity issues in the market.  These factors, as well as general investor concerns regarding the credibility of corporate financial statements, may have a material adverse effect upon our stock price in the future.

We may fail to meet analyst expectations, which could cause the price of our stock to decline.

Our common stock is publicly traded on the New York Stock Exchange, and at any given time various securities analysts follow our financial results and issue reports on us.  These periodic reports include information about our historical financial results as well as the analysts’ estimates of our future performance.  The analysts’ estimates are based on their own opinions and are often different from our estimates or expectations.  If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.  If our stock price is volatile, we may become involved in securities litigation following a decline in prices.  Any litigation could result in substantial costs and a diversion of management’s attention and re sources that are needed to successfully run our business.

Ineffective internal controls could impact our business and operating results.

Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.  Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.  If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if the Company experiences difficulties in their implementation, our business and operating results may be harmed and we could fail to meet our financial reporting obligations.

New or more stringent governmental regulations could adversely affect our business.

Increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change may result in increased compliance costs and other financial obligations for us.  We rely on the ability of our consultants and salespeople to travel to client destinations using automobiles and jet aircraft, which use fossil fuels.  Legislation, regulation, or additional taxes affecting the cost of these inputs could materially affect our profitability.

The Company’s use of accounting estimates involves judgment and could impact our financial results.

Our most critical accounting estimates are described in Management’s Discussion and Analysis found in Item 7 of this report under the section entitled “Use of Estimates and Critical Accounting Policies.”  In addition, as discussed in various footnotes to our financial statements as found in Item 8, we make certain estimates for loss contingencies, including decisions related to legal proceedings and reserves.  Because, by definition, these estimates and assumptions involve the use of judgment, our actual financial results may differ from these estimates.


ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.



ITEM 2.  PROPERTIES

Franklin Covey’s executive offices are located in Salt Lake City, Utah.  The following is a summary of our properties and facilities utilized in the operation of our business.  Our leases primarily consist of sales and administrative offices both in the United States and various countries around the world.  As of August 31, 2010, all of our facilities are leased.  Our corporate headquarters lease is accounted for as a financing arrangement and all other facility lease agreements are accounted for as operating leases that expire at various dates through the year 2025.

Corporate Facilities
Corporate Headquarters and Administrative Offices:
Salt Lake City, Utah (7 buildings)

Domestic Sales Offices
Regional Sales Offices:
United States (4 locations)

Administrative Offices:
United States (2 locations)

International Facilities
International Administrative/Sales Offices:
Australia (3 locations)
England (1 location)
Japan (1 location)

International Distribution Facilities:
Australia (1 location)
England (1 location)
Japan (1 location)
New Zealand (1 location)

We consider our existing facilities to be in good condition and suitable for our current and anticipated level of operations in the upcoming fiscal year.

A significant portion of our corporate headquarters campus located in Salt Lake City, Utah is subleased to several unrelated entities.


ITEM 3.  LEGAL PROCEEDINGS

On April 20, 2010, Moore Wallace North America, Inc.dba TOPS filed a complaint against Franklin Covey Products, LLC (Franklin Covey Products) in the Circuit Court of Cook County, Illinois, for breach of contract.  The complaint also named us as a defendant and alleged that we should be liable for Franklin Covey Products’ debts under the doctrine of alter ego or fraudulent transfer.  We are still in the early stages of this litigation and any potential liability is not currently estimable.  We believe that we have meritorious defenses against this action, and we will continue to vigorously defend it.

The Company is also the subject of certain other legal actions, which we consider routine to our business activities.  At August 31, 2010, we believe that, after consultation with legal counsel, any potential liability to the Company under these other actions will not materially affect our financial position, liquidity, or results of operations.


ITEM 4.  RESERVED


PART II

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

FranklinCovey common stock is listed and traded on the New York Stock Exchange (NYSE) under the symbol “FC.”  The following table sets forth the high and low sale prices per share for our common stock, as reported by the NYSE, for the fiscal years ended August 31, 2010 and 2009.

   
High
   
Low
 
Fiscal Year Ended August 31, 2010:
           
Fourth Quarter
  $ 7.52     $ 5.35  
Third Quarter
    8.19       5.75  
Second Quarter
    6.39       5.06  
First Quarter
    6.44       4.76  
                 
Fiscal Year Ended August 31, 2009:
               
Fourth Quarter
  $ 7.24     $ 5.30  
Third Quarter
    5.69       3.20  
Second Quarter
    6.05       3.61  
First Quarter
    9.45       4.02  

We did not pay or declare dividends on our common stock during the fiscal years ended August 31, 2010 or 2009.  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.  

As of November 1, 2010, the Company had 17,037,070 shares of common stock outstanding, which were held by 724 shareholders of record.

Purchases of Common Stock

The following table summarizes Company purchases of common stock during the fiscal quarter ended August 31, 2010:


 
 
 
 
 
 
 
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)
 
May 30, 2010 to July 3, 2010
    3     $ 7.02  
 
none
  $ 2,413  
                           
July 4, 2010 to  July 31, 2010
    -       -  
 
none
    2,413  
                           
August 1, 2010 to August 31, 2010
    15       6.16  
 
none
    2,413 (1)
                           
Total Common Shares
    18     $ 6.30  
 
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, 2010 under the terms of this plan, which does not have an expiration date.

Performance Graph

The following graph shows a comparison of cumulative total shareholder return indexed to August 31, 2005, calculated on a dividend reinvested basis, for the five fiscal years ended August 31, 2010 for Franklin Covey Co. common stock, the S&P SmallCap 600 Index, and the S&P Commercial & Professional Services Index.  We were previously included in the S&P 600 SmallCap Index and were assigned to the S&P Diversified Commercial and Professional Services Index within the S&P 600 SmallCap Index.  However, during fiscal 2009, the Diversified Commercial Services Index was discontinued, and we have determined that the S&P 600 Commercial & Professional Services Index is appropriate for comparative purposes. We believe that if we were included in an index we would be included in the indices where we were previously listed, which would include the Commercial & Professional Services Index.  We are no longer a part of the S&P 600 SmallCap Index, but we believe that the S&P 600 SmallCap Index and the Commercial and Professional Services Index continue to provide appropriate benchmarks with which to compare our stock performance.


Indexed Returns Graph




ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of Franklin Covey and the related footnotes as found in Item 8 of this report on Form 10-K.

In the fourth quarter of fiscal 2010, we sold the product sales component of our wholly owned subsidiary in Japan to an unrelated Japan-based paper products company.  We determined that the operating results of the Japan product sales component qualified for discontinued operations presentation and we have presented the operating results of the Japan product sales component as discontinued operations for all periods presented in this report and have adjusted the financial statement information presented below to be consistent with the discontinued operations presentation.

During fiscal 2008, we sold substantially all of the assets of our Consumer Solutions Business Unit (CSBU), which was primarily responsible for the sale of our products to consumers.  Based upon applicable accounting guidance, the operations of CSBU did not qualify for discontinued operations presentation, and therefore, no prior periods were adjusted to reflect the sale of the CSBU assets.

