UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) FO THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2005
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSISTION PERIOD FROM ___ TO ___ |
Franklin Covey
Co.
(Exact
name of registrant as specified in its charter)
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Utah
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1-11107
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87-0401551
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(State
or other jurisdiction of incorporation)
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(Commission
File No.)
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(IRS
Employer Commission File No.)
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2200
West Parkway Boulevard
Salt
Lake City, Utah 84119-2331
(Address
of principal executive offices, including zip code)
Registrant's
telephone number, including area code: (801) 817-1776
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $.05 Par Value
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New
York Stock Exchange
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Securities
registered pursuant ot Section 12(g) of the Act:
Series
A Preferred Stock, no par value
Title
of Class
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
preceeding 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 x NO o
Indicate
by check mark if disclosure of delinquent filers pursuant ot Item 405 of
Regulation S-K 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 an accelerated filer (as defined
in Rule
12b-2 of the Act). YES o NO x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES o NO x
As
of
February 25, 2005, the aggregate market value of the Registrant's Common
Stock
held by non-affiliates of the Registrant was $40,623,127.
As
of
November 7, 2005, the Registrant had 20,744,725 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts
of
the Registrant's Proxy Statement for the Registrant's Annual Meeting of
Shareholders, which is scheduled to be held on January 20, 2006, are
incorporated by reference in Part III of this Form 10-K.
INDEX
TO FORM 10-K
PART
I
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PART
II
PART
III
PART
IV
PART
I
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Item
1.
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Franklin
Covey Co. (the Company, we, us, our or FranklinCovey) influences organizations,
families and individuals the world over by helping them achieve their own
great
purposes through teaching the principles and practices of effectiveness
and by
providing reinforcement tools like the FranklinCovey Planning System. Nearly
1,500 FranklinCovey associates world-wide delivered timeless and universal
curriculum and effectiveness tools to more than five million customers
in fiscal
2005. We strive to excel in this endeavor because we believe that:
| l | People are inherently capable, aspire to greatness, and have the power to choose. |
| l | Principles are timeless and universal and are the foundation to lasting effectiveness |
| l | Leadership is a choice, built inside out on a foundation of character. Great leaders unleash the collective talent and passion of people toward the right goal. |
| l | Habits of effectiveness come only from the committed use of integrated processes and tools. |
| l | Sustained superior performance requires a balance of performance and performance capability (P/PC BalanceÒ) - a focus on achieving results and building capability. |
The
Opportunity
Corporations,
organizations and individuals cumulatively purchase more than $10 billion
a year
in professional performance training curricula, books, tapes, CD’s and other
tools in an effort to improve their effectiveness and productivity. The
$10
billion training industry is roughly divided into two segments - IT training
and
performance skills training. After several years of lackluster industry
results,
performance skills training is estimated1
to grow
10% in 2005 compared to an estimated 4% growth rate in IT training. The
performance skills training segment of the industry has hundreds of different
curricula, delivered to both corporations and individual customers. In
addition
to training, the performance skills industry includes a number of measurement
methodologies and integrated implementation tools. The measurement methodologies
include return on investment analysis and behavior modification measurement.
Implementation tools are designed to increase learning retention and increase
behavior modification. Many companies in the industry specialize in only
one or
two of these areas.
FranklinCovey
is engaged in the performance skills industry. FranklinCovey’s competitive
advantage in this highly fragmented industry stems from our fully integrating
training curricula, measurement methodologies and implementation tool offerings
to help individuals and organizations measurably improve their effectiveness.
This advantage allows FranklinCovey to deliver not only training to both
corporations and individuals, but also to implement the training through
the use
of powerful behavior changing tools and then measure the impact of that
training.
In
fiscal
2005, we provided products and services to 90 of the Fortune 100 companies
and
more than 75 percent of the Fortune 500 companies. We also provide products
and
services to a number of U.S. and foreign governmental agencies, including
the
U.S. Department of Defense, as well as numerous educational institutions.
We
provide training curricula, measurement services and implementation tools
internationally, either through directly operated offices, or through licensed
providers. At August 31, 2005, we had direct operations in Australia, Brazil,
Canada, Japan, Mexico and the United Kingdom. We also had licensed operations
in
67 countries and licensed rights in 129 countries. Approximately
400,000
individuals were trained during the fiscal year ended August 31,
2005.
Unless
the context requires otherwise, all references to the "Company", “we”, “us”,
“our” or to "FranklinCovey" herein refer to Franklin Covey Co. and each of its
operating divisions and subsidiaries. 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.
1
Simba Information, Corporate Training
Market 2005: Forecast and Analysis. (2005)
An
important principle taught in our productivity training is to have a single
personal productivity system and to have all of one’s information in that
system. Based upon that principle, we developed the FranklinCovey Planning
System with the original Franklin Planner as one of the basic tools for
implementing the principles of our time management system. The Franklin
Planner
consists of paper-based FranklinCovey Planning Pages, a binder in which
to carry
it, weekly, monthly and annual calendars as well as personal management
sections. We offer a broad line of renewal planning pages, forms and binders
in
various sizes and styles. The FranklinCovey Planning System broadened as
we
developed additional planning tools to address the needs of more technology
oriented workers as well as those who require both greater mobility and
ready
access to large quantities of data. For
those
clients who use digital or electronic productivity systems, we offer a
wide
variety of electronic solutions incorporating the same planning
methodology.
FrankinCovey
Planning Pages.
Paper
planning pages are available for the FranklinCovey Planning System in various
sizes and styles and consist of daily or weekly formats, with Appointment
Schedules, Prioritized Daily Task Lists, Monthly Calendars, Daily Notes,
and
personal management pages for an entire year. FranklinCovey Planning Pages
are
offered in a number of designs to appeal to various customer segments.
The
Starter Pack, which includes personal management tabs and pages, a guide
to
using the planner, a pagefinder and weekly compass cards, combined with
a
storage binder, completes the basic FranklinCovey Planning System.
Binders.
To
further customize the FranklinCovey Planning System, we offer binders and
business cases (briefcases, portfolios, business totes, messenger bags,
etc.) in
a variety of materials, styles and sizes. These materials include high
quality
leathers, fabrics, synthetic materials and vinyl in a variety of color
and
design options. Binder styles include zipper closures, snap closures, and
open
formats with pocket configurations to accommodate credit cards, business
cards,
checkbooks, electronic devices and writing instruments. Most of the leather
items are proprietary FranklinCovey designs. However, we also offer products
from leading manufacturers such as Kenneth Cole.
Electronic
Solutions.
We
offer our time and life management methodology in an electronic format
within a
complete Personal Information Management (“PIM”) system through the
FranklinCovey PlanPlusÔ Software
offerings. The software application can be used in conjunction with planning
pages, electronic handheld organizers or used as a stand-alone planning
and
information management system. The FranklinCovey PlanPlus Software permits
users
to generate and print data on FranklinCovey Planning Pages that can be
inserted
directly into the FranklinCovey Planner. The program operates in the Windows®
95, 98, 2000, NT and XP operating systems. The FranklinCovey PlanPlus Software
includes all necessary software, related tutorials and reference manuals.
FranklinCovey
PlanPlusÔ
Software
is also intended for our corporate clients that have already standardized
on
MicrosoftÒ
for
group scheduling, but wish to make the FranklinCovey Planning System available
to their employees without creating the need to support two separate systems.
As
this kind of extension proves its value in the market, the FranklinCovey
Planning Software extension model may be expanded to other
platforms.
We
are an
OEM provider of the PalmOneÔ
handheld
devices, which has become another successful planning tool for which we
provide
FranklinCovey Planning Software and sell through our FranklinCovey channels.
In
an effort to combine the functionality of paper and the capabilities of
the
PalmÒ,
we
introduced products that can add paper-based planning to these electronic
planners as well as binders and carrying cases specific to the
PalmOneÔ
product
line. We have also expanded the handheld line to include other electronic
organizers with the FranklinCovey Planning Software such as the iPAQÔ
Pocket
PC from Hewlett-Packard® and the TrioÔ
by
Handspring®, now part of PalmOneÔ.
We
also
provide The
7
Habits of Highly Effective People®
training course in online and CD-ROM versions. This edition delivers the
content
from the 3-day classroom workshop in a flexible self-paced version via
the
Internet or CD-ROM that is available when and where employees need it.
The
Online Edition is presented in a multi-media format with video segments,
voiceovers, a learning journal, interactive exercises, and other techniques.
Included with the course is a 360-Degree profile and e-Coaching to help
participants gain a broader perspective of their strengths and weaknesses
and to
help them implement the training to improve their skills.
The
FranklinCovey Planning System is also available for the Tablet PC through
FranklinCovey PlanPlus for Windows XP software. The software was developed
in
cooperation with Agilix Labs and includes the following features: screen
views
similar to the paper-based FranklinCovey Planner, natural handwriting interface,
the full FranklinCovey Planning System with appointment scheduling, prioritized
daily and master tasks and daily notes, digital note-taking and synchronization
with Outlook Exchange and an e-Binder concept allowing for the collection
of all
important documents into one place.
Personal
Development and Accessory Products.
To
supplement our principal products, we offer a number of accessories and
related
products, including third-party books, videotapes and audio cassettes focused
on
time management, leadership, personal improvement and other topics. We
also
market a variety of content-based personal development products. These
products
include books, audio learning systems such as multi-tape, CDs and workbook
sets,
CD-ROM software products, calendars and other specialty name brand items.
We
offer numerous accessory forms through our Forms Wizard software, which
allows
customization of our more popular forms, including check registers,
spreadsheets, stationery, mileage logs, maps, menu planners, shopping lists
and
other information management and project planning forms. Our accessory
products
and forms are generally available in all the FranklinCovey
Planner
sizes.
Books.
The
principles we teach in our curriculum have also been published in book,
audiotape and CD formats. Books to which the Company holds copyrights include
The
7
Habits of Highly Effective People®,
Principle-Centered Leadership, First Things First, The 7 Habits of Highly
Effective Families, Nature of Leadership, Living
the 7 Habits, and
the
latest
book, The
8th
Habit:
From Effectiveness to Greatness
all by
Stephen R. Covey, The
10 Natural Laws of Time and Life Management, What
Matters Most
and
The
Modern Gladiator
by Hyrum
W. Smith, The
Power Principle
by
Blaine Lee, The
7
Habits of Highly Effective Teens
by Sean
Covey and Business
Think
by Dave
Marcum and Steve Smith. These books, as well as audiotape and CD audio
versions
of many of these products, and the products mentioned above are sold through
general retail channels, as well as through our own catalog, our e-commerce
Internet site at www.franklincovey.com
and our
more than 100 retail stores.
We
offer
training and consulting services for organizations through a combination
of
assessment instruments, including the xQ™(Execution
QuotientÔ)
Profile
and the 7 Habits Profile, and training courses including FOCUS:
Achieving Your Highest Priorities;
The
4
Disciplines of Execution™;
The
4
Roles of Leadership™;
and
The
7
Habits of Highly Effective PeopleÒ.
We
measure the impact of training investments for our clients through pre-
and
post- assessment profiles and return on investment analysis. These services
are
marketed and delivered world-wide through our Organizational Solutions
Business
Unit (OSBU), which consists of consultants, selected through a competitive
and
demanding process, and sales professionals.
Training
and Education Programs.
We
offer a range of training programs designed to measurably improve the
effectiveness of individuals and organizations. Our programs are oriented
to
address personal, interpersonal, managerial and organizational needs. In
addition, we believe that our learning process provides an engaging and
behavior-changing experience, which frequently generates additional business.
During fiscal year 2005, approximately 400,000 individuals were trained
using
the Company’s curricula in its single and multiple-day workshops and seminars.
We also offer assessment tools to help organizational clients determine
the
effectiveness of implementing company goals. The xQ Survey is an exclusive
FranklinCovey assessment tool that gathers information, from an employee
perspective, on how well organizational goals are understood and are being
carried out. The survey questions, administered through a Web-based system,
probe for details to uncover underlying focus and teamwork barriers or
issues.
Our
single-day FOCUS:
Achieving Your Highest Priorities workshop
teaches productivity skills integrated with a planning system to help
individuals clarify, focus on, and execute their highest priorities, both
personally and professionally. This seminar is conducted by our training
consultants for employees of clients and in public seminars throughout
the
United States and in many foreign countries. The single-day The
4
Disciplines of Execution
workshop
helps managers identify the highest priorities for their teams and then
lead
those teams to execute tasks day-after-day.
We
also
deliver multiple-day workshops, primarily in the leadership area. Included
in
these offerings is the three-day 7 Habits workshop based upon the material
presented in The
7
Habits of Highly Effective People®.
The 7
Habits workshop provides the foundation for continued client relationships
and
the content and application tools are designed to be delivered deep into
the
client’s organization. Additionally, a three-day 4
Roles of Leadership
course
is offered, which focuses on the managerial aspects of client needs.
FranklinCovey Leadership Week consists of a five-day session focused on
materials from FranklinCovey's
The
7 Habits of Highly Effective People®
and
The
4
Roles of Leadership
courses.
FranklinCovey Leadership Week is reserved for supervisory level management
of
our corporate clients. As a part of the week's agenda, executive participants
plan and design strategies to successfully implement key organizational
goals or
initiatives.
In
addition to providing consultants and presenters, we also train and certify
client facilitators to teach selected FranklinCovey workshops within their
organizations. We believe client-facilitated training is important to our
fundamental strategy of creating pervasive on-going client impact and revenue
streams. After having been certified, client facilitators can purchase
manuals,
profiles, planners and other products to conduct training workshops within
their
organization, generally without repeating the sales process. This creates
programs which have an on-going impact on our customers and which generate
annuity-type revenues. This is aided by the fact that curriculum content
in one
course leads the client to additional participation in other Company courses.
Since 1988, we have trained more than 20,000 client facilitators. Client
facilitators are certified only after graduating from one of our certification
workshops and completing post-course certification requirements.
In
April
2002, we introduced The
7
Habits of Highly Effective People®
training
course in online and CD-ROM versions. The need for reaching more employees
faster and more inexpensively are the key drivers behind the growth of
e-learning in the marketplace. The 7 Habits Online Edition addresses that
need,
offering a flexible alternative to classroom training.
