x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Utah
(State
of Incorporation)
|
87-0401551
(I.R.S.
employer identification number
|
2200
West Parkway Boulevard
Salt
Lake City, Utah
(Address
of principal executive offices)
|
84119-2099
(Zip
Code)
|
Registrant's
telephone number,
Including
area code
|
(801)
817-1776
|
Yes
|
x
|
|
No
|
o
|
Yes
|
|
o
|
No
|
x
|
May
28,
2005
|
August
31,
2004
|
||||||
|
(unaudited)
|
||||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash,
cash equivalents, and short-term investments
|
$
|
45,453
|
$
|
41,904
|
|||
Accounts
receivable, less allowance for doubtful accounts
of $1,553 and $1,034
|
24,925
|
18,636
|
|||||
Inventories
|
21,508
|
23,693
|
|||||
Other
current assets
|
5,249
|
5,794
|
|||||
Total
current assets
|
97,135
|
90,027
|
|||||
Property
and equipment, net
|
35,498
|
40,584
|
|||||
Intangible
assets, net
|
84,388
|
87,507
|
|||||
Other
long-term assets
|
8,941
|
7,593
|
|||||
$
|
225,962
|
$
|
225,711
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Current
portion of long-term debt
|
$
|
120
|
$
|
120
|
|||
Accounts
payable
|
9,345
|
14,018
|
|||||
Income
taxes payable
|
4,314
|
5,903
|
|||||
Accrued
liabilities
|
35,506
|
36,158
|
|||||
Total
current liabilities
|
49,285
|
56,199
|
|||||
Long-term
debt, less current portion
|
1,299
|
1,350
|
|||||
Other
liabilities
|
2,033
|
1,550
|
|||||
Total
liabilities
|
52,617
|
59,099
|
|||||
Shareholders’
equity:
|
|||||||
Preferred
stock - Series A, no par value; 4,000 shares authorized, 3,494
issued;
liquidation
preference totaling $89,529
|
87,345
|
||||||
Preferred
stock - Series A, no par value; convertible into common stock
at $14 per share;
4,000
shares authorized, 3,494 shares issued; liquidation
preference totaling $89,530;
recapitalized
in 2005 (Note 7)
|
87,203
|
||||||
Common
stock - $0.05 par value; 40,000 shares authorized, 27,056
shares issued
|
1,353
|
1,353
|
|||||
Additional
paid-in capital
|
192,148
|
205,585
|
|||||
Common
stock warrants
|
7,611
|
||||||
Accumulated
deficit
|
(4,871
|
)
|
(8,798
|
)
|
|||
Deferred
compensation on restricted stock grants
|
(723
|
)
|
(732
|
)
|
|||
Accumulated
other comprehensive income
|
656
|
1,026
|
|||||
Treasury
stock at cost, 6,517 and 7,028 shares
|
(110,174
|
)
|
(119,025
|
)
|
|||
Total
shareholders’ equity
|
173,345
|
166,612
|
|||||
$
|
225,962
|
$
|
225,711
|
||||
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
(unaudited)
|
(unaudited)
|
||||||||||||
Net
sales:
|
|||||||||||||
Products
|
$
|
35,217
|
$
|
35,031
|
$
|
134,443
|
$
|
143,815
|
|||||
Training
and services
|
30,571
|
26,217
|
82,972
|
71,178
|
|||||||||
65,788
|
61,248
|
217,415
|
214,993
|
||||||||||
Cost
of sales:
|
|||||||||||||
Products
|
17,056
|
18,741
|
61,873
|
70,303
|
|||||||||
Training
and services
|
10,612
|
9,846
|
26,198
|
24,879
|
|||||||||
27,668
|
28,587
|
88,071
|
95,182
|
||||||||||
Gross
margin
|
38,120
|
32,661
|
129,344
|
119,811
|
|||||||||
Selling,
general, and administrative
|
35,947
|
35,128
|
110,388
|
114,553
|
|||||||||
Gain
on disposal of investment in
unconsolidated
subsidiary
|
(500
|
)
|
(500
|
)
|
|||||||||
Depreciation
|
1,848
|
2,509
|
6,346
|
9,322
|
|||||||||
Amortization
|
1,043
|
1,043
|
3,130
|
3,130
|
|||||||||
Income
(loss) from operations
|
(218
|
)
|
(6,019
|
)
|
9,980
|
(7,194
|
)
|
||||||
Interest
income
|
310
|
85
|
592
|
313
|
|||||||||
Interest
expense
|
(29
|
)
|
(27
|
)
|
(95
|
)
|
(195
|
)
|
|||||
Income
(loss) before provision for
income
taxes
|
63
|
(5,961
|
)
|
10,477
|