August 31,
 
2010
   
2009
   
2008
   
2007
   
2006
 
In thousands, except per share data
                             
                               
Income Statement Data:
                             
Net sales
  $ 136,874     $ 123,134     $ 252,074     $ 276,660     $ 271,463  
Income (loss) from operations
    4,038       (11,840 )     14,204       16,133       11,492  
Net income (loss) from continuing operations before income taxes
      1,180       (14,862 )       11,278         13,714         11,077  
Income tax benefit (provision)(1)
    (2,484 )     3,814       (6,738 )     (7,172 )     16,017  
Income (loss) from continuing operations
    (1,304 )     (11,048 )     4,540       6,542       27,094  
Income from discontinued operations, net of tax
    548       216       987       923       1,439  
Gain on sale of discontinued operations, net of tax
    238       -       -       -       -  
Net income (loss)(1)
    (518 )     (10,832 )     5,527       7,465       28,533  
Net income (loss) available to common shareholders(1)
    (518 )     (10,832 )     5,527       5,250       24,148  
                                         
Earnings (loss) per share:
                                       
Basic
  $ (.01 )   $ (.81 )   $ .28     $ .27     $ 1.20  
Diluted
  $ (.01 )   $ (.81 )   $ .28     $ .26     $ 1.17  
                                         
Balance Sheet Data:
                                       
Total current assets
  $ 48,616     $ 40,142     $ 66,661     $ 69,653     $ 87,056  
Other long-term assets
    9,396       11,608       11,768       14,542       12,249  
Total assets
    147,343       143,878       177,677       196,181       216,495  
                                         
Long-term obligations
    32,988       32,191       38,762       35,178       35,347  
Total liabilities
    76,308       74,874       99,500       95,476       83,185  
                                         
Preferred stock(2)
    -       -       -       -       37,345  
Shareholders’ equity
    71,035       69,004       78,177       100,705       133,310  
 
 
(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 preferred stock at its liquidation preference of $25 per share plus accrued dividends.



ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 Franklin Covey, 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.

Franklin Covey is a leading global provider of execution, leadership, and personal-effectiveness training with over 600 employees worldwide that deliver principle-based curriculum and effectiveness tools to our customers.  Our training, consulting services, and related accessories are designed to help organizations and individuals transform the way they conduct their business and personal lives to enable them to achieve greatness.  We operate globally with one common brand and business model designed to enable us to provide clients around the world with the same high level of service.  To achieve this level of service, we operate four regional sales offices in the United States; wholly owned subsidiaries in Australia, Japan, and the United Kingdom; and contract with licensee partners who deliver our curr iculum and provide services in over 140 other countries and territories around the world.  Our business-to-business service utilizes our expertise in training, consulting, and technology that is designed to help our clients define great performance and execute at the highest levels.  We also provide clients with training in management skills, relationship skills, and individual effectiveness, and can provide personal-effectiveness literature and electronic educational solutions to our clients as needed.

Historically, our solutions included products and services that encompassed training and consulting, assessment, and various application tools that were generally available in electronic or paper-based formats.  Our products and services were available through professional consulting services, public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com, and our best-known offerings in the marketplace 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.

Over the past several years, the strategic focus of our Consumer Solutions Business Unit (CSBU), which was focused primarily on sales of our products, and our Organizational Solutions Business Unit (OSBU), which was focused on the development and delivery of training, consulting, and related services, changed significantly.  As a consequence of these changes in strategic direction, we determined that the extent of overlap between our training and consulting offerings and our products had diminished.  After significant analysis and deliberation, it became apparent that these business units would be able to operate more effectively as separate companies, each with clear and distinct strategic objectives, market definitions, and competitive products and services.  This conclusion persuaded us to sell substantial ly all of the operations of the CSBU, and during the fourth quarter of our fiscal year ended August 31, 2008, we completed the sale of the CSBU to a newly formed entity, Franklin Covey Products, LLC.

Following the sale of the CSBU, we have been able to focus our full resources on the continued expansion of our training, consulting, content-rich media, and thought leadership businesses.  Our business now primarily consists of training, consulting, assessment services, and products to help organizations and individuals achieve superior results by focusing on and executing on top priorities, building the capability of knowledge workers, and aligning business processes.

The sale of the CSBU had a significant impact on our financial statements since the CSBU and corresponding product sales represented a substantial portion of our total sales, and the business dynamics of a training company are considerably different than a consumer products company.  Based on relevant accounting


literature, we were unable to present the operational results of the CSBU in a discontinued operations format, which makes comparisons of fiscal 2010 and fiscal 2009 financial results to fiscal 2008 results difficult.

The key factors that influence our operating results include the number of organizations that are active customers; the number of people trained within those organizations; the availability of budgeted training spending at our clients and prospective clients, which is significantly influenced by general economic conditions; and our ability to manage operating costs necessary to develop and provide meaningful training and related products to our clients.

Our fiscal year ends on August 31, and unless otherwise indicated, fiscal 2010, fiscal 2009, and fiscal 2008 refer to the twelve-month periods ended August 31, 2010, 2009, and 2008 and so forth.


RESULTS OF OPERATIONS

Overview of the Fiscal Year ended August 31, 2010

Our operating results for fiscal 2010 marked a significant improvement over fiscal 2009 financial results.  We believe that slowly stabilizing economic conditions in the United States, and in many of the countries which we operate, helped to improve corporate earnings and increase training budgets at many of our existing and newly acquired clients.  During fiscal 2010 we experienced broad-based improvements in our training and consulting sales at nearly all of our regional offices and directly owned international offices as well as from most of our international licensees.  Nearly all of our major practices and content groups had increased sales and we believe that our investments in curriculum development will allow us to maintain this favorable momentum.  In addition, during the fourth quarter of fiscal 2010 we were awarded a contract to provide training and consulting services to a governmental entity, which significantly improved our sales in the fourth quarter compared to the prior year.  We started fiscal 2011 with approximately $11.5 million more in our pipeline of booked days and awarded revenue at August 31, 2010 to be delivered in future periods compared to the same time last year.  We believe that the combination of stablized economic conditions and increased booked training days as we enter fiscal 2011 will enable us to achieve improved financial results in fiscal 2011.

During fiscal 2010, we sold the product sales component of our wholly owned subsidiary in Japan to an unrelated Japan-based paper products company.  The sale included the disposition of inventories, certain intangibles assets, and other current assets.  The sale closed on June 1, 2010, and the total sale price was JPY 305.0 million, or approximately $3.4 million.  In addition, the sale agreement provides for a three percent passive royalty on annual sales, which we believe will not be significant to our future operations.  We believe that the sale of this division will further align our Japanese operations with our overall strategic focus on training and consulting sales.  As a consequence of the sale, we determined that the operating results of the Japan product sales component qualified for discontinued operations presentation, and we have presented the operating results of the Japan product sales component as discontinued operations for all periods presented in this report on Form 10-K.  The following management’s discussion and analysis is presented on a comparative continuing operations presentation as shown in our consolidated statements of operations, which is found in Item 8.

For the year ended August 31, 2010, our consolidated sales (from continuing operations) increased 11 percent to $136.9 million compared to $123.1 million in fiscal 2009.  Increased sales and an improved gross margin percentage contributed to improved operating results and in fiscal 2010 we recognized income from operations of $4.0 million compared to a loss from operations of $11.8 million in fiscal 2009.  Our income from continuing operations before taxes was $1.2 million, compared to a loss of $14.9 million in fiscal 2009.  We recorded a $2.5 million income tax provision (refer to discussion below) during fiscal 2010 compared to a $3.8 million income tax benefit in the prior year, primarily due to increased pre-tax earnings.  After accounting for discontinued operations, our net loss for fiscal 20 10 was $0.5 million, or ($0.04) per share, compared to a $10.8 million loss, or ($0.81) per share, recognized in fiscal 2009.

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, 2010:

·  
Sales PerformanceOur consolidated sales from continuing operations increased $13.7 million, or 11 percent, compared to fiscal 2009.  We continue to be encouraged by revenue growth from our government services group, in our practices, at most of our U.S./Canadian regional sales offices, from our international licensee partners, and from our directly owned offices in Australia and the United Kingdom.  Growth in these areas was partially offset by decreased sales in Japan.  Sales in Japan were impacted by an intellectual property licensing arrangement in fiscal 2009 that did not repeat in fiscal 2010 and by weak economic conditions in that country.  Looking forward, our bookin g pace continues to improve over the prior year, and in fiscal 2010 we were awarded several training contracts that had a favorable impact on the fourth quarter of fiscal 2010 and which we believe will strengthen sales during fiscal 2011.

·  
Gross Profit – Consolidated gross profit increased to $89.1 million in fiscal 2010 compared to $77.9 million in fiscal 2009 primarily due to increased sales as described above.  Our gross margin, which is gross profit stated as a percentage of sales, improved to 65.1 percent compared to 63.2 percent in the prior year.