To
help
us fulfill our mission of enabling greatness in people and organizations
everywhere, we have organized our business in two segments: (1) the Consumer
and
Small Business Unit (CSBU) designed to reach individual consumers; and
(2) the
Organizational Solutions Business Unit (OSBU) designed to serve organizational
clients. The following table sets forth, for the periods indicated, the
Company's revenue from external customers for each of its operating segments
(in
thousands):
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2005
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2004
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2003
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Consumer
and Small Business Unit
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Retail
Stores
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$
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74,331
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$
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87,922
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$
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112,054
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Consumer
Direct
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55,575
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55,059
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56,177
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Wholesale
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19,691
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21,081
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16,915
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Other
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3,757
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2,007
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7,020
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Total
CSBU
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153,354
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166,069
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192,166
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Organizational
Solutions Business Unit
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Domestic
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76,114
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61,047
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74,306
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International
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54,074
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48,318
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40,688
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Total
OSBU
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130,188
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109,365
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114,994
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Total
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$
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283,542
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$
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275,434
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$
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307,160
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We
market
products and services to organizations, schools and individuals both
domestically and internationally through FranklinCovey retail stores, our
consumer direct channel (which includes catalog operations and our Internet
website, www.franklincovey.com),
our
organizational and educational sales forces and other distribution channels.
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).
Consumer
and Small Business Unit
We
sell
FranklinCovey products and other productivity tools to individual consumers
through our company-owned retail stores, through FranklinCovey consumer
direct
channels, and through selected wholesale channels.
Retail
Stores.
Beginning in late 1985, we began a retail strategy by opening retail stores
in
areas of high client density. The initial stores were generally located
in close
proximity to corporate clients. We revised our strategy by locating retail
stores in high-traffic retail centers, primarily large shopping centers
and
malls, to serve existing clients and to attract increased numbers of walk-in
clients. Our retail stores average approximately 1,900 square feet. Our
retail
strategy focuses on reinforcing the training experience with high client
service
and consultative sales of planning tools. We believe this approach ensures
longer-term usage and satisfaction with the FranklinCovey Planning System.
We
believe that our retail stores have an upscale image consistent with our
marketing strategy. Products are attractively presented and displayed with
an
emphasis on integration of related products and accessories. Our retail
sales
associates have been trained to teach the FranklinCovey Planning System,
using
the various tools and electronic handheld devices and software we offer,
enabling them to assist and advise clients in the selection and use of
our
products.
Retail
store employees have also been engaged to proactively market to small businesses
in the cities where they are located. Their marketing efforts include calling
upon small (fewer than 100 employees) businesses to offer productivity
tools and
training. This
out-bound selling effort has helped to stabilize declining revenues in
the
retail channel and provided access to FranklinCovey training and products
to a
business segment not traditionally marketed to through the Company’s sales
force.
At
August
31, 2005, FranklinCovey had 105 domestic retail stores located in 33 states
and
the District of Columbia. We closed 30 retail stores in the United States
during
fiscal year 2005. These closures were comprised of under-performing and
unprofitable stores. The Company anticipates that it will close additional
stores in fiscal year 2006.
Consumer
Direct.
Our
Consumer Direct channel consists of sales through catalog call-in operations
and
Internet sales operations. We periodically mail catalogs to our clients,
including a fall catalog, holiday catalogs, spring and summer catalogs
timed to
coincide with planner renewals. Catalogs may be targeted to specific geographic
areas or user groups as appropriate. Catalogs are typically printed in
full
color with an attractive selling presentation highlighting product benefits
and
features. We also market the FranklinCovey Planning System through our
e-commerce Internet site at www.franklincovey.com.
Customers may order catalogs and other marketing materials as well as the
Company’s product line through this Internet portal.
During
fiscal 2001, we entered into a long-term contract with Electronic Data
Systems
(EDS) of Dallas, Texas, to provide a large part of our customer relationship
management in servicing our Consumer Direct customers through our catalog
and
e-commerce operations. We use EDS to maintain a client service department,
which
clients may call toll-free, from 6:00 a.m. to 7:00 p.m. MST, Monday through
Friday, to inquire about a product or to place an order. Through a computerized
order entry system, client representatives have access to client preferences,
prior orders, billings, shipments and other information on a real-time
basis.
Each of the more than 91 customer service representatives has the authority
to
immediately solve client service problems. The
integrated relationship management system provided by EDS allows orders
from our
customers to be processed through its warehousing and distribution systems.
Client information stored within the order entry system is also used for
additional purposes, including target marketing of specific products to
existing
clients. We believe that the order entry system helps assure client satisfaction
through both rapid delivery and accurate order shipment.
Wholesale.
We have
an alliance with MeadWestvaco to sell our products through the contract
stationer channel. MeadWestvaco distributes our products to contract stationer
businesses such as Office Express, Office Depot, Office Max and Staples,
which
sell office products through catalog order entry systems to businesses
and
organizations. MeadWestvaco also represents FranklinCovey in the office
superstore category by wholesaling the FranklinCovey Planning System to
Staples,
Office Depot and OfficeMax and represents us with Target Stores, for which
we
designed a specialty line of paper planning products branded under the
“365 by
FranklinCovey” under-brand label which is sold exclusively in their stores. We
also have a similar distribution agreement with Heritage Industries in
which
they sell select products into Sam’s and Costco stores and an under-brand label
“DayOne by FranklinCovey” product line that is sold through WalMart
stores.
Other. Other
sales include sales of printing services by FranklinCovey Printing, a
wholly-owned subsidiary, and miscellaneous licensing rights of FranklinCovey
products and brands to various marketing customers. Sub-lease revenues
from
third-party tenants are also contained in the Other revenue
category. Beginning
in fiscal 2006, the marketing and administration of public seminars will
be
managed under the CSBU and sales reported as “Other CSBU” sales. Public seminars
are planned and coordinated with training consultants by a staff of marketing
and administrative personnel at the Company's corporate offices. The seminars
are delivered by our training consultants in more than 100 major metropolitan
cities throughout the United States. These seminars provide training for
organizations and the general public and are also used as a marketing tool
for
attracting corporate and other institutional clients. Corporate training
directors are often invited to attend public seminars to preview the seminar
content prior to engaging FranklinCovey to train in-house employees. Smaller
institutional clients often enroll their employees in public seminars when
a
private seminar is not cost effective.
Domestic
Training.
We
sell
effectiveness and productivity solutions to organizations and schools through
our own direct sales forces. We then deliver training services to organizations,
schools and individuals in one of four ways:
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1.
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FranklinCovey
consultants provide on-site consulting or training classes for
organizations and schools. In these situations, our consultant
can tailor
the curriculum to our client’s specific business and
objectives.
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2.
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We
conduct public seminars in more than 151 cities throughout the
United
States, where organizations can send their employees in smaller
numbers.
These public seminars are also marketed directly to individuals
through
our catalog, e-commerce web-site, retail stores, and by direct
mail.
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3.
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Our
programs are also designed to be facilitated by licensed professional
trainers and managers in client organizations, reducing dependence
on our
professional presenters, and creating continuing revenue through
royalties
and as participant materials are purchased for trainees by these
facilitators.
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4.
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We
also offer The
7 Habits of Highly Effective People®
training course in online and CD-ROM formats. This self-paced
e-learning
alternative provides the flexibility that many organizations
need to meet
the needs of various groups, managers or supervisors who may
be unable to
attend extended classroom training and executives who need a
series of
working sessions over several
weeks.
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FranklinCovey's
domestic training operations are organized in geographic regional sales
teams in
order to assure that both the consultant and the client sales professional
participate in the development of new business and the assessment of client
needs. Consultants are then entrusted with the actual delivery of content,
seminars, processes and other solutions. Consultants follow up with client
service teams, working with them to develop lasting client impact and ongoing
business opportunities.
We
employ
89 sales professionals and business developers located in six major metropolitan
areas throughout the United States who sell integrated offerings to
institutional clients. We also employ an additional 48 sales professionals
and
business developers outside of the United States in six countries. Our
sales
professionals have selling experience prior to employment by the Company
and are
trained and evaluated in their respective sales territories. Sales professionals
typically call upon persons responsible for corporate employee training,
such as
corporate training directors or human resource officers. Increasingly,
sales
professionals also call upon line leaders. Our sales professionals work
closely
with training consultants in their territories to schedule and tailor seminars
and workshops to meet specific objectives of institutional clients. FranklinCovey
currently employs 84 training consultants in major metropolitan areas of
the
United States, with an additional 51 training consultants outside of the
United
States. Our training consultants are selected from a large number of experienced
applicants. These consultants generally have several years of training
and/or
consulting experience and are known for their excellent presentation skills.
Once selected, the training consultant goes through a rigorous training
program
including multiple live presentations. The training program ultimately
results
in the Company's certification of the consultant.
We
also
provide The
7
Habits of Highly Effective Teens™ as
a
workshop or as a year-long curriculum to schools and school districts and
other
organizations working with youth. Based on The
7
Habits of Highly Effective Teens
book, it
helps to teach students and teachers studying skills, learning habits,
and
interpersonal development. In December 2001, we sold the stock of Premier
Agendas, a wholly owned subsidiary that previously delivered our products
and
services to schools, to School Specialty. Pursuant to a license from
FranklinCovey, Premier Agendas is expected to continue to expose over 20
million
K-12 students to FranklinCovey’s world-renowned 7
Habits content.
We retained the educator leadership and effectiveness training portion
of
Premier’s business.
International
Sales.
We
provide products, training and printing services internationally through
Company-owned and licensed operations. We have Company-owned operations
and
offices in Australia, Brazil, Canada, Japan, Mexico and the United Kingdom.
We
also have licensed operations in Argentina, Aruba, Austria, Bahamas, Bahrain
Belgium, Bermuda, Bulgaria, China, Colombia, Costa Rica, Croatia, Czech
Republic, Denmark, Dominican Republic, Egypt, El Salvador, Estonia, Finland,
France, Germany, Greece, Greenland, Honduras, Hong Kong, Hungary, India,
Indonesia, Israel, Italy, Jordan, Kuwait, Latvia, Lebanon, Lithuania,
Luxembourg, Malaysia, The Netherlands, The Netherlands Antilles, Nicaragua,
Nigeria, Norway, Panama, Philippines, Poland, Portugal, Puerto Rico, Russia,
Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, South
Korea,
Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Trinidad/Tobago,
Turkey, UAE, Venezuela, Vietnam and The West Indies. There are also licensee
retail operations in Hong Kong and South Korea. Our seven most popular
books,
The
7
Habits of Highly Effective People,
Principle-Centered
Leadership, The 10 Natural Laws of Time and Life Management, First
Things First, The Power Principle, The 7 Habits of Highly Effective Families
and
The 7 Habits of Highly Effective Teens are
currently published in multiple languages. Financial information about
our
foreign operations is contained in Note 18 to our consolidated financial
statements.
We
have
created strategic alliances with third-party organizations in an effort
to
develop effective distribution of our products and services. The principal
distribution alliances currently maintained by FranklinCovey are: Simon
& Schuster
and
Saint
Martin’s Press
in
publishing books for the Company; Lumacore
to
promote and facilitate Dr. Covey's personal appearances and teleconferences;
Nightingale-Conant
to
market and distribute audio and video tapes of the Company's book titles;
MeadWestvaco
to
market and distribute selected FranklinCovey Planners and accessories through
the At-A-Glance catalog office supply channels and in the office superstores
channel; PalmOneÔ
to serve
as the official training organization for its PalmOneÔ
products; distribution agreements with Hewlett
Packard
and
Acer
in
connection with the Tablet PC; Agilix
Labs
in
development of the PlanPlus Software; Microsoft
in
conjunction with the Tablet PC training and PlanPlus marketing; and Heritage
Industries
to
market and distribute selected FranklinCovey products to Sams Club, Costco
and
WalMart.
We
have a
relatively broad base of institutional and individual clients. We have
more than
2,000 institutional clients consisting of corporations, governmental agencies,
educational institutions and other organizations. We believe our products,
workshops and seminars encourage strong client loyalty. Employees in each
of our
distribution channels focus on providing timely and courteous responses
to
client requests and inquiries. Institutional clients may choose to receive
assistance in designing and developing customized forms, tabs, pagefinders
and
binders necessary to satisfy specific needs. As a result of the nature
of
FranklinCovey’s business and distribution channels, the Company does not have,
nor has it had, a significant backlog of firm orders.
Training.
Competition in the performance skills organizational training and education
industry is highly fragmented with few large competitors. We estimate that
the
industry represents more than $6 billion in annual revenues and that the
largest
traditional organizational training firms have sales in the $100 million
to $400
million range. Based upon FranklinCovey's fiscal 2005 organizational sales
of
approximately $130 million, we believe we are a leading competitor in the
organizational training and education market. Other significant competitors
in
the training market are Development Dimensions International, Institute
for
International Research (IIR) (formerly Achieve Global and Zenger Miller),
Organizational Dynamics Inc., Provant, Forum Corporation, EPS Solutions
and the
Center for Creative Leadership.
Products.
The
paper-based time management and personal organization products market is
intensely competitive and subject to rapid change. FranklinCovey competes
directly with other companies that manufacture and market calendars, planners,
personal organizers, appointment books, diaries and related products through
retail, mail order and other sales channels. In this market, several competitors
have strong name recognition. We believe our principal competitors include
DayTimer, At-A-Glance and Day Runner. We also compete with companies that
market
substitutes for paper-based products, such as electronic organizers, software,
PIM’s and handheld computers. Many FranklinCovey competitors, particularly
those
providing electronic organizers, software-based management systems, and
hand-held computers, have access to marketing, product development, financial
and other resources significantly in excess of those available to FranklinCovey.
An emerging potential source of competition is the appearance of calendars
and
event-planning services available at no charge on the Web. There is no
indication that the current level of features has proven to be attractive
to the
traditional planner customer as a stand-alone service, but as these products
evolve and improve, they could pose a competitive threat.