(7,076
|
)
|
|||||||
Benefit
(provision) for income taxes
|
3,006
|
812
|
1,203
|
(1,021
|
)
|
||||||||
Net
income (loss)
|
3,069
|
(5,149
|
)
|
11,680
|
(8,097
|
)
|
|||||||
Preferred
stock dividends
|
(2,184
|
)
|
(2,184
|
)
|
(6,551
|
)
|
(6,551
|
)
|
|||||
Loss
on recapitalization of preferred stock
|
(7,753
|
)
|
(7,753
|
)
|
|||||||||
Net
loss attributable to common
shareholders
|
$
|
(6,868
|
)
|
$
|
(7,333
|
)
|
$
|
(2,624
|
)
|
$
|
(14,648
|
)
|
|
Net
loss attributable to common
shareholders
per share:
|
|||||||||||||
Basic
and diluted (Note
11)
|
$
|
(.34
|
)
|
$
|
(.37
|
)
|
$
|
(.18
|
)
|
$
|
(.73
|
)
|
|
Weighted
average number of
common
shares:
|
|||||||||||||
Basic
and diluted
|
19,922
|
19,940
|
19,847
|
19,947
|
Three
Quarters Ended
|
|||||||
May
28,
2005
|
May
29,
2004
|
||||||
(unaudited)
|
|||||||
Cash
flows from operating activities:
|
|||||||
Net
income (loss)
|
$
|
11,680
|
$
|
(8,097
|
)
|
||
Adjustments
to reconcile net income (loss) to net cash
provided
by operating
activities:
|
|||||||
Depreciation
and amortization
|
11,047
|
13,764
|
|||||
Loss
(gain) on disposal of assets
|
35
|
(29
|
)
|
||||
Restructuring
cost reversal
|
(306
|
)
|
|||||
Amortization
of deferred compensation
|
729
|
55
|
|||||
Gain
on disposal of investment in unconsolidated subsidiary
|
(500
|
)
|
|||||
Compensation
related to CEO common stock grant
|
404
|
||||||
Changes
in assets and liabilities:
|
|||||||
Decrease
(increase) in accounts receivable, net
|
(6,095
|
)
|
1,295
|
||||
Decrease
in inventories
|
2,253
|
14,152
|
|||||
Decrease
(increase) in other assets
|
(742
|
)
|
4,656
|
||||
Decrease
in accounts payable, outsourcing contract costs
payable,
and accrued liabilities
|
(5,450
|
)
|
(23,436
|
)
|
|||
Increase
(decrease) in other long-term liabilities
|
470
|
(161
|
)
|
||||
Decrease
in income taxes payable
|
(1,547
|
)
|
(105
|
)
|
|||
Net
cash provided by operating activities
|
11,978
|
2,094
|
|||||
Cash
flows from investing activities:
|
|||||||
Purchases
of property and equipment
|
(2,671
|
)
|
(2,418
|
)
|
|||
Purchases
of short-term investments
|
(10,653
|
)
|
(13,430
|
)
|
|||
Sales
of short-term investments
|
21,383
|
6,000
|
|||||
Proceeds
from sale of investment in unconsolidated subsidiary
|
500
|
||||||
Proceeds
from sale of property and equipment
|
1,554
|
||||||
Net
cash provided by (used for) investing activities
|
8,559
|
(8,294
|
)
|
||||
Cash
flows from financing activities:
|
|||||||
Principal
payments on long-term debt
|
(87
|
)
|
(73
|
)
|
|||
Proceeds
from sales of common stock from treasury
|
35
|
120
|
|||||
Purchase
of treasury shares
|
(22
|
)
|
(129
|
)
|
|||
Proceeds
from management stock loan payments
|
840
|
||||||
Payment
of preferred stock dividends
|
(6,551
|
)
|
(6,551
|
)
|
|||
Net
cash used for financing activities
|
(5,785
|
)
|
(6,633
|
)
|
|||
Effect
of foreign exchange rates on cash and cash equivalents
|
(473
|
)
|
45
|
||||
Net
increase (decrease) in cash and cash equivalents
|
14,279
|
(12,788
|
)
|
||||
Cash
and cash equivalents at beginning of the period
|
31,174
|
41,916
|
|||||
Cash
and cash equivalents at end of the period
|
$
|
45,453
|
$
|
29,128
|
|||
Supplemental
disclosure of cash flow information:
|
|||||||
Cash
paid for interest
|
$
|
79
|
$
|
252
|
|||
Cash
paid for income taxes
|
$
|
770
|
$
|
474
|
|||
Non-cash
investing and financing activities:
|
|||||||
Accrued
preferred stock dividends
|
$
|
2,184
|
$
|
2,184
|
|||
Issuance
of restricted common stock awards
|
$
|
720
|
$
|
829
|
|||
Loss