·  
Operating Costs – Our operating costs decreased by $4.7 million compared to fiscal 2009, which was the net result of a $1.8 million increase in selling, general, and administrative costs; a $2.0 million decrease in restructuring costs; a $3.6 million decrease in impaired asset charges; and a $0.9 million decrease in depreciation expense.  During fiscal 2010, we did not initiate a restructuring plan or have impaired asset charges.

·  
Income Taxes – Our income tax provision attributed to continuing operations for the fiscal year ended August 31, 2010 totaled $2.5 million on pre-tax earnings of $1.2 million.  Our effective tax rate on continuing operations of approximately 210 percent is higher than statutory combined rates primarily due to foreign withholding taxes for which we cannot utilize a foreign tax credit, the accrual of taxable interest income on the management stock loan program, disallowed executive compensation, and actual and deemed dividends from foreign subsidiaries for which we also cannot utilize foreign tax credits.  These items and other differences added approximately $2.0 million to our income tax provision for fiscal 2010.  However, due to the utiliz ation of net operating loss carryforwards, our income tax expense is not indicative of the actual cash paid for income taxes.

Further details regarding these items can be found in the comparative analysis of fiscal 2010 compared to fiscal 2009 as discussed in this management’s discussion and analysis.

The following table sets forth, for the fiscal years indicated, the percentage of total sales represented by the line items through income or loss before income taxes in our consolidated statements of operations:

YEAR ENDED
AUGUST 31,
 
2010
   
2009
   
2008
 
Sales:
                 
Training and consulting services
    94.6 %     93.3 %     54.8 %
Products
    3.1       3.8       44.2  
Leasing
    2.3       2.9       1.0  
Total sales
    100.0       100.0       100.0  
                         
Cost of sales:
                       
Training and consulting services
    32.1       33.1       17.7  
Products
    1.6       2.1       19.2  
Leasing
    1.2       1.6       0.6  
Total cost of sales
    34.9       36.8       37.5  
Gross profit
    65.1       63.2       62.5  
                         
Selling, general, and administrative
    56.7       61.6       55.4  
Gain on sale of CSBU
    -       -       (3.6 )
Restructuring costs
    -       1.7       0.8  
Impairment of assets
    -       2.9       0.6  
Depreciation
    2.7       3.6       2.3  
Amortization
    2.7       3.0       1.4  
Total operating expenses
    62.1       72.8       56.9  
Income (loss) from operations
    3.0       (9.6 )     5.6  
Interest income
    0.0       0.0       0.1  
Interest expense
    (2.1 )     (2.5 )     (1.2
Income (loss) from continuing operations before income taxes
    0.9 %     (12.1 )%     4.5 %


FISCAL 2010 COMPARED TO FISCAL 2009

Sales

We offer a variety of training courses, consulting services, and training related products that are focused on leadership, productivity, strategy execution, sales force performance, trust, and effective communications that are provided both domestically and internationally through our sales force or through international licensee partners.  The following table sets forth sales data from continuing operations by category and by our primary delivery channels (in thousands):

 
YEAR ENDED
AUGUST 31,
 
 
2010
   
Percent change from prior year
   
 
2009
   
Percent change from prior year
   
 
2008
 
Sales by Category:
                             
Training and consulting services
  $ 129,462       13     $ 114,910       (17 )   $ 138,112  
Products
    4,226       (9 )     4,668       (96 )     111,491  
Leasing
    3,186       (10 )     3,556       44       2,471  
    $ 136,874       11     $ 123,134       (51 )   $ 252,074  
                                         
Sales by Channel:
                                       
U.S./Canada direct
  $ 68,707       21     $ 56,898       (23 )   $ 73,709  
International direct
    26,110       (6 )     27,747       (16 )     32,972  
International licensees
    9,198       5       8,732       (13 )     10,091  
National account practices
    19,447       32       14,711       109       7,042  
Self-funded marketing
    8,075       (19 )     9,954       (43 )     17,390  
Other
    5,337       5       5,092       40       3,635  
CSBU channels
    -       -       -       (100 )     107,235  
    $ 136,874       11     $ 123,134       (51 )   $ 252,074  

Our consolidated sales increased by $13.7 million, or 11 percent, compared to fiscal 2009.  The following analysis of our sales performance for the fiscal year ended August 31, 2010 is based on activity through our primary delivery channels as shown above.

U.S./Canada Direct – This channel includes our four regional field offices that serve our clients in the United States and Canada and our government services group.  During fiscal 2010, we had improved sales performance in this channel primarily due to increased sales from our government services group, improved sales at three of our four regional offices, increased revenue per training day, and decreased cancellation rates compared to fiscal 2009.  Sales through our government services group increased primarily due to a governmental services contract obtained during the fourth quarter of fiscal 2010.  We recognized $6.7 million from this contract during the fourth quarter of fiscal 2010.  Sales through our regional s ales offices increased $2.9 million compared to fiscal 2009

and bookings are currently strong for the first quarter of fiscal 2011.  

International Direct – Our three directly owned international offices are located in Australia, Japan, and the United Kingdom.  The decrease in international direct sales was due to reduced sales in Japan, which declined $4.9 million (on a continuing operations basis) compared to fiscal 2009.  This decrease was partially offset by sales increases in Australia and the United Kingdom.  Sales in Japan were impacted by a $0.8 million intellectual property sale in fiscal 2009 that did not repeat in fiscal 2010 and by economic conditions in that country.  We believe that continued economic weakness in Japan was the primary factor in decreased sales, which resulted in decreased training and consulting sales and decreased boo k publishing sales compared to fiscal 2009.

International Licensees – In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees, which may translate and adapt our curriculum to local preferences and customs, if necessary.  During the fiscal year ended August 31, 2010, nearly all of our foreign licensees had increased sales compared to the prior year.  We believe that increased licensee royalties were indicative of stabilizing economic conditions in many countries around the world.

National Account Practices – Our national account practices are comprised of programs that are not typically offered in our regional field offices and includes Helping Clients Succeed from the sales performance group, The Leader In Me curriculum designed for students from our education practice, and Winning Customer Loyalty from our customer loyalty practice.  During fiscal 2010, each of our major components of this channel had increased sales compared to the prior year.

Self-Funded Marketing – This group includes our public programs, book and audio sales, and speeches.  The decrease in sales was primarily due to decreased speeches delivered and reduced public program sales resulting from the decision to offer fewer programs during the fiscal year.

Other – Our other sales are comprised primarily of leasing and shipping and handling revenues.  The decrease in other sales was primarily due to reduced leasing revenues as certain lease contracts at our corporate headquarters expired.  We are actively seeking new tenants for available property and believe that we will be successful in attracting new tenants to occupy vacant space at our corporate campus.

Gross Profit

Gross profit consists of net sales less the cost of services provided or the cost of goods sold.  Our cost of sales includes the direct costs of conducting seminars, materials used in the production of training products and related accessories, assembly and manufacturing labor costs, freight, and certain other overhead costs.  Gross profit may be affected by, among other things, the mix of training and consulting courses provided, prices of materials, labor rates, changes in product discount levels, production efficiency, and freight costs.

Our consolidated gross profit from continuing operations increased to $89.1 million in fiscal 2010 compared to $77.9 million in fiscal 2009.  Our consolidated gross margin, which is gross profit stated in terms of a percentage of sales, was 65.1 percent of sales in fiscal 2010 compared to 63.2 percent in fiscal 2009.

Gross margin on our training and consulting sales, which represented approximately 95 percent of our consolidated sales in fiscal 2010, was 66.1 percent compared to 64.5 percent in fiscal 2009.  The increase was primarily due to sales from a government services contract that included intellectual property, which have higher margins than other types of training and consulting sales; increased international licensee royalty revenues, which have virtually no cost of sales; and an increase in training and consulting sales as

a percent of our consolidated sales as training and consulting sales generally have higher gross margins than product or leasing sales.