Given
the
relative ease of entry in FranklinCovey's product and training markets,
the
number of competitors could increase, many of whom may imitate existing
methods
of distribution, products and seminars, or offer similar products and seminars
at lower prices. Some of these companies may have greater financial and
other
resources than us. We believe that the FranklinCovey Planning System and
related
products compete primarily on the basis of user appeal, client loyalty,
design,
product breadth, quality, price, functionality and client service. We also
believe that the FranklinCovey Planning System has obtained market acceptance
primarily as a result of the concepts embodied in it, the high quality
of
materials, innovative design, our attention to client service, and the
strong
loyalty and referrals of our existing clients. We believe that our integration
of training services with products has become a competitive advantage.
Moreover,
we believe that we are a market leader in the United States among a small
number
of integrated providers of productivity and time management products and
services. Increased competition from existing and future competitors could,
however, have a material adverse effect on our sales and
profitability.
The
manufacturing operations of FranklinCovey consist primarily of printing,
collating, assembling and packaging components used in connection with
our paper
product lines.
We
operate
our central manufacturing services out of Salt Lake City, Utah. We have
also
developed partner printers, both domestically and internationally, who
can meet
our quality standards, thereby facilitating efficient delivery of product
in a
global market. We believe this has positioned us for greater flexibility
and
growth capacity. Automated production, assembly and material handling equipment
are used in the manufacturing process to ensure consistent quality of production
materials and to control costs and maintain efficiencies. By
operating in this fashion, we have gained greater control of production
costs,
schedules and quality control of printed materials.
During
fiscal 2001, we entered into a long-term contract with EDS to provide
warehousing and distribution services for our product line. EDS maintains
a
facility at the Company’s headquarters as well as at other locations throughout
North America.
Binders
used for our products are produced from either leather, simulated leather,
tapestry or vinyl materials. These binders are produced by multiple and
alternative product suppliers. We currently enjoy good relations with our
suppliers and vendors and do not anticipate any difficulty in obtaining
the
required binders and materials needed for our business. We have implemented
special procedures to ensure a high standard of quality for binders, most
of
which are manufactured by suppliers in the United States, Europe, Canada,
Korea,
Mexico and China.
We
also
purchase numerous accessories, including pens, books, videotapes, calculators
and other products, from various suppliers for resale to our clients. These
items are manufactured by a variety of outside contractors located in the
United
States and abroad. We do not believe that we are materially dependent on
any one
or more of such contractors and consider our relationships with such suppliers
to be good.
FranklinCovey
believes that the development of new products and curricula are important
to
maintaining its competitive position. Our
products and services are conceived, designed and developed through the
collaboration of our internal innovations group and external partner
organizations. We focus our product design efforts on both improving our
existing products and developing new products. We intend to continue to
employ a
customer focused design approach to provide innovative products and curricula
that respond to and anticipate customer needs for functionality, productivity
and effectiveness.
Our
research and development expenditures totaled $2.2 million, $3.6 million,
and
$4.9 million in fiscal years 2005, 2004, and 2003 respectively.
We
seek
to protect our intellectual property through a combination of trademarks,
copyrights and confidentiality agreements. We claim rights for 147 trademarks
in
the United States and have obtained registration in the United States and
many
foreign countries for many of our trademarks, including
FranklinCovey, The 7 Habits of Highly Effective People, Principle-Centered
Leadership,
The
4
Disciplines of Execution,
FranklinCovey
Planner,
PlanPlus,
The
7
Habits and The 8th
Habit.
We
consider our trademarks and other proprietary rights to be important and
material to our business. Each of the marks set forth in italics above
is a
registered mark or a mark for which protection is claimed.
We
own
sole or joint copyrights on our planning systems, books, manuals, text
and other
printed information provided in our training seminars, the programs contained
within FranklinCovey Planner Software and its instructional materials,
and our
software and electronic products, including audio tapes and video tapes.
We
license, rather than sell, all facilitator workbooks and other seminar
and
training materials in order to protect our intellectual property rights
therein.
FranklinCovey places trademark and copyright notices on its instructional,
marketing and advertising materials. In order to maintain the proprietary
nature
of our product information, FranklinCovey enters into written confidentiality
agreements with certain executives, product developers, sales professionals,
training consultants, other employees and licensees. Although we believe
the
protective measures with respect to our proprietary rights are important,
there
can be no assurance that such measures will provide significant protection
from
competitors.
As
of
August 31, 2005, FranklinCovey had 1,333 full and part-time associates,
including 416 in sales, marketing and training; 515 in customer service
and
retail; 140 in production operations and distribution; and 262 in administration
and support staff. During fiscal 2002, the Company outsourced a significant
part
of its information technology services, customer service, distribution
and
warehousing operations to EDS. A number of the Company’s former employees
involved in these operations are now employed by EDS to provide those services
to FranklinCovey. None of our associates are represented by a union or
other
collective bargaining group. Management believes that its relations with
its
associates are good and we do not currently foresee a shortage in qualified
personnel needed to operate our business.
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 450
Fifth Street, NW, Washington, DC 20549. The public may obtain information
on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The
SEC also maintains electronic versions of the Company’s reports on its website
at www.sec.gov.
The
Company makes our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q,
current reports on Form 8-K, and other reports filed or furnished with
the SEC
available to the public, free of charge, through our website at www.franklincovey.com.
These
reports are provided through our website as soon as reasonably practicable
after
we file or furnish these reports with the SEC.
FranklinCovey’s
principal business operations and executive offices are located in Salt Lake
City, Utah. The following is a summary of our owned and leased properties.
Our
corporate headquarters lease is accounted for as a financing arrangement
and all
other facility lease agreements are accounted for as operating leases. Our
lease
agreements expire at various dates through the year 2025.
Corporate
Facilities
Corporate
Headquarters and Administrative Offices:
Salt
Lake
City, Utah (7 buildings) - all leased
Organizational
Solutions Business Unit
Regional
Sales Offices:
United
States (7 locations) - all leased
International
Administrative Offices:
Canada
(1
location)
Latin
America (3 locations) - all leased
Asia
Pacific (2 locations) - both leased
Europe
(1
location) - leased
International
Distribution Facilities:
Canada
(1
location)
Latin
America (1 location) - leased
Asia
Pacific (2 locations) - both leased
Europe
(1
location) - leased
Consumer
and Small Business Unit
Retail
Stores:
United
States (105 locations) - all leased
Manufacturing
Facilities:
United
States (1 location)
We
consider our existing facilities sufficient for our current and anticipated
level of operations in the upcoming fiscal year. Our manufacturing facility,
which produces the majority of our printed paper products, operates at
near
capacity. Other significant developments related to our properties during
fiscal
2005 consisted of the following:
|
l
|
In
June 2005, we completed the sale and leaseback of our corporate
headquarters facility, located in Salt Lake City, Utah. The sale
price was
$33.8 million in cash and after deducting customary closing costs,
including commissions and payment of the remaining mortgage on
one of the
buildings, we received net proceeds totaling $32.4 million. In
connection
with the transaction, we entered into a 20-year master lease
agreement
with the purchaser, an unrelated private investment group. The
master
lease agreement also contains six five-year options to renew
the master
lease agreement, thus allowing us to maintain our operations
at the
current location for up to 50 years.
|
|
l
|
In
November 2004, we simultaneously exercised our option to purchase
the
corporate facilities leased in Provo, Utah and sold these facilities
to
the tenant currently occupying that property. For further information
regarding this transaction, refer to Note 15 to our consolidated
financial
statements.
|
|
l
|
During
fiscal 2005, we closed 30 domestic retail store locations and
may close
additional retail locations during fiscal
2006.
|
|
Item
3.
|
During
fiscal 2002, we received a subpoena from the Securities and Exchange
Commission
(SEC) seeking documents and information relating to our management stock
loan
program and previously announced, and withdrawn, tender offer. We have
provided
the documents and information requested by the SEC, including the testimonies
of
our Chief Executive Officer, Chief Financial Officer, and other key employees.
The Company has cooperated, and will continue to fully cooperate, in
providing
requested information to the SEC. The SEC and the Company are currently
engaged
in discussions with respect to a potential resolution of this
matter.
In
fiscal
2002, we brought legal action against World Marketing Alliance, Inc.,
a Georgia
corporation (WMA) and World Financial Group, Inc., a Delaware corporation
and
the purchaser of substantially all assets of WMA, for breach of contract.
The
case proceeded to jury trial commencing October 25, 2004. The jury rendered
a
verdict in our favor and against WMA on November 1, 2004 for the entire
unpaid
contract amount of approximately $1.1 million. In addition to the verdict,
we
recovered legal fees totaling $0.3 million and pre- and post-judgment
interest
of $0.3 million from WMA. The Company received payment in cash for the
legal
settlement during the quarter ended May 28, 2005. However, shortly after
paying
the legal settlement, WMA appealed the jury decision to the 10th Circuit
Court
of Appeals. As a result of the appeal, we recorded the cash received and a
corresponding increase to accrued liabilities, and will not recognize
the gain
for the legal settlement until the case is completely resolved.
The
Company is also the subject of certain legal actions, which we consider
routine
to our business activities. At August 31, 2005, we believe that, after
consultation with legal counsel, any potential liability to the Company
under
such actions will not materially affect our financial position, liquidity,
or
results of operations.
No
matters were submitted to a vote of security holders during the fourth quarter
of our fiscal year ended August 31, 2005.
PART
II
FranklinCovey’s
common stock is listed and traded on the New York Stock Exchange (NYSE)
under
the symbol “FC.” The following table sets forth, for the periods indicated, the
high and low sale prices for our common stock, as reported on the NYSE
Composite
Tape, for the fiscal years ended August 31, 2005 and 2004.
|
High
|
Low
|
||||||
|
Fiscal
Year Ended August 31, 2005:
|
|||||||
|
Fourth
Quarter
|
$
|
8.10
|
$
|
5.80
|
|||
|
Third
Quarter
|
7.13
|
2.22
|
|||||
|
Second
Quarter
|
2.80
|
1.65
|
|||||
|
First
Quarter
|
1.98
|
1.61
|
|||||
|
Fiscal
Year Ended August 31, 2004:
|
|||||||
|
Fourth
Quarter
|
$
|
2.75
|
$
|
1.70
|
|||
|
Third
Quarter
|
2.86
|
2.05
|
|||||
|
Second
Quarter
|
3.25
|
1.50
|
|||||
|
First
Quarter
|
1.86
|
1.15
|
|||||
We
did
not pay or declare dividends on our common stock during the fiscal year
years
ended August 31, 2005 and 2004. We currently anticipate that we will
retain all
available funds to redeem outstanding preferred stock and to finance
our future
growth and business opportunities and we do not intend to pay cash dividends
on
our common stock in the foreseeable future. However, we are obligated
and pay
cash dividends on our outstanding shares of Series A preferred
stock.
As
of
November 7, 2005, the Company had 20,744,725 shares of its common stock
outstanding, which was held by approximately 328 shareholders of
record.
The
following table summarizes Company purchases of our preferred and common
stock
during the fiscal quarter ended August 31, 2005 (in thousands, except
per share
amounts):
|
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
Number of Shares That May Yet Be Purchased Under the Plans
or
Programs
|
|||||||||
|
Common
Shares:
|
|||||||||||||
|
May
29, 2005 to July 2, 2005
|
10(1)
|
|
$
|
6.86
|
none
|
n/a
|
|||||||
|
July
3, 2005 to July 30, 2005
|
-
|
-
|
none
|
n/a
|
|||||||||
|
July
31, 2005 to August 31, 2005
|
1(3)
|
|
7.15
|
none
|
n/a
|
||||||||
|
Total
Common Shares
|
11
|
$
|
6.89
|
426(4)
|
|
||||||||
|
Total
Preferred Shares
|
1,200(2)
|
|
$
|
25.00
|
|||||||||
|
(1)
|
These
shares of common stock were purchased in open market transactions
for
exclusive distribution to participants in our employee stock
purchase
program.
|
|
(2)
|
Amount
represents the redemption of $30.0 million of preferred stock
held by
Knowledge Capital during the period July 3, 2005 to July 30,
2005 as
provided by our fiscal 2005 preferred stock recapitalization.
Subsequent
to August 31, 2005, we redeemed an additional $10.0 million,
or
approximately 400,000 shares of preferred stock.
|
|
(3)
|
These
shares of common stock were purchased in open market transactions
for
participants in the Company’s non-qualified deferred compensation plan by
the plan administrator.
|
|
(4)
|
In
previous fiscal years, our Board of Directors approved various
plans for
the purchase of up to 8,000,000 shares of our common stock.
As of November
25, 2000, the Company had purchased 7,705,000 shares of common
stock under
these board-authorized purchase plans. On December 1, 2000,
the Board of
Directors approved an additional plan to acquire up to $8.0
million of our
common stock. To date, we have purchased $7.1 million of our
common stock
under the terms of the December 2000 Board approved purchase
plan. The
maximum number of shares that may yet be purchased under the
plans was
calculated for the December 2000 plan by dividing the remaining
approved
dollars by $7.00, which was the closing price of the Company’s common
stock on August 31, 2005. These shares were added to the remaining
shares
from the Company’s other Board-approved plans to arrive at the maximum
amount that may be purchased as of August 31, 2005. No shares
of our
common stock were purchased during the fiscal quarter ended
August 31,
2005 under terms of any Board authorized purchase
plan.
|
|
Item
6.
|
Financial
Highlights
The
selected consolidated financial data presented below should be read in
conjunction with the consolidated financial statements of Franklin Covey
and the
related footnotes as found in Item 8 of this report on Form 10-K.
During
fiscal 2005, we determined that due to inaccurate deferred income tax
calculations, our consolidated financial statements contained an error.
The
selected consolidated financial data has been derived from our consolidated
financial statements and has been restated to reflect adjustments described
in
Note 2 to those consolidated financial statements. This restatement
affects our fiscal 2002 income statement data and our fiscal 2004, 2003,
2002,
and 2001 balance sheet data as presented below. There was no impact in any
year due to this restatement on net cash provided by operating, investing,
or
financing activities on our consolidated statements of cash flows.