on recapitalization of preferred stock
|
$
|
(7,753
|
)
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
Net
loss attributable to common shareholders,
as
reported
|
$
|
(6,868
|
)
|
$
|
(7,333
|
)
|
$
|
(2,624
|
)
|
$
|
(14,648
|
)
|
|
Fair
value of stock-based compensation, net of tax
|
(112
|
)
|
(199
|
)
|
(2,215
|
)
|
(586
|
)
|
|||||
Net
loss attributable to common shareholders,
pro
forma
|
$
|
(6,980
|
)
|
$
|
(7,532
|
)
|
$
|
(4,839
|
)
|
$
|
(15,234
|
)
|
|
Basic
and diluted loss per share, as reported
|
$
|
(.34
|
)
|
$
|
(.37
|
)
|
$
|
(.18
|
)
|
$
|
(.73
|
)
|
|
Basic
and diluted loss per share, pro forma
|
$
|
(.35
|
)
|
$
|
(.38
|
)
|
$
|
(.29
|
)
|
$
|
(.76
|
)
|
May
28,
2005
|
August
31,
2004
|
||||||
Finished
goods
|
$
|
18,007
|
$
|
19,756
|
|||
Work
in process
|
882
|
978
|
|||||
Raw
materials
|
2,619
|
2,959
|
|||||
$
|
21,508
|
$
|
23,693
|
May
28, 2005
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||
Definite-lived
intangible assets:
|
||||||||||
License
rights
|
$
|
27,000
|
$
|
(6,246
|
)
|
$
|
20,754
|
|||
Curriculum
|
58,230
|
(24,626
|
)
|
33,604
|
||||||
Customer
lists
|
18,774
|
(11,744
|
)
|
7,030
|
||||||
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
105,281
|
(43,893
|
)
|
61,388
|
|||||||
Indefinite-lived
intangible asset:
|
||||||||||
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
Balance
at May 28, 2005
|
$
|
128,281
|
$
|
(43,893
|
)
|
$
|
84,388
|
|||
August
31, 2004
|
||||||||||
Definite-lived
intangible assets:
|
||||||||||
License
rights
|
$
|
27,000
|
$
|
(5,543
|
)
|
$
|
21,457
|
|||
Curriculum
|
58,221
|
(23,067
|
)
|
35,154
|
||||||
Customer
lists
|
18,774
|
(10,878
|
)
|
7,896
|
||||||
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
105,272
|
(40,765
|
)
|
64,507
|
|||||||
Indefinite-lived
intangible asset:
|
||||||||||
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
Balance
at August 31, 2004
|
$
|
128,272
|
$
|
(40,765
|
)
|
$
|
87,507
|
Category
of Intangible Asset
|
Range
of Remaining
Estimated
Useful Lives
|
Weighted
Average Amortization Period
|
||
License
rights
|
22
years
|
30
years
|
||
Curriculum
|
2
to 22 years
|
26
years
|
||
Customer
lists
|
1
to 12 years
|
17
years
|
Severance
Costs
|
Leased
Space
Exit
Costs
|
Total
|
||||||||
Balance
at August 31, 2004
|
$
|
16
|
$
|
2,766
|
$
|
2,782
|
||||
Charges
to the accrual
|
178
|
67
|
245
|
|||||||
Amounts
utilized
|
(16
|
)
|
(2,207
|
)
|
(2,223
|
)
|
||||
Balance
at November 27, 2004
|
178
|
626
|
804
|
|||||||
Charges
to the accrual
|
79
|
169
|
248
|
|||||||
Amounts
utilized
|
(23
|
)
|
(102
|
)
|
(125
|
)
|
||||
Balance
at February 26, 2005
|
234
|
693
|
927
|
|||||||
Charges
to the accrual
|
-
|
9
|
9
|
|||||||
Amounts
utilized
|
(179
|
)
|
(80
|
)
|
(259
|
)
|
||||
Balance
at May 28, 2005
|
$
|
55
|
$
|
622
|
$
|
677
|
§
|
Have
the conditional right to redeem shares of preferred stock;
|
|
§
|
Place
a limit on the period in which the Company may be required to issue
common
stock. The new warrants to purchase shares of common stock
expire in
eight years, compared to the perpetual right of previously
existing
Series A preferred stock to convert to shares of common
stock;
|
|
§
|
Increase
the Company's ability to purchase shares of its common stock.
Previous purchases of common stock were limited and potentially subject
to
the approval of Series A preferred shareholders;
|
|
§
|
Create
the possibility that the Company may receive cash upon issuing additional
shares of common stock to Series A preferred shareholders.