Operating Expenses

Selling, General and AdministrativeOur selling, general, and administrative (SG&A) expenses increased by $1.8 million compared to the prior year.  However, as a percent of sales, consolidated SG&A expense decreased to 56.7 percent of sales in fiscal 2010 compared to 61.6 percent in the prior year.  The increase in SG&A expenses was primarily due to increased sales and the corresponding increase in commissions, severance costs, reimbursement of airfare costs previously paid by the Company’s CEO for business travel, and costs associated with the forgiveness of certain management stock loans.  Due to the significant increase in sales during our fourth quar ter of fiscal 2010, our commissions also increased as many of our sales personnel substantially exceeded sales goals, which provides for special bonus compensation.  However, as our sales performance improves, annual sales goals are adjusted higher, which we believe provides incentive for continued growth.  Of the $3.3 million increase in associate costs, we believe that $1.7 million was attributable to these special commissions.  During the fourth quarter of fiscal 2010, it was mutually determined that our co-Chief Operating Officers would terminate their employment with the Company.  As a result of this decision, we paid the former co-Chief Operating Officers severance according to our corporate policy, which totaled $0.9 million.  During fiscal 2010 we also expensed $0.7 million for the reimbursement of airfare costs previously paid by the Company’s CEO for business travel pursuant to a change in policy approved by the Board of Directors.&# 160; We also expensed $0.3 million related to bonuses for the income tax consequences resulting from the forgiveness of certain management stock loans during the fiscal year.

In previous fiscal years, we have implemented cost reduction efforts that reduced virtually every aspect of our spending.  These initiatives included a restructuring plan that reduced the number of our domestic regional sales offices, decentralized certain sales support functions, reduced our headcount, closed our Canadian office, and made other changes to our operations in Canada.  Increased SG&A expenses as described above were partially offset by the decreases in the following areas: 1) our advertising and promotional expenses decreased $2.2 million primarily due to the decision to reduce the number of public programs held and strategic reductions in our overall marketing expenses; 2) our telephone and overall utility charges decreased by $0.6 million primarily due to cost savings initiatives; 3) our spending on computer, office, and other related items declined by $0.5 million; and 4) we experienced reduced expenses in various other areas of our operations resulting from our cost cutting efforts.

DepreciationDepreciation expense decreased $0.9 million compared to the prior year.  The decrease was primarily due to impaired accounting software costs that resulted in an additional $0.5 million depreciation charge during the fourth quarter of fiscal 2009 (which did not repeat in fiscal 2010) and the full depreciation of other capital assets during the year.  Based upon anticipated capital asset acquisitions in fiscal 2011 and previous depreciation expense levels, we expect depreciation expense to total approximately $3.6 million during fiscal 2011.

Amortization – Amortization expense from definite-lived intangible assets was flat compared to the prior year.  We currently expect that intangible asset amortization expense will total $3.5 million in fiscal 2011.


FISCAL 2009 COMPARED TO FISCAL 2008

Sales

Training and Consulting Services and Leasing (continuing channels) – Our consolidated training and consulting service sales decreased by $23.2 million compared to the prior year, which was attributable to unfavorable performance from the majority of our domestic and international delivery channels.  We

believe that the decrease in sales was primarily due to unfavorable economic conditions, which eroded business confidence and led to decreased training budgets and the deferral of scheduled programs.  The effects of the economic downturn were widespread and led to economic contraction and reduced sales in many countries where we operate through direct offices or through our licensees.  These conditions led to the following results in our primary delivery channels:

U.S./Canada Direct – During fiscal 2009, our sales decreased at all of our regional offices, primarily due to the economic factors described above.  These factors led to cancelations or deferral of scheduled programs, reduced on-site training days, and overall decreased sales.  Partially offsetting decreased sales at our regional offices was improved government services sales, which increased $1.4 million compared to fiscal 2008.

International Direct – Consistent with sales performance in the United States, sales at all of our directly owned international offices declined compared to fiscal 2008.  In addition, the translation of foreign sales was adversely affected by changes in the exchange rates as these sales were translated to United States dollars.  The translation of foreign sales to United States dollars had a net $0.4 million unfavorable impact on our consolidated sales during the fiscal year ended August 31, 2009.

International Licensees – During the fiscal year ended August 31, 2009, nearly all of our foreign licensees had decreased sales compared to the prior year.  We believe that decreased licensee royalties were indicative of deteriorating economic conditions in many countries around the world throughout late 2008 and the majority of fiscal 2009.

National Account Practices – Our national account practices are comprised of programs that are not typically offered in our regional field offices and includes Helping Clients Succeed from the sales performance group, The Leader In Me curriculum designed for students from our education practice, and Winning Customer Loyalty from our customer loyalty practice.  During fiscal 2009, each of our major components of this channel had increased sales compared to the prior year primarily because most of these offerings were relatively new to the marketplace and gained momentum in fiscal 2009.

Self-Funded Marketing – This group includes our public programs, book and audio sales, and speeches.  The decrease in sales was primarily due to 1) reduced public seminar sales resulting from the decision to reduce the number of events scheduled during the year and from the decision to license the delivery rights of certain public programs to a third party, which resulted in the Company recording a licensee fee from these programs rather than the gross sale amount previously recorded; and 2) lower books and audio sales as fiscal 2008 sales were favorably impacted by the release of The Leader in Me book by Dr. Stephen R. Covey.

Other – Our other sales are comprised primarily of leasing and shipping and handling revenues.  The improvement over fiscal 2008 was due to increased leasing sales totaling $1.1 million primarily due to the addition of new leasing contracts that are generated from various arrangements to lease office space at our Salt Lake City, Utah headquarters campus.

Product Sales (primarily CSBU channels)Consolidated product sales, which were primarily sold through our CSBU channels, declined $107.0 million compared to the prior year primarily due to the sale of our CSBU during the fourth quarter of fiscal 2008.

Gross Profit

Prior to the sale of CSBU assets in fiscal 2008, we recorded the costs associated with operating our retail stores, call center, and Internet site as part of our consolidated selling, general, and administrative expenses.  Therefore, our consolidated gross profit may not be comparable with the gross profit of other companies that include similar costs in their cost of sales.

Our consolidated gross profit decreased to $77.9 million in fiscal 2009 compared to $157.5 million in fiscal 2008.  The decrease in gross profit was primarily attributable to decreased product sales resulting from the sale of the CSBU.  Our consolidated gross margin from continuing operations was 63.2 percent of sales in fiscal 2009 compared to 62.5 percent in the prior year.

Our training and consulting services gross margin was 64.5 percent compared to 67.6 percent in fiscal 2008.  The decrease was primarily attributable to decreased licensee royalty revenues, which have virtually no corresponding cost of sales, increased royalty costs on certain programs sold, and increased amortization of capitalized curriculum development costs.

Gross margin on product sales decreased to 43.9 percent compared to 56.6 percent in the prior year.  The decrease was primarily due to the sale of the CSBU, which eliminated virtually all of our domestic product sales.

Operating Expenses

Selling, General and AdministrativeOur SG&A expenses decreased $63.8 million compared to the prior year.  The decrease in SG&A expenses was primarily due to: 1) the sale of the CSBU, which reduced consolidated SG&A by approximately $51.7 million compared to the prior year; 2) a $7.5 million decrease in compensation costs resulting from lower sales and corresponding reductions to commissions and other variable compensation elements; 3) a $2.9 million decrease in advertising costs, primarily related to a decrease in the number of public programs held; 4) $0.7 million of reduced travel and conference costs, primarily due to the cancellation of our annual sales and delivery conferen ce and focused cost cutting measures; and 5) the favorable impacts of our restructuring plan on various areas of our operations.  These decreases were partially offset by $1.4 million of increased warehousing costs that were previously charged to CSBU cost centers, and $0.7 million of increased share-based compensation costs due to reversals of share-based compensation expense in the prior year that did not repeat in fiscal 2009.