During
fiscal 2002, we sold the operations of Premier Agendas and discontinued
our
on-line planning service offered at franklinplanner.com. Accordingly,
the
information set forth in the table below has been restated to reflect
Premier
Agendas and franklinplanner.com as discontinued operations.
|
August
31,
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||||
|
In
thousands, except per share data
|
Restated
|
Restated
|
Restated
|
As
Previously
Reported
|
Restated
|
||||||||||||||
|
Income
Statement Data
|
|||||||||||||||||||
|
Net
sales
|
$
|
283,542
|
$
|
275,434
|
$
|
307,160
|
$
|
332,998
|
$
|
332,998
|
$
|
439,781
|
|||||||
|
Income
(loss) from operations
|
8,943
|
(9,064
|
)
|
(47,665
|
)
|
(122,573
|
)
|
(122,573
|
)
|
(14,793
|
)
|
||||||||
|
Net
income (loss) from continuing operations before income
taxes
|
9,101
|
(8,801
|
)
|
(47,790
|
)
|
(122,179
|
)
|
(122,179
|
)
|
(17,196
|
)
|
||||||||
|
Income
tax benefit (provision)
|
1,085
|
(1,349
|
)
|
2,537
|
32,122
|
25,713
|
4,000
|
||||||||||||
|
Net
income (loss) from continuing operations
|
10,186
|
(10,150
|
)
|
(45,253
|
)
|
(90,057
|
)
|
(96,466
|
)
|
(13,196
|
)
|
||||||||
|
Cumulative
effect of accounting change, net of income taxes
|
(75,928
|
)
|
(61,386
|
)
|
|||||||||||||||
|
Net
loss attributable to common shareholders
|
(5,837
|
)
|
(18,885
|
)
|
(53,988
|
)
|
(117,399
|
)
|
(109,266
|
)
|
(19,236
|
)
|
|||||||
|
Basic
and diluted loss per share
|
(.34
|
)
|
(.96
|
)
|
(2.69
|
)
|
(5.90
|
)
|
(5.49
|
)
|
(.95
|
)
|
|||||||
|
Balance
Sheet Data
|
|||||||||||||||||||
|
Total
current assets
|
$
|
105,182
|
$
|
92,229
|
$
|
110,057
|
$
|
124,345
|
$
|
120,739
|
$
|
226,911
|
|||||||
|
Other
long-term assets
|
9,426
|
7,305
|
10,472
|
11,474
|
11,474
|
14,369
|
|||||||||||||
|
Total
assets
|
233,233
|
227,625
|
262,146
|
308,344
|
304,738
|
551,022
|
|||||||||||||
|
Deferred
income tax liabilities
|
9,715
|
10,047
|
10,538
|
11,739
|
-
|
41,326
|
|||||||||||||
|
Long-term
obligations of continuing operations
|
46,171
|
13,067
|
15,743
|
15,231
|
3,492
|
146,138
|
|||||||||||||
|
Total
liabilities
|
100,407
|
69,146
|
84,479
|
81,922
|
70,183
|
241,140
|
|||||||||||||
|
Shareholders’
equity
|
132,826
|
158,479
|
177,667
|
226,422
|
234,555
|
309,882
|
|||||||||||||
The
following management’s discussion and analysis is intended to provide a summary
of the principal factors affecting the results of operations, liquidity
and
capital resources, contractual obligations, and the critical accounting
policies
of Franklin Covey Co. (also referred to as the Company, we, us, our,
and
FranklinCovey, unless otherwise indicated) and subsidiaries. This
discussion and
analysis should be read together with our consolidated financial
statements and
related notes, which contain additional information regarding the
accounting
policies and estimates underlying the Company’s financial statements. Our
consolidated financial statements and related notes are presented
in Item 8 of
this report on Form 10-K.
FranklinCovey
seeks to improve the effectiveness of organizations and individuals
and is a
worldwide leader in providing integrated learning and performance
solutions to
organizations and individuals that are designed to enhance strategic
execution,
productivity, leadership, sales force performance, effective communications,
and
other skills. Each performance solution may include products and
services that
encompass training and consulting, assessment, and various application
tools
that are generally available in electronic or paper-based formats.
Our products
and services are available through professional consulting services,
public
workshops, retail stores, catalogs, and the Internet at www.franklincovey.com.
Historically, our best-known offerings include the FranklinCovey
Planner™, and a
suite of new and updated individual-effectiveness and leadership-development
training products based on the best-selling book The
7
Habits of Highly Effective People.
We also
offer a range of training and assessment products to help organizations
achieve
superior results by focusing and executing on top priorities, building
the
capability of knowledge workers, and aligning business processes.
These
offerings include the popular workshop FOCUS:
Achieving Your Highest Priorities™,
The
4
Disciplines of Execution™,
The
4
Roles of Leadership™,
Building
Business Acumen: What the CEO Wants You to Know™,
the
Advantage Series communication workshops, and the Execution
Quotient
(xQ™)
organizational assessment tool.
Our
fiscal year ends on August 31, and unless otherwise indicated, fiscal
2005,
fiscal 2004, and fiscal 2003, refers to the twelve-month periods
ended August
31, 2005, 2004, and 2003.
Key
factors that influence our operating results include the number of
organizations
that are active customers; the number of people trained within those
organizations; the sale of personal productivity tools (including
FranklinCovey
Planners, personal digital assistants or “PDAs”, binders, and other related
products); the availability of budgeted training spending at our
clients and
prospective clients, which is significantly influenced by general
economic
conditions; and our ability to manage operating costs necessary to
provide
training and products to our clients.
During
the fiscal 2005 year-end closing process, the Company determined that
its previously issued consolidated balance sheet for the year ended
August
31, 2004 and consolidated statements of shareholders' equity for
the three years
in the period ended August 31, 2004 needed to be restated to correct
an
inaccurate deferred tax calculation that affected our statement
of operations
for the fiscal year ended August 31, 2002. The Company identified that,
historically, the deferred income tax liability for the basis difference
on
indefinite-lived intangibles calculated upon the adoption of SFAS
No. 142,
Goodwill and Other Intangibles, was incorrectly offset against deferred
income tax assets. The deferred tax liability relating to this basis
difference was assumed to reverse against the deferred tax asset,
which resulted
in the Company not providing a sufficient valuation allowance against
the deferred tax assets. Since this deferred tax liability relates to
indefinite-lived assets, it was not correct to net the deferred tax assets
and liabilities.
In
addition, the Company determined that it should have recognized a deferred
tax liability and a corresponding increase to goodwill related
to the
acquisition of intangible assets in a prior period. The additional
goodwill
should have been expensed in the cumulative effect of the accounting
change
resulting from the adoption of SFAS No. 142 because all goodwill
was considered
impaired at the date that we adopted SFAS No. 142, and the additional
deferred
income tax liability should have been utilized to reduce the deferred
tax
valuation allowance.
These
inaccurate deferred tax calculations impacted the consolidated statement of
operations for fiscal 2002 by increasing the income tax benefit, and
by decreasing the loss from continuing operations, by $6.4 million,
and by increasing the charge resulting from the cumulative effect
of accounting
change related to the adoption of SFAS No. 142 by $14.5 million.
The net effect
of these errors increases the reported $109.3 million net loss attributable
to common shareholders in fiscal 2002 by $8.1 million, to $117.4
million.
For
periods subsequent to fiscal 2002, these errors only affected our
consolidated
balance sheets through the impact of increased net deferred tax
liabilities and
decreased retained earnings. There was no impact in any year due
to this
restatement on net cash provided by operating, investing, or financing
activities on the consolidated statements of cash flows.
The
following discussion in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations reflects the effects of this
restatement
where applicable.
Overview
Our
operating results in fiscal 2005 showed significant year-over-year
improvement
in nearly every area, including increased sales, improved gross margins,
and
lower operating costs. For the fiscal year ended August 31, 2005,
we reported
net income (before preferred dividends and loss on preferred stock
recapitalization) of $10.2
million,
compared to a net loss of $10.2
million
in the prior year. Our operating income for the year ended August
31, 2005
improved by $18.0
million
as we recognized operating income of $8.9
million
compared to an operating loss of $9.1
million
in fiscal 2004. The primary factors that influenced our financial
results for
the fiscal year ended August 31, 2005 were as follows:
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Sales
Performance
- Our
total sales increased by $8.1
million, which represented the first increase in year-over-year
sales
performance in several years. The increase in total sales
was due to
improved training and consulting services sales, which
increased
$18.1
million compared to fiscal 2004. Increased training and
consulting sales
was attributable to improvements in both domestic and international
delivery channels. During fiscal 2005 we also completed
significant
enhancements to our successful and well-known The
7 Habits of Highly Effective People training
course and related products. We believe that our refreshed
course
materials and related products, in combination with our
new training
offerings, will contribute to continuing improvements in
our training and
consulting sales performance.
Product
sales decreased by $10.0
million, which was primarily due to the impact of closed
retail stores and
declining technology and specialty product sales compared
to the prior
year.
|
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|
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.
|
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|
Decreased
Operating Costs
-
Our operating costs decreased by $5.1
million, primarily due to reduced depreciation and reduced
selling,
general, and administrative expenses. Consistent with prior
years, we
continue to seek for and implement strategies that will
enable us to
reduce our operating costs in order to improve our
profitability.
|
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|
Improved
Cash Flows from Operations
- Our
cash flows from operations improved to $22.3
million compared to $12.1
million in fiscal 2004 and $5.8
million in fiscal 2003. We were able to improve our cash
flows from
operations primarily through improved operating results
and continued
reductions of on-hand inventories. As a result of these
and other factors,
we were able to increase our cash and cash equivalents
balance to
$51.7
million at August 31, 2005.
|
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|
Completion
of the Preferred Stock Recapitalization
-
During fiscal 2005, we completed a preferred stock recapitalization
that
allows the Company to redeem shares of preferred stock.
Although we
recorded a $7.8
million non-cash loss resulting from the revaluation of
our preferred
stock and valuation of the newly issued common stock warrants,
we were
able to use a portion of the proceeds from the sale of
our corporate
headquarters to redeem $30.0
million, or 1.2
million shares, of preferred stock in fiscal 2005. This
redemption will
save $3.0
million annually in preferred dividends. Subsequent to
August 31, 2005, we
redeemed an additional $10.0
million of preferred stock, which will save additional
dividend costs in
future periods.
|
Although
we achieved improved financial results in fiscal 2005 and saw improvements
in
many other related trends, we have not yet attained our targeted
business model
and we are therefore continuing our efforts to increase sales, improve
gross
margins, and reduce operating costs in order to achieve consistently
profitable
operations. Further details regarding our operating results and liquidity
are
provided throughout the following 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 (loss) before
income
taxes in our consolidated statements of operations:
|
YEAR
ENDED
AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
Product
sales
|
59.0
|
%
|
64.3
|
%
|
65.8
|
%
|
||||
|
Training
and consulting services sales
|
41.0
|
35.7
|
34.2
|
|||||||
|
Total
sales
|
100.0
|
100.0
|
100.0
|
|||||||
|
Product
cost of sales
|
27.2
|
31.1
|
33.3
|
|||||||
|
Training
and consulting services cost of sales
|
13.3
|
12.3
|
11.2
|
|||||||
|
Total
cost of sales
|
40.5
|
43.4
|
44.5
|
|||||||
|
Gross
margin
|
59.5
|
56.6
|
55.5
|
|||||||
|
Selling,
general and administrative
|
52.3
|
54.1
|
60.0
|
|||||||
|
Impairment
of and (gain) on disposal of investment in unconsolidated
subsidiary
|
(0.2
|
)
|
0.2 | |||||||
|
Provision
for losses on management stock loans
|
1.3
|
|||||||||
|
Recovery
of investment in unconsolidated subsidiary
|
(0.5
|
)
|
||||||||
|
Depreciation
|
2.7
|
4.3
|
8.6
|
|||||||
|
Amortization
|
1.5
|
1.5
|
1.4
|
|||||||
|
Total
operating expenses
|
56.3
|
59.9
|
71.0
|
|||||||
|
Income
(loss) from operations
|
3.2
|
(3.3
|
)
|
(15.5
|
)
|
|||||
|
Interest
income
|
0.3
|
0.1
|
0.2
|
|||||||
|
Interest
expense
|
(0.3
|
)
|
(0.1
|
)
|
||||||
|
Other
expense, net
|
(0.1
|
)
|
||||||||
|
Income
(loss) before income taxes
|
3.2
|
%
|
(3.2
|
)%
|
(15.5
|
)%
|
||||
Segment
Review
We
have
two reporting segments: the Consumer and Small Business Unit (CSBU)
and the
Organizational Solutions Business Unit (OSBU). The following is a
brief
description of these segments and their primary operating
activities.
Consumer
and Small Business Unit
- This
business unit is primarily focused on sales to individual customers
and small
business organizations and includes the results of the Company’s retail stores,
catalog and eCommerce operations, wholesale, and other related distribution
channels, including government sales, and office superstores. The
CSBU results
of operations also include the financial results of our paper planner
manufacturing operations. Although CSBU sales primarily consist of
products such
as planners, binders, software, and handheld electronic planning
devices,
virtually any component of the Company’s leadership and productivity solutions
can be purchased through CSBU channels. During fiscal 2005, we began
an
initiative to increase both training and product sales to small businesses
through our CSBU channels with the addition of a small business sales
force and
other initiatives designed especially for small business clients.
Organizational
Solutions Business Unit
- The
OSBU
is primarily responsible for the development, marketing, sale, and
delivery of
productivity, leadership, strategic execution, goal alignment, sales
performance, and effective communication training solutions directly
to
organizational clients, including other companies, the government,
and
educational institutions. The OSBU includes the financial results
of our
domestic sales force as well as our international operations. Our
international
operations include the financial results of our directly-owned foreign
offices
and royalty revenues from licensees.
The
following table sets forth segment sales data for the years indicated.