The warrants have an exercise price of $8.00 per share compared to
the
existing right of Series A preferred shareholders to convert their
preferred shares into common shares without paying cash; and
|
|
§ | Eliminate the requirement to pay common stock dividends to preferred shareholders on an "as converted" basis. |
§
|
Liquidation
Preference-
Both Series A and Series B preferred stock have a liquidation preference
of $25.00 per share plus accrued unpaid dividends, which will be
paid in
preference to the liquidation rights of all other equity
classes.
|
|
§
|
Conversion
- Neither Series A nor Series B preferred stock is convertible
to
shares of common stock. Series A preferred stock converts into shares
of
Series B upon the sale or transfer of the Series A shares. Series
B
preferred stock does not have any conversion rights.
|
|
§ |
Dividends
-
Both Series A and Series B preferred stock accrue dividends at 10.0
percent, payable quarterly, in preference to dividends on all other
equity
classes. If dividends are in arrears for six or more quarters, the
number
of the Company’s Board of Directors will be increased by two and the
Series A and Series B preferred shareholders will have the ability
to
select these additional directors. Series A and Series B preferred
stock
may not participate in dividends paid to common stockholders.
|
|
§
|
Redemption
- The Company may redeem any of the Series A or Series B preferred
shares
during the first year following the recapitalization at a price per
share
equal to 100 percent of the liquidation preference. Subsequent to
the
first anniversary of the recapitalization and before the fifth anniversary
of the transaction, the Company may only purchase preferred shares
(up to
$30.0 million in aggregate) from Knowledge Capital, which holds the
majority of the Company’s preferred stock, at a premium that increases one
percentage point annually. After the sixth anniversary of the
recapitalization, the Company may redeem any shares of preferred
stock at
101 percent of the liquidation preference on the date of
redemption.
|
|
§
|
Change
in Control
-
In the event of any change in control of the Company, Knowledge Capital,
to the extent that it still holds shares of Series A preferred stock,
will
have the option to receive a cash payment equal to 101 percent of
the
liquidation preference of its Series A preferred shares then held.
The
remaining Series A and Series B preferred shareholders have no such
option.
|
|
§
|
Voting
Rights
-
Although the new Series A preferred shareholders will not have conversion
rights, they will still be entitled to voting rights. The holder
of each
new share of Series A preferred stock will be entitled to the voting
rights they would have if they held two shares of common stock. The
cumulative number of votes will be based upon the number of votes
attributable to shares of Series A held immediately prior to the
recapitalization transaction less any transfers of Series A shares
to
Series B shares or redemptions. In the event that a Series A preferred
shareholder exercises a warrant to purchase the Company’s common stock,
their Series A voting rights will be reduced by the number of the
common
shares issued upon exercise of the warrant. This feature will prevent
the
holders of Series A preferred stock from increasing their voting
influence
through the acquisition of additional shares of common stock from
the
exercise of the warrants.
|
|
§
|
Registration
Rights
-
The Company is required to use its best efforts to register the resale
of
all shares of common stock and shares of Series B preferred stock
issuable
upon the transfer and conversion of the Series A preferred stock
held by
Knowledge Capital and certain permitted transferees of Knowledge
Capital
within 240 days following the initial filing of the registration
statement
covering such shares. The initial filing of the registration statement
was
required to occur within 120 days following the closing of the
recapitalization transaction. However, the Company obtained an extension
on this filing date from Knowledge Capital to August 31, 2005, and
the
Company is currently in the process of preparing the initial registration
statement. Any failure by the Company to cause such registration
statement
to be declared effective within the specified time period would require
the Company to pay to Knowledge Capital and such permitted transferees
a
penalty amount for each share equal to two percent per annum of the
$25
face value of the preferred stock calculated based upon the number
of days
that such registration statement has not been declared effective.
Additionally, the Company would have the obligation to use its best
efforts to register the resale of the shares of common stock Knowledge
Capital and certain permitted transferees could receive pursuant
to the
exercise of the common stock warrants issued to Knowledge Capital
at the
closing of the recapitalization transaction, provided the obligation
to
register the resale of such shares would be conditioned upon the
weighted
average sales price of the common stock over the previous ten trading
days
being at least 80 percent of the common stock warrant exercise
price.