Restructuring Costs – Following the sale of our CSBU, we initiated a restructuring plan that reduced the number of our domestic regional sales offices, decentralized certain sales support functions, and significantly changed the operations of our Canadian subsidiary.  The restructuring plan was intended to strengthen the remaining domestic sales offices and reduce our overall operating costs, and this effort continued into fiscal 2009.  During fiscal 2009 we expensed $2.0 million for anticipated severance costs necessary to complete the restructuring plan.

Impairment of Assets – Based on the terms of the sale of CSBU assets, we were entitled to receive a $1.2 million adjustment for working capital delivered on the closing date of the sale and to receive $2.3 million as reimbursement for specified costs necessary to complete the transaction.  Payment for these costs was originally due in January 2009, but we extended the due date of the payment at Franklin Covey Products’ request and obtained a promissory note from Franklin Covey Products for the amount owed, plus accrued interest.  At the time we received the promissory note from Franklin Covey Products, we believed that we could obtain payment for the amounts owed, based on prior year performance and forecasted financial performance in 2009.  However, the financial position of Franklin Covey Products deteriorated significantly late in fiscal 2009 and the deterioration accelerated subsequent to August 31, 2009.  As a result of this deterioration, the Company reassessed the collectibility of the promissory note.  Based on revised expected cash flows and other operational issues, we determined that the promissory note should be impaired at August 31, 2009.  Accordingly, we recorded a $3.6 million impaired asset charge and reversed $0.1 million of interest income that was recorded during fiscal 2009 from the working capital settlement and reimbursable transaction cost receivables.

DepreciationDepreciation expense decreased by $1.2 million compared to the prior year.  The decrease was primarily due to the sale of the CSBU.  During the fourth quarter of fiscal 2009, we impaired certain software costs due to the decision to replace our primary general ledger accounting

system in fiscal 2010 and recorded an additional $0.5 million depreciation charge.  We also recorded impairment charges totaling $0.6 million for two software applications that did not function as anticipated and were written off during fiscal 2008.

Amortization Consolidated amortization expense increased by $0.2 million compared to the prior year due to the acquisition of CoveyLink, which was purchased in fiscal 2009.

Income Taxes

Our income tax benefit from continuing operations for fiscal 2009 was $3.8 million compared to a $6.7 million provision in fiscal 2008.  The income tax benefit was primarily due to a pre-tax loss recognized in fiscal 2009 compared to pre-tax income in the prior year.  Our effective tax benefit rate of approximately 26 percent was lower than statutory combined rates primarily due to foreign withholding taxes for which we cannot utilize a foreign tax credit, the accrual of taxable interest income on the management stock loan program, and actual and deemed dividends from foreign subsidiaries for which we also cannot utilize foreign tax credits.


SEGMENT REVIEW

Prior to the sale of the CSBU, we had two operating segments:  the OSBU and the CSBU.  Following the sale, our operations constitute one reportable segment.  However, to improve comparability, the amounts presented in the table below reflect fiscal 2008 operating results based upon the previously defined segments and include the impact of the sale of the CSBU, which closed during the fourth quarter of fiscal 2008.  The following is a description of the previously reported operating segments, their primary operating components, and their significant business activities:

Organizational Solutions Business Unit – The OSBU was 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 included the financial results of our domestic sales force, public programs, and certain international operations.  The domestic sales force remains responsible for the sale and delivery of our training and consulting services in the United States and Canada.  Our international sales group includes the financial results of our directly owned foreign offices and royalty revenues from licensees.

Consumer Solutions Business Unit – This business unit was primarily focused on sales to individual customers and small business organizations and included the results of our domestic retail stores, consumer direct operations (primarily Internet sales and call center), wholesale operations, international product channels in certain countries, and other related distribution channels, including government product sales and domestic printing and publishing sales.  The CSBU results of operations also included the financial results of our paper planner manufacturing operations.  Although CSBU sales primarily consisted of products such as planners, binders, software, totes, and related accessories, virtually any component of our leadership, pro ductivity, and strategy execution solutions may have been purchased through the CSBU channels.

The following table sets forth sales data by our operating segments for the periods indicated.  For further information regarding our reporting segments and geographic information, refer to Note 18 to our consolidated financial statements as found in Item 8 of this report on Form 10-K (in thousands).


 
 
YEAR ENDED
AUGUST 31,
 
 
 
2010
   
Percent change from prior year
   
 
 
2009
   
Percent change from prior year
   
 
 
2008
 
Organizational Solutions Business Unit:
                             
Domestic
  $ 98,344       18     $ 83,193       (16 )   $ 99,308  
International
    35,309       (3 )     36,385       (16 )     43,060  
Total OSBU
    133,653       12       119,578       (16 )     142,368  
                                         
Consumer Solutions Business Unit:
    -       -       -       (100 )     107,235  
Total operating units
    133,653       12       119,578       (52 )     249,603  
Corporate and eliminations
    3,221       (9 )     3,556       44       2,471  
Consolidated
  $ 136,874       11     $ 123,134       (51 )   $ 252,074  


QUARTERLY RESULTS

The following tables set forth selected unaudited quarterly consolidated financial data for the years ended August 31, 2010 and 2009.  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.

YEAR ENDED AUGUST 31, 2010 (unaudited)
                       
   
November 28
   
February 27
   
May 29
   
August 31
 
In thousands, except per share amounts
                       
Net sales
  $ 31,926     $ 29,751     $ 30,496     $ 44,701  
Gross profit
    20,620       19,299       19,204       29,948  
Selling, general, and administrative expense
    17,275       18,464       17,530       24,335  
Depreciation
    974       1,012       915       768  
Amortization
    962       940       929       929  
Income (loss) from operations
    1,409       (1,117 )     (170 )     3,916  
Income (loss) from continuing operations before income taxes
    694       (1,850 )     (902 )     3,238  
Income (loss) from continuing operations
    116       (417 )     263       (1,266 )
Income (loss) from discontinued operations, net of tax
    132       36       (128 )     508  
Gain on sale of discontinued operations, net of tax
    -       -       -       238  
Net income (loss)
    248       (381 )     135       (520 )
                                 
Net income (loss) per share:
                               
Basic and diluted
  $ .01     $ (.03 )   $ .01     $ (.04 )
                                 
                                 
YEAR ENDED AUGUST 31, 2009 (unaudited)
                               
   
November 29
   
February 28
   
May 30
   
August 31
 
In thousands, except per share amounts
                               
Net sales
  $ 32,455     $ 27,773     $ 29,492     $ 33,414  
Gross profit
    20,259       17,839       18,665       21,119  
Selling, general, and administrative expense
    20,114       19,634       16,798       19,267  
Restructuring costs
    -       -       843       1,204  
Impairment of assets
    -       -       -       3,569  
Depreciation
    903       906       994       1,729  
Amortization
    902       903       995       961  
Loss from operations
    (1,660 )     (3,604 )     (965 )     (5,611 )
Loss from continuing operations before income taxes
    (2,435 )     (4,124 )     (1,910 )     (6,393 )
Loss from continuing operations
    (908 )     (314 )     (5,542 )     (4,284 )
Income (loss) from discontinued operations, net of tax
    339       (319 )     489       (293 )
Net loss
    (569 )     (633 )     (5,053 )     (4,577 )
                                 
Net loss per share:
                               
Basic and diluted
  $ (.04 )   $ (.05 )   $ (.38 )   $ (.34 )


Training sales are moderately seasonal because of the timing of corporate training, which is not typically scheduled as heavily during holiday and vacation periods.  Quarterly fluctuations may also be affected by other factors including the introduction of new offerings, the addition of new organizational customers, and the elimination of underperforming offerings.