For
further information regarding our reporting segments and geographic
information,
refer to Note 18
to our
consolidated financial statements (in thousands).
|
YEAR
ENDED
AUGUST
31,
|
2005
|
2004
|
2003
|
|||||||
|
Consumer
and Small Business Unit:
|
||||||||||
|
Retail
stores
|
$
|
74,331
|
$
|
87,922
|
$
|
112,054
|
||||
|
Consumer
direct
|
55,575
|
55,059
|
56,177
|
|||||||
|
Wholesale
|
19,691
|
21,081
|
16,915
|
|||||||
|
Other
CSBU
|
3,757
|
2,007
|
7,020
|
|||||||
|
153,354
|
166,069
|
192,166
|
||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||
|
Domestic
|
76,114
|
61,047
|
74,306
|
|||||||
|
International
|
54,074
|
48,318
|
40,688
|
|||||||
|
130,188
|
109,365
|
114,994
|
||||||||
|
Total
net sales
|
$
|
283,542
|
$
|
275,434
|
$
|
307,160
|
||||
Product
Sales - Our
overall product sales, which primarily consist of planners, binders,
software,
handheld electronic planning devices, and publishing, which are primarily
sold
through our CSBU channels, declined $10.0
million,
or six
percent,
compared to fiscal 2004. The decline in product sales was primarily
due to
decreased sales in our retail and wholesale delivery channels, with
the majority
of the decline in product sales occurring in our first quarter of
fiscal 2005.
The following is a description of sales performance in our CSBU delivery
channels during the fiscal year ended August 31, 2005:
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Retail
Sales
-
The decline in retail sales was due to the impact of fewer stores,
which represented $10.7
million of the total $13.6
million decline, and reduced technology and specialty product
sales which
totaled $5.5 million. During fiscal 2004, we closed 18
retail store
locations and we closed 30 additional stores during fiscal
2005. At August
31, 2005, we were operating 105 retail stores compared
to 135 stores at
August 31, 2004. Overall product sales trends were reflected
in a
four
percent decline in year-over-year comparable store (stores
which were open
during the comparable periods) sales. Declining technology
and specialty
product sales were partially offset by increased “core” product (e.g.
planners, binders, and totes) sales during fiscal 2005.
|
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Consumer
Direct
-
Sales through our consumer direct channels (catalog and
eCommerce) were
generally consistent with the prior year and the slight
increase was
primarily due to increased core product sales compared
to the prior
year.
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Wholesale
Sales
- Sales
through our wholesale channel, which includes sales to
office superstores
and other retail chains, decreased primarily due to a shift
from contract
stationer revenue channels to royalty based retail channels. As a
result of this change our sales decreased, but our gross
margin contribution through this channel remained consistent with
the
prior year.
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Other
CSBU Sales
-
Other CSBU sales primarily consist of domestic printing
and publishing
sales and building sublease revenues. The increase in other
CSBU sales was
primarily attributable to increased sublease income. We
have subleased a
substantial portion of our corporate headquarters in Salt
Lake City, Utah
and have recognized $1.1
million of sublease revenue during fiscal 2005, compared
to $0.2 million
in fiscal 2004, which has been classified as other CSBU
sales.
|
Training
and Consulting Services Sales - We
offer
a variety of training solutions, training related products, and consulting
services focused on productivity, leadership, strategy execution,
sales force
performance, and effective communications training programs that
are provided
both domestically and internationally through the Organizational
Solutions
Business Unit (OSBU). Our overall training and consulting service
sales
increased by $18.1
million,
or 18
percent,
compared to the same period of the prior year. The improvement in
training sales
was reflected in both domestic and international training program
and consulting
sales. Our domestic sales performance improved in nearly all sales
regions and
was primarily attributable to increased client facilitated sales
of the enhanced
The
7
Habits of Highly Effective People
training
course, increased sales performance group sales, and improved sales
of our
The
4
Disciplines of Leadership
and
xQ
offerings.
International
sales improved by $5.8
million,
or 12
percent
primarily due to increased sales in Japan, Mexico, Brazil, the United
Kingdom,
increased licensee royalty revenues, and the translation of foreign
sales
amounts as foreign currencies strengthened against the United States
dollar
during much of fiscal 2005. The favorable impact of currency translation
on
reported international revenues totaled $1.7
million
for the fiscal year ended August 31, 2005. These increases were partially
offset
by decreased sales performance at our Canadian operations.
Gross
Margin
Gross
margin consists of sales less cost of sales. Our cost of sales includes
materials used in the production of planners and related products,
assembly and
manufacturing labor costs, direct costs of conducting seminars, freight,
and
certain other overhead costs. Gross margin may be affected by, among
other
things, prices of materials, labor rates, product sales mix, changes
in product
discount levels, production efficiency, and freight costs.
We
record
the costs associated with operating our retail stores, call center,
and Internet
site as part of consolidated selling, general, and administrative
expenses.
Therefore, our consolidated gross margin may not be comparable with
the gross
margin of other retailers that include similar costs in their cost
of
sales.
Our
overall gross margin improved to 59.5
percent
of sales, compared to 56.6
percent
in fiscal 2004. This overall gross margin improvement is consistent
with
quarterly gross margin trends during fiscal 2005 and was primarily
due to
increased training and consulting sales as a percent of total sales,
favorable
product mix changes, lower product costs, and improved margins on
our training
and consulting service sales. Training and consulting service sales,
which
typically have higher gross margins than our product sales, increased
to
41
percent
of total sales during fiscal 2005 compared to 36
percent
in the prior year.
Our
gross
margin on product sales improved to 53.9
percent
compared to 51.6
percent
in fiscal 2004. The improvement was primarily due to a favorable
shift in our
product mix as sales of higher-margin paper products and binders
increased as a
percent of total sales, while sales of lower-margin technology and
specialty
products continued to decline. Additionally, the overall margin on
paper and
binder sales has improved through focused cost reduction efforts,
and improved
inventory management.
Training
and related consulting services gross margin, as a percent of sales
for these
services, improved to 67.5
percent
compared to 65.6
percent
in fiscal 2004. The improvement in our training and consulting services
gross
margin was primarily due to a continued shift in training sales mix
toward
higher-margin courses and offerings, reduced costs for training materials,
such
as participant manuals and related items, and overall lower costs
associated
with training sales.
Operating
Expenses
Selling,
General, and Administrative
- Our
selling, general, and administrative (SG&A) expenses decreased $0.6
million
and improved as a percent of sales to 52.3
percent,
compared to 54.1
percent
in fiscal 2004. Declining SG&A expenses were the direct result of
initiatives specifically designed to reduce our overall operating
costs and is
consistent with operating expense trends during the previous two
fiscal years.
Our cost-reduction efforts have included retail store closures, headcount
reductions, consolidation of corporate office space, and other measures
designed
to focus our resources on critical activities and projects. These
efforts were
partially offset by increased commission expenses related to increased
training
sales, severance costs associated with a former executive officer,
expenses
related to the cancellation of the CEO's compensation agreement,
additional
costs associated with the preferred stock recapitalization, investments
in new
products, and costs of hiring new sales force personnel. The primary
effects of
our cost-cutting initiatives were reflected in reduced rent and utilities
expenses of $3.2
million
and reductions in other SG&A expenses, such as outsourcing and development
costs, that totaled $1.4
million
compared to the prior year. We also reduced our store closure costs
by
$1.3
million
(refer to discussion below) as many of the leases on stores that
were closed
expired during fiscal 2005 and did not require additional costs to
exit the
leases. These improvements were partially offset by $2.7
million
of increased associate costs and $1.7
million
of additional advertising and promotion spending.
We
regularly assess the operating performance of our retail stores,
including
previous operating performance trends and projected future profitability.
During
this assessment process, judgments are made as to whether under-performing
or
unprofitable stores should be closed. As a result of this evaluation
process, we
closed 30 stores during fiscal 2005. The costs associated with closing
retail
stores are typically comprised of charges related to vacating the
premises,
which may include a provision for the remaining term on the lease,
and severance
and other personnel costs. These store closure costs totaled $1.0
million
during fiscal 2005 and were included as a component of our SG&A expense.
Based upon our continuing analyses of retail store performance, we
may close
additional retail stores and may continue to incur costs associated
with closing
these stores in future periods.
During
fiscal 1999, our Board of Directors approved a plan to restructure
our
operations, which included an initiative to formally exit leased
office space
located in Provo, Utah. During fiscal 2005, we exercised an option,
available
under our master lease agreement, to purchase, and simultaneously
sell, the
office facility to the current tenant. The negotiated purchase price
with the
landlord was $14.0
million
and the tenant agreed to purchase the property for $12.5
million.
These prices were within the range of estimated fair values of the
buildings as
determined by an independent appraisal obtained by the Company. We
paid the
difference between the sale and purchase prices, plus other closing
costs, which
were included as a component of the restructuring plan accrual. After
completion
of the sale transaction, the remaining fiscal 1999 restructuring
costs, which
totaled $0.3
million,
were credited to SG&A expense in our consolidated statement of
operations.
Gain
on Disposal of Investment in Unconsolidated Subsidiary
- During
fiscal 2003, we purchased approximately 20 percent of the capital
stock
(subsequently diluted to approximately 12 percent ownership) of Agilix
Labs,
Inc. (Agilix), for cash payments totaling $1.0 million. Agilix is
a development
stage enterprise that develops software applications, including the
majority of
our software applications that are available for sale to external
customers.
Although we continue to sell software developed by Agilix, uncertainties
in
Agilix’s business plan developed during our fiscal quarter ended March 1,
2003
and their potential adverse effects on Agilix’s operations and future cash flows
were significant. As a result of this assessment, we determined that
our ability
to recover the investment in Agilix was remote. Accordingly, we impaired
and
expensed our remaining investment in Agilix of $0.9 million during
the quarter
ended March 1, 2003. During the quarter ended May 28, 2005, certain
affiliates
of Agilix purchased the shares of capital stock held by us for $0.5
million
in cash, which was reported as a gain on disposal of an investment
in
unconsolidated subsidiary.
Depreciation
and Amortization
- Depreciation
expense decreased $4.0
million,
or 34
percent,
compared to fiscal 2004 primarily due to the full depreciation or
disposal of
certain property and equipment balances, primarily computer software
and
hardware, and the effects of significantly reduced capital expenditures
during
preceding fiscal years. Based upon these events and current capital
spending
trends, we expect that depreciation expense will continue to decline
compared to
prior periods.
Amortization
expense on definite-lived intangible assets totaled $4.2
million
for the fiscal years ended August 31, 2005 and 2004. We expect intangible
asset
amortization expense to total $3.8
million
in fiscal 2006 as certain intangible assets become fully amortized
in fiscal
2006.
Interest
Income and Interest Expense
Interest
Income
-
Our
interest income increased $0.5
million
compared to fiscal 2004 primarily due to increased cash balances
and higher
interest rates on our interest-bearing cash accounts.
Interest
Expense
-
Our
interest expense increased $0.6
million
primarily due to the sale of our corporate headquarters facility
and the
resulting interest component of our lease payments to the landlord.
We are
accounting for the lease on the corporate facility as a financing
obligation,
which is accounted for similar to long-term debt.
Income
Taxes
The
income tax benefit for fiscal 2005 resulted primarily from reversal
of accruals
related to the resolution of certain tax matters. This tax benefit
was partially
offset by taxes payable by foreign affiliates and taxes withheld on
royalties from foreign licensees. The income tax provision for
fiscal 2004 was
primarily attributable to taxes payable by foreign affiliates and
taxes withheld
on royalties from foreign licensees. These foreign taxes were partially
offset
by the reversal of accruals related to the resolution of certain
tax
matters.
As
of
August 31, 2005 and 2004, given our recent history of significant
operating
losses, we had provided a valuation allowance against the majority
of our
deferred income tax assets. As of August 31, 2005 and 2004, we
had net deferred
tax liabilities of $6.9
million
and $7.3
million,
respectively. Our foreign deferred tax assets of $0.9
million
and $0.8
million
at August 31, 2005 and 2004 primarily relate to our operations
in Japan. The net
domestic deferred tax liability of $7.8
million
at August 31, 2005 and the restated $8.1
million
deferred liability at August 31, 2004 primarily relate to the step-up
of
indefinite-lived intangibles. For further information concerning
deferred tax
items, including the restatement of prior period deferred tax liabilities,
refer
to Notes 2 and 16 to
our
consolidated financial statements.
Loss
on Recapitalization of Preferred Stock
We
completed our preferred stock recapitalization during the quarter
ended May 28,
2005. Due to the significant modifications to our preferred stock,
we determined that previously outstanding preferred stock was replaced
with
new classes of preferred stock and common stock warrants. As a result,
the new
preferred stock was recorded at its fair value on the date of modification,
which was determined to be equal to the liquidation preference of
$25 per share.
The difference between the aggregate fair value of the consideration
given (the
new Series A preferred stock and the common stock warrants) and the
carrying
value of the previously existing Series A preferred stock, which
totaled
$7.8
million,
was reported as a loss on recapitalization of preferred stock, which
decreased
net income attributable to common shareholders in the quarter ended
May 28,
2005. Subsequent to May 28, 2005, we used $30.0 million of the proceeds
from the
June 2005 sale of our corporate headquarters facility to redeem shares
of
preferred stock under terms of the recapitalization plan.
Subsequent
to August 31, 2005, we redeemed an additional $10.0 million of preferred
stock
and announced that we intend to seek shareholder approval to amend
our articles
of incorporation to extend the period during which we have the right
to redeem
the outstanding preferred stock at 100 percent of the liquidation
preference.
The amendment would extend the current redemption deadline from March
8, 2006 to
December 31, 2006 and would also provide the right to extend the
redemption
period for an additional year to December 31, 2007, if another $10.0
million of
preferred stock is redeemed before December 31, 2006.
Sales
Product
Sales
- Our
product sales, which are primarily delivered through our CSBU channels,
declined
$25.0
million,
or 12
percent,
compared to the prior year. The decline in product sales compared
to fiscal 2003
was primarily attributable to the following sales performance at
our various
CSBU channels.
Retail
sales decreased $24.1
million,
or 22
percent,
compared to fiscal 2003. The decline in retail sales was primarily
attributable
to the following:
|
l
|
$14.3
million of the retail sales decrease is the result of the
closure of
retail stores. The Company closed 18 stores in fiscal 2004
in addition to
22 domestic and 10 international stores that were closed
in fiscal 2003.