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
Net
income (loss)
|
$
|
3,069
|
$
|
(5,149
|
)
|
$
|
11,680
|
$
|
(8,097
|
)
|
|||
Other
comprehensive income
(loss)
items:
|
|||||||||||||
Adjustment
for fair value of
hedge
derivatives
|
-
|
(62
|
)
|
(318
|
)
|
(62
|
)
|
||||||
Foreign
currency translation
adjustments
|
(455
|
)
|
(285
|
)
|
(52
|
)
|
506
|
||||||
Comprehensive
income (loss)
|
$
|
2,614
|
$
|
(5,496
|
)
|
$
|
11,310
|
$
|
(7,653
|
)
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
Net
income (loss)
|
$
|
3,069
|
$
|
(5,149
|
)
|
$
|
11,680
|
$
|
(8,097
|
)
|
|||
Non-convertible
preferred stock dividends
|
(2,184
|
)
|
(2,184
|
)
|
|||||||||
Convertible
preferred stock dividends
|
(2,184
|
)
|
(4,367
|
)
|
(6,551
|
)
|
|||||||
Loss
on recapitalization of preferred stock
|
(7,753
|
)
|
(7,753
|
)
|
|||||||||
Net
loss attributable to common shareholders
|
$
|
(6,868
|
)
|
$
|
(7,333
|
)
|
$
|
(2,624
|
)
|
$
|
(14,648
|
)
|
|
Undistributed
income (loss) through February 26, 2005
|
$
|
-
|
$
|
-
|
$
|
4,244
|
$
|
-
|
|||||
Common
stock ownership on an as-converted basis
|
-
|
-
|
76
|
%
|
-
|
||||||||
Common
shareholder interest in undistributed income through
February 26, 2005
|
-
|
-
|
3,225
|
-
|
|||||||||
Undistributed
loss for the quarters ended May 28, 2005 and
May 29, 2004
|
(6,868
|
)
|
(7,333
|
)
|
(6,868
|
)
|
(14,648
|
)
|
|||||
Common
shareholder interest in undistributed loss (1)
|
$
|
(6,868
|
)
|
$
|
(7,333
|
)
|
$
|
(3,643
|
)
|
$
|
(14,648
|
)
|
|
Weighted
average common shares outstanding - Basic
|
19,922
|
19,940
|
19,847
|
19,947
|
|||||||||
Common
share equivalents (2)
|
-
|
-
|
-
|
-
|
|||||||||
Weighted
average common shares outstanding - Diluted
|
19,922
|
19,940
|
19,847
|
19,947
|
|||||||||
Basic
EPS - Common
|
$
|
(.34
|
)
|
$
|
(.37
|
)
|
$
|
(.18
|
)
|
$
|
(.73
|
)
|
|
Diluted
EPS - Common
|
$
|
(.34
|
)
|
$
|
(.37
|
)
|
$
|
(.18
|
)
|
$
|
(.73
|
)
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
Number
of Series A preferred stock shares on an “as converted”
basis
|
-
|
6,239
|
-
|
6,239
|
|||||||||
Common
stock equivalents from the assumed exercise of in-the-money stock
options
|
24
|
29
|
17
|
21
|
|||||||||
Common
stock equivalents from non-vested restricted stock deferred
compensation
|
405
|
-
|
151
|
-
|
|||||||||
429
|
6,268
|
168
|
6,260
|
|
Consumer
and Small Business Unit
|
Organizational
Solutions Business Unit
|
|||||||||||||||||||||||
Quarter
Ended May 28, 2005
|
Retail
|
Consumer
Direct
|
Wholesale
|
Other
CSBU
|
OSG
|
International
|
Corporate
and Eliminations
|
Consolidated
|
|||||||||||||||||
Sales
to external customers
|
$
|
13,443
|
$
|
10,114
|
$
|
7,627
|
$
|
792
|
$
|
20,766
|
$
|
13,046
|
$
|
65,788
|
|||||||||||
Gross
margin
|
7,392
|
5,737
|
3,459
|
(187
|
)
|
13,045
|
8,674
|
38,120
|
|||||||||||||||||
EBITDA
|
(1,083
|
)
|
3,863
|
3,292
|
(5,014
|
)
|
2,354
|
2,744
|
(3,483
|
)
|
2,673
|
||||||||||||||
Depreciation
|
614
|
23
|
163
|
74
|
331
|
643
|
1,848
|
||||||||||||||||||
Amortization
|
86
|
954
|
2
|
1
|
1,043
|
||||||||||||||||||||
Quarter
Ended May 29, 2004
|
|||||||||||||||||||||||||
Sales
to external customers
|
$
|
16,005
|
$
|
9,685
|
$
|
6,820
|
$
|
629
|
$
|
15,862
|
$
|
12,247
|
$
|
61,248
|
|||||||||||
Gross
margin
|
8,184
|
5,296
|
3,069
|
(1,526
|
)
|
9,491
|
8,147
|
32,661
|
|||||||||||||||||
EBITDA
|
(2,968
|
)
|
3,039
|
2,861
|
(5,639
|
)
|
287
|
2,390
|
(2,437
|
)
|
(2,467
|
)
|
|||||||||||||
Depreciation
|
819
|
249
|
242
|
87
|
353
|
759
|
2,509
|
||||||||||||||||||
Amortization
|
86
|
954
|
2
|
1
|
1,043
|
||||||||||||||||||||
Three
Quarters Ended May 28, 2005
|
|||||||||||||||||||||||||
Sales
to external customers
|
$
|
59,886
|
$
|
44,016
|
$
|
16,107
|
$
|
2,542
|
$
|
53,677
|
$
|
41,187
|
$
|
217,415
|
|||||||||||
Gross
margin