LIQUIDITY AND CAPITAL RESOURCES

Summary

At August 31, 2010 we had $3.5 million of cash and cash equivalents compared to $1.7 million at August 31, 2009 and our net working capital (current assets less current liabilities) increased significantly to $4.6 million compared to a deficit of $3.2 million at August 31, 2009.  Our primary sources of liquidity are cash flows from the sale of services in the normal course of business and proceeds from our revolving line of credit.  Our primary uses of liquidity include payments for operating activities, capital expenditures, working capital, and debt repayment.

During the second quarter of fiscal 2010, we obtained a modification to our existing line of credit facility (the Fourth Modification).  The Fourth Modification Agreement affected the following terms of our existing line of credit agreements:

·  
Loan Amount – The line of credit will continue to allow up to $13.5 million of borrowing capacity until December 31, 2010, when the loan amount will be reduced to $10.0 million.

·  
Maturity Date – The maturity date of the credit facility has been extended one year to March 14, 2011.

·  
Interest Rate – The effective interest rate will be based upon the calculation of the Funded Debt to EBITDAR Ratio and the Fixed Charge Coverage Ratio.  If our Funded Debt to EBITDAR Ratio is less than 2.5 to 1.0 and the Fixed Charge Coverage Ratio is greater than 2.0 to 1.0, the interest rate will be LIBOR plus 2.6 percent.  If the ratios are in excess of these amounts, but still in compliance with the terms of the line of credit facility, the interest rate will be LIBOR plus 3.5 percent.

·  
Financial Covenants – The Funded Debt to EBITDAR Ratio was modified for the twelve month periods to be less than (a) 3.75 to 1.00 as of the end of the fiscal quarter ending on February 27, 2010, (b) 3.50 to 1.00 as of the end of the fiscal quarter ending on May 29, 2010, and (c) 3.00 to 1.00 as of the end of the fiscal quarter ending on August 31, 2010 and each fiscal quarter thereafter.  The Fixed Charge Coverage Ratio is required to be greater than 1.5 to 1.0 for all periods and the minimum net worth was revised to $67.0 million.  The capital expenditure limitations remain unchanged.

We may use the line of credit facility for general corporate purposes as well as for other transactions, unless specifically prohibited by the terms of the line of credit agreement.  The line of credit also contains customary representations and guarantees as well as provisions for repayment and liens.  At August 31, 2010, we had $9.5 million outstanding on our line of credit.

In addition to customary non-financial terms and conditions, our line of credit requires us to be in compliance with specified financial covenants, as described above.  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.  At August 31, 2010, we believe that we were in compliance with the terms and financial covenants of our line of credit facility.

In addition to our $13.5 million line of credit facility, we have a long-term lease on our corporate campus that is accounted for as a long-term financing obligation.

The following table summarizes our cash flows from operating, investing, and financing activities for the past three years (in thousands):

YEAR ENDED AUGUST 31,
 
2010
   
2009
   
2008
 
Total cash provided by (used for):
                 
Operating activities
  $ 7,024     $ 5,282     $ 7,868  
Investing activities
    (2,002 )     (3,203 )     18,520  
Financing activities
    (3,617 )     (16,248 )     (16,159 )
Effect of exchange rates on cash
    391       (47 )     (451 )
Increase (decrease) in cash and cash equivalents
  $ 1,796     $ (14,216 )   $ 9,778  

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, 2010.

Cash Flows from Operating Activities

Our cash provided by operating activities totaled $7.0 million in fiscal 2010 compared to $5.3 million during fiscal 2009.  The increase was primarily due to improved operating results from increased sales during fiscal 2010 compared to the prior year.  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.  Cash provided by or used for changes in working capital during fiscal 2010 was primarily related to:

·  
Increased accounts receivable resulting from significantly increased sales during the fourth quarter of fiscal 2010;
·  
Increased accrued liabilities resulting primarily from increased sales and a corresponding increase in commissions and bonuses; and
·  
Reduced inventory balances resulting from improved forecasting and purchasing processes.

We continue to strive to optimize our working capital balances by, among other things, improving our collections of accounts receivable, maintaining proper levels of inventory, and control spending for prepaid and other assets.  Combined with existing and future sales growth programs and cost-reduction initiatives, we hope to improve our cash flows from operating activities in future periods.  However, the success of these efforts, and their eventual contribution to our cash flows, is dependent upon numerous factors, many of which are not within our control.

Cash Flows from Investing Activities and Capital Expenditures

During the fiscal year ended August 31, 2010 we used $2.0 million of net cash for investing activities.  Our primary uses of cash for investing activities were the payment of the first of five potential earnout payments to the former owners of CoveyLink, purchases of property and equipment, and additional spending on curriculum development.  During fiscal 2010, we paid $3.3 million to the former owners of CoveyLink based on earnings growth over the specified earnings period.  The former owners of CoveyLink include a son of our Vice-Chairman of the Board of Directors.  Our purchases of property and equipment, which totaled $1.4 million, consisted primarily of computer hardware and software.  During fiscal 2010, we also spent $0.7 million for further investment in curriculum development acti vities.  These uses of cash were partially offset by the receipt of $3.4 million from the sale of our product sales component of our Japan subsidiary.

During fiscal 2011, we expect to spend approximately $1.0 million on purchases of property and equipment and $2.9 million on curriculum development activities.  Purchases of property and equipment are expected to consist primarily of new computer hardware, software, and in other areas as deemed necessary.  However, actual capital spending is based upon a variety of factors and may differ from these estimates.

Cash Flows from Financing Activities

Net cash used for financing activities during the fiscal year ended August 31, 2010 totaled $3.6 million.  Our uses of cash for financing activities primarily consisted of $3.4 million of cash used to reduce our line of credit balance and $0.7 million used for principal payments on our financing obligation.  These uses were partially offset by $0.3 million of cash received from participants in the employee stock purchase plan to purchase shares of our common stock, and $0.2 million of cash received from a management stock loan participant to repay their loan.

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.  In order to obtain a more favorable interest rate on the line of credit facility, the facility requires an annual renewal.  We currently believe that we will be successful in obtaining a new or extended line of credit from our lender prior to the expiration of the current credit facility in March 2011 to ensure available liquidity in future periods.  Additional potential sources of liquidity include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources.  However, no assurance can be provided that we will obtain a new or extended line of credit or obtain additional financing from other sources on terms that would be acceptable to us.  If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.  If we are unsuccessful in obtaining a renewal or extension of our line of credit, or additional financing, we believe that cash flows from operations combined with a number of initiatives we would implement in the months preceding the due date would create sufficient liquidity to pay down the required outstanding balance on the line of credit.  These initiatives include deferral of capital purchases for externally developed curriculum and uncommitted capital expenditures; deferral of executive team compensation; deferral of certain related party contractual earnout payments; substantial reduction of associate salaries; reduction of operating expenses, including non-critical travel; and deferral of payments to other vendors in order to generate sufficient cash.

Considering the foregoing, 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, 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, as described above, to maintain sufficient resources for future growth and capital requirements. 60; However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.

Contractual Obligations

The Company has not structured any special purpose or variable interest entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity.  Required contractual payments primarily consist of lease payments resulting from the sale of our corporate campus (financing obligation); payments to HP Enterprise Services (HP) for outsourcing services related to information systems, warehousing, and distribution services; minimum rent payments for office and warehouse space; the repayment of our line of credit

obligation, which matures in fiscal 2011; 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
 
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
 
Required lease payments on corporate campus
  $ 3,116     $ 3,178     $ 3,242     $ 3,307     $ 3,373     $ 36,858     $ 53,074  
Minimum required payments to HP for outsourcing services(1)
    4,138       4,138       4,138       4,138       4,138       2,969       23,659  
Minimum operating lease payments(2)
    1,853       1,923       1,376       1,248       1,210       1,067       8,677  
Line of credit
    9,532       -       -       -       -       -       9,532  
Purchase obligations
    3,220       -       -       -       -       -       3,220  
Total expected contractual
obligation payments
  $ 21,859     $ 9,239     $ 8,756     $ 8,693     $ 8,721     $ 40,894     $ 98,162  

(1)  
Our obligation for outsourcing services contains an annual escalation based upon changes in the Employment Cost Index, the impact of which was not estimated in the above table.  We are also contractually allowed to collect amounts from Franklin Covey Products that reduce the amounts shown in the table above.