These store closures were primarily comprised of unprofitable
stores and
stores located in markets where we had multiple retail
operations.
|
|
l
|
$8.4
million of the retail store decrease was the result of
declining
comparable store technology sales, which include handheld
electronic
devices, or PDAs, and related products. Comparable stores
are retail
locations which have been open for the full year in the
periods reported.
Technology sales decreased as competition increased from
office product
superstores and discounters. Sales of core products remained
relatively
flat, decreasing less than one percent compared to fiscal
2003.
|
At
August
31, 2004, we were operating 135 retail stores compared to 153 stores
at August
31, 2003.
Consumer
direct (includes catalog and eCommerce operations) sales decreased
$1.1
million,
or two
percent,
compared with fiscal 2003. The primary factors affecting consumer
direct sales
were as follows:
|
l
|
Technology
sales, including handheld electronic devices and PDAs,
through this
channel decreased $1.5
million.
|
|
l
|
The
total number of orders placed through the consumer direct
channel
decreased five
percent from the prior year.
|
During
2004, our wholesale sales increased $4.2
million,
or 25
percent,
as we expanded our product offerings in office superstores and discount
stores.
Offsetting this increase were decreased other CSBU sales, which are
comprised
primarily of government product and external printing sales, and
declined by
$5.0
million
compared to the prior year. During fiscal 2004, we outsourced the
sale and
distribution of our products through government channels to a well-established
office products distributor. Accordingly, we now only recognize royalty
income
from the distributor rather than the net sale and corresponding costs
related to
those sales.
Training
and Consulting Services Sales
- Our
overall training and consulting service sales declined $6.7
million,
or six
percent,
compared to the prior year. Decreased training sales were primarily
due to
decreased domestic training sales which experienced a slow start
in fiscal 2004.
Of the $13.3
million
decline in domestic training sales, $10.0
million
occurred during the first two quarters of fiscal 2004 and was primarily
attributable to decreased client-facilitated leadership programs.
Decreased
leadership training was partially offset by increased productivity
training and
sales from our new program, The 4
Disciplines of Execution
and
related xQ
sales.
However, our training and consulting business improved significantly
during late
fiscal 2004, especially in the fourth quarter.
International
sales, which represented 44
percent
of our OSBU segment sales in fiscal 2004, increased by $7.6
million,
or 19
percent
compared to the prior year. International sales growth was led by
our two
largest international offices, located in Japan and the United Kingdom,
which
experienced growth rates of 25
percent
and 23
percent
during fiscal 2004. Currency conversion also favorably impacted international
results through translation of foreign sales to U.S. dollars. Excluding
the
impact of foreign currency exchange fluctuations, international sales
grew
10
percent
compared to fiscal 2003.
Gross
Margin
For
fiscal 2004, our overall gross margin improved to 56.6
percent
of sales compared to 55.5
percent
in fiscal 2003. The improvement in our overall gross margin was primarily
due to
increased margins from product sales and an increase in training
and service
sales as a percent of total sales. Increased gross margin on product
sales was
primarily due to a favorable shift in our product mix away from technology
and
specialty products to higher-margin paper and binder products. Paper
product
sales, including forms and tabs, combined with binder product sales,
increased
as a percentage of total sales to 61
percent
in fiscal 2004 compared to 58
percent
in fiscal 2003. Our gross margins on paper and binder products also
increased as
a result of specific cost reduction initiatives.
Training
solution and related services gross margin, as a percent of sales,
decreased to
65.6
percent
compared to 67.2
percent
the prior year. The decline in our training gross margin during the
year was
primarily due to the delivery of certain higher-cost programs that
are part of a
longer-term marketing strategy. These activities include: custom
programs for
certain strategic clients, multiple domestic symposium events, and
a series of
international events that also had lower gross margins than our other
training
programs. These factors were partially offset by ongoing initiatives
designed to
reduce overall training program delivery costs that continue to have
a favorable
impact on our training and services gross margin.
Operating
Expenses
Selling,
General, and Administrative
- Our
selling, general, and administrative (SG&A) expenses for fiscal 2004
decreased $35.2
million,
or 19
percent,
compared to the prior year. Declining SG&A expenses were the direct result
of initiatives specifically designed to reduce our overall operating
costs and
were consistent with SG&A expense trends during the previous two fiscal
years. Our cost-reduction efforts have included retail store closures,
headcount
reductions, consolidation of corporate office space, and other measures
designed
to focus our resources on critical activities and projects. The primary
effects
of these cost-cutting initiatives were reflected in associate expense
reductions
totaling $18.1
million,
advertising and promotional expense reductions totaling $7.7
million,
reduced rent and utilities charges totaling $5.1
million,
and reductions in other SG&A expenses, such as outsourcing and development
costs, that totaled $5.1
million
compared to the prior year. Partially offsetting these cost reduction
efforts
were $2.3
million
of additional expenses related to retail store closures, as discussed
below.
We
regularly assess the operating performance of our retail stores,
which includes
assessment of previous operating performance trends and projected
future
profitability. As a result of this evaluation process, we decided
to close
certain stores during fiscal 2004 and fiscal 2003. During fiscal
2004, we closed
18
retail
stores and incurred additional expenses related to certain store
closures that
occurred during fiscal 2003. These store closure costs totaled $2.3
million
during fiscal 2004 and were reported as a component of our SG&A
expense.
Provision
for Losses on Management Common Stock Program -
Prior
to May 2004, we utilized a systematic methodology for determining
the level of
loan loss reserves that were appropriate for the management common
stock loan
program. Based upon this systematic methodology, we recorded a $3.9
million
increase to the loan loss reserve during fiscal 2003.
As
a
result of modifications to the terms of the management stock loans
that were
approved in May 2004 and their effects on the Company and loan participants
(refer to Note 11 to our consolidated financial statements for further
information), we determined that the management common stock loans
should be
accounted for as non-recourse stock compensation instruments. While
this
accounting treatment does not alter the legal rights associated with
the loans
to the participants, the modifications to the terms of the loans
were deemed
significant enough to adopt the non-recourse accounting model. As
a result of
this accounting treatment, the remaining carrying value of the notes
and
interest receivable related to financing common stock purchases by
related
parties, which totaled $7.6
million
prior to the accounting change, was reduced to zero with a corresponding
reduction in additional paid-in capital.
We
currently account for the non-recourse stock loans as variable stock
option
instruments. Under the provisions of SFAS No. 123R, which we will
adopt on
September 1, 2005, additional compensation expense will only be recognized
on
the loans if the Company takes action on the loans that in effect
constitutes a
modification of an option. Although we do not anticipate significant
further
compensation expense related to the management stock loans, this
accounting
treatment precludes us from recovering the amounts expensed as additions
to the
loan loss reserve, totaling $29.7 million, which were recognized
in prior
periods.
The
inability of the Company to collect all, or a portion, of these management
stock
loan receivables could have an adverse impact upon our financial
position and
future cash flows compared to full collection of the loans.
Depreciation
and Amortization
-
Depreciation expense decreased $14.6
million,
or 55
percent,
compared to fiscal 2003 primarily due to the full depreciation or
disposal of
certain computer hardware and software assets, the prior year impairment
of
retail store assets, which totaled $5.0
million,
and the effects of significantly reduced capital expenditures during
preceding
fiscal years.
Amortization
expense on definite-lived intangible assets totaled $4.2
million
during fiscal 2004 compared to $4.4
million
in the prior year. The reduction in our amortization expense was
due to the full
amortization of certain definite-lived intangible assets.
Income
Taxes
The
income tax provision for fiscal 2004 was primarily attributable to
taxes payable
by foreign affiliates and taxes withheld on royalties from foreign
licensees.
These foreign taxes were partially offset by the reversal of accruals
related to
the resolution of certain tax matters. The income tax benefit for
fiscal 2003
was primarily attributable to reversal of accruals related to the
resolution of
certain tax matters and a foreign income tax benefit related to our
Japan
operations.
The
following tables set forth selected unaudited quarterly consolidated
financial
data for fiscal 2005 and fiscal 2004. The quarterly consolidated
financial data
reflects, in the opinion of management, all adjustments necessary
to fairly
present the results of operations for such periods. Results of any
one or more
quarters are not necessarily indicative of continuing trends.
Quarterly
Financial Information:
|
YEAR
ENDED AUGUST 31, 2005
|
|||||||||||||
|
November
27
|
February
26
|
May
28
|
August
31
|
||||||||||
|
In
thousands, except per share amounts
|
|||||||||||||
|
Net
sales
|
$
|
69,104
|
$
|
82,523
|
$
|
65,788
|
$
|
66,128
|
|||||
|
Gross
margin
|
41,435
|
50,217
|
38,268
|
38,775
|
|||||||||
|
Selling,
general, and administrative expense
|
35,930
|
38,939
|
36,095
|
37,341
|
|||||||||
|
Depreciation
|
2,178
|
2,320
|
1,848
|
1,428
|
|||||||||
|
Amortization
|
1,043
|
1,043
|
1,043
|
1,044
|
|||||||||
|
Income
(loss) from operations
|
2,284
|
7,915
|
(218
|
)
|
(1,038
|
)
|
|||||||
|
Income
(loss) before income taxes
|
2,364
|
8,051
|
63
|
(1,377
|
)
|
||||||||
|
Net
income (loss)
|
1,526
|
7,086
|
3,069
|
(1,495
|
)
|
||||||||
|
Preferred
stock dividends
|
(2,184
|
)
|
(2,184
|
)
|
(2,184
|
)
|
(1,718
|
)
|
|||||
|
Loss
on recapitalization of preferred stock
|
-
|
-
|
(7,753
|
)
|
-
|
||||||||
|
Income
(loss) attributable to common shareholders
|
(658
|
)
|
4,902
|
(6,868
|
)
|
(3,213
|
)
|
||||||
|
Basic
and diluted income (loss) per share attributable to common
shareholders
|
$
|
(.03
|
)
|
$
|
.19
|
$
|
(.34
|
)
|
$
|
(.16
|
)
|
||
|
YEAR
ENDED AUGUST 31, 2004
|
|||||||||||||
|
|
|
|
November
29
|
February
28
|
May
29
|
August
31
|
|||||||
|
In
thousands, except per share amounts
|
|||||||||||||
|
Net
sales
|
$
|
75,031
|
$
|
78,715
|
$
|
61,248
|
$
|
60,440
|
|||||
|
Gross
margin
|
42,755
|
44,784
|
32,767
|
35,495
|
|||||||||
|
Selling,
general, and administrative expense
|
40,245
|
39,569
|
35,234
|
33,870
|
|||||||||
|
Depreciation
|
3,591
|
3,222
|
2,509
|
2,452
|
|||||||||
|
Amortization
|
1,043
|
1,043
|
1,043
|
1,044
|
|||||||||
|
Income
(loss) from operations
|
(2,124
|
)
|
950
|
(6,019
|
)
|
(1,871
|
)
|
||||||
|
Income
(loss) before income taxes
|
(2,150
|
)
|
1,035
|
(5,961
|
)
|
(1,725
|
)
|
||||||
|
Net
income (loss)
|
(3,180
|
)
|
232
|
(5,149
|
)
|
(2,053
|
)
|
||||||
|
Preferred
stock dividends
|
(2,184
|
)
|
(2,184
|
)
|
(2,184
|
)
|
(2,183
|
)
|
|||||
|
Loss
attributable to common shareholders
|
(5,364
|
)
|
(1,952
|
)
|
(7,333
|
)
|
(4,236
|
)
|
|||||
|
Basic
and diluted loss per share attributable to common
shareholders
|
$
|
(.27
|
)
|
$
|
(.10
|
)
|
$
|
(.37
|
)
|
$
|
(.21
|
)
|
|
Our
quarterly results of operations reflect seasonal trends that are
primarily the
result of customers who renew their FranklinCovey Planners on a calendar
year
basis. Domestic training sales are moderately seasonal because of
the timing of
corporate training, which is not typically scheduled as heavily during
holiday
and vacation periods.
During
the fourth quarter of fiscal 2005, we reclassified certain overhead
costs that
were included in cost of sales to selling, general, and administrative
expense.
The quarterly information included above was adjusted to reflect
the quarterly
impact of this reclassification. Amounts reclassified from cost of
sales to
selling, general, administrative expense consisted of the following
(in
thousands):
|
QUARTER
ENDED
|
Fiscal
2005
|
Fiscal
2004
|
|||||
|
November
|
$
|
276
|
$
|
229
|
|||
|
February
|
152
|
159
|
|||||
|
May
|
148
|
106
|
|||||
|
August
|
145
|
167
|
|||||
|
Total
reclassified
|
$
|
721
|
$
|
661
|
|||
During
the fourth quarter of fiscal 2004, we recorded an adjustment to properly
record
shares of Company stock held by our non-qualified deferred compensation
plan.
This correction resulted in a $0.6 million favorable adjustment to
our SG&A
expense during the fourth quarter of our fiscal year ended August
31,
2004.
Quarterly
fluctuations may also be affected by other factors including the
introduction of
new products or training seminars, the addition of new institutional
customers,
the timing of large corporate orders, the elimination of unprofitable
products
or training services, and the closure of retail stores.
Historically,
our primary sources of capital have been net cash provided by operating
activities, line-of-credit financing, long-term borrowings, asset
sales, and the
issuance of preferred and common stock. We currently rely primarily
upon cash
flows from operating activities and cash on hand to maintain adequate
liquidity
and working capital levels. At August 31, 2005 we had $51.7
million
of cash, cash equivalents, and short-term investments compared to
$41.9
million
at August 31, 2004. Our net working capital (current assets less
current
liabilities) increased to $49.9
million
at August 31, 2005 compared to $36.0
million
at August 31, 2004.
During
fiscal 2005, we completed the sale of our corporate headquarters
located in Salt
Lake City, Utah and received net proceeds totaling $32.4
million.