|
34,369
|
25,590
|
7,536
|
(1,865
|
)
|
35,621
|
28,093
|
129,344
|
|||||||||||||||||
EBITDA
|
5,453
|
19,284
|
6,995
|
(17,607
|
)
|
5,398
|
9,903
|
(9,970
|
)
|
19,456
|
|||||||||||||||
Depreciation
|
2,136
|
516
|
512
|
228
|
994
|
1,960
|
6,346
|
||||||||||||||||||
Amortization
|
258
|
2,862
|
5
|
5
|
3,130
|
||||||||||||||||||||
Three
Quarters Ended May 29, 2004
|
|||||||||||||||||||||||||
Sales
to external customers
|
$
|
71,341
|
$
|
44,162
|
$
|
16,946
|
$
|
1,850
|
$
|
42,920
|
$
|
37,774
|
$
|
214,993
|
|||||||||||
Gross
margin
|
38,480
|
25,131
|
7,537
|
(3,757
|
)
|
26,679
|
25,741
|
119,811
|
|||||||||||||||||
EBITDA
|
2,242
|
16,200
|
6,747
|
(18,407
|
)
|
(2,750
|
)
|
8,425
|
(7,199
|
)
|
5,258
|
||||||||||||||
Depreciation
|
2,607
|
807
|
1
|
944
|
518
|
985
|
3,460
|
9,322
|
|||||||||||||||||
Amortization
|
258
|
2,862
|
6
|
4
|
3,130
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
Reportable
segment EBITDA
|
$
|
6,156
|
$
|
(30
|
)
|
$
|
29,426
|
$
|
12,457
|
||||
Restructuring
cost reversal
|
306
|
||||||||||||
Recovery
of investment in unconsolidated subsidiary
|
500
|
500
|
|||||||||||
Corporate
expenses
|
(3,983
|
)
|
(2,437
|
)
|
(10,776
|
)
|
(7,199
|
)
|
|||||
Consolidated
EBITDA
|
2,673
|
(2,467
|
)
|
19,456
|
5,258
|
||||||||
Depreciation
|
(1,848
|
)
|
(2,509
|
)
|
(6,346
|
)
|
(9,322
|
)
|
|||||
Amortization
|
(1,043
|
)
|
(1,043
|
)
|
(3,130
|
)
|
(3,130
|
)
|
|||||
Income
(loss) from operations
|
(218
|
)
|
(6,019
|
)
|
9,980
|
(7,194
|
)
|
||||||
Interest
income
|
310
|
85
|
592
|
313
|
|||||||||
Interest
expense
|
(29
|
)
|
(27
|
)
|
(95
|
)
|
(195
|
)
|
|||||
Income
(loss) before provision for income taxes
|
$
|
63
|
$
|
(5,961
|
)
|
$
|
10,477
|
$
|
(7,076
|
)
|
§
|
Sales
Performance - Training and consulting services sales
increased $4.4 million compared to the third quarter of the prior
year,
which was attributable to increased training and consulting sales
in both
domestic and international delivery channels. We have recently completed
significant enhancements to The 7 Habits of Highly Effective People
training courses and related products, which were released in
March
2005. We believe that our refreshed course materials and related
products,
in combination with our other training offerings, will be a factor
in
continuing improvements in our training and consulting sales
performance.
Product
sales increased by $0.2 million, which was primarily due to improved
“core” product (e.g. planners, binders, and totes) sales, the timing
of
wholesale product orders, and increased publishing revenue in Japan
related to the release of The
8th
Habit, From Effectiveness to Greatness,
by Dr. Stephen R. Covey. These favorable product sales results
were
partially offset by the impact of closed retail stores and declining
technology and specialty product sales compared to the prior
year.
|
|
§
|
Gross
Margin Improvement - Our
gross margin improved compared to the prior year primarily due to
increased training and consulting sales as a percent of total sales,
favorable product and training program mix changes, reduced product
costs,
and lower overall costs in delivering our training and consulting
service
sales.
|
|
§
|
Decreased Operating Costs -
Overall
operating costs decreased by $0.3 million, primarily due to reduced
depreciation and the recovery of a previously impaired investment
in an
unconsolidated subsidiary. However, our selling, general, and
administrative (SG&A) expenses increased compared to the prior year
primarily due to higher commissions on increased training sales and
severance costs related to an executive separation agreement. Consistent
with prior periods, we continue to seek for and implement strategies
that
will enable us to reduce our operating costs in order to improve
our
profitability.