(2)  
The operating agreement with Franklin Covey Products provides for reimbursement of a portion of the warehouse leasing costs, the impact of which is not included in the lease obligations in the table above.

Our contractual obligations presented above exclude unrecognized tax benefits of $3.9 million for which we cannot make a reasonably reliable estimate of the amount and period of payment.  For further information regarding the application of FASC 740-10-05, refer to the Notes to the consolidated financial statements as presented in Item 8 of this report on Form 10-K.

Other Items
 
Franklin Covey Products is contractually obligated to pay us for rented warehouse and office space, a portion of the fixed costs for warehousing and distribution facilities, and is primarily liable for leasing costs at its retail stores.  In the event that Franklin Covey Products is unable to pay these items, our cash flows and operating results may be adversely affected.
 
The Company is the creditor for a loan program that provided the capital to allow certain management personnel the opportunity to purchase shares of our common stock.  For further information regarding our management common stock loan program, refer to the notes to our consolidated financial statements as found in Item 8 of this report on Form 10-K.  The inability of the Company to collect all, or a portion, of these receivables could have an adverse impact upon our financial position and future cash flows compared to full collection of the loans.


USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.  The significant accounting polices that we used to prepare our consolidated financial statements are primarily outlined in Note 1 to the consolidated financial statements, which are presented in Part II, Item 8 of this Annual Report on Form 10-K.  Some of those accounting policies require us to make assumptions and use judgments that may affect the amounts reported in our consolidated financial statements.  Management regularly evaluates its estimates and assumptions and bases those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America.  Actual results may differ from these estimates under different assumptions or conditions, including changes in economic and political conditions and other circumstances that are not in our control, but which may have an impact on these estimates and our actual financial results.

The following items require the most significant judgment and often involve complex estimates:

Revenue Recognition

We derive revenues primarily from the following sources:

·  
Training and Consulting Services – We provide training and consulting services to both organizations and individuals in leadership, productivity, strategic execution, goal alignment, sales force performance, and communication effectiveness skills.

·  
Products – We sold planners, binders, planner accessories, handheld electronic devices, and other related products that were primarily delivered through our CSBU channels prior to the fourth quarter of fiscal 2008.  We continue to sell products, such as books, audio products, and other related items.

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 were 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 the guidance for multiple element arrangements.  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 us ing 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.  Royalty revenue is reported as a component of training and consulting service sales in our consolidated statements of operations.

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

Share-Based Compensation

Our shareholders have approved a performance based long-term incentive plan (the LTIP) that provides for annual grants of share-based performance awards to certain managerial personnel and executive management as directed by the Organization and Compensation Committee (the Compensation Committee) of the Board of Directors.  The number of common shares that are vested and issued to LTIP participants is variable and is based entirely upon the achievement of specified financial performance objectives during a defined performance period.  Due to the variable number of common shares that may be issued under the LTIP, we reevaluate our LTIP grants on a quarterly basis and adjust the number of shares expected to be awarded based upon actual and estimated financial results of the

Company 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 adjustment date based upon the estimated probable number of common shares to be awarded.

The analysis of our LTIP awards contain 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 the 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 as described above.

During fiscal 2010 we granted options to purchase shares of our common stock that have a share price, or market based, vesting condition.  As a result, we used a Monte Carlo simulation to determine the fair value of these stock options.  The Monte Carlo option pricing model required the input of subjective assumptions, including items such as the expected term of the options.  If factors change and we use different assumptions for estimating share-based compensation expense related to stock options, our share-based compensation expense may differ materially from that recorded in the current period.

Accounts Receivable Valuation

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

Our allowance for doubtful accounts calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the collectibility of customer accounts, which may be influenced by a number of factors that are not within our control, such as the financial health of each customer.  We regularly review the collectibility assumptions of our allowance for doubtful accounts calculation and compare them against historical collections.  Adjustments to the assumptions may either increase or decrease our total allowance for doubtful accounts.  For example, a 10 percent increase to our allowance for doubtful accounts at August 31, 2010 would increase our reported loss from operations by approximately $0.1 million.

Inventory Valuation

Following the sale of CSBU, our inventories are comprised primarily of training materials and training related accessories.  Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method.  Inventories are reduced to their fair market value through the use of inventory loss reserves, which are recorded during the normal course of business.

Our inventory loss reserve calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding a number of factors, including future inventory demand requirements and pricing strategies.  During the evaluation process we consider historical sales patterns and current sales trends, but these may not be indicative of future inventory losses.  While we have not made material changes to our inventory reserves methodology during the past three years, our inventory requirements may change based on projected customer demand, technological and product life cycle changes, longer or shorter than expected usage periods, and other factors that could affect the valuation of our inventories.  If our estimates regarding consumer demand and other factors are inaccurate, we may b e exposed to losses that may have a materially adverse impact upon our financial position and results of

operations.  For example, a 10 percent increase to our inventory reserves at August 31, 2010 would increase our reported loss from operations by $0.1 million.

Indefinite-Lived Intangible Assets and Goodwill

Intangible assets that are deemed to have an indefinite life and goodwill balances 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 was generated by the merger with the Covey Leadership Center and has been deemed to have an indefinite life.  This intangible asset is tested for impairment using the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars and international licensee royalties.  Our goodwill at August 31, 2010 was generated by the acquisition of CoveyLink during the second quarter of fiscal 2009 and the subsequent payment of the first of five potential earnout payments contained in the acqui sition agreement.

Our impairment evaluation calculations for goodwill and the Covey trade name contain uncertainties because they require 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 has remained 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.  The valuation methodologies for both indefinite-lived intangible assets and goodwill are also dependent upon  ;the share price of our common stock and corresponding market capitalization, which may differ from estimated royalties used in our annual impairment testing.  Based upon the fiscal 2010 evaluation of the Covey trade name and goodwill, our trade-name related revenues, licensee royalties, and overall sales levels would have to suffer significant reductions before we would be required to impair them.  However, future declines in our share price may trigger additional impairment testing and may result in impairment charges.

Impairment of Long-Lived Assets

Long-lived tangible assets and definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  We use an estimate of undiscounted future net cash flows of the assets over their remaining useful lives in determining whether the carrying value of the assets is recoverable.  If the carrying values of the assets exceed the anticipated future cash flows of the assets, we calculate an impairment loss.  The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based upon discounted cash flows over the estimated remaining useful life of the asset.  If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis, which is then depreciated or amortized over the remaining useful life of the asset.  Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets.

Our impairment evaluation calculations contain uncertainties because they require us to make assumptions and apply judgment in order to estimate future cash flows, forecast the useful lives of the assets, and select a discount rate that reflects the risk inherent in future cash flows.  Although we have not made any material changes to our long-lived assets impairment assessment methodology during the past three years, if forecasts and assumptions used to support the carrying value of our long-lived tangible and definite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.

Income Taxes

We regularly evaluate our United States federal and various state and foreign jurisdiction income tax exposures.  We account for certain aspects of our income tax provision using the provisions of FASC

740-10-05 (formerly FIN 48), which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon final settlement.  The provisions of FASC 740-10-05 also provide guidance on de-recognition, classification, interest, and penalties on income taxes, accounting for income taxes in interim periods, and require incre ased disclosure of various income tax items.  Taxes and penalties are components of our overall income tax provision.

We record previously unrecognized tax benefits in the financial statements when it becomes more likely than not (greater than a 50 percent likelihood) that the tax position will be sustained.  To assess the probability of sustaining a tax position, we consider all available evidence.  In many instances, sufficient positive evidence may not be available until the expiration of the statute of limitations for audits by taxing jurisdictions, at which time the entire benefit will be recognized as a discrete item in the applicable period.

Our unrecognized tax benefits result from uncertain tax positions about which we are required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions.  The calculation of our income tax provision or benefit, as applicable, requires estimates of future taxable income or losses.  During the course of the fiscal year, these estimates are compared to actual financial results and adjustments may be made to our tax provision or benefit to reflect these revised estimates.  Our effective income tax rate is also affected by changes in tax law and the results of tax audits by various jurisdictions.  Although we believe that our judgments and estimates discussed herein are reasonable, actual results could differ, and we could be exposed to losses or gai ns that could be material.


ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED

Revenue Recognition – In October 2009, the Financial Accounting Standards Board issued guidance on revenue recognition that will be effective for us beginning September 1, 2010.  The new guidance amends existing guidance on multiple element revenue arrangements to improve the ability of entities to recognize revenue from the sale of delivered items that are part of a multiple-element arrangement when other items have not yet been delivered.  One of the current requirements is that there must be objective and reliable evidence of the standalone selling price of the undelivered items, which must be supported by vendor-specific objective evidence (VSOE) or third-party evidence (TPE).  The new guidance eliminates the requirements th at all undelivered elements have VSOE or TPE before an entity can recognize the portion of an overall arrangement that is attributable to items that have already been delivered.  The “residual method” of allocating revenue is thereby eliminated and entities are required to allocate the arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method.  We have not completed our evaluation of the impact of this guidance.

REGULATORY COMPLIANCE

The Company is registered in states in which we do business that have a sales tax and collects and remits sales or use tax on retail sales made through its stores and catalog sales.  Compliance with environmental laws and regulations has not had a material effect on our operations.

INFLATION AND CHANGING PRICES

Inflation has not had a material effect on our operations.  However, future inflation may have an impact on the price of materials used in the production of training products and related accessories, including paper and related raw materials.  We may not be able to pass on such increased costs to our customers.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain written and oral statements made by the Company in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the Exchange Act).  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or phrases of similar meaning.  In our reports and filings we may make forward looking statements regarding our expectations about future sales levels, future training and consulting sales activity, anticipated expenses, the adequac y of existing capital resources, the ability of the Company to obtain a renewal or extension of its line of credit agreement, projected cost reduction and strategic initiatives, our expectations about the effect of the sale of the CSBU on our business, our expectations about our restructuring plan, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuation expenses, the seasonality of future sales, the seasonal fluctuations in cash used for and provided by operating activities, expected improvements in cash flows from operating activities, future compliance with the terms and conditions of our line of credit, the ability to borrow on our line of credit, expected repayment of our line of credit in future periods, estimated capital expenditures, 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 res ults 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, 2010, 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 HP 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; co mpetition; the number and nature of customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our products and services and those of competitors; adverse publicity; and other factors which may adversely affect our business.

The risks included here are not exhaustive.  Other sections of this report may include additional factors that could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements.  Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.

The market price of our common stock has been and may remain volatile.  In addition, the stock markets in general have experienced increased volatility.  Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock.  In addition, the price of our common stock can change for reasons unrelated to our performance.  Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.

Forward-looking statements are based on management’s expectations as of the date made, and the Company does not undertake any responsibility to update any of these statements in the future except as required by law.  Actual future performance and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk of Financial Instruments

We are exposed to financial instrument market risk primarily through fluctuations in foreign currency exchange rates and interest rates.  To manage risks associated with foreign currency exchange and interest rates, we make limited use of derivative financial instruments.  Derivatives are financial instruments that derive their value from one or more underlying financial instruments.  As a matter of policy, our derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures.  In addition, we do not enter into derivative contracts for trading or speculative purposes, nor are we party to any leveraged derivative instrument.  The notional amounts of derivatives do not represent actual amounts exchanged by the parties to the instrument, and, thus, are not a measure of exposure to us through our use of derivatives.  Additionally, we enter into derivative agreements only with highly rated counterparties and we do not expect to incur any losses resulting from non-performance by other parties.

Foreign Exchange Sensitivity

Due to the global nature of our operations, we are subject to risks associated with transactions that are denominated in currencies other than the United States dollar, as well as the effects of translating amounts denominated in foreign currencies to United States dollars as a normal part of the reporting process.  The objective of our foreign currency risk management activities is to reduce foreign currency risk in the consolidated financial statements.  In order to manage foreign currency risks, we make limited use of foreign currency forward contracts and other foreign currency related derivative instruments.  Although we cannot eliminate all aspects of our foreign currency risk, we believe that our strategy, which includes the use of derivative instruments, can reduce the impacts of foreign currency rela ted issues on our consolidated financial statements.  The following is a description of our use of foreign currency derivative instruments.

Foreign Currency Forward ContractsDuring the fiscal years ended August 31, 2010, 2009, and 2008, 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 did not meet specific hedge accounting requirements, gains and losses on these contracts, which expired on a quarterly basis, were recognized in current operations and were 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 statements of operations and had the followi ng net impact on the periods indicated (in thousands):

YEAR ENDED
AUGUST 31,
 
2010
   
2009
   
2008
 
                   
Losses on foreign exchange contracts
  $ (240 )   $ (321 )   $ (487 )
Gains on foreign exchange contracts
    -       105       36  
Net loss on foreign exchange contracts
  $ (240 )   $ (216 )   $ (451 )

At August 31, 2010, we had one open foreign currency sell contract that did not qualify for hedge accounting.  The notional amount of this contract was JPY 186.1 million with a contracted value of $2.0 million.  The fair value of this foreign currency forward contract, which was determined using the estimated amount at which the contract could be settled based upon forward market exchange rates, was insignificant.


Interest Rate Sensitivity

The Company is exposed to fluctuations in interest rates primarily due to our line of credit borrowings.  At August 31, 2010, our debt obligations consisted primarily of a long-term lease agreement (financing obligation) associated with the sale of our corporate headquarters facility and a variable-rate line of credit arrangement.  Our overall interest rate sensitivity is primarily influenced by 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 and the line of credit obligation had an effective interest rate of 3.8 percent at August 31, 2010.  At August 31, 20 10 borrowing levels, a one percent increase in the interest rate on our variable rate line of credit obligation would increase our interest expense over the next year by approximately $0.1 million.

During the fiscal years ended August 31, 2010, 2009, and 2008, we were not party to any interest rate swap agreements or similar derivative instruments.



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Franklin Covey Co.:
 
We have audited Franklin Covey Co.’s internal control over financial reporting as of August 31, 2010, 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 authoriz ations 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, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Franklin Covey Co. and subsidiaries as of August 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2010, and our report dated November 12, 2010 expressed an unqualified opinion on those consolidated financial statements.
 
/s/ KPMG LLP
 
Salt Lake City, Utah
November 12, 2010
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Franklin Covey Co.:
 
We have audited the accompanying consolidated balance sheets of Franklin Covey Co. and subsidiaries as of August 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2010.  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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 2010, 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, 2010, 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 12, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 

/s/ KPMG LLP
 
Salt Lake City, Utah
November 12, 2010



FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS

AUGUST 31,
 
2010
   
2009
 
In thousands, except per share data
           
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 3,484     $ 1,688  
Accounts receivable, less allowance for doubtful accounts of $718 and $879
    30,665       22,877  
Inventories
    4,470       6,770  
Deferred income tax assets
    2,543       2,551  
Income taxes receivable
    -       508  
Prepaid expenses and other current assets
    7,454       5,748  
       Total current assets
    48,616       40,142  
                 
Property and equipment, net
    20,330       22,629  
Intangible assets, net
    65,240       68,994  
Goodwill
    3,761       505  
Other long-term assets
    9,396       11,608  
    $ 147,343     $ 143,878  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of financing obligation
  $ 734     $ 621  
Line of credit
    9,532       12,949  
Accounts payable
    6,847       8,758  
Income taxes payable
    198       -  
Accrued liabilities