We used a portion of the proceeds from the sale of the campus to
redeem
$30.0
million
of preferred stock, and we anticipate that additional redemptions
in future
periods will occur if our cash flows from operating activities continue
to
improve. However, in connection with the sale of our corporate campus
we
incurred a long-term financing obligation for the purchase price. The
annual payments on the financing obligation are approximately $3.0
million
per year for the first five years with two percent annual increases
thereafter.
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, 2005.
Cash
Flows from Operating Activities
During
fiscal 2005 our net cash provided by operating activities improved
to
$22.3
million
compared to $12.1
million
in fiscal 2004. Our primary source of cash from operating activities
was the
sale of goods and services to our customers in the normal course
of business.
The primary uses of cash for operating activities were payments to
suppliers for
materials used in products sold, payments for direct costs necessary
to conduct
training programs, and payments for selling, general, and administrative
expenses. Our cash flows from operating activities were favorably
affected by
increased sales compared to fiscal 2004 and we recognized cash flow
improvements
from operating activities through reduced cash payments for costs
and expenses
related to generating these revenues, which was reflected by improved
gross
margins and income from operations. We also received $1.7
million
in cash from a legal settlement rendered in our favor.
During
fiscal 2005, our primary uses of cash for operating activities were
related to
increased accounts receivable that was primarily due to increased
sales in our
OSBU during the fourth quarter of fiscal 2005 and payment of income
taxes on
international royalty revenue and on the sale of our corporate
headquarters.
Partially offsetting these uses of cash were improved cash flows
from reduced
inventory balances. In addition to the impact of closed stores, we
have actively
sought to improve our inventory levels through better management
of on-hand
inventories, especially for electronic devices. We believe that efforts
to
optimize working capital balances combined with existing and planned
efforts to
increase sales, including sales of new products and services, and
cost-cutting
initiatives, will improve our cash flows from operating activities
in future
periods. However, the success of these efforts is dependent upon
numerous
factors, many of which are not within our control.
Cash
Flows from Investing Activities and Capital Expenditures
Net
cash
provided by investing activities totaled $4.9
million
for the fiscal year ended August 31, 2005. Our primary sources of
investing cash
were the sale of $21.4
million
of short-term investments and $0.5
million
of proceeds received from the sale of our investment in an unconsolidated
subsidiary. These cash inflows were partially offset by purchases
of short-term
marketable securities totaling $10.7
million
and the purchase of $4.2
million
of property and equipment, which consisted primarily of tenant improvements
on
subleased areas of our corporate campus, computer hardware, software,
and
leasehold improvements in certain of our retail stores. During fiscal
2005, we also invested $2.2 million in curriculum development, primarily
related
to our refreshed The 7 Habits of Highly Effective People training
course.
Cash
Flows from Financing Activities
Net
cash
used for financing activities during fiscal 2005 totaled $6.0
million.
As mentioned above, we completed the sale of our corporate campus
in Salt Lake
City, Utah during the fourth quarter of fiscal 2005 and received
net proceeds
totaling $32.4
million. The proceeds from the sale of our corporate campus was a financing
activity. As a result of this transaction we will use cash in future
periods to repay the financing obligation through our monthly lease
payment
(refer to the discussion under “Contractual Obligations” below). We used a
portion of the proceeds from the sale of the corporate campus to
redeem
$30.0
million
of preferred stock at its liquidation preference under the terms
of our
recapitalization agreement. This redemption will reduce our ongoing
cash
outflows for preferred dividends by $3.0
million
per year. During fiscal 2005, we paid $9.0
million
for preferred dividends, which included accrued dividends on the
1.2
million
shares of preferred stock that were redeemed. We anticipate making
additional
preferred stock redemptions under the terms of our recapitalization
plan if our
cash flows from operating activities continue to improve.
Contractual
Obligations
The
Company has not structured any special purpose or variable interest
entities, or
participated in any commodity trading activities, which would expose
us to
potential undisclosed liabilities or create adverse consequences
to our
liquidity. Required contractual payments primarily consist of payments
to EDS
for outsourcing services related to information systems, warehousing
and
distribution, and call center operations; payments on the financing
obligation
resulting from the sale of our corporate campus; minimum rent payments
for
retail store and sales office space; cash payments for Series A preferred
stock
dividends; mortgage payments on certain buildings and property; and
monitoring
fees paid to a Series A preferred stock investor. 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
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
Total
|
|||||||||||||||
|
Minimum
required payments to EDS for outsourcing services
|
$
|
23,918
|
$
|
22,591
|
$
|
22,829
|
$
|
23,076
|
$
|
23,330
|
$
|
141,467
|
$
|
257,211
|
||||||||
|
Required
payments on corporate campus financing obligation
|
3,045
|
3,045
|
3,045
|
3,045
|
3,055
|
53,072
|
68,307
|
|||||||||||||||
|
Minimum
operating lease payments
|
8,509
|
6,204
|
5,346
|
4,225
|
3,148
|
7,718
|
35,150
|
|||||||||||||||
|
Preferred
stock dividend payments(2)
|
4,930
|
4,734
|
4,734
|
4,734
|
4,734
|
-
|
23,866
|
|||||||||||||||
|
Debt
payments(1)
|
866
|
160
|
155
|
148
|
143
|
554
|
2,026
|
|||||||||||||||
|
Contractual
computer hardware and software purchases(3)
|
1,334
|
680
|
797
|
1,072
|
1,334
|
6,059
|
11,276
|
|||||||||||||||
|
Monitoring
fees paid to a preferred stock investor(2)
|
219
|
210
|
210
|
210
|
210
|
-
|
1,059
|
|||||||||||||||
|
Total
expected contractual obligation payments
|
$
|
42,821
|
$
|
37,624
|
$
|
37,116
|
$
|
36,510
|
$
|
35,954
|
$
|
208,870
|
$
|
398,895
|
||||||||
|
(1)
|
The
Company’s variable rate debt payments include interest payments
at 5.5%,
which was the applicable interest rate at September 30,
2005.
|
|
(2)
|
Amount
reflects the $10.0 million preferred stock redemption that
occurred
subsequent to August 31, 2005 and will decline if we determine
to make
future redemptions of our preferred stock.
|
|
(3)
|
We
are contractually obligated by our EDS outsourcing agreement
to purchase
the necessary computer hardware and software to keep such
equipment up to
current specifications. Amounts shown are estimated capital
purchases of
computer hardware and software under terms of the EDS outsourcing
agreement and its amendments.
|
Other
Items
The
Company is the creditor for a loan program that provided the capital
to allow
certain management personnel the opportunity to purchase shares of
our common
stock. For further information regarding our management common stock
loan
program, refer to Note 11
in our
consolidated financial statements. The inability of the Company to
collect all,
or a portion, of these receivables could have an adverse impact upon
our
financial position and future cash flows compared to full collection
of the
loans.
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 operating activities on the condition that we can continue
to
improve our cash flows generated from operating activities, and other
financing
alternatives, if necessary, for these expenditures. We anticipate
that our
existing capital resources should be adequate to enable us to maintain
our
operations for at least the upcoming twelve months. However, our
ability to
maintain adequate capital for our operations in the future is dependent
upon a
number of factors, including sales trends, our ability to contain
costs, levels
of capital expenditures, collection of accounts receivable, and other
factors.
Some of the factors that influence our operations are not within
our control,
such as economic conditions and the introduction of new technology
and products
by our competitors. We will continue to monitor our liquidity position
and may
pursue additional financing alternatives, if required, to maintain
sufficient
resources for future growth and capital requirements. However, there
can be no
assurance such financing alternatives will be available to us on
acceptable
terms.
Our
consolidated financial statements were prepared in accordance with
accounting
principles generally accepted in the United States of America. The
significant
accounting polices that we used to prepare our consolidated financial
statements
are outlined in Note 1 to the consolidated financial statements,
which are
presented in Part II, Item 8 of this Annual Report on Form 10-K.
Some of those
accounting policies require us to make estimates and assumptions
that affect the
amounts reported in our consolidated financial statements. Management
regularly
evaluates its estimates and assumptions and bases those estimates
and
assumptions on historical experience, factors that are believed to
be reasonable
under the circumstances, and requirements under accounting principles
generally
accepted in the United States of America. Actual results may differ
from these
estimates under different assumptions or conditions, including changes
in
economic conditions and other circumstances that are not in our control,
but
which may have an impact on these estimates and our actual financial
results.
The
following items require the most significant judgment and often involve
complex
estimates:
Revenue
Recognition
We
derive
revenues primarily from the following sources:
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Products
-
We sell planners, binders, planner accessories, handheld
electronic
devices, and other related products that are primarily
sold through our
CSBU channels.
|
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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.
|
The
Company recognizes revenue when: 1) persuasive evidence of an agreement
exists,
2) delivery of product has occurred or services have been rendered,
3) the price
to the customer is fixed and determinable, and 4) collectibility
is reasonably
assured. For product sales, these conditions are generally met upon
shipment of
the product to the customer or by completion of the sale transaction
in a retail
store. For training and service sales, these conditions are generally
met upon
presentation of the training seminar or delivery of the consulting
services.
Some
of
our training and consulting contracts contain multiple deliverable
elements that
include training along with other products and services. In accordance
with
Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables,
sales
arrangements with multiple deliverables are divided into separate
units of
accounting if the deliverables in the sales contract meet the following
criteria: 1) the delivered training or product has value to the client
on a
standalone basis; 2) there is objective and reliable evidence of
the fair value
of undelivered items; and 3) delivery of any undelivered item is
probable. The
overall contract consideration is allocated among the separate units
of
accounting based upon their fair values, with the amount allocated
to the
delivered item being limited to the amount that is not contingent
upon the
delivery of additional items or meeting other specified performance
conditions.
If the fair value of all undelivered elements exits, but fair value
does not
exist for one or more delivered elements, the residual method is
used. Under the
residual method, the amount of consideration allocated to the delivered
items
equals the total contract consideration less the aggregate fair value
of the
undelivered items. Fair value of the undelivered items is based upon
the normal
pricing practices for the Company’s existing training programs, consulting
services, and other products, which are generally the prices of the
items when
sold separately.
Revenue
is recognized on software sales in accordance with Statement of Position
(SOP)
97-2, Software
Revenue Recognition
as
amended by SOP 98-09. SOP 97-2, as amended, generally requires revenue
earned on
software arrangements involving multiple elements such as software
products and
support to be allocated to each element based on the relative fair
value of the
elements based on vendor specific objective evidence (VSOE). The
majority of the
Company’s software sales have elements, including a license and post contract
customer support (PCS). Currently the Company does not have VSOE
for either the
license or support elements of its software sales. Accordingly, revenue
is
deferred until the only undelivered element is PCS and the total
arrangement fee
is recognized ratably over the support period.
Revenue
is recognized as the net amount to be received after deducting estimated
amounts
for discounts and product returns.
Accounts
Receivable Valuation
Trade
accounts receivable are recorded at the invoiced amount and do not
bear
interest. The allowance for doubtful accounts represents our best
estimate of
the amount of probable credit losses in the existing accounts receivable
balance. We determine the allowance for doubtful accounts based upon
historical
write-off experience and current economic conditions and we review
the adequacy
of our allowance for doubtful accounts on a regular basis. Receivable
balances
past due over 90 days, which exceed a specified dollar amount, are
reviewed
individually for collectibility. Account balances are charged off
against the
allowance after all means of collection have been exhausted and the
probability
for recovery is considered remote. We do not have any off-balance
sheet credit
exposure related to our customers.
Inventory
Valuation
Inventories
are stated at the lower of cost or market with cost determined using
the
first-in, first-out method. Our inventories are comprised primarily
of dated
calendar products and other non-dated products such as binders, handheld
electronic devices, stationery, training products, and other accessories.
Provision is made to reduce excess and obsolete inventories to their
estimated
net realizable value. In assessing the realization of inventories,
we make
judgments regarding future demand requirements and compare these
assessments
with current and committed inventory levels. Inventory requirements
may change
based on projected customer demand, technological and product life
cycle
changes, longer or shorter than expected usage periods, and other
factors that
could affect the valuation of our inventories.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized,
but rather
are tested for impairment on an annual basis, or more often if events
or
circumstances indicate that a potential impairment exists. The Covey
trade name
intangible asset has been deemed to have an indefinite life. This
intangible
asset is assigned to the OSBU and is tested for impairment using
the present
value of estimated royalties on trade name related revenues, which
consist
primarily of training seminars, international licensee royalties,
and related
products. If forecasts and assumptions used to support the realizability
of our
indefinite-lived intangible asset change in the future, significant
impairment
charges could result that would adversely affect our results of operations
and
financial condition.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed
for possible
impairment whenever events or changes in circumstances indicate that
the
carrying amount of such assets may not be recoverable. We use an
estimate of
undiscounted future net cash flows of the assets over the remaining
useful lives
in determining whether the carrying value of the assets is recoverable.
If the
carrying values of the assets exceed the anticipated future cash
flows of the
assets, we recognize an impairment loss equal to the difference between
the
carrying values of the assets and their estimated fair values. Impairment
of
long-lived assets is assessed at the lowest levels for which there
are
identifiable cash flows that are independent from other groups of
assets. The
evaluation of long-lived assets requires us to use estimates of future
cash
flows. If forecasts and assumptions used to support the realizability
of our
long-lived tangible and definite-lived intangible assets change in
the future,
significant impairment charges could result that would adversely
affect our
results of operations and financial condition.
Income
Taxes
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
history of significant operating losses precludes us from demonstrating
that it
is more likely than not that the related benefits from deferred income
tax
deductions and foreign tax carryforwards will be realized. Accordingly,
we
recorded valuation allowances on the majority of our deferred income
tax assets.
These valuation allowances are based on estimates of future taxable
income or
losses that may or may not be realized.
Equity-Based
Payments
- In
December 2004, the Financial Accounting Standards Board (FASB) approved
Statement No. 123 (Revised 2004), Share-Based
Payment (SFAS
No.
123R), which is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation.
Statement 123R supersedes Accounting Principles Board (APB) Opinion
No. 25,
Accounting
for Stock Issued to Employees,
and
amends SFAS No. 95, Statement
of Cash Flows.