|
|
§
|
Income Taxes -
We
recognized a net income tax benefit totaling $3.0 million during
the
quarter ended May 28, 2005 compared to a $0.8 million benefit in
the prior
year. The tax benefit for the quarter ended May 28, 2005 resulted
primarily from the resolution of various income tax matters, that
were
partially offset by income taxes incurred by the Company’s profitable
foreign subsidiaries and foreign income taxes on payments received
from
foreign licensees.
|
|
§
|
Completion
of the Preferred Stock Recapitalization - During
the quarter, we completed a preferred stock recapitalization and
recorded
a $7.8 million loss resulting from the revaluation of our preferred
stock
and valuation of the newly issued common stock warrants.
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||||||||
May
28,
2005
|
May
29,
2004
|
Percent
Change
|
May
28,
2005
|
May
29,
2004
|
Percent
Change
|
||||||||||||||
Consumer
and Small Business Unit:
|
|||||||||||||||||||
Retail
Stores
|
$
|
13,443
|
$
|
16,005
|
(16)
|
|
$
|
59,886
|
71,341
|
(16)
|
|
||||||||
Consumer
Direct
|
10,114
|
9,685
|
4
|
44,016
|
44,162
|
-
|
|||||||||||||
Wholesale
|
7,627
|
6,820
|
12
|
16,107
|
16,946
|
(5)
|
|
||||||||||||
Other
CSBU
|
792
|
629
|
26
|
2,542
|
1,850
|
37
|
|||||||||||||
31,976
|
33,139
|
(4)
|
|
122,551
|
134,299
|
(9)
|
|
||||||||||||
Organizational
Solutions Business Unit:
|
|
||||||||||||||||||
Organizational
Solutions Group
|
20,766
|
15,862
|
31
|
53,677
|
42,920
|
25
|
|||||||||||||
International
|
13,046
|
12,247
|
7
|
41,187
|
37,774
|
9
|
|||||||||||||
33,812
|
28,109
|
20
|
94,864
|
80,694
|
18
|
||||||||||||||
Total
Sales
|
$
|
65,788
|
$
|
61,248
|
7
|
$
|
217,415
|
$
|
214,993
|
1
|
§
|
Retail Sales
- The
decline in retail sales was primarily due to fewer stores, the impact
of
which totaled $2.4 million, and reduced technology and specialty
product
sales, which totaled $1.2 million. Declining technology and specialty
product sales were partially offset by increased “core” product (e.g.
planners, binders, and totes) sales during the period. Comparable
store
(stores which were open during the comparable periods) sales declined
by
two percent compared to the prior year. During fiscal 2004, we closed
18
retail store locations and we have closed 23 additional stores during
the
first three quarters of fiscal 2005. At May 28, 2005, we were operating
112 retail stores compared to 141 stores at May 29, 2004.
|
|
§
|
Consumer Direct
- Sales
through our consumer direct channels (catalog and eCommerce) improved
primarily due to increased “core” product sales compared to the prior year
and from sales that transitioned to these channels from closed
stores.
|
|
§
|
Wholesale Sales - Sales through our wholesale channel, which includes sales to office superstores and other retail chains, increased primarily due to the timing of product sales to these entities. |
§
|
Retail
Sales - The
decline in retail sales was primarily due to the impact of fewer
stores,
which totaled $7.7 million, and reduced technology and specialty
product
sales. Declining technology and specialty product sales were partially
offset by increased “core” product sales. Overall product sales trends
were reflected by a seven percent decline in year-to-date comparable
store
sales.
|
|
§
|
Consumer
Direct - Sales
through our consumer direct channels (catalog and eCommerce) were
generally consistent with the prior year and the slight decline was
primarily due to decreased technology and specialty product sales
compared
to the prior year.
|
|
§
|
Wholesale
Sales - Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, decreased primarily due to demand for these
products by these entities. In the previous fiscal year, we recognized
significant wholesale sales as we opened new wholesale channels and
sold
product to fill these new venues.
|
|
§
|
Other CSBU Sales - Other CSBU sales primarily consist of domestic external printing and publishing sales and building lease revenues. We have leased a substantial portion of our corporate campus in Salt Lake City, Utah and have recognized $0.6 million of lease revenue during fiscal 2005, which has been classified as other CSBU sales. During fiscal 2005, we have also made an effort to increase external printing sales in order to increase the utilization of our printing and publishing assets, which has improved printing and publishing sales compared to the prior year. |
§
|
Products
- We sell planners, binders, planner accessories, printed
materials, handheld electronic devices, and other technology related
products that are primarily sold through our CSBU channels.
|
|
§
|
Training and Services - We provide training and consulting services to both organizations and individuals in strategic execution, leadership, productivity, goal alignment, sales force performance, and communication effectiveness skills. These training programs and services are primarily sold through our OSBU channels. |
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
Losses
on foreign exchange
contracts
|
$
|
(31
|
)
|
$
|
-
|
$
|
(384
|
)
|
$
|
(539
|
)
|
||
Gains
on foreign exchange
contracts
|
53
|
203
|
56
|
227
|
|||||||||
Net
gain (loss) on foreign
exchange
contracts
|
$
|
22
|
$
|
203
|
$
|
(328
|
)
|
$
|
(312
|
)
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
|||||
Japanese
Yen
|
325,000
|
$
|
3,011
|
||||
Australian
Dollars
|
1,824
|
1,372
|
|||||
Mexican
Pesos
|
9,400
|
844
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
Losses
on net investment
hedge
contracts
|
$
|
-
|
$
|
(132
|
)
|
$
|
(384
|
)
|
$
|
(132
|
)
|
||
Gains
on net investment
hedge
contracts
|
-
|
70
|
66
|
70
|
|||||||||
Net
loss on net investment
hedge
contracts
|
$
|
-
|
$
|
(62
|
)
|
$
|
(318
|
)
|
$
|
(62
|
)
|
(A)
|
Exhibits: |
31
|
Certification
of the CEO and CFO under Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32
|
Certification
of the CEO and CFO under Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
10.1 |
Separation
Agreement between the Company and Val J. Christensen, dated March
29, 2005
(filed as Exhibit 99.1 in the Company's Current report on Form 8-K
filed
with the Commission on April 4, 2005 and incorporated herein by
reference).
|
|
10.2 |
Legal
Services Agreement between the Company and Val J. Christense,
dated March 29, 2005 (filed as Exhibit 99.2 in the Company's
current
Report on Form 8-K filed with the Commission on April 4, 2005 and
incorporated herein by reference).
|
|
10.3 |
Master
Lease Agreement between Franklin SaltLake LLC (Landlord) and Franklin
Development Corporation (Tenant) (filed as Exhibit 99.1 in the Company's
Current Report on Form 8-K filed with the Commission on June 27,
2005 and
incorporated herein by reference).
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10.4 | Purchase and Sale Agreement and Escrow Instructions between Levy Affiliated Holdings, LLC (Buyer) and Franklin Development Corporation (Seller) and Amendments (filed as Exhibit 99.2 in the Company's Current Report on Form 8-K filed with the Commission on June 27, 2005 and incorporated herein by reference). |
FRANKLIN COVEY CO. | ||
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Date: July 12, 2005 | By: | /s/ ROBERT A. WHITMAN |
Robert A. Whitman |
||
Chief Executive Officer |
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Date: July 12, 2005 | By: | /s/ STEPHEN D. YOUNG |
Stephen D. Young |
||
Chief Financial Officer |
1.
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I
have reviewed this report on Form 10-Q of Franklin Covey Co.;
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2.
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Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
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3.
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Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
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4.
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The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the
registrant
and have:
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a)
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Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including
its
consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
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b)
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Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
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c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s third fiscal
quarter (the registrant's fourth fiscal quarter in the case of
an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
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5.
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The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
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|
a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
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b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
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Dated: July 12, 2005 | /s/ ROBERT A. WHITMAN | |
Robert A. Whitman |
||
Chief Executive Officer |
1.
|
I
have reviewed this report on Form 10-Q of Franklin Covey Co.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the
registrant
and have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including
its
consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|
c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s third fiscal
quarter (the registrant's fourth fiscal quarter in the case of
an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
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5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
|
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Dated: July 12, 2005 | /s/ STEPHEN D. YOUNG | |
Stephen D. Young |
||
Chief Financial Officer |
1.
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the
accompanying report on Form 10-Q of the Company for the period ended
May
28, 2005 (the “Report”) fully complies with the requirements of Section 13
(a) or Section 15 (d), as applicable, of the Securities Exchange
Act of
1934, as amended; and
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2.
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
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Date: July 12, 2005 | By: | /s/ ROBERT A. WHITMAN |
Robert A. Whitman |
||
Chief Executive Officer |
1.
|
the
accompanying report on Form 10-Q of the Company for the period ended
May
28, 2005 (the “Report”) fully complies with the requirements of Section 13
(a) or Section 15 (d), as applicable, of the Securities Exchange
Act of
1934, as amended; and
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2.
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
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Date: July 12, 2005 | By: | /s/ STEPHEN D. YOUNG |
Stephen D. Young |
||
Chief Financial Officer |