Generally, this new statement follows the approach previously defined
in SFAS
No. 123. However, SFAS No. 123R requires all share based-payments
to employees,
including grants of stock options and the compensatory elements of
employee
stock purchase plans, to be recognized in the income statement based
upon their
fair values. Pro forma disclosure is no longer an alternative.
We
previously accounted for our stock-based compensation using the intrinsic
method
as defined in APB Opinion No. 25 and accordingly, we have not recognized
any
expense for our stock option plans or employee stock purchase plan
in our
consolidated financial statements. Statement No. 123R is effective
for interim
or annual periods beginning after June 15, 2005, and will thus be
effective for
our first quarter of fiscal 2006. Upon adoption, we intend to use
the modified
prospective transition method. Under this method, awards that are
granted,
modified, or settled after the date of adoption will be measured
and accounted
for in accordance with Statement 123R. Based upon our analysis of
the
requirements of SFAS No. 123R, our employee stock purchase plan will
become a
compensatory plan in fiscal 2006. However, due to current participation
levels
in the employee stock purchase plan and remaining levels of unvested
stock
option compensation expense, we do not believe that the adoption
SFAS No. 123R
will have a material impact upon our results of operations until
we grant
additional stock option awards or until participation in our employee
stock
purchase plan significantly increases. However, the transition to
SFAS No. 123R
will require us to reclassify our unamortized deferred compensation
reported in
the equity section of our balance sheet to additional paid-in
capital.
For
further information regarding our share-based compensation, refer
to Note 3
to our consolidated financial statements.
Inventory
Costs
- In
November 2004, the FASB approved Statement No. 151, Inventory
Costs an Amendment of ARB No. 43, Chapter 4.
Statement No. 151 clarifies the accounting for abnormal amounts of
idle facility
expense, freight, handling costs, and wasted material (spoilage)
and requires
that those items be recognized as a current period expense regardless
of whether
they meet the criteria of “so abnormal.” This statement also requires that
allocation of fixed production overheads to the costs of conversion
be based
upon the normal capacity of the production facilities. This statement
is
effective for interim or annual periods beginning after June 15,
2005 and will
thus be effective for our first quarter of fiscal 2006. We do not
believe that
the new accounting requirements of SFAS No. 151 will have a material
impact on
our financial statements.
Nonmonetary
Exchange Transactions
- In
December 2004, the FASB issued SFAS No. 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29.
Statement No. 153 amends APB Opinion No. 29, which is based upon
the principle
that exchanges of nonmonetary assets should be measured based on
the fair value
of the assets exchanged, by eliminating the exception to fair value
accounting
for nonmonetary exchanges of similar productive assets and replacing
it with a
general exception to fair value accounting for nonmonetary exchanges
that do not
have commercial substance. A nonmonetary exchange has commercial
substance if
the future cash flows of the entity are expected to change significantly
as a
result of the exchange. Statement No. 153 is effective for nonmonetary
asset
exchanges occurring in periods beginning after June 15, 2005. We
do not believe
that the requirements of this statement will have a material impact
upon our
financial statements.
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
has not had a material effect on our operations. However, future
inflation may
have an impact on the price of materials used in the production of
planners and
related products, including paper and leather materials. We may not
be able to
pass on such increased costs to our customers.
Certain
written and oral statements made by the Company or our representatives
in this
report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, Internet webcasts, or otherwise, are
“forward-looking statements” within the meaning of the Private Securities
Litigation reform Act of 1995 and Section 21E of the Securities Exchange
Act of
1934. 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. Forward-looking
statements are subject to certain risks and uncertainties that may
cause actual
results to differ materially from the forward-looking statements.
These risks
and uncertainties are disclosed from time to time in reports filed
by us with
the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks
and
uncertainties include, but are not limited to, the matters discussed
under
“Business Environment and Risk” below. In addition, such risks and uncertainties
may include unanticipated developments in any one or more of the
following
areas: unanticipated costs or capital expenditures; difficulties
encountered by
EDS in operating and maintaining our information systems and controls,
including
without limitation, the systems related to demand and supply planning,
inventory
control, and order fulfillment; delays or unanticipated outcomes
relating to our
strategic plans; dependence on existing products or services; the
rate and
consumer acceptance of new product introductions; competition; the
number and
nature of customers and their product orders, including changes in
the timing or
mix of product or training orders; pricing of our products and services
and
those of competitors; adverse publicity; and other factors which
may adversely
affect our business.
The
risks
included here are not exhaustive. Other sections of this report may
include
additional factors that could adversely affect our business and financial
performance. Moreover, we operate in a very competitive and rapidly
changing
environment. New risk factors may emerge and it is not possible for
our
management to predict all such risk factors, nor can we assess the
impact of all
such risk factors on our business or the extent to which any single
factor, or
combination of factors, may cause actual results to differ materially
from those
contained in forward-looking statements. Given these risks and uncertainties,
investors should not rely on forward-looking statements as a prediction
of
actual results.
The
market price of our common stock has been and may remain volatile.
In addition,
the stock markets in general have experienced increased volatility.
Factors such
as quarter-to-quarter variations in revenues and earnings or losses
and our
failure to meet expectations could have a significant impact on the
market price
of our common stock. In addition, the price of our common stock can
change for
reasons unrelated to our performance. Due to our low market capitalization,
the
price of our common stock may also be affected by conditions such
as a lack of
analyst coverage and fewer potential investors.
Forward-looking
statements are based on management’s expectations as of the date made, and the
Company does not undertake any responsibility to update any of these
statements
in the future. Actual future performance and results will differ
and may differ
materially from that contained in or suggested by forward-looking
statements as
a result of the factors set forth in this Management’s Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in
our filings
with the SEC.
Market
Risk of Financial Instruments
The
Company is exposed to financial instrument market risk primarily
through
fluctuations in foreign currency exchange rates and interest rates.
To manage
risks associated with foreign currency exchange and interest rates,
we make
limited use of derivative financial instruments. Derivatives are
financial
instruments that derive their value from one or more underlying financial
instruments. As a matter of policy, our derivative instruments are
entered into
for periods consistent with the related underlying exposures and
do not
constitute positions that are independent of those exposures. In
addition, we do
not enter into derivative contracts for trading or speculative purposes,
nor are
we party to any leveraged derivative instrument. The notional amounts
of
derivatives do not represent actual amounts exchanged by the parties
to the
instrument, and, thus, are not a measure of exposure to us through
our use of
derivatives. Additionally, we enter into derivative agreements only
with highly
rated counterparties and we do not expect to incur any losses resulting
from
non-performance by other parties.
Foreign
Exchange Sensitivity
- Due to
the global nature of our operations, we are subject to risks associated
with
transactions that are denominated in currencies other than the United
States
dollar, as well as the effects of translating amounts denominated
in foreign
currencies to United States dollars as a normal part of the reporting
process.
The objective of our foreign currency risk management activities
is to reduce
foreign currency risk in the consolidated financial statements. In
order to
manage foreign currency risks, we make limited use of foreign currency
forward
contracts and other foreign currency related derivative instruments.
Although we
cannot eliminate all aspects of our foreign currency risk, we believe
that our
strategy, which includes the use of derivative instruments, can reduce
the
impacts of foreign currency related issues on our consolidated financial
statements. The following is a description of our use of foreign
currency
derivative instruments.
Foreign
Currency Forward Contracts - During
the fiscal years ended August 31, 2005, 2004, and 2003, we utilized
foreign
currency forward contracts to manage the volatility of certain intercompany
financing transactions and other transactions that are denominated
in foreign
currencies. Because these contracts do not meet specific hedge accounting
requirements, gains and losses on these contracts, which expire on
a quarterly
basis, are recognized currently and are used to offset a portion
of the gains or
losses of the related accounts. The gains and losses on these contracts
were
recorded as a component of SG&A expense in our consolidated statements of
operations and resulted in the following net losses for the periods
indicated
(in thousands):
|
YEAR
ENDED AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
Losses
on foreign exchange contracts
|
$
|
(437
|
)
|
$
|
(641
|
)
|
$
|
(501
|
)
|
|
|
Gains
on foreign exchange contracts
|
127
|
227
|
38
|
|||||||
|
Net
losses on foreign exchange contracts
|
$
|
(310
|
)
|
$
|
(414
|
)
|
$
|
(463
|
)
|
|
At
August
31, 2005, the fair value of these contracts, which was determined
using the
estimated amount at which contracts could be settled based upon forward
market
exchange rates, was insignificant. The notional amounts of our foreign
currency
sell contracts that did not qualify for hedge accounting were as
follows at
August 31, 2005 (in thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
|||||
|
Japanese
Yen
|
273,000
|
$
|
2,458
|
||||
|
Australian
Dollars
|
1,333
|
1,018
|
|||||
|
Mexican
Pesos
|
9,400
|
846
|
|||||
Net
Investment Hedges - During
fiscal 2005 and 2004, we entered into foreign currency forward contracts
that
were designed to manage foreign currency risks related to the value
of our net
investment in directly-owned operations located in Canada, Japan,
and the United
Kingdom. These three offices comprise the majority of our net investment
in
foreign operations. These foreign currency forward instruments qualified
for
hedge accounting and corresponding gains and losses were recorded
as a component
of accumulated other comprehensive income in our consolidated balance
sheet.
During fiscal 2005 and 2004, we recognized the following net losses
on our net
investment hedging contracts (in thousands):
|
YEAR
ENDED AUGUST
31,
|
2005
|
|
2004
|
|
|||
|
Losses
on net investment hedge contracts
|
$
|
(384
|
)
|
$
|
(337
|
)
|
|
|
Gains
on net investment hedge contracts
|
66
|
130
|
|||||
|
Net
losses on investment hedge contracts
|
$
|
(318
|
)
|
$
|
(207
|
)
|
|
As
of
August 31, 2005, we had settled our net investment hedge contracts
and we had
none outstanding. However, we may continue to utilize net investment
hedge
contracts in future periods as a component of our overall foreign
currency risk
strategy.
Interest
Rate Sensitivity - The
Company is exposed to fluctuations in U.S. interest rates primarily
as a result
of the cash and cash equivalents that we hold. Following the sale
of our
building in June 2005, our debt balances consist of the financing
obligation
from the sale of the corporate campus, one fixed-rate long-term mortgage,
and
one variable-rate mortgage on certain of our buildings and property.
The
financing obligation has a payment structure equivalent to a lease
arrangement
with an interest rate of 7.7 percent. Our fixed-rate debt has a 9.9
percent
interest rate and was paid in full during September 2005 and our
variable-rate
mortgage has interest at the Canadian Prime Rate (5.5 percent at
August 31,
2005) and requires payments through January 2015.
During
the fiscal years ended August 31, 2005, 2004, and 2003, we were not
party to any
interest rate swap agreements or similar derivative instruments.
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.
We
have experienced significant declines in sales and corresponding net
losses in
recent fiscal years and we may not be able to return to consistent
profitability
Although
our sales increased in fiscal 2005 compared to fiscal 2004, we have
experienced
significant sales declines in recent years. Our sales during fiscal
2005 were
$283.5
million
compared to $275.4
million
in fiscal 2004 and $307.2
million
in fiscal 2003. While our net income (before preferred dividends and
recapitalization loss) has improved to $10.2
million
in fiscal 2005, declining sales have also had a corresponding adverse
impact
upon our operating results during recent fiscal years and we have reported
net
losses totaling $10.2
million
in fiscal 2004 and $45.3
million
in fiscal 2003. We continue to implement initiatives designed to increase
our
sales and improve our operating results, and have recognized significant
improvements in recent years, however, we cannot assure that we will
return to
consistently profitable operations.
In
addition to declining sales, we have faced numerous challenges that
have
affected our operating results in recent years. Specifically, we have
experienced, and may continue to experience the following:
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Declining
traffic in our retail stores and consumer direct
channel
|
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Increased
risk of excess and obsolete inventories
|
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Operating
expenses that, as a percentage of sales, have exceeded our
desired
business model
|
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Costs
associated with exiting unprofitable retail
stores
|
Our
results of operations are materially affected by economic conditions,
levels of
business activity, and other changes experienced by our
clients
Uncertain
economic conditions continue to affect many of our clients’ businesses and their
budgets for training, consulting, and related products. Such economic
conditions
and budgeted spending are influenced by a wide range of factors that
are beyond
our control and that we have no comparative advantage in forecasting.
These
conditions include:
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|
The
overall demand for training, consulting, and our related
products
|
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|
Conditions
and trends in the training and consulting industry
|
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l
|
General
economic and business conditions
|
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|
General
political developments, such as the war on terrorism, and
their impacts
upon our business both domestically and internationally
|
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|
Natural
disasters
|
In
addition, our business tends to lag behind economic cycles and, consequently,
the benefits of any economic recovery may take longer for us to realize
than
other segments of the economy. Future deterioration of economic conditions,
particularly in the United States, could increase these effects on
our
business.
We
may not be able to compensate for lower sales or unexpected cash outlays
with
cost reductions significant enough to generate positive net
income
Although
we have initiated cost-cutting efforts that have included headcount
reductions,
retail store closures, consolidation of administrative office space,
and changes
in our advertising and marketing strategy, if we are not able to prevent
further
revenue declines or achieve our growth objectives, we will need to
further
reduce our costs. An unintended consequence of additional cost reductions
may be
reduced sales. If we are not able to effectively reduce our costs and
expenses
commensurate with, or at the same pace as, any further deterioration
in our
sales, we may not be able to generate positive net income or cash flows
from
operations. Although we have experienced improved cash flows from operations
during fiscal 2005 and 2004, an inability to maintain or continue to
increase
cash flows from operations may have an adverse impact upon our liquidity
and
ability to operate the business. For example, we may not be able to
obtain
additional financing or raise additional capital on terms that would
be
acceptable to us.
We
are
unable to predict the exact amount of cost reductions required for
us to
generate increased cash flows from operations because we cannot accurately
predict the amount of our future sales. Our future sales performance
depends, in
part, on future economic and market conditions, which are not within
our
control.
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, Brazil, Canada, Japan, Mexico,
and the
United Kingdom. We also have licensed operations in numerous other
foreign
countries. As a result of these foreign operations and their growing
impact upon
our results of operations, we are subject to a number of risks,
including: