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:
|
l
|
The
overall demand for training, consulting, and our related
products
|
|
l
|
Conditions
and trends in the training and consulting industry
|
|
l
|
General
economic and business conditions
|
|
l
|
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:
|
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|
Restrictions
on the movement of cash
|
|
l
|
Burdens
of complying with a wide variety of national and local
laws
|
|
l
|
The
absence in some jurisdictions of effective laws to protect
our
intellectual property rights
|
|
l
|
Political
instability
|
|
l
|
Currency
exchange rate fluctuations
|
|
l
|
Longer
payment cycles
|
|
l
|
Price
controls or restrictions on exchange of foreign
currencies
|
While
we
are not currently aware of any of the foregoing conditions materially
adversely
affecting our operations, these conditions, which are outside of our
control,
could change at any time.
We
operate in a highly competitive industry
The
training and consulting industry is highly competitive with a relatively
easy
entry. Competitors continually introduce new programs and products
that may
compete directly with our offerings. Larger and better capitalized
competitors
may have enhanced abilities to compete for clients and skilled professionals.
In
addition, one or more of our competitors may develop and implement
training
courses or methodologies that may adversely affect our ability to sell
our
methodologies to new clients.
Our
profitability will suffer if we are not able to maintain our pricing
and
utilization rates and control our costs
Our
profit margin on training services is largely a function of the rates
we are
able to recover for our services and the utilization, or chargeability,
of our
trainers, client partners, and consultants. Accordingly, if we are
unable to
maintain sufficient pricing for our services or an appropriate utilization
rate
for our training professionals without corresponding cost reductions,
our profit
margin and overall profitability will suffer. The rates that we are
able to
recover for our services are affected by a number of factors,
including:
|
l
|
Our
clients’ perceptions of our ability to add value through our programs
and
products
|
|
l
|
Competition
|
|
l
|
General
economic conditions
|
|
l
|
Introduction
of new programs or services by us or our competitors
|
|
l
|
Our
ability to accurately estimate, attain, and sustain engagement
sales,
margins, and cash flows over longer contract
periods
|
Our
utilization rates are also affected by a number of factors,
including:
|
l
|
Seasonal
trends, primarily as a result of scheduled training
|
|
l
|
Our
ability to forecast demand for our products and services
and thereby
maintain an appropriate headcount in our employee base
|
|
l
|
Our
ability to manage attrition
|
Our
profitability is also a function of our ability to control costs and
improve our
efficiency in the delivery of our products and services. Our cost-cutting
initiatives, which focus on reducing both fixed and variable costs,
may not be
sufficient to deal with downward pressure on pricing or utilization
rates. As we
introduce new programs and seek to increase the number of our training
professionals, we may not be able to manage a significantly larger
and more
diverse workforce, control our costs, or improve our efficiency.
Our
new training programs and products may not be widely accepted in the
marketplace
In
an
effort to improve our sales performance, we have made significant investments
in
new training and consulting offerings such as the “4 Disciplines of Execution.”
Additionally, we have invested in our existing programs in order to
refresh
these programs and keep them relevant in the marketplace, including
the newly
revised The
7
Habits of Highly Effective People
curriculum. We expect that these new programs, combined with new product
offerings, will contribute to future growth in our revenue. Although
we believe
that our intellectual property is highly regarded in the marketplace,
the demand
for these new programs and products is still emerging. If our clients’ demand
for these new programs and products does not develop as we expect,
or if our
sales and marketing strategies for these programs are not effective,
our
financial results could be adversely impacted and we may need to change
our
business strategy.
If
we are unable to attract, retain, and motivate high-quality employees,
we will
not be able to compete effectively and will not be able to grow our
business
Due
to
our reliance on customer satisfaction, our overall success and ability
to grow
are dependent, in part, on our ability to hire, retain, and motivate
sufficient
numbers of talented people with the necessary skills needed to serve
clients and
grow our business. The inability to attract qualified employees in
sufficient
numbers to meet particular demands or the loss of a significant number
of our
employees could have a serious adverse effect on us, including our
ability to
obtain and successfully complete important client engagements and thus
maintain
or increase our sales.
We
continue to offer a variable component of compensation, the payment
of which is
dependent upon our sales performance and profitability. We adjust our
compensation levels and have adopted different methods of compensation
in order
to attract and retain appropriate numbers of employees with the necessary
skills
to serve our clients and grow our business. We may also use equity-based
performance incentives as a component of our executives’ compensation, which may
affect amounts of cash compensation. Variations in any of these areas
of
compensation may adversely impact our operating performance.
We
may experience foreign currency gains and losses
We
conduct a portion of our business in currencies other than the United
States
dollar. As our international operations continue to grow and become
a larger
component of our financial results, our revenues and operating results
may be
adversely affected when the dollar strengthens relative to other currencies
and
are positively affected when the dollar weakens. In order to manage
a portion of
our foreign currency risk, we make limited use of foreign currency
derivative
contracts to hedge certain transactions and translation exposure. There
can be
no guarantee that our foreign currency risk management strategy will
be
effective in reducing the risks associated with foreign currency transactions
and translation.
Our
product sales may continue to decline and result in changes to our
profitability
In
recent
years, our product sales have declined. These product sales, which
are primarily
delivered through our retail stores, consumer direct channels (catalog
call
center and eCommerce), wholesale, and government product channels have
historically been very profitable for us. However, due to recent declines,
we
have reevaluated our product business and have taken steps to restore
its
profitability. These initiatives have included hiring an additional
sales force
based at certain retail stores, retail store closures, transitioning
catalog
customers to our eCommerce site, outsourcing our government products
channel,
and increasing our business through wholesale channels. However, these
initiatives may also result in decreased gross margins on our product
sales if
lower-margin wholesale sales continue to increase. If product sales
continue to
decline or gross margins decline, our product sales strategies may
not be
adequate to return our product delivery channels to past profitability
levels.
Our
strategy of outsourcing certain functions and operations may fail to
reduce our
costs for these services
We
have
an outsourcing contract with Electronic Data Systems (EDS) to provide
warehousing, distribution, information systems, and call center operations.
Under terms of the outsourcing contract and its addendums, EDS operates
the
Company’s primary call center, provides warehousing and distribution services,
and supports our various information systems. Certain components of
the
outsourcing agreement contain minimum activity levels that we must
meet or we
will be required to pay penalty charges. If these activity levels are
not
achieved, we may not realize anticipated benefits from the EDS outsourcing
agreement in these areas.
Our
outsourcing contracts with EDS contain early termination provisions
that we may
exercise under certain conditions. However, in order to exercise the
early
termination provisions, we would have to pay specified penalties to
EDS
depending upon the circumstances of the contract termination.
We
have significant intangible asset balances that may be impaired if
cash flows
from related activities declines
At
August
31, 2005 we had $83.3
million
of intangible assets, which were primarily generated from the fiscal
1997 merger
with the Covey Leadership Center. These intangible assets are evaluated
for
impairment based upon cash flows (definite-lived intangible assets)
and
estimated royalties from revenue streams (indefinite-lived intangible
assets).
Although our current sales and cash flows are sufficient to support
these
intangibles, if our sales and corresponding cash flows decline, we
may be faced
with significant asset impairment charges.
Our
sales are subject to changes in consumer preferences and buying trends
Our
product sales are subject to changing consumer preferences and difficulties
in
anticipating or forecasting these changes may result in adverse
consequences to our sales. Although we continue to have a substantial
loyal
customer base for many of our existing products, changes in consumer
preferences, such as a shift in demand from paper-based planners to
handheld
electronic devices or other technology products may have an adverse
impact upon
our sales. While we have experienced stabilizing sales in our core
products
(paper-based planners, binders, and accessories) during fiscal 2005,
we are
still subject to consumer preferences for these products.
Our
future quarterly operating results are subject to factors that can
cause
fluctuations in our stock price
Historically,
our stock price has experienced significant volatility. We expect that
our stock
price may continue to experience volatility in the future due to a
variety of
potential factors that may include the following:
|
l
|
Fluctuations
in our quarterly results of operations and cash flows
|
|
l
|
Variations
between our actual financial results and market expectations
|
|
l
|
Changes
in our key balances, such as cash and cash equivalents
|
|
l
|
Currency
exchange rate fluctuations
|
|
l
|
Unexpected
asset impairment charges
|
|
l
|
No
analyst coverage
|
In
addition, the stock market has experienced substantial price and volume
fluctuations over the past several quarters that has had some impact
upon our
stock and other stock issues in the market. These factors, as well
as general
investor concerns regarding the credibility of corporate financial
statements
and the accounting profession, may have a material adverse effect upon
our stock
in the future.
We
may need additional capital in the future, and this capital may not
be available
to us on favorable terms
We
may
need to raise additional funds through public or private debt offerings
or
equity financings in order to:
|
l
|
Develop
new services, programs, or products
|
|
l
|
Take
advantage of opportunities, including expansion of the
business
|
|
l
|
Respond
to competitive pressures
|
We
may be
unable to obtain the necessary capital on terms or conditions that
are favorable
to us.
We
are the creditor for a management common stock loan program that may
not be
fully collectible
We
are
the creditor for a loan program that provided the capital to allow
certain
management personnel the opportunity to purchase shares of our common
stock. For
further information regarding our management common stock loan program,
refer to
Note 11
to
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.
We
may have exposure to additional tax liabilities
As
a
multinational company, we are subject to income taxes as well as non-income
based taxes, in both the United States and various foreign tax jurisdictions.
Significant judgment is required in determining our worldwide provision
for
income taxes and other tax liabilities. In the normal course of a global
business, there are many intercompany transactions and calculations
where the
ultimate tax determination is uncertain. As a result, we are regularly
under
audit by tax authorities. Although we believe that our tax estimates
are
reasonable, we cannot assure you that the final determination of tax
audits will
not be different from what is reflected in our historical income tax
provisions
and accruals.
We
are
also subject to non-income taxes, such as payroll, sales, use, valued-added,
and
property taxes in both the United States and various foreign jurisdictions.
We
are regularly under audit by tax authorities with respect to these
non-income
taxes and may have exposure to additional non-income tax
liabilities.
We
may be exposed to potential risks relating to internal controls procedures
and
our ability to have those controls attested to by our independent
auditors
While
we
believe that we can comply with the requirements of Section 404 of
the
Sarbanes-Oxley Act of 2002, our failure to document, implement, and
comply with
these requirements may harm our reputation and the market price of
our stock
could suffer. We may be exposed to risks from recent legislation requiring
companies to evaluate their internal controls and have those controls
attested
to by their independent auditors. We are evaluating our internal control
systems
in order to allow our management to report on, and our independent
auditors
attest to, our internal controls, as a required part of our Annual
Report on
Form 10-K beginning with our report for the fiscal year ended August
31,
2006.
At
present, there is little precedent available with which to measure
compliance
adequacy. In the event we identify significant deficiencies or material
weaknesses in our internal controls that we cannot remediate in a timely
manner,
our reputation, financial results, and market price of our stock could
suffer.
We
may elect to use our cash to redeem shares of preferred stock, which
may
decrease our ability to respond to adverse changes
Our
outstanding preferred stock bears a cumulative dividend equal to 10
percent per
annum. During fiscal 2005, we utilized a portion of the proceeds from
the sale
of our corporate headquarters to redeem $30.0 million of our preferred
stock.
Subsequent to August 31, 2005, we redeemed an additional $10.0 million
of
preferred stock and we are proposing to amend the terms of our preferred
stock
recapitalization that was completed in fiscal 2005 to extend the period
during
which we can redeem preferred stock at an amount equal to the liquidation
preference. We have obtained an agreement from the majority holder
of the
preferred stock to vote in favor of such an amendment. We anticipate
that we may
redeem additional shares of preferred stock in the future to the extent
that we
believe sufficient cash is available to do so. Any such redemptions
will reduce
our cash on hand and may reduce our ability to adequately respond to
any future
adverse changes in our business and operations, whether anticipated
or
unanticipated.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
Franklin
Covey Co.:
We
have
audited the accompanying consolidated balance sheets of Franklin Covey
Co. and
subsidiaries (the Company) as of August 31, 2005 and 2004, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the three-year
period ended August 31, 2005. These consolidated financial statements
are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Franklin Covey Co.
and
subsidiaries as of August 31, 2005 and 2004, and the results of their
operations
and their cash flows for each of the years in the three-year period ended
August
31, 2005, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 2, the consolidated financial statements as of August
31, 2004
and for each of the years ended August 31, 2004 and 2003 have been
restated.
KPMG
LLP
Salt
Lake
City, Utah
November
23, 2005
FRANKLIN
COVEY CO.
|
AUGUST
31,
|
2005
|
2004
|
|||||
|
In
thousands, except per share data
|
Restated
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
51,690
|
$
|
31,174
|
|||
|
Restricted
cash
|
699
|
||||||
|
Short-term
investments
|
10,730
|
||||||
|
Accounts
receivable, less allowance for doubtful accounts of
$1,425 and $1,034
|
22,399
|
18,636
|
|||||
|
Inventories
|
20,975
|
23,693
|
|||||
|
Prepaid
expenses and other assets
|
9,419
|
7,996
|
|||||
|
Total
current assets
|
105,182
|
92,229
|
|||||
|
Property
and equipment, net
|
35,277
|
40,584
|
|||||
|
Intangible
assets, net
|
83,348
|
87,507
|
|||||
|
Other
long-term assets
|
9,426
|
7,305
|
|||||
|
$
|
233,233
|
$
|
227,625
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of long-term debt and financing obligation
|
$
|
1,088
|
$
|
120
|
|||
|
Accounts
payable
|
13,704
|
14,018
|
|||||
|
Income
taxes payable
|
3,996
|
5,903
|
|||||
|
Accrued
liabilities
|
36,536
|
36,158
|
|||||
|
Total
current liabilities
|
55,324
|
56,199
|
|||||
|
Long-term
debt and financing obligation, less current portion
|
34,086
|
1,350
|
|||||
|
Other
liabilities
|
1,282
|
1,550
|
|||||
|
Deferred
income tax liabilities
|
9,715
|
10,047
|
|||||
|
Total
liabilities
|
100,407
|
69,146
|
|||||
|
Commitments
and contingencies (Notes 1, 7, and 8)
|
|||||||
|
Shareholders’
equity:
|
|||||||
|
Preferred
stock - Series A, no par value; 4,000 shares authorized, 2,294
shares
issued; liquidation preference totaling $58,778 (Note 9)
|
57,345
|
||||||
|
Preferred
stock - Series A, no par value; convertible into common stock
at $14 per
share; 4,000 shares authorized, 873 shares issued; liquidation
preference
totaling $89,530; recapitalized in 2005 (Note 9)
|
87,203
|
||||||
|
Common
stock, $.05 par value; 40,000 shares authorized, 27,056 shares
issued
|
1,353
|
1,353
|
|||||
|
Additional
paid-in capital
|
190,760
|
205,585
|
|||||
|
Common
stock warrants
|
7,611
|
||||||
|
Accumulated
deficit
|
(14,498
|
)
|
(16,931
|
)
|
|||
|
Deferred
compensation on unvested stock grants
|
(1,055
|
)
|
(732
|
)
|
|||
|
Accumulated
other comprehensive income
|
556
|
1,026
|
|||||
|
Treasury
stock at cost, 6,465 shares and 7,028 shares
|
(109,246
|
)
|
(119,025
|
)
|
|||
|
Total
shareholders’ equity
|
132,826
|
158,479
|
|||||
|
$
|
233,233
|
$
|
227,625
|
||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
|
YEAR
ENDED AUGUST 31,
|
2005
|
2004
|
2003
|
|||||||
|
In
thousands, except per share amounts
|
||||||||||
|
Net
sales:
|
||||||||||
|
Products
|
$
|
167,179
|
$
|
177,184
|
$
|
202,225
|
||||
|
Training
and consulting services
|
116,363
|
98,250
|
104,935
|
|||||||
|
283,542
|
275,434
|
307,160
|
||||||||
|
Cost
of sales:
|
||||||||||
|
Products
|
77,074
|
85,803
|
102,320
|
|||||||
|
Training
and consulting services
|
37,773
|
33,830
|
34,457
|
|||||||
|
114,847
|
119,633
|
136,777
|
||||||||
|
Gross
margin
|
168,695
|
155,801
|
170,383
|
|||||||
|
Selling,
general, and administrative
|
148,305
|
148,918
|
184,136
|
|||||||
|
Impairment
of and (gain) on disposal of investment in unconsolidated
subsidiary
|
(500
|
)
|
872
|
|||||||
|
Provision
for losses on management stock loans
|
3,903
|
|||||||||
|
Recovery
of investment in unconsolidated subsidiary
|
(1,644
|
)
|
||||||||
|
Depreciation
|
7,774
|
11,774
|
26,395
|
|||||||
|
Amortization
|
4,173
|
4,173
|
4,386
|
|||||||
|
Income
(loss) from operations
|
8,943
|
(9,064
|
)
|
(47,665
|
)
|
|||||
|
Equity
in losses of unconsolidated subsidiary
|
(128
|
)
|
||||||||
|
Interest
income
|
944
|
481
|
665
|
|||||||
|
Interest
expense
|
(786
|
)
|
(218
|
)
|
(248
|
)
|
||||
|
Other
expense, net
|
(414
|
)
|
||||||||
|
Income
(loss) before income taxes
|
9,101
|
(8,801
|
)
|
(47,790
|
)
|
|||||
|
Income
tax benefit (provision)
|
1,085
|
(1,349
|
)
|
2,537
|
||||||
|
Net
income (loss)
|
10,186
|
(10,150
|
)
|
(45,253
|
)
|
|||||
|
Preferred
stock dividends
|
(8,270
|
)
|
(8,735
|
)
|
(8,735
|
)
|
||||
|
Loss
on recapitalization of preferred stock
|
(7,753
|
)
|
||||||||
|
Net
loss attributable to common shareholders
|
$
|
(5,837
|
)
|
$
|
(18,885
|
)
|
$
|
(53,988
|
)
|
|
|
Net
loss attributable to common shareholders per share:
|
||||||||||
|
Basic
and diluted
|
$
|
(.34
|
)
|
$
|
(.96
|
)
|
$
|
(2.69
|
)
|
|
|
Basic
and diluted weighted average number of common shares
|
19,949
|
19,734
|
20,041
|
|||||||
|
COMPREHENSIVE
INCOME (LOSS)
|
||||||||||
|
Net
income (loss)
|
$
|
10,186
|
$
|
(10,150
|
)
|
$
|
(45,253
|
)
|
||
|
Adjustment
for fair value of hedge derivatives
|
(318
|
)
|
(207
|
)
|
||||||
|
Foreign
currency translation adjustments
|
(152
|
)
|
788
|
725
|
||||||
|
Comprehensive
income (loss)
|
$
|
9,716
|
$
|
(9,569
|
)
|
$
|
(44,528
|
)
|
||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
|
Series
A Preferred Stock Shares
|
Series
A Preferred Stock Amount
|
Common
Stock Shares
|
Common
Stock Amount
|
Additional
Paid-In Capital
|
Common
Stock Warrants
|
Retained
Earnings (Accumulated Deficit)
|
Notes
and Interest Receivable
|
Deferred
Compensa-tion
|
Accumulated
Other Comprehensive Income (Loss)
|
Treasury
Stock Shares
|
Treasury
Stock Amount
|
||||||||||||||||||||||||||
|
In
thousands
|
Restated
|
||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2002, as previously reported
|
873
|
$
|
87,203
|
27,056
|
$
|
1,353
|
$
|
222,953
|
$
|
-
|
$
|
58,209
|
$
|
(12,362
|
)
|
$
|
-
|
$
|
(280
|
)
|
(7,089
|
)
|
$
|
(122,521
|
)
|
||||||||||||
|
Restatement
adjustment (Note 2)
|
(8,133
|
)
|
|||||||||||||||||||||||||||||||||||
|
Restated
balance at August 31, 2002
|
873
|
87,203
|
27,056
|
1,353
|
222,953
|
-
|
50,076
|
(12,362
|
)
|
-
|
(280
|
)
|
(7,089
|
)
|
(122,521
|
)
|
|||||||||||||||||||||
|
Preferred
stock dividends
|
(8,735
|
)
|
|||||||||||||||||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(1,485
|
)
|
211
|
1,721
|
|||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(129
|
)
|
(131
|
)
|
|||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustment
|
725
|
||||||||||||||||||||||||||||||||||||
|
Additions
to reserve for management loan losses
|
3,903
|
||||||||||||||||||||||||||||||||||||
|
CEO
compensation contribution
|
500
|
||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(45,253
|
)
|
|||||||||||||||||||||||||||||||||||
|
Restated
balance at August 31, 2003
|
873
|
87,203
|
27,056
|
1,353
|
221,968
|
-
|
(3,912
|
)
|
(8,459
|
)
|
-
|
445
|
(7,007
|
)
|
(120,931
|
)
|
|||||||||||||||||||||
|
Preferred
stock dividends
|
(5,866
|
)
|
(2,869
|
)
|
|||||||||||||||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(27
|
)
|
99
|
181
|
|||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(93
|
)
|
(182
|
)
|
|||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustment
|
788
|
||||||||||||||||||||||||||||||||||||
|
Adjustment
for fair value of hedge derivatives
|
(207
|
)
|
|||||||||||||||||||||||||||||||||||
|
Modification
of management stock loans
|
(7,565
|
)
|
7,565
|
||||||||||||||||||||||||||||||||||
|
Cancellation
of note receivable from sale of common stock
|
1,495
|
894
|
(121
|
)
|
(2,389
|
)
|
|||||||||||||||||||||||||||||||
|
Unvested
stock award
|
(4,420
|
)
|
(829
|
)
|
304
|
5,249
|
|||||||||||||||||||||||||||||||
|
Common
stock held in non-qualified deferred compensation plan
|
(210
|
)
|
(953
|
)
|
|||||||||||||||||||||||||||||||||
|
Amortization
of deferred compensation
|
97
|
||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(10,150
|
)
|
|||||||||||||||||||||||||||||||||||
|
Restated
balance at August 31, 2004
|
873
|
87,203
|
27,056
|
1,353
|
205,585
|
-
|
(16,931
|
)
|
-
|
(732
|
)
|
1,026
|
(7,028
|
)
|
(119,025
|
)
|
|||||||||||||||||||||
|
Preferred
stock dividends
|
(8,270
|
)
|
|||||||||||||||||||||||||||||||||||
|
Extinguishment
of previously existing Series A Preferred Stock
|
(873
|
)
|
(87,203
|
)
|
|||||||||||||||||||||||||||||||||
|
Preferred
stock recapitalization
|
3,494
|
87,345
|
7,611
|
(7,753
|
)
|
||||||||||||||||||||||||||||||||
|
Preferred
stock redemption
|
(1,200
|
)
|
(30,000
|
)
|
|||||||||||||||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(257
|
)
|
42
|
366
|
|||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(23
|
)
|
(91
|
)
|
|||||||||||||||||||||||||||||||||
|
Unvested
stock awards
|
(5,192
|
)
|
(1,114
|
)
|
352
|
6,234
|
|||||||||||||||||||||||||||||||
|
Amortization
of deferred compensation
|
791
|
||||||||||||||||||||||||||||||||||||
|
CEO
fully-vested stock award
|
(2,837
|
)
|
187
|
3,241
|
|||||||||||||||||||||||||||||||||
|
Non-qualified
deferred compensation plan treasury stock transactions
|
892
|
5
|
29
|
||||||||||||||||||||||||||||||||||
|
Payments
on management common stock loans
|
839
|
||||||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
(152
|
)
|
|||||||||||||||||||||||||||||||||||
|
Adjustment
for fair value of hedge derivatives
|
(318
|
)
|
|||||||||||||||||||||||||||||||||||
|
Net
income
|
10,186
|
||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2005
|
2,294
|
$
|
57,345
|
27,056
|
$
|
1,353
|
$
|
190,760
|
$
|
7,611
|
$
|
(14,498
|
)
|
$
|
-
|
$
|
(1,055
|
)
|
$
|
556
|
(6,465
|
)
|
$
|
(109,246
|
)
|
||||||||||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
|
YEAR
ENDED AUGUST 31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
In
thousands
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||
|
Net
income (loss)
|
$
|
10,186
|
$
|
(10,150
|
)
|
$
|
(45,253
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash provided
by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
13,939
|
17,717
|
32,938
|
|||||||
|
Provision
for losses on management stock loans
|
3,903
|
|||||||||
|
Recovery
of investment in unconsolidated subsidiary
|
(1,644
|
)
|
||||||||
|
Gain
on disposal of investment in unconsolidated subsidiary
|
(500
|
)
|
||||||||
|
Restructuring
cost reversal
|
(306
|
)
|
||||||||
|
Deferred
income taxes
|
(410
|
)
|
623
|
(1,322
|
)
|
|||||
|
Impairment
of assets
|
872
|
|||||||||
|
Equity
in loss of unconsolidated subsidiary
|
128
|
|||||||||
|
Compensation
cost of CEO fully-vested stock grant
|
404
|
|||||||||
|
CEO
compensation contribution
|
500
|
|||||||||
|
Amortization
of deferred compensation
|
791
|
97
|
||||||||
|
Changes
in assets and liabilities:
|
||||||||||
|
Decrease
(increase) in accounts receivable, net
|
(3,481
|
)
|
2,120
|
694
|
||||||
|
Decrease
in inventories
|
2,813
|
13,262
|
2,343
|
|||||||
|
Decrease
(increase) in prepaid expenses and other assets
|
(526
|
)
|
3,679
|
9,081
|
||||||
|
Increase
(decrease) in accounts payable and accrued liabilities
|
532
|
(14,271
|
)
|
11,949
|
||||||
|
Decrease
in income taxes payable
|
(1,832
|
)
|
(649
|
)
|
(8,562
|
)
|
||||
|
Increase
(decrease) in other long-term liabilities
|
652
|
(348
|
)
|
175
|
||||||
|
Net
cash provided by operating activities
|
22,262
|
12,080
|
5,802
|
|||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||
|
Purchases
of property and equipment
|
(4,179
|
)
|
(3,970
|
)
|
(4,201
|
)
|
||||
|
Purchases
of short-term investments
|
(10,653
|
)
|
(18,680
|
)
|
||||||
|
Sales
of short-term investments
|
21,383
|
7,950
|
||||||||
|
Curriculum
development costs
|
(2,184
|
)
|
(961
|
)
|
||||||
|
Cash
distributions of earnings from unconsolidated subsidiary
|
2,000
|
|||||||||
|
Investment
in unconsolidated subsidiary
|
(1,000
|
)
|
||||||||
|
Proceeds
from disposal of unconsolidated subsidiary
|
500
|
|||||||||
|
Proceeds
from sale of property and equipment, net
|
1,556
|
426
|
||||||||
|
Net
cash provided by (used for) investing activities
|
4,867
|
(14,105
|
)
|
(2,775
|
)
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||
|
Proceeds
from sale and financing of corporate campus (net of restricted
cash of
$699)
|
32,422
|
|||||||||
|
Redemption
of Series A preferred stock
|
(30,000
|
)
|
||||||||
|
Principal
payments on long-term debt and financing obligation
|
(216
|
)
|
(102
|
)
|
(185
|
)
|
||||
|
Purchases
of common stock for treasury
|
(91
|
)
|
(182
|
)
|
(131
|
)
|
||||
|
Proceeds
from sales of common stock from treasury
|
109
|
154
|
236
|
|||||||
|
Proceeds
from management stock loan payments
|
839
|
|||||||||
|
Payment
of preferred stock dividends
|
(9,020
|
)
|
(8,735
|
)
|
(8,735
|
)
|
||||
|
Net
cash used for financing activities
|
(5,957
|
)
|
(8,865
|
)
|
(8,815
|
)
|
||||
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
(656
|
)
|
148
|
655
|
||||||
|
Net
increase (decrease) in cash and cash equivalents
|
20,516
|
(10,742
|
)
|
(5,133
|
)
|
|||||
|
Cash
and cash equivalents at beginning of the year
|
31,174
|
41,916
|
47,049
|
|||||||
|
Cash
and cash equivalents at end of the year
|
$
|
51,690
|
$
|
31,174
|
$
|
41,916
|
||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid for income taxes
|
$
|
1,549
|
$
|
1,069
|
$
|
4,637
|
||||
|
Cash
paid for interest
|
606
|
277
|
159
|
|||||||
|
Non-cash
investing and financing activities:
|
||||||||||
|
Accrued
preferred stock dividends
|
$
|
1,434
|
$
|
2,184
|
$
|
2,184
|
||||
|
Issuance
of unvested stock as deferred compensation
|
1,147
|
829
|
||||||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
Franklin
Covey Co. (hereafter referred to as us, we, our, or the Company) provides
integrated consulting, training, and performance enhancement solutions
to
organizations and individuals in strategy execution, productivity, leadership,
sales force effectiveness, effective communications, and other areas.
Each
integrated solution may include components of training and consulting,
assessment, and other application tools that are generally available
in
electronic or paper-based formats. Our products and services are available
through professional consulting services, public workshops, retail stores,
catalogs, and the Internet at www.franklincovey.com.
The
Company’s historically 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.
Fiscal
Year
The
Company utilizes a modified 52/53-week fiscal year that ends on August
31 of
each year. Corresponding quarterly periods generally consist of 13-week
periods
that ended on November 27, 2004, February 26, 2005, and May 28, 2005
during
fiscal 2005. Unless otherwise noted, references to fiscal years apply
to the 12
months ended August 31 of the specified year.
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of
the
Company and our subsidiaries. Intercompany balances and transactions
have been
eliminated in consolidation.
Pervasiveness
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make
estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenues and expenses
during
the reporting periods. Actual results could differ from those
estimates.
Reclassifications
Certain
reclassifications have been made to the fiscal 2004 financial statements
to
conform to the current period presentation. Reclassifications consisted
of 1)
$10.7
million
of cash equivalents at August 31, 2004 that were reclassified to short-term
investments and 2) certain overhead costs which were reclassified from
cost of
sales to selling, general, and administrative expenses that totaled $0.7
million
and $0.8
million
for the fiscal years ended August 31, 2004 and 2003.
Cash
and Cash Equivalents
We
consider highly liquid investments with insignificant interest rate risk
and
original maturities to the Company of three months or less to be cash
equivalents. Our cash equivalents consisted primarily of commercial paper
and
money market funds and totaled $36.7
million
and $10.9
million
at August 31, 2005 and 2004. As of August 31, 2005, we had demand deposits
at
various banks in excess of the $100,000 limit for insurance by the Federal
Deposit Insurance Corporation (FDIC).
Restricted
Cash
Our
restricted cash represents a portion of the proceeds from the fiscal
2005 sale
of our corporate campus (Note 6) that was held in escrow to repay the
outstanding mortgage on one of the buildings that was sold. The mortgage
was
repaid in full during September 2005.
Short-Term
Investments
We
consider highly liquid investments with an effective maturity to the
Company of
more than three months and less than one year to be short-term investments.
We
define effective maturity as the shorter of the original maturity to
the Company
or the effective maturity as a result of the periodic auction of our
investments
classified as available for sale. We determine the appropriate classification
of
our investments at the time of purchase and reevaluate such designations
as of
each balance sheet date. At August 31, 2004, we had short-term investments
of
$10.7
million,
which were classified as available-for-sale securities and were recorded
at fair
value, which approximated cost.
Realized
gains and losses on the sale of available for sale short-term investments
were
insignificant for the periods presented. Unrealized gains and losses
on
short-term investments were also insignificant for the periods presented.
We use
the specific identification method to compute the gains and losses on
our
short-term investments.
Trade
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best estimate
of
the amount of probable credit losses in the existing accounts receivable
balance. We determine the allowance for doubtful accounts based upon
historical
write-off experience and current economic conditions and review the adequacy
of
the allowance for doubtful accounts on a regular basis. Receivable balances
past
due over 90 days, which exceed a specified dollar amount, are reviewed
individually for collectibility. Account balances are charged off against
the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. In addition, we do not have any off-balance
sheet credit exposure related to our customers.
Inventories
Inventories
are stated at the lower of cost or market, cost being determined using
the
first-in, first-out method. Elements of cost in inventories generally
include
raw materials, direct labor, and overhead. Our inventories are comprised
primarily of dated calendar products and other non-dated products such
as
binders, handheld electronic devices, stationery, training products,
and other
accessories and were comprised of the following (in thousands):
|
AUGUST
31,
|
2005
|
2004
|
|||||
|
Finished
goods
|
$
|
18,161
|
$
|
19,756
|
|||
|
Work
in process
|
825
|
978
|
|||||
|
Raw
materials
|
1,989
|
2,959
|
|||||
|
$
|
20,975
|
$
|
23,693
|
Provision
is made to reduce excess and obsolete inventories to their estimated
net
realizable value. At August 31, 2005 and 2004, reserves for excess and
obsolete
inventories were $5.3
million
and $5.1
million.
In assessing the realization of inventories, we make judgments regarding
future
demand requirements and compare these estimates with current and committed
inventory levels. Inventory requirements may change based on projected
customer
demand, technological and product life cycle changes, longer or shorter
than
expected usage periods, and other factors that could affect the valuation
of our
inventories.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation, which includes the
amortization of assets recorded under capital lease obligations, is calculated
using the straight-line method over the expected useful life of the asset.
The
Company generally uses the following depreciable lives for our major
classifications of property and equipment:
|
Description
|
Useful
Lives
|
|
Buildings
|
15-39
years
|
|
Machinery
and equipment
|
3-7
years
|
|
Computer
hardware and software
|
3
years
|
|
Furniture,
fixtures, and leasehold improvements
|
5-8
years
|
Leasehold
improvements are amortized over the lesser of the useful economic life
of the
asset or the contracted lease period. We expense costs for repairs and
maintenance as incurred. Gains and losses resulting from the sale of
property
and equipment are recorded in current operations.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized,
but rather
are tested for impairment on an annual basis, or more often if events
or
circumstances indicate that a potential impairment exists. The Covey
trade name
intangible asset (Note 5) has been deemed to have an indefinite life.
This
intangible asset is assigned to the Organizational Solutions Business
Unit and
is tested for impairment using the present value of estimated royalties
on trade
name related revenues, which consist primarily of training seminars and
work
sessions, international licensee sales, and related products. No impairment
charge to the Covey trade name was required during the fiscal years ended
August
31, 2005, 2004, or 2003.
Capitalized
Curriculum Development Costs
During
the normal course of business, we develop training courses and related
materials
that we sell to our customers. Capitalized curriculum development costs
include
certain expenditures to develop course materials such as video segments,
course
manuals, and other related materials. Curriculum costs are only capitalized
when
a course is developed that is related to a successful training program
or when
there is a major revision to a course or significant re-write of the
course
materials or curriculum.
During
fiscal 2005, we completed major revisions to our well-known and successful
The
7
Habits of Highly Effective People
training
course and capitalized costs associated with the refreshed course. These
capitalized development costs are being amortized over a five-year life,
which
is based on numerous factors, including expected cycles of major changes
to
curriculum. Capitalized curriculum development costs are reported as
a component
of our other long-term assets in our consolidated balance sheet and totaled
$2.6
million
and $1.0
million
at August 31, 2005 and 2004. Capitalized curriculum development cost
amortization is reported as a component of cost of sales.
Restricted
Investments
The
Company’s restricted investments consist of insurance contracts and investments
in mutual funds that are held in a “rabbi trust” and are restricted for payment
to the participants of our deferred compensation plan (Note 14). We account
for
our restricted investments in accordance with Statement of Financial
Accounting
Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
As
required by SFAS No. 115, the Company determines the proper classification
of
its investments at the time of purchase and reassesses such designations
at each
balance sheet date. At August 31, 2005 and 2004, our restricted investments
were
classified as trading securities and consisted of insurance contracts
and mutual
funds. The fair value of these restricted investments totaled $1.2
million
at August 31, 2005 and 2004, and were recorded as components of other
long-term
assets in the accompanying consolidated balance sheets.
In
accordance with SFAS No. 115, our unrealized losses on restricted investments,
which were immaterial during fiscal years 2005, 2004, and 2003, were
recognized
in the accompanying consolidated statements of operations as a component
of
selling, general, and administrative expense.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for
possible
impairment whenever events or changes in circumstances indicate that
the
carrying amount of such assets may not be recoverable. We use an estimate
of
undiscounted future net cash flows of the assets over the remaining useful
lives
in determining whether the carrying value of the assets is recoverable.
If the
carrying values of the assets exceed the anticipated future cash flows
of the
assets, we recognize an impairment loss equal to the difference between
the
carrying values of the assets and their estimated fair values. Impairment
of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent from other groups of assets.
The
evaluation of long-lived assets requires us to use estimates of future
cash
flows. If forecasts and assumptions used to support the realizability
of our
long-lived tangible and definite-lived intangible assets change in the
future,
significant impairment charges could result that would adversely affect
our
results of operations and financial condition.
Accrued
Liabilities
Significant
components of our accrued liabilities were as follows (in
thousands):
|
AUGUST
31,
|
2005
|
|
2004
|
||||
|
Accrued
compensation
|
$
|
8,069
|
$
|
5,894
|
|||
|
Unearned
revenue
|
4,541
|
|
5,881
|
||||
|
Outsourcing
contract costs payable
|
4,211
|
4,914
|
|||||
|
Customer
credits
|
2,701
|
3,128
|
|||||
|
Accrued
preferred stock dividends
|
1,434
|
2,184
|
|||||
|
Accrued
restructuring and retail store closure costs
|
369
|
2,782
|
|||||
|
Other
accrued liabilities
|
15,211
|
11,375
|
|||||
|
$
|
36,536
|
$
|
36,158
|
||||
Foreign
Currency Translation and Transactions
Translation
adjustments result from translating the Company’s foreign subsidiaries’
financial statements into United States dollars. The balance sheet accounts
of
our foreign subsidiaries are translated into U.S. dollars using the exchange
rate in effect at the balance sheet date. Revenues and expenses are translated
using average exchange rates during the fiscal year. The resulting translation
gains or losses were recorded as a component of accumulated other comprehensive
income in shareholders’ equity. Transaction losses totaled $0.3
million,
$0.2
million,
and $0.3
million,
during fiscal years 2005, 2004, and 2003 and were reported as a component
of
selling, general, and administrative expenses.
Derivative
Instruments
Derivative
instruments are accounted for in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
as
modified by SFAS No. 138, Accounting
for Certain Derivative and Certain Hedging Activities,
and
SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities.
During
the normal course of business, we are exposed to risks associated with
foreign
currency exchange rate and interest rate fluctuations. Foreign currency
exchange
rate exposures result from the Company’s operating results, assets, and
liabilities that are denominated in currencies other than the United
States
dollar. In order to limit our exposure to these elements, we have made
limited
use of derivative instruments. Each derivative instrument is recorded
in the
balance sheet at its fair value. Changes in the fair value of derivative
instruments that qualify for hedge accounting are recorded in accumulated
other
comprehensive income (a component of shareholders’ equity). Changes in the fair
value of derivative instruments that are not designated as hedge instruments
are
immediately recognized as a component of selling, general, and administrative
expense in our consolidated statements of operations.
Revenue
Recognition
We
recognize revenue when: 1) persuasive evidence of an agreement exists,
2)
delivery of product has occurred or services have been rendered, 3) the
price to
the customer is fixed and determinable, and 4) collectibility is reasonably
assured. For product sales, these conditions are generally met upon shipment
of
the product to the customer or by completion of the sales transaction
in a
retail store. For training and service sales, these conditions are generally
met
upon presentation of the training seminar or delivery of the consulting
services.
Some
of
our training and consulting contracts contain multiple deliverable elements
that
include training along with other products and services. In accordance
with EITF
Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables,
sales
arrangements with multiple deliverables are divided into separate units
of
accounting if the deliverables in the sales contract meet the following
criteria: 1) the delivered training or product has value to the client
on a
standalone basis; 2) there is objective and reliable evidence of the
fair value
of undelivered items; and 3) delivery of any undelivered item is probable.
The
overall contract consideration is allocated among the separate units
of
accounting based upon their fair values. If the fair value of all undelivered
elements exists, but fair value does not exist for one or more delivered
elements, the residual method is used. Under the residual method, the
amount of
consideration allocated to the delivered items equals the total contract
consideration less the aggregate fair value of the undelivered items.
Fair value
of the undelivered items is based upon the normal pricing practices for
our
existing training programs, consulting services, and other products,
which are
generally the prices of the items when sold separately.
Revenue
is recognized on software sales in accordance with Statement of Position
(SOP)
97-2, Software
Revenue Recognition
as
amended by SOP 98-09. Statement 97-2, as amended, generally requires
revenue
earned on software arrangements involving multiple elements such as software
products and support to be allocated to each element based on the relative
fair
value of the elements based on vendor specific objective evidence (VSOE).
The
majority of the Company’s software sales have multiple elements, including a
license and post contract customer support (PCS). Currently we do not
have VSOE
for either the license or support elements of our software sales. Accordingly,
revenue is deferred until the only undelivered element is PCS and the
total
arrangement fee is recognized ratably over the support period. During
fiscal
years 2005, 2004, and 2003, we had software sales totaling $4.6
million,
$4.7
million,
and $4.8
million,
which are included in product sales in the consolidated statements of
operations.
Revenue
is recognized as the net amount to be received after deducting estimated
amounts
for discounts and product returns.
Shipping
and Handling Fees and Costs
All
shipping and handling fees billed to customers are recorded as a component
of
net sales. All costs incurred related to the shipping and handling of
products
or training services are recorded in cost of sales.
Advertising
Costs
Costs
for
newspaper, television, radio, and other advertising are expensed as incurred
or
recognized over the period of expected benefit for direct response and
catalog
advertising. Direct response advertising costs consist primarily of printing
and
mailing costs for catalogs and seminar mailers that are charged to expense
over
the period of projected benefit, which ranges from three to 12 months.
Advertising costs included in selling, general, and administrative expenses
totaled $16.2
million,
$14.0
million,
and $21.2
million
for the fiscal years ended August 31, 2005, 2004, and 2003. Our direct
response
advertising costs reported in other current assets totaled $3.1
million
and $2.7
million
at August 31, 2005 and 2004.
Research
and Development Costs
We
expense research and development costs as incurred. During fiscal years
2005,
2004, and 2003, we expensed $2.2
million,
$3.6
million,
and $4.9
million
of research and development costs that are recorded as a component of
selling,
general, and administrative expenses in our consolidated statements of
operations.
Income
Taxes
Our
income tax provision has been determined using the asset and liability
approach
of accounting for income taxes. Under this approach, deferred income
taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The income tax
provision represents income taxes paid or payable for the current year
plus the
change in deferred taxes during the year. Deferred income taxes result
from
differences between the financial and tax bases of our assets and liabilities
and are adjusted for tax rates and tax laws when changes are enacted.
A
valuation allowance is provided against deferred income tax assets when
it is
more likely than not that all or some portion of the deferred income
tax assets
will not be realized.
The
Company provides for income taxes on unremitted foreign earnings assuming
the
eventual full repatriation of foreign cash balances.
Comprehensive
Income (Loss)
Comprehensive
income (loss) includes changes to equity accounts that were not the result
of
transactions with shareholders. Comprehensive income (loss) is comprised
of net
income or loss and other comprehensive income and loss items. Our comprehensive
income and losses generally consist of changes in the fair value of derivative
instruments and changes in the cumulative foreign currency translation
adjustment.
New
Accounting Pronouncements
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 increases significantly. 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.
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.
|
2.
|
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 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
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. The restated amounts on the consolidated
balance sheet and consolidated statements of shareholders’ equity for fiscal
years 2004, 2003, and 2002 resulting from these errors were as follows
(in
thousands):
|
Restated
|
As
Previously Reported
|
||||||
|
Fiscal
2004
|
|||||||
|
Prepaid
expenses and other assets
|
$
|
7,996
|
$
|
5,794
|
|||
| Total current assets | 92,229 | 90,027 | |||||
|
Other
long-term assets
|
7,305
|
7,593
|
|||||
| Total assets | 227,625 | 225,711 | |||||
|
Deferred
income tax liabilities
|
10,047
|
-
|
|||||
|
Total
liabilities
|
69,146
|
59,099
|
|||||
|
Accumulated
deficit at August 31, 2004
|
(16,931
|
)
|
(8,798
|
)
|
|||
|
Total
shareholders’ equity
|
158,479
|
166,612
|
|||||
|
Fiscal
2003
|
|||||||
|
Retained
earnings (accumulated deficit) at August 31, 2003
|
(3,912
|
)
|
4,221
|
||||
|
Fiscal
2002
|
|||||||
|
Retained
earnings at August 31, 2002
|
50,076
|
58,209
|
|||||
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.
This restatement also impacts information presented in Note 16 (Income
Taxes)
and Note 18 (Segment Information) to these consolidated financial
statements.
Overview
Through
August 31, 2005, we accounted for our stock-based compensation and awards
using
the intrinsic-value method of accounting as outlined in Accounting Principles
Board (APB) Opinion 25 and related interpretations. Under the intrinsic-value
methodology, no compensation expense is recognized for stock option awards
granted at, or above, the fair market value of the stock on the date
of grant.
Accordingly, no compensation expense has been recognized from our stock
option
plans or employee stock purchase plan in our consolidated statements
of
operations. Had compensation expense for our stock option plans and employee
stock purchase plan been determined in accordance with SFAS No. 123,
Accounting
for Stock-Based Compensation,
our net
loss attributable to common shareholders and corresponding basic and
diluted
loss per share would have been the following (in thousands, except for
per share
amounts):
|
YEAR
ENDED AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
Net
loss attributable to common shareholders, as reported
|
$
|
(5,837
|
)
|
$
|
(18,885
|
)
|
$
|
(53,988
|
)
|
|
|
Fair
value of stock-based compensation, net of income taxes
|
(2,228
|
)
|
(774
|
)
|
(876
|
)
|
||||
|
Net
loss attributable to common shareholders, pro forma
|
$
|
(8,065
|
)
|
$
|
(19,659
|
)
|
$
|
(54,864
|
)
|
|
|
Basic
and diluted net loss per share, as reported
|
$
|
(.34
|
)
|
$
|
(.96
|
)
|
$
|
(2.69
|
)
|
|
|
Basic
and diluted net loss per share, pro forma
|
$
|
(.46
|
)
|
$
|
(1.00
|
)
|
$
|
(2.74
|
)
|
|
In
connection with changes to our Chief Executive Officer’s (CEO) compensation
(Note 19), we accelerated the vesting on the CEO’s 1.6
million
stock options with an exercise price of $14.00
per
share during fiscal 2005. The accelerated vesting of these options increased
the stock-based compensation as shown in the table above by $1.9
million
during fiscal 2005.
A
Black-Scholes option-pricing model was used to calculate the pro forma
compensation expense from stock option activity and the weighted average
fair
value of options granted. The following assumptions were used in the
Black-Scholes option-pricing model for stock options that were granted
in fiscal
years 2004 and 2003. We
did
not grant any stock options during fiscal 2005.
|
AUGUST
31,
|
2004
|
|
|
2003
|
|||
|
Dividend
yield
|
None
|
None
|
|||||
|
Volatility
|
65.2
|
%
|
65.0
|
%
|
|||
|
Expected
life (years)
|
2.9
|
2.9
|
|||||
|
Risk
free rate of return
|
4.2
|
%
|
4.2
|
%
|
The
weighted average fair value of options granted under our stock option
plans
during fiscal years 2004 and 2003 was $0.75 per share and $0.44 per
share.
The
estimated fair value of options granted is subject to the assumptions
made in
the Black-Scholes option-pricing model and if the assumptions were to
change,
the estimated fair value amounts could be significantly different.
The
following is a summary of our stock-based compensation plans.
Stock
Options
Our
Board
of Directors have approved an incentive stock option plan whereby options
to
purchase shares of our common stock are issued to key employees at an
exercise
price not less than the fair market value of the Company’s common stock on the
date of grant. The term, not to exceed ten years, and exercise period
of each
incentive stock option awarded under the plan are determined by a committee
appointed by our Board of Directors. In addition to stock options granted
from
the incentive stock option plan in prior years, we granted a fully vested
stock
award and other unvested stock awards during fiscal 2005 (refer to discussion
below) from the incentive stock option plan, which also reduced the number
of
shares available for granting under the incentive option plan. At August
31,
2005, we had approximately 770,000
shares
available for granting under this incentive stock option plan.
A
summary
of our stock option activity is presented below:
|
Number
of Stock Options
|
Weighted
Avg. Exercise Price
|
||||||
|
Outstanding
at August 31, 2002
|
3,044,281
|
$
|
12.63
|
||||
|
Granted
|
20,000
|
0.99
|
|||||
|
Forfeited
|
(329,670
|
)
|
11.31
|
||||
|
Outstanding
at August 31, 2003
|
2,734,611
|
12.71
|
|||||
|
Granted
|
70,000
|
1.70
|
|||||
|
Forfeited
|
(298,952
|
)
|
12.84
|
||||
|
Outstanding
at August 31, 2004
|
2,505,659
|
12.37
|
|||||
|
Granted
|
-
|
-
|
|||||
|
Exercised
|
(15,000
|
)
|
1.73
|
||||
|
Forfeited
|
(204,775
|
)
|
12.58
|
||||
|
Outstanding
at August 31, 2005
|
2,285,884
|
$
|
12.40
|
||||
The
following table summarizes exercisable stock option information for the
periods
indicated:
|
AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
Exercisable
stock options
|
2,248,384
|
810,659
|
1,023,486
|
|||||||
|
Weighted
average exercise price per share
|
$
|
12.58
|
$
|
10.22
|
$
|
11.37
|
||||
The
following information applies to our stock options outstanding at August
31,
2005:
|
l
|
A
total of 261,474
options outstanding have exercise prices between $1.70
per share and $7.00
per share, with a weighted average exercise price of $5.26
per share and a weighted average remaining contractual life
of
4.6
years. At August 31, 2005, 223,974
of
these options were exercisable.
|
|
l
|
We
have 347,500
options outstanding that have exercise prices ranging from
$7.19
per share to $9.69
per share, with a weighted average exercise price of $9.08
per share and a weighted average remaining contractual life
of
4.0
years. At August 31, 2005, all
of
these options were exercisable.
|
|
l
|
We
granted 1,602,000
options to our CEO under terms of a Board and shareholder approved
employment agreement. These options have an exercise price
of $14.00
per share, with a weighted average remaining contractual life
of
5.0
years. As a result of changes to the CEO’s compensation arrangement in
fiscal 2005 (Note 19), all of these options were vested in
fiscal 2005 and
were exercisable at August 31, 2005.
|
|
l
|
The
remaining 74,910
stock options outstanding have exercise prices between $17.69
per share and $21.50
per share, with a weighted average exercise price of $18.57
per share and a weighted average remaining contractual life
of
less
than one year.
At August 31, 2005, all of these options were
exercisable.
|
Unvested
Stock Awards
During
fiscal years 2005 and 2004, the Company granted shares of our common
stock to
certain employees and non-employee members of our Board of Directors
in the form
of unvested stock awards. A summary of our unvested stock award activity
during
these years is presented below (in thousands, except share
amounts):
|
Number
of Unvested Stock Awards
|
Compensation
Cost
|
||||||
|
Outstanding
at August 31, 2003
|
-
|
-
|
|||||
|
Granted
|
303,660
|
$
|
829
|
||||
|
Amortization
of compensation
|
n/a
|
(97
|
)
|
||||
|
Outstanding
shares and unamortized compensation cost at August 31,
2004
|
303,660
|
732
|
|||||
|
Granted
|
376,090
|
1,147
|
|||||
|
Vested
|
(258,205
|
)
|
-
|
||||
|
Forfeited
|
(12,250
|
)
|
(33
|
)
|
|||
|
Amortization
of compensation
|
n/a
|
(791
|
)
|
||||
|
Outstanding
shares and unamortized compensation cost at August 31,
2005
|
409,295
|
$
|
1,055
|
||||
Employee
Awards
- Unvested
stock awards granted to employees vest five years from the grant date
or on an
accelerated basis if we achieve specified earnings levels. The compensation
cost
of the unvested stock awards was based on the fair value of the shares
on the
grant date, which was recorded as deferred compensation in shareholders’ equity.
The compensation cost related to these unvested stock awards will be
expensed on
a straight-line basis over the vesting period of the shares and will
be
accelerated when we believe that it is more likely than not that we will
achieve
the specified earnings thresholds and the shares will vest.
In
connection with these unvested stock awards, the participants are eligible
to
receive a cash bonus for a portion of the income taxes resulting from
the grant.
The participants could receive their cash bonus at the time of grant
or when the
award shares vest. These cash bonuses totaled $0.5
million
for awards granted in fiscal 2005, which was expensed as the bonuses
were paid
to the participants on or around the grant date. For fiscal 2004 awards,
the
cash bonuses totaled $0.4
million,
of which $0.2
million
was paid and expensed at the grant date. The remaining $0.2
million
will be expensed on a straight-line basis over the vesting period, subject
to
acceleration, if necessary.
During
our third quarter of fiscal 2005, we achieved the specified earnings
thresholds
required to accelerate the vesting for one-half of the unvested stock
awards
granted in fiscal 2004 and to our CEO in December 2004. Accordingly,
during
fiscal 2005 we expensed an additional $0.5
million
of deferred compensation for the accelerated vesting of these unvested
stock
awards.
The
unvested award shares were issued from common stock held in treasury
and had a
cost basis of $5.2
million
for awards granted in fiscal 2005 and 2004. The difference between the
fair
value of the unvested shares granted and their cost, which totaled $4.2
million
for fiscal 2005 awards and $4.4
million
for fiscal 2004 awards, was recorded as a reduction to additional paid-in
capital.
Subsequent
to August 31, 2005, our Board of Directors
approved a long-term incentive plan in which certain employees of the
Company
may be granted unvested share awards. This proposed long-term incentive
plan is subject to shareholder approval.
Board
of Director Awards
- During
fiscal 2005, we awarded 76,090 shares of common stock as unvested stock
awards
to non-employee members of the Board of Directors as part of a shareholder
approved long-term incentive plan. The fair value of these shares were
calculated on the grant date and the corresponding compensation cost
was
recorded as deferred compensation in shareholders’ equity and will be recognized
over the vesting period of the awards, which is three years. These awards
were
valued at the closing market price of our common stock on the measurement
date
and resulted in a $0.2
million
increase to deferred compensation in our balance sheet. The cost of the
common
stock issued from treasury stock was $1.3
million
and the difference between the cost of the treasury stock and fair value
of the
award, which totaled $1.1
million,
was recorded as a reduction of additional paid-in capital.
Fully-Vested
Stock Award
In
connection with changes to our CEO’s compensation plan (Note 19), the CEO was
granted 187,000 shares of fully-vested common stock during the second
quarter of
fiscal 2005. The fully-vested stock award was valued at $2.16 per share,
which
was the closing market price of our common stock on the measurement date
and
resulted in $0.4
million
of expense that was included as a component of selling, general, and
administrative expense in fiscal 2005. The cost of the common stock issued
from
treasury was $3.2
million
and the difference between the cost of the treasury stock and fair value
of the
award, which totaled $2.8
million,
was recorded as a reduction of additional paid-in capital.
Our
property and equipment were comprised of the following (in
thousands):
|
AUGUST
31,
|
2005
|
|
2004
|
||||
|
Land
and improvements
|
$
|
1,848
|
$
|
1,822
|
|||
|
Buildings
|
34,763
|
34,589
|
|||||
|
Machinery
and equipment
|
31,660
|
31,444
|
|||||
|
Computer
hardware and software
|
61,820
|
69,459
|
|||||
|
Furniture,
fixtures, and leasehold improvements
|
43,798
|
46,078
|
|||||
|
173,889
|
183,392
|
||||||
|
Less
accumulated depreciation
|
(138,612
|
)
|
(142,808
|
)
|
|||
|
$
|
35,277
|
$
|
40,584
|
||||
On
June
21, 2005 we completed the sale and leaseback of our corporate headquarters
facility, located in Salt Lake City, Utah. The sale price was $33.8
million
in cash and after deducting customary closing costs, including commissions
and
an amount held in escrow for payment of the remaining mortgage on one
of the
buildings, we received net proceeds totaling $32.4
million.
In connection with the transaction, we entered into a 20-year master
lease
agreement with the purchaser, an unrelated private investment group.
Although
the corporate headquarters facility was sold and the Company has no legal
ownership of the property, SFAS No. 98, Accounting
for Leases,
precluded us from recording the transaction as a sale since we have subleased
more than a minor portion of the property. Accordingly, we have accounted
for
the sale as a financing transaction, which required us to continue reporting
the
corporate headquarters facility as an asset and to depreciate the property
over the life of the master lease agreement. We also recorded a liability
to the
purchaser (Note 6) for the sale price. At August 31, 2005, the carrying
value of
the corporate headquarters facility was $23.4
million.
The master lease agreement also contains six five-year renewal options,
which
allows us to maintain our operations at the current location for up to
50
years.
As
a
result of projected negative cash flows at certain retail stores, we
recorded
impairment charges totaling $0.2
million,
$0.3
million,
and $5.0
million,
during fiscal years 2005, 2004, and 2003 to reduce the carrying values
of the
stores’ long-lived assets to their estimated fair values. These impairment
charges were related to assets that are to be held and used by the Company
and
were included as a component of depreciation expense in our consolidated
statements of operations.
Certain
land and buildings are collateral for mortgage debt obligations (Note
6).
Our
intangible assets were comprised of the following (in thousands):
|
AUGUST
31, 2005
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||
|
Definite-lived
intangible assets:
|
||||||||||
|
License
rights
|
$
|
27,000
|
$
|
(6,480
|
)
|
$
|
20,520
|
|||
|
Curriculum
|
58,232
|
(25,146
|
)
|
33,086
|
||||||
|
Customer
lists
|
18,774
|
(12,032
|
)
|
6,742
|
||||||
|
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
|
105,283
|
(44,935
|
)
|
60,348
|
|||||||
|
Indefinite-lived
intangible asset:
|
||||||||||
|
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
|
$
|
128,283
|
$
|
(44,935
|
)
|
$
|
83,348
|
||||
|
AUGUST
31, 2004
|
||||||||||
|
Definite-lived
intangible assets:
|
||||||||||
|
License
rights
|
$
|
27,000
|
$
|
(5,543
|
)
|
$
|
21,457
|
|||
|
Curriculum
|
58,221
|
(23,067
|
)
|
35,154
|
||||||
|
Customer
lists
|
18,774
|
(10,878
|
)
|
7,896
|
||||||
|
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
|
105,272
|
(40,765
|
)
|
64,507
|
|||||||
|
Indefinite-lived
intangible asset:
|
||||||||||
|
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
|
$
|
128,272
|
$
|
(40,765
|
)
|
$
|
87,507
|
||||
The
range
of remaining estimated useful lives and weighted-average amortization
period
over which we are amortizing the major categories of definite-lived intangible
assets at August 31, 2005 were as follows:
|
Category
of Intangible Asset
|
Range
of Remaining Estimated Useful Lives
|
Weighted
Average Amortization Period
|
||
|
License
rights
|
21
years
|
30
years
|
||
|
Curriculum
|
1
to 21 years
|
26
years
|
||
|
Customer
lists
|
1
to 6 years
|
13
years
|
Our
aggregate amortization expense from definite-lived intangible assets
totaled
$4.2
million,
$4.2
million,
and $4.4
million,
for the fiscal years ended August 31, 2005, 2004, and 2003. Estimated
amortization expense for the next five years is expected to be as follows
(in
thousands):
|
YEAR
ENDING AUGUST
31,
|
||||
|
2006
|
$
|
3,810
|
||
|
2007
|
3,613
|
|||
|
2008
|
3,613
|
|||
|
2009
|
3,613
|
|||
|
2010
|
3,613
|
|||
Our
long-term debt and financing obligation were comprised of the following
(in
thousands):
|
AUGUST
31,
|
2005
|
2004
|
|||||
|
Financing
obligation on corporate campus, payable in monthly installments
of $254
for the first five years with two percent annual increases
thereafter
(imputed interest at 7.7%), through June 2025
|
$
|
33,739
|
|||||
|
Mortgage
payable in monthly installments of $9 CDN ($7 USD at August
31, 2005),
plus interest at CDN prime plus 1% (5.5% at August 31, 2005)
through
January 2015, secured by real estate
|
889
|
$
|
889
|
||||
|
Mortgage
payable in monthly installments of $8 including interest at
9.9%, secured
by real estate, and paid in full in September 2005
|
546
|
581
|
|||||
|
35,174
|
1,470
|
||||||
|
Less
current portion
|
(1,088
|
)
|
(120
|
)
|
|||
|
Total
long-term debt and financing obligation, less current
portion
|
$
|
34,086
|
$
|
1,350
|
|||
The
mortgage loan on our Canadian facility requires the Company to maintain
certain
financial ratios at our directly owned Canadian operation. During fiscal
2005
our Canadian operation was not in compliance with the debt covenants
on this
mortgage. However, we obtained a waiver from the lender regarding this
instance
of non-compliance.
On
June
21, 2005, we completed the sale and leaseback of our corporate headquarters
facility, located in Salt Lake City, Utah. The sale price was $33.8
million
in cash and after deducting customary closing costs, we received net
proceeds
totaling $32.4
million.
In connection with the transaction, we entered into a 20-year master
lease
agreement with the purchaser, an unrelated private investment group.
Although
the corporate headquarters facility was sold and the Company has no legal
ownership of the property, SFAS No. 98, Accounting
for Leases,
precluded us from recording the transaction as a sale since we have subleased
a
significant portion of the property that was sold. Accordingly, we have
accounted for the sale as a financing transaction which required us to
continue
reporting the corporate headquarters facility as an asset (Note 4) and
record a
financing obligation for the sale price. The future minimum payments
under the
financing obligation for the initial 20 year lease term are as follows
(in
thousands):
|
YEAR
ENDING AUGUST
31,
|
||||
|
2006
|
$
|
3,045
|
||
|
2007
|
3,045
|
|||
|
2008
|
3,045
|
|||
|
2009
|
3,045
|
|||
|
2010
|
3,055
|
|||
|
Thereafter
|
53,072
|
|||
|
Total
future minimum financing obligation payments
|
68,307
|
|||
|
Less
interest
|
35,880
|
|||
|
Present
value of future minimum financing obligation payments
|
$
|
32,427
|
The
difference between the carrying value of the financing obligation and
the
present value of the future minimum financing obligation payments represents
the
carrying value of the land sold in the financing transaction, which is
not
depreciated. At the conclusion of the master lease agreement, the remaining
financing obligation and carrying value of the land will be written off
the
Company’s financial statements. The lease agreement also contains six five-year
renewal options that allow us to maintain our operations at the current
location
for up to 50 years.
Future
principal maturities of our long-term debt and financing obligation were
as
follows at August 31, 2005 (in thousands):
|
YEAR
ENDING AUGUST
31,
|
||||
|
2006
|
$
|
1,088
|
||
|
2007
|
579
|
|||
|
2008
|
618
|
|||
|
2009
|
659
|
|||
|
2010
|
715
|
|||
|
Thereafter
|
31,515
|
|||
|
$
|
35,174
|
In
September 2005, we used a portion of the proceeds from the sale of our
corporate
headquarters to repay the mortgage, including a prepayment penalty totaling
$0.1
million,
on one of the buildings sold. The proceeds from the sale of the corporate
headquarters facility that were used to repay the mortgage were reported
as
restricted cash on our August 31, 2005 consolidated balance sheet.
Lease
Expense
In
the
normal course of business, we lease retail store and office space under
noncancelable operating lease agreements. The majority of our retail
stores are
leased in locations that generally have significant consumer traffic,
such as
shopping malls and other commercial districts. We also rent office space,
primarily for regional sales administration offices, in commercial office
complexes that are conducive to administrative operations. These operating
lease
agreements generally contain renewal options that may be exercised at
our
discretion after the completion of the base rental term. In addition,
many of
the rental agreements provide for regular increases to the base rental
rate at
specified intervals, which usually occur on an annual basis. At August
31, 2005,
we had operating leases that have remaining terms of one to 11
years.
The following table summarizes our future minimum lease payments under
operating
lease agreements at August 31, 2005 (in thousands):
|
YEAR
ENDING AUGUST
31,
|
||||
|
2006
|
$
|
8,509
|
||
|
2007
|
6,204
|
|||
|
2008
|
5,346
|
|||
|
2009
|
4,225
|
|||
|
2010
|
3,148
|
|||
|
Thereafter
|
7,718
|
|||
|
$
|
35,150
|
|||
We
recognize lease expense on a straight-line basis over the life of the
lease
agreement. Contingent rent expense is recognized as it is incurred. Total
rent
expense in selling, general, and administrative expense from operating
lease
agreements was $13.6
million,
$15.3
million,
and $18.9
million
for fiscal years 2005, 2004, and 2003. Additionally, certain retail store
leases
contain terms that require additional, or contingent, rental payments
based upon
the realization of certain sales thresholds. Our contingent rental payments
under these arrangements were insignificant
during
the fiscal years ended August 31, 2005, 2004, and 2003.
During
fiscal 2005,
we
completed the sale of our corporate headquarters facility, located in
Salt Lake
City, Utah. In connection with the transaction, we entered into a 20-year
master
lease agreement with the purchaser, an unrelated private investment group,
which
also contains six five-year renewal options. Although the corporate headquarters
facility was sold and the Company has no legal ownership of the property,
SFAS
No. 98, Accounting
for Leases,
precluded us from recording the transaction as a sale and a lease since
we have
subleased more than a minor portion of the property. Accordingly, we
have
accounted for the sale as a financing transaction which required us to
continue
reporting the corporate headquarters facility as an asset and to continue
depreciating the property (Note 4). We also recorded a liability to the
purchaser (Note 6) for the sale price.
Lease
Income
During
fiscal 2005 and 2004, we subleased a significant portion of our corporate
headquarters office space located in Salt Lake City, Utah to multiple,
unrelated
tenants. The cost basis of the office space available for lease was
approximately $23.3
million
and had a carrying value of $16.7
million
at August 31, 2005. We also have sublease agreements on two retail store
locations that we have exited, but still have a remaining lease obligation
(Note
15). Future minimum lease payments due to us from these sublease agreements
at
August 31, 2005, are as follows (in thousands):
|
YEAR
ENDING AUGUST
31,
|
||||
|
2006
|
$
|
1,875
|
||
|
2007
|
2,155
|
|||
|
2008
|
2,230
|
|||
|
2009
|
2,230
|
|||
|
2010
|
1,495
|
|||
|
Thereafter
|
2,156
|
|||
|
$
|
12,141
|
|||
Total
sublease payments made to the Company totaled $1.9
million,
$2.4
million,
and $2.2
million
during fiscal 2005, 2004, and 2003 of which $0.8
million,
$2.3
million,
and $2.2
million
was recorded as a reduction of rent expense associated with underlying
lease
agreements in our selling, general, and administrative expense. The remaining
sublease income was from leases at our corporate headquarters and was
reported
as a component of product sales in our consolidated statement of operations
for
fiscal 2005 and 2004.
EDS
Contract
The
Company has an outsourcing contract with Electronic Data Systems (EDS)
to
provide warehousing, distribution, information systems, and call center
operations. Under terms of the outsourcing contract and its addendums,
EDS
operates our primary call center, provides warehousing and distribution
services, and supports our software products and various information
systems.
The outsourcing contract and its addendums expire on June 30, 2016 and
have
remaining required minimum payments totaling approximately $257.2
million,
which are payable over the life of the contract. During fiscal years
2005, 2004,
and 2003, we expensed $30.4
million,
$33.8
million,
and $35.9
million
for services provided under terms of the EDS outsourcing contract. The
total
amount expensed each year under the EDS contract includes freight charges,
which
are billed to the Company based upon activity, that totaled $9.6
million,
$9.6
million,
and $10.7
million,
during fiscal years 2005, 2004, and 2003. The following schedule summarizes
our
required minimum payments to EDS for services over the life of the outsourcing
contract and its addendums (in thousands):
|
YEAR
ENDING AUGUST
31,
|
||||
|
2006
|
$
|
23,918
|
||
|
2007
|
22,591
|
|||
|
2008
|
22,829
|
|||
|
2009
|
23,076
|
|||
|
2010
|
23,330
|
|||
|
Thereafter
|
141,467
|
|||
|
$
|
257,211
|
|||
Actual
expenses resulting from the outsourcing contracts may exceed required
minimum
payments if actual services provided under the contracts exceed specified
minimum levels.
Under
terms of the outsourcing agreement with EDS, we are contractually obligated
to
purchase the necessary computer hardware and software to keep such property
and
equipment up to certain specifications. Amounts shown below are estimated
capital purchases of computer hardware and software under terms of the
EDS
outsourcing agreement and its amendments (in thousands):
|
YEAR
ENDING AUGUST
31,
|
||||
|
2006
|
$
|
1,334
|
||
|
2007
|
680
|
|||
|
2008
|
797
|
|||
|
2009
|
1,072
|
|||
|
2010
|
1,334
|
|||
|
Thereafter
|
6,059
|
|||
|
$
|
11,276
|
|||
In
addition to the minimum required outsourcing contract payments that were
due in
fiscal 2004, we paid an additional $11.6
million
related to invoices outstanding for the period from December 2002 through
May
2003. These payments had been postponed until certain software system
implementation issues were resolved. Under terms of the revised payment
schedule, we paid EDS interest at the monthly prime rate as quoted in
the Wall
Street Journal plus one percent on the outstanding balance of these
invoices.
The
outsourcing contracts contain early termination provisions that the Company
may
exercise under certain conditions. However, in order to exercise the
early
termination provisions, we would have to pay specified penalties to EDS
depending upon the circumstances of the contract termination.
Legal
Matters
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
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 third quarter of fiscal 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
from 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.
Overview
On
March
4, 2005, at the Annual Meeting of Shareholders, our shareholders approved
a plan
to recapitalize the Company’s preferred stock. Under terms of the
recapitalization plan, we completed a one-to-four forward split of the
existing
Series A preferred stock and then bifurcated each share of Series A preferred
stock into a new share of Series A preferred stock that is no longer
convertible
into common stock, and a warrant to purchase shares of common stock.
The new
Series A preferred stock retains its common-equivalent voting rights
and will
automatically convert to shares of Series B preferred stock if the holder
of the
original Series A preferred stock sells, or transfers, the preferred
stock to
another party. Series B preferred stock does not have common-equivalent
voting
rights, but retains substantially all other characteristics of the new
Series A
preferred stock.
Each
previously existing Series A preferred shareholder received a warrant
to
purchase a number of common shares equal to 71.43 shares for each $1,000
($14
per share) in aggregate liquidation value of Series A preferred shares
held
immediately prior to the recapitalization transaction. The exercise price
of
each warrant is $8.00 per share (subject to customary anti-dilution and
exercise
features) and the warrants will be exercisable over an eight-year
term.
The
preferred stock recapitalization transaction enables us to:
|
l
|
Have
the conditional right to redeem shares of preferred
stock;
|
|
l
|
Place
a limit on the period in which we may be required to issue
common stock.
The new warrants to purchase shares of common stock expire
in eight years,
compared to the perpetual right of previously existing Series
A preferred
stock to convert to shares of common stock;
|
|
l
|
Increase
our ability to purchase shares of our common stock. Previous
purchases of
common stock were limited and potentially subject to the approval
of
Series A preferred shareholders;
|
|
l
|
Create
the possibility that we may receive cash upon issuing additional
shares of
common stock to Series A preferred shareholders. The warrants
have an
exercise price of $8.00 per share compared to the previously
existing
right of Series A preferred shareholders to convert their preferred
shares
into common shares without paying cash; and
|
|
l
|
Eliminate
the requirement to pay common stock dividends to preferred
shareholders on
an “as converted” basis.
|
New
Preferred Stock Rights
Upon
completion of the recapitalization transaction, Series A preferred rights
were
amended to prevent the conversion of Series A preferred stock to shares
of
common stock. Series B preferred stock rights were amended to be substantially
equivalent to Series A rights, except for the eliminated voting rights.
The
rights of the new Series A and Series B preferred stock include the
following:
|
l
|
Liquidation
Preference
-
Both Series A and Series B preferred stock have a liquidation
preference
of $25.00 per share plus accrued unpaid dividends, which will
be paid in
preference to the liquidation rights of all other equity
classes.
|
|
l
|
Conversion
-
Neither Series A nor Series B preferred stock is convertible
to shares of
common stock. Series A preferred stock converts into shares
of Series B
upon the sale or transfer of the Series A shares. Series B
preferred stock
does not have any conversion rights.
|
|
l
|
Dividends-
Both Series A and Series B preferred stock accrue dividends
at 10.0
percent, payable quarterly, in preference to dividends on all
other equity
classes. If dividends are in arrears for six or more quarters,
the number
of the Company’s Board of Directors will be increased by two and the
Series A and Series B preferred shareholders will have the
ability to
select these additional directors. Series A and Series B preferred
stock
may not participate in dividends paid to common
stockholders.
|
|
l
|
Redemption
-
We may redeem any of the Series A or Series B preferred shares
during the
first year following the recapitalization at a price per share
equal to
100 percent of the liquidation preference. Subsequent to the
first
anniversary of the recapitalization and before the fifth anniversary
of
the transaction, we may only purchase preferred shares (up
to $30.0
million in aggregate) from Knowledge Capital, which holds the
majority of
our preferred stock, at a premium that increases one percentage
point
annually. After the sixth anniversary of the recapitalization,
we may
redeem any shares of preferred stock at 101 percent of the
liquidation
preference on the date of redemption.
|
|
l
|
Change
in Control
-
In the event of any change in control of the Company, Knowledge
Capital,
to the extent that it still holds shares of Series A preferred
stock, will
have the option to receive a cash payment equal to 101 percent
of the
liquidation preference of its Series A preferred shares then
held. The
remaining Series A and Series B preferred shareholders have
no such
option.
|
|
l
|
Voting
Rights
-
Although the new Series A preferred shareholders will not have
conversion
rights, they will still be entitled to voting rights. The holder
of each
new share of Series A preferred stock will be entitled to the
voting
rights they would have if they held two shares of common stock.
The
cumulative number of votes will be based upon the number of
votes
attributable to shares of Series A held immediately prior to
the
recapitalization transaction less any transfers of Series A
shares to
Series B shares or redemptions. In the event that a Series
A preferred
shareholder exercises a warrant to purchase the Company’s common stock,
their Series A voting rights will be reduced by the number
of the common
shares issued upon exercise of the warrant. This feature will
prevent the
holders of Series A preferred stock from increasing their voting
influence
through the acquisition of additional shares of common stock
from the
exercise of the warrants.
|
|
l
|
Registration
Rights
-
We were required to use our best efforts to register the resale
of all
shares of common stock and shares of Series B preferred stock
issuable
upon the transfer and conversion of the Series A preferred
stock held by
Knowledge Capital and certain permitted transferees of Knowledge
Capital
within 240 days following the initial filing of the registration
statement
covering such shares. The initial filing of the registration
statement was
required to occur within 120 days following the closing of
the
recapitalization transaction. However, we obtained an extension
on this
filing from Knowledge Capital and the registration statement
was filed and
became effective in September 2005.
|
Accounting
for the Recapitalization
In
order
to account for the various aspects of the preferred stock recapitalization
transaction, we considered guidance found in SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liability
and
Equity,
Emerging Issues Task Force (EITF) Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock,
EITF
Issue D-98 Classification
and Measurement of Redeemable Securities,
and EITF
Issue D-42, The
Effect on the Calculation of Earnings per Share for the Redemption or
Induced
Conversion of Preferred Stock.
Based
upon the relevant guidance found in these pronouncements, we accounted
for the
various aspects of the preferred stock recapitalization as follows:
New
Series A and Series B Preferred Stock
- The
new shares of preferred stock will continue to be classified as a component
of
shareholders’ equity since its conversion into cash or common stock is solely
within the Company’s control as there are no provisions in the recapitalization
documents that would obligate us to redeem shares of the Series A or
Series B
preferred stock. In addition, by virtue of the Utah Control Shares Act,
the
Company’s Bylaws, and the special voting rights of the preferred shareholders,
there are no circumstances under which a third party could acquire controlling
voting power of the Company’s stock without consent of our Board of Directors
and thus trigger our obligation to redeem the new preferred stock. Due
to the
significant modifications to existing shares of Series A and Series B
preferred
stock, we believe that the previously outstanding preferred stock was
replaced
with new classes of preferred stock and common stock warrants. As a result,
the
new preferred stock was recorded at its fair value on the date of modification.
Consistent with other equity instruments, the carrying value of the new
preferred stock will not be subsequently adjusted to its fair market
value at
the end of any reporting period.
We
engaged an independent valuation firm to determine the fair value of
the newly
issued shares of preferred stock prior to the March 8, 2005 recapitalization
closing date. The fair value of the new preferred stock under this valuation
was
preliminarily determined to be $20.77 per share, or $4.23 per share less
than
the preferred stock’s liquidation preference of $25.00 per share. Based upon
this valuation, we would have recorded a recapitalization gain of approximately
$7.7 million during the quarter in which the recapitalization transaction
was
completed and also would have recorded losses in future periods for preferred
stock redemptions made at the liquidation preference.
Subsequent
to this valuation, we completed the sale of our corporate headquarters
facility
and redeemed $30.0 million, or 1.2 million shares, of Series A preferred
stock
at its liquidation preference and we are considering additional redemptions
of
preferred stock at the liquidation preference in the near future. Based
upon
these considerations and other factors, including the improvements in
our
operating results, we determined that the liquidation preference ($25.00
per
share) is more indicative of the fair value of the preferred stock at
the date
of the recapitalization transaction. Accordingly, we recorded a $7.8
million
loss from the recapitalization transaction since the aggregate fair value
of the
new shares of preferred stock and warrants (see warrant discussion below)
exceeded the carrying value of the old preferred stock.
Warrants
- EITF
Issue 00-19 states that warrants should be classified as a component
of
shareholders’ equity if 1) the warrant contract requires physical settlement or
net-share settlement or 2) the warrant contract gives the Company a choice
of
net-cash settlement or settlement in its own shares. We determined that the
warrants should be accounted for as equity instruments because they meet
these
requirements.
Accordingly,
we recorded the warrants at their fair value, as determined using a
Black-Scholes valuation model on the date of the transaction, as a component
of
shareholders’ equity. Subsequent changes in fair value will not be recorded in
our financial statements as long as the warrants remain classified as
shareholders’ equity in accordance with EITF Issue 00-19. At the date of the
recapitalization transaction, the warrants had a fair value of $1.22
per share,
or approximately $7.6 million in total. We issued 6.2 million common
stock
warrants in connection with the recapitalization transaction.
Derivatives
- The
modified preferred stock agreement contains a feature that allows us
to redeem
preferred stock at its liquidation preference in the first year following
the
recapitalization transaction and at 101 percent of the liquidation preference
after the sixth anniversary of the recapitalization transaction. In accordance
with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
we have
determined that this embedded call feature is not a derivative because
the
contract is both 1) indexed in our stock, and 2) is classified in stockholders’
equity on our balance sheet.
A
separate agreement exists with Knowledge Capital, the entity that holds
the
majority of the Series A preferred stock, which contains a call option
to redeem
$30.0 million of preferred stock at 100 percent to 103 percent of the
liquidation preference as well as a “change in control” put option at 101
percent of the liquidation preference. This agreement is a derivative
and meets
the criteria found in paragraph 11 of SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities
and
Equity,
to be
separately accounted for as a liability. However, the fiscal 2005 $30.0
million
redemption of Knowledge Capital preferred stock extinguished the call
option in
the recapitalization agreement and the corresponding liability derivative.
Therefore, the incremental change of control feature (the amount in excess
of
100 percent of liquidation preference in the change of control put option)
will
be valued at fair value based upon the likelihood of exercise and the
expected
incremental amount to be paid upon the change of control provision of
the
agreement. This derivative-based liability will require adjustment to
fair value
at each reporting period and had an initial value of zero on the date
of the
recapitalization transaction. At August 31, 2005, the fair value of this
derivative-based liability was zero.
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
(Note 22). The amendment would extend the current redemption deadline
from March
8, 2006 to December 31, 2006 and 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.
Preferred
Stock
Series
A
- Following
the recapitalization of our preferred stock in fiscal 2005, which included
a
one-to-four forward split of existing Series A preferred stock, we had
3.5
million shares of Series A preferred stock outstanding. Following the
sale of
our corporate headquarters facility, we used $30.0 million of the proceeds
from
the sale to redeem 1.2 million shares of Series A preferred stock held
by
Knowledge Capital at the liquidation preference of the preferred stock
as
allowed by the recapitalization agreement. At August 31, 2005, we had
2.3
million shares of Series A preferred stock outstanding.
Series
A
preferred stock dividends accrue at an annual rate of 10.0 percent and
are
payable quarterly in cash. At August 31, 2005 and 2004, we had $1.4
million
and $2.2
million,
respectively, of accrued Series A preferred dividends, which were recorded
in
accrued liabilities in our consolidated balance sheets. For further information
regarding the rights and preferences of our recapitalized Series A preferred
stock, refer to the disclosures in Note 9, “Preferred Stock
Recapitalization.”
Series
B
- The
preferred stock recapitalization completed in fiscal 2005 significantly
changed
the rights and preferences of our Series B preferred stock. Our new Series
A
preferred stock automatically converts to shares of Series B preferred
stock if
the holder of the original Series A preferred stock sells, or transfers,
the
preferred stock to another party. Series B preferred stock does not have
common-equivalent voting rights, but retains substantially all other
characteristics of the new Series A preferred stock. At August 31, 2005,
there
were 4.0 million shares of Series B preferred stock authorized and no
shares of
Series B preferred stock outstanding.
Common
Stock Warrants
Pursuant
to the terms of the preferred stock recapitalization plan, we completed
a
one-to-four forward split of the existing Series A preferred stock and
then
bifurcated each share of Series A preferred stock into a new share of
Series A
preferred stock that is no longer convertible into common stock, and
a warrant
to purchase shares of common stock. Accordingly, we issued 6.2
million
common stock warrants with an exercise price of $8.00 per share (subject
to
customary anti-dilution and exercise features), which will be exercisable
over
an eight-year term. These newly issued common stock warrants were recorded
at
fair value on the date of the recapitalization, as determined by a Black-Scholes
valuation methodology, which totaled $7.6
million.
During the fiscal year ended August 31, 2005 no common stock warrants
were
exercised.
Treasury
Stock
During
the fiscal years ended August 31, 2005, 2004, and 2003, we issued 42,263; 99,137;
and
211,245
shares
of our common stock held in treasury to participants in the Company’s employee
stock purchase plan and as the result of the exercise of stock options.
Proceeds
from the issuance of these shares totaled $0.1
million,
$0.2
million,
and $0.2
million
during fiscal years 2005, 2004, and 2003. In addition, we issued 563,090
and
303,660
shares
of our common stock held in treasury in connection with unvested and
fully-vested stock awards during fiscal 2005 and 2004 (Note 3).
Our
Board
of Director approved plans to purchase shares of our common stock consisted
of
the following at August 31, 2005 (in thousands):
|
Description
|
Total
Approved Shares or Amount
|
Total
Shares Purchased or Amount Utilized
|
Total
Shares That May Yet Be Purchased
|
|||||||
|
All
plans prior to December 1, 2000
|
8,000
|
7,705
|
295
|
|||||||
|
December
1, 2000 plan
|
$
|
8,000
|
$
|
7,085
|
131
|
|||||
|
Total
approximate number of shares remaining in purchase plans
|
426
|
|||||||||
The
approximate number of shares that may yet be purchased under the plans
was
calculated for the December 1, 2000 plan by dividing the remaining approved
amount by $7.00, which was the closing price of the Company’s common stock on
August 31, 2005. No shares of our common stock were purchased during
fiscal
years 2005, 2004, or 2003 under terms of these purchase plans. However,
during
the fiscal years ended August 31, 2005, 2004, and 2003, we purchased
22,500;
92,300; and 129,300 shares of our common stock with a corresponding cost
of
$0.1
million,
$0.2
million,
and $0.1
million
for exclusive distribution to participants in the Company’s employee stock
purchase plan.
During
the fiscal year ended August 31, 2000, certain of our management personnel
borrowed funds from an external lender, on a full-recourse basis, to
acquire
shares of our common stock. The loan program closed during fiscal 2001
with
3.825 million shares of common stock purchased by the loan participants
for a
total cost of $33.6 million. The Company initially participated on these
management common stock loans as a guarantor to the lending institution.
However, in connection with a new credit facility obtained during the
fourth
quarter of fiscal 2001, we acquired the loans from the external lender
at fair
value and are now the creditor for these loans. The loans in the management
stock loan program have historically accrued interest at 9.4 percent
(compounded
quarterly), are full-recourse to the participants, and were originally
due in
March 2005. Although interest accrues on the outstanding balance over
the life
of the loans, the Company ceased recording interest receivable (and related
interest income) related to these loans during the third quarter of fiscal
2002.
However, loan participants remain obligated to pay all accrued interest
upon
maturity of the loans.
In
May
2004, our Board of Directors approved modifications to the terms of the
management stock loans. While these changes have significant implications
for
most management stock loan program participants, the Company did not
formally
amend or modify the stock loan program notes. Rather, the Company is
foregoing
certain of its rights under the terms of the loans and granting participants
the
modifications described below in order to potentially improve their ability
to
pay, and our ability to collect, the outstanding balances of the loans.
These
modifications to the management stock loan terms apply to all current
and former
employees whose loans do not fall under the provisions of the Sarbanes-Oxley
Act
of 2002. Loans to the Company’s officers and directors (as defined by the
Sarbanes-Oxley Act of 2002) were not affected by the approved modifications.
Accordingly, the Company collected $0.8
million,
which represented payment in full, from an officer and members of the
Board of
Directors that were required to repay their loans on March 30,
2005.
The
modifications to the management stock loan terms were as follows:
|
Waiver
of Right to Collect
- The
Company will waive its right to collect the outstanding balance
of the
loans prior to the earlier of (a) March 30, 2008, or (b) the
date after
March 30, 2005 on which the closing price of the Company’s stock
multiplied by the number of shares purchased equals the outstanding
principal and accrued interest on the management stock loans.
|
|
|
Lower
Interest Rate
- Effective
May 7, 2004, the Company prospectively waived collection of
all interest
on the loans in excess of 3.16 percent per annum, which was
the “Mid-Term
Applicable Federal Rate” for May 2004.
|
|
|
Use
of the Company’s Common Stock to Pay Loan
Balances
- The
Company may consider receiving shares of our common stock as
payment on
the loans, which were previously only payable in cash.
|
|
|
Elimination
of the Prepayment Penalty
- The
Company will waive its right to charge or collect any prepayment
penalty
on the management common stock
loans.
|
These
modifications, including the reduction of the loan program interest rate,
were
not applied retroactively and participants remain obligated to pay interest
previously accrued using the original interest rate. Also during fiscal
2005,
our Board of Directors approved loan modifications for a former executive
officer and a former director substantially similar to loan modifications
previously granted to other loan participants in the management stock
loan
program as described above.
Based
upon guidance found in EITF Issue 00-23, Issues
Related to the Accounting for Stock Compensation under APB Opinion No.
25 and
FASB Interpretation No. 44,
and
EITF Issue 95-16, Accounting
for Stock Compensation Agreements with Employer Loan Features under APB
Opinion
No. 25,
we
determined that the management common stock loans should be accounted
for as
non-recourse stock compensation instruments due to the modifications
approved in
May 2004 and their corresponding effects on the Company and the loan
participants. While this accounting treatment does not alter the legal
rights
associated with the loans to the employees as described above, the modifications
to the terms of the loans were deemed significant enough to adopt the
non-recourse accounting model as described in EITF 00-23. As a result
of this
accounting treatment, the remaining carrying value of the notes and interest
receivable related to financing common stock purchases by related parties,
which
totaled $7.6 million prior to the loan term modifications, was reduced
to zero
with a corresponding reduction in additional paid-in capital.
We
currently account for the management common stock loans as variable stock
option
arrangements. Under the provisions of SFAS No. 123R, which we will adopt
effective 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. This accounting treatment also
precludes us from reversing the amounts expensed as additions to the
loan loss
reserve, totaling $29.7 million, which were recognized in prior periods.
As a
result of these loan program modifications, the Company hopes to increase
the
total value received from loan participants; however, the inability of
the
Company to collect all, or a portion, of these receivables could have
an adverse
impact upon our financial position and future cash flows compared to
full
collection of the loans.
Fair
Value of Financial Instruments
The
book
value of our financial instruments approximates their fair values except
as
noted below. The assessment of the fair values of our financial instruments
is
based on a variety of factors and assumptions. Accordingly, the fair
values may
not represent the actual values of the financial instruments that could
have
been realized at August 31, 2005 or 2004, or that will be realized in
the
future, and do not include expenses that could be incurred in an actual
sale or
settlement. The following methods and assumptions were used to determine
the
fair values of our financial instruments, none of which were held for
trading or
speculative purposes:
Cash
and Cash Equivalents
- The
carrying amounts of cash and cash equivalents approximate their fair
values due
to the liquidity and short-term maturity of these instruments.
Accounts
Receivable
- The
carrying value of accounts receivable approximate their fair value due
to the
short-term maturity and expected collection of these instruments.
Other
Assets
- Our
other
assets, including notes receivable, were recorded at the net realizable
value of
estimated future cash flows from these instruments.
Long-Term
Debt and Financing Obligation
- At
August
31, 2005, our long-term debt consisted of a variable rate mortgage, a
fixed rate
mortgage, and a financing obligation resulting from the June 2005 sale
of our
corporate headquarters (Note 6). Further information regarding the fair
value of
these liability instruments is provided below.
Variable-Rate
Debt
- The
fair value of our variable debt approximated its carrying value since
the
prevailing interest rate is adjusted to reflect market rates that would
be
available to us for similar debt with the corresponding remaining
maturity.
Fixed
Rate Debt
- Our
fixed-rate debt consists of a mortgage on one of the corporate campus
buildings
that was sold in June 2005 and was paid in full during September 2005.
Due to
the short-term nature of the mortgage at August 31, 2005, the fair value
of this
liability approximated its carrying value. At August 31, 2004, the fair
value of
this fixed-rate mortgage was $0.7
million
compared to its carrying value of $0.6
million.
Financing
Obligation
- The
fair value of the financing obligation approximates its carrying value
as the
interest rate on the obligation approximates the rate that would be available
to
us for similar debt with the same remaining maturity.
Derivative
Instruments
During
the normal course of business, we are exposed to fluctuations in foreign
currency exchange rates due to our international operations and interest
rates.
To manage risks associated with foreign currency exchange and interest
rates, we
make limited use of derivative financial instruments. Derivatives are
financial
instruments that derive their value from one or more underlying financial
instruments. As a matter of policy, our derivative instruments are entered
into
for periods that do not exceed the related underlying exposures and do
not
constitute positions that are independent of those exposures. In addition,
we do
not enter into derivative contracts for trading or speculative purposes,
nor are
we party to any leveraged derivative instrument. The notional amounts
of
derivatives do not represent actual amounts exchanged by the parties
to the
instrument and thus, are not a measure of exposure to the Company through
its
use of derivatives. Additionally, we enter into derivative agreements
only with
highly rated counterparties.
Foreign
Currency Exposure
- Due to
the global nature of our operations, we are subject to risks associated
with
transactions that are denominated in currencies other than the United
States
dollar, as well as the effects of translating amounts denominated in
foreign
currencies to United States dollars as a normal part of the reporting
process.
The objective of our foreign currency risk management activities is to
reduce
foreign currency risk in the consolidated financial statements. In order
to
manage foreign currency risks, we make limited use of foreign currency
forward
contracts and other foreign currency related derivative instruments.
Although we
cannot eliminate all aspects of our foreign currency risk, we believe
that our
strategy, which includes the use of derivative instruments, can reduce
the
impacts of foreign currency related issues on our consolidated financial
statements.
Foreign
Currency Forward Contracts - During
the fiscal years ended August 31, 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 selling, general, and administrative 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 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. 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 Risk Management
-
Due to
the limited nature of our interest rate risk, we do not make regular
use of
interest rate derivatives and we were not a party to any interest rate
derivative instruments during fiscal years 2005 or 2004.
Back
to top
During
fiscal 2003, the Company purchased approximately 20 percent of the capital
stock
(subsequently diluted to approximately 12 percent ownership) of Agilix
Labs,
Inc. (Agilix), a Delaware corporation, for cash payments totaling $1.0
million.
Agilix is a development stage enterprise that develops software applications,
including the majority of our software applications that are available
for sale
to external customers. We used the equity method of accounting for our
investment in Agilix, as the Company appointed a member to Agilix’s board of
directors and had the ability to exercise significant influence over
the
operations of Agilix. Although we continue to sell software developed
by Agilix,
uncertainties in Agilix’s business plan developed during our fiscal quarter
ended March 1, 2003 and their potential adverse effects on Agilix’s operations
and future cash flows were significant. Based on these factors, we determined
that our ability to recover the carrying value of our investment in Agilix
was
remote. Accordingly, we impaired and expensed our remaining investment
in Agilix
of $0.9
million
during fiscal 2003.
During
fiscal 2005, certain affiliates of Agilix purchased the shares of capital
stock
held by the Company for $0.5
million
in cash, which was reported as a gain on disposal of investment in
unconsolidated subsidiary. Following the sale of the Agilix capital stock,
we
have no remaining ownership interest in Agilix, no representative on
their board
of directors, or any remaining obligations associated with our investment
in
Agilix.
Profit
Sharing Plans
We
have
defined contribution profit sharing plans for our employees that qualify
under
Section 401(k) of the Internal Revenue Code. These plans provide retirement
benefits for employees meeting minimum age and service requirements.
Qualified
participants may contribute up to 50 percent of their gross wages, subject
to
certain limitations. These plans also provide for matching contributions
to the
participants that are paid by the Company. The matching contributions,
which
were expensed as incurred, totaled $0.8
million,
$0.7
million,
and $1.0
million,
for the fiscal years ended August 31, 2005, 2004, and 2003.
Employee
Stock Purchase Plan
The
Company has an employee stock purchase plan that offers qualified employees
the
opportunity to purchase shares of our common stock at a price equal to
85
percent of the average fair market value of the Company’s common stock on the
last trading day of each fiscal quarter. A total of 27,266;
99,136;
and
211,245
shares
were issued under this plan in the fiscal years ended August 31, 2005,
2004, and
2003. On August 31, 2004, our previously existing employee stock purchase
plan
expired. Since the new employee stock purchase plan was not ratified
by
shareholders until March 2005, the Company did not withhold employee
contributions for approximately six months in fiscal 2005 and substantially
fewer shares were issued to plan participants during fiscal 2005 than
in
previous years.
Through
August 31, 2005, we accounted for our employee stock purchase plan using
the
intrinsic method as defined in the provisions of APB Opinion 25 and related
interpretations (Note 1).
Deferred
Compensation Plan
The
Company has a non-qualified deferred compensation plan that provided
certain key
officers and employees the ability to defer a portion of their compensation
until a later date. Deferred compensation amounts used to pay benefits
are held
in a “rabbi trust,” which invests in insurance contracts, various mutual funds,
and shares of our common stock as directed by the plan participants.
The trust
assets, which consist of the investments in insurance contracts and mutual
funds, are recorded in our consolidated balance sheets because they are
subject
to the claims of our creditors. The corresponding deferred compensation
liability represents the amounts deferred by plan participants plus or
minus any
earnings or losses on the trust assets. The deferred compensation plan’s assets
totaled $1.2
million
at August 31, 2005 and 2004, while the plan’s liabilities totaled $1.3
million
and $1.6
million
at August 31, 2005 and 2004. At August 31, 2005, the rabbi trust also
held
shares of our common stock with a cost basis of $0.6
million.
The assets and liabilities of the deferred compensation plan were recorded
in
other long-term assets, treasury stock, additional paid-in capital, and
long-term liabilities, as appropriate, in the accompanying consolidated
balance
sheets.
We
expensed charges totaling $0.8
million,
$0.2
million,
and $0.2
million
during each of the fiscal years ended August 31, 2005, 2004, and 2003
related to
our deferred compensation plan. Due to increases in the market value
of our
common stock held by the deferred compensation plan during fiscal 2005
which
increased the plan liability to participants without a corresponding
increase in
plan assets, we recorded increased expenses associated with our deferred
compensation plan. To reduce expenses from the plan in future periods,
we
modified the deferred compensation plan to require participants who hold
shares
of our common stock to receive distributions in common stock rather than
cash.
Accordingly, $0.9
million
of the plan liability at the date of the modification was reclassified
to
additional paid-in capital.
Due
to
legal changes resulting from the American Jobs Creation Act of 2004,
the Company
determined to cease compensation deferrals to this plan after December
31, 2004.
Other than the cessation of compensation deferrals and the requirement
to
distribute investments in Company stock with shares of stock, the plan
will
continue to operate and make payments under the same rules as in prior
periods.
Restructuring
Costs
During
fiscal 1999, our Board of Directors approved a plan to restructure our
operations, reduce our workforce, and formally exit certain leased office
space
located in Provo, Utah. The Company, under a long-term agreement, leased
the
Provo office space in buildings that were owned by partnerships, the
majority
interest of which were owned by the Vice-Chairman of the Board of Directors
and certain other employees and former employees of the Company. During
the
first quarter of fiscal 2005, we exercised an option, available under
our master
lease agreement, to purchase, and simultaneously sell, the office facility
to
the current tenant, an unrelated party. Based on the continuing negative
cash
flow associated with these buildings, and other factors, we determined
that it
was in our best interest to exercise the option and sell the
property.
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
accounting
for the sale transaction, the remaining fiscal 1999 accrued restructuring
costs,
which totaled $0.3
million,
were reversed and recorded as a reduction to selling, general, and
administrative expenses in our condensed consolidated statement of operations.
Following the sale of these buildings, we have no further obligations
remaining
under the fiscal 1999 restructuring plan.
Retail
Store Closure Costs
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
retail
stores during fiscal 2005, 18
retail
stores in fiscal 2004, and we may close additional retail locations in
future
periods if further analysis indicates that our operating results may
be improved
through additional closures. We have incurred severance and lease termination
costs related to these store closure activities, which are included as
a
component of selling, general, and administrative expenses in our condensed
consolidated statements of operations.
The
components of the remaining restructuring and store closure accruals
were as
follows for the periods indicated (in thousands):
|
Severance
Costs
|
Leased
Space Exit Costs
|
Total
|
||||||||
|
Balance
at August 31, 2003
|
$
|
304
|
$
|
3,146
|
$
|
3,450
|
||||
|
Charges
to the accrual
|
224
|
1,482
|
1,706
|
|||||||
|
Amounts
utilized
|
(512
|
)
|
(1,862
|
)
|
(2,374
|
)
|
||||
|
Balance
at August 31, 2004
|
16
|
2,766
|
2,782
|
|||||||
|
Charges
to the accrual
|
279
|
293
|
572
|
|||||||
|
Amounts
utilized
|
(266
|
)
|
(2,719
|
)
|
(2,985
|
)
|
||||
|
Balance
at August 31, 2005
|
$
|
29
|
$
|
340
|
$
|
369
|
||||
At
August
31, 2005, accrued store closure costs were recorded as a component of
accrued
liabilities in our consolidated balance sheet. During fiscal 2005 we
accrued and
expensed additional leased space exit costs totaling $0.2
million
related to changes in estimated sublease receipts on three retail store
closures
that occurred during prior fiscal years. Although we believe that our
accruals
for retail store closures are adequate at August 31, 2005, these amounts
are
partially based upon estimates and may change if actual amounts related
to these
activities differ.
|
16.
|
The
benefit (provision) for income taxes from continuing operations consisted
of the
following (in thousands):
|
YEAR
ENDED AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
Current:
|
||||||||||
|
Federal
|
$
|
1,857
|
$
|
1,615
|
$
|
1,940
|
||||
|
State
|
(2
|
)
|
151
|
(29
|
)
|
|||||
|
Foreign
|
(1,180
|
)
|
(2,492
|
)
|
(696
|
)
|
||||
|
675
|
(726
|
)
|
1,215
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
$
|
(2,132
|
)
|
$
|
3,440
|
$
|
15,739
|
|||
|
State
|
(285
|
)
|
310
|
836
|
||||||
|
Foreign
|
378
|
(623
|
)
|
1,322
|
||||||
|
Valuation
allowance
|
2,449
|
(3,750
|
)
|
(16,575
|
)
|
|||||
|
410
|
(623
|
)
|
1,322
|
|||||||
|
$
|
1,085
|
$
|
(1,349
|
)
|
$
|
2,537
|
||||
Income
(loss) from operations before income taxes consisted of the following
(in
thousands):
|
YEAR
ENDED AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|
||||
|
United
States
|
$
|
6,094
|
$
|
(10,716
|
)
|
$
|
(49,247
|
)
|
||
|
Foreign
|
3,007
|
1,915
|
1,457
|
|||||||
|
$
|
9,101
|
$
|
(8,801
|
)
|
$
|
(47,790
|
)
|
|||
The
differences between income taxes at the statutory federal income tax
rate and
income taxes reported from continuing operations in the consolidated
statements
of operations were as follows:
|
YEAR
ENDED AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
Federal
statutory income tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
State
income taxes, net of federal effect
|
3.2
|
5.7
|
1.7
|
|||||||
|
Deferred
tax valuation allowance
|
(26.9
|
)
|
(49.1
|
)
|
(32.7
|
)
|
||||
|
Foreign
jurisdictions tax differential
|
(2.9
|
)
|
(7.1
|
)
|
1.2
|
|||||
|
Tax
differential on income subject to both U.S. and foreign
taxes
|
5.1
|
(9.5
|
)
|
(2.5
|
)
|
|||||
|
Resolution
of tax matters
|
(29.6
|
)
|
8.8
|
2.8
|
||||||
|
Other
|
4.2
|
.9
|
(0.2
|
)
|
||||||
|
(11.9
|
)%
|
(15.3
|
)%
|
5.3
|
%
|
|||||
A
recent
history of operating losses has precluded the Company from demonstrating
that it
is more likely than not that the benefits of domestic operating loss
carryforwards, together with the benefits of deferred income tax assets,
deferred income tax deductions, and foreign tax carryforwards, will be
realized.
Accordingly, we recorded valuation allowances on our net deferred income
tax
assets generated in the United States.
We
paid
significant amounts of withholding tax on foreign royalties during fiscal
years
2005, 2004, and 2003. However, no domestic foreign tax credits were available
to
offset the foreign withholding taxes during those years.
Various
income tax matters were resolved during fiscal 2005, 2004, and 2003,
which
resulted in net tax benefits to the Company.
We
restated the fiscal 2004 deferred tax liabilities related to intangibles
and the
valuation allowance for errors that occurred in prior periods (Note 2).
Significant components of our deferred tax assets and liabilities were
comprised
of the following (in thousands):
|
YEAR
ENDED AUGUST
31,
|
2005
|
|
2004
|
||||
|
|
|
|
|
|
|
Restated
|
|
|
Deferred
income tax assets:
|
|||||||
|
Net
operating loss carryforward
|
$
|
15,313
|
$
|
21,268
|
|||
|
Loan
loss reserve on management stock loans
|
15,234
|
14,709
|
|||||
|
Sale
and financing of corporate headquarters
|
12,383
|
-
|
|||||
|
Impairment
of investment in Franklin Covey Coaching, LLC
|
3,341
|
3,901
|
|||||
|
Foreign
income tax credit carryforward
|
2,246
|
2,246
|
|||||
|
Inventory
and bad debt reserves
|
2,103
|
2,466
|
|||||
|
Sales
returns and contingencies
|
1,954
|
1,559
|
|||||
|
Intangible
asset amortization and impairment
|
1,878
|
2,646
|
|||||
|
Vacation
and other accruals
|
1,438
|
1,199
|
|||||
|
Deferred
compensation
|
815
|
582
|
|||||
|
Alternative
minimum tax carryforward
|
748
|
478
|
|||||
|
Restructuring
and severance cost accruals
|
24
|
902
|
|||||
|
Property
and equipment depreciation
|
-
|
5,452
|
|||||
|
Investment
in Agilix
|
-
|
375
|
|||||
|
Other
|
766
|
642
|
|||||
|
Total
deferred income tax assets
|
58,243
|
58,425
|
|||||
|
Less:
valuation allowance
|
(38,180
|
)
|
(40,629
|
)
|
|||
|
Net
deferred income tax assets
|
20,063
|
17,796
|
|||||
|
Deferred
income tax liabilities:
|
|||||||
|
Intangibles
and property and equipment step-ups
|
(23,533
|
)
|
(24,347
|
)
|
|||
|
Property
and equipment depreciation
|
(2,636
|
)
|
-
|
||||
|
Unremitted
earnings of foreign subsidiaries
|
(377
|
)
|
(666
|
)
|
|||
|
Other
|
(461
|
)
|
(78
|
)
|
|||
|
Total
deferred income tax liabilities
|
(27,007
|
)
|
(25,091
|
)
|
|||
|
Net
deferred income taxes
|
$
|
(6,944
|
)
|
$
|
(7,295
|
)
|
|
Deferred
income tax amounts are recorded as follows in our consolidated balance
sheets
(in thousands).
|
YEAR
ENDED AUGUST
31,
|
2005
|
2004
|
|||||
|
Restated
|
|||||||
|
Other
current assets
|
$
|
2,396
|
$
|
2,202
|
|||
|
Other
long-term assets
|
375
|
550
|
|||||
|
Deferred
income tax liability
|
(9,715
|
)
|
(10,047
|
)
|
|||
|
Net
deferred income tax liability
|
$
|
(6,944
|
)
|
$
|
(7,295
|
)
|
|
A
federal
net operating loss of $32.9 million was generated in fiscal 2003. In
fiscal
2005, $13.5
million
of the 2003 loss carryforward was utilized, leaving a remaining loss
carryforward from fiscal 2003 of $19.4
million,
which expires on August 31, 2023. The federal net operating loss carryforward
generated in fiscal 2004 totaled $20.5
million
and expires on August 31, 2024.
The
state
net operating loss carryforward of $32.9
million
generated in fiscal 2003 was reduced by the utilization of $13.5
million
in fiscal 2005 for a net carryforward amount of $19.4
million,
which primarily expires between August 31, 2006 and August 31, 2018.
The state
net operating loss carryforward of $20.5
million
generated in fiscal 2004 primarily expires between August 31, 2007 and
August
31, 2019.
The
amount of federal and state net operating loss carryforwards remaining
at August
31, 2005 and deductible against future years’ taxable income may be subject to
limitations imposed by Section 382 of the Internal Revenue Code and similar
state statutes. The Company has not determined the impact, if any, of
Section
382 limitations as of August 31, 2005.
The
net
deferred tax asset relating to the loan loss reserve on our management
stock
loans is entirely offset by a valuation allowance. Because of the accounting
treatment of the management stock loans (Note 11), any tax benefit eventually
realized on these loans will be recorded as an increase to additional
paid-in
capital, rather than reducing our income tax expense.
As
discussed in Note 6, we completed the sale and financing of our corporate
headquarters facility during fiscal 2005. For financial reporting purposes,
the
sale of the facility was treated as a financing transaction and no gain
was
recognized on the sale. However, for tax purposes, the transaction was
accounted
for as a sale, resulting in a taxable gain of $11.4
million.
Our
foreign income tax credit carryforward of $2.2
million
that was generated during fiscal 2002 expires on August 31, 2012.
Basic
earnings (loss) per common share (EPS) is calculated by dividing net
income or
loss available to common shareholders by the weighted-average number
of common
shares outstanding for the period. Diluted EPS is calculated by dividing
net
income or loss available to common shareholders, by the weighted-average
number
of common shares outstanding plus the assumed exercise of all dilutive
securities using the treasury stock method or the “as converted” method, as
appropriate. Following the preferred stock recapitalization (Note 9),
our
preferred stock is no longer convertible or entitled to participate in
dividends
payable to holders of common stock. Accordingly, we no longer use the
two-class
method of calculating EPS as defined in SFAS No. 128, Earnings
Per Share,
and
EITF Issue 03-6, Participating
Securities and the Two-Class Method under FASB Statement No.
128,
for
periods after February 26, 2005. The following table presents the computation
of
our EPS for the periods indicated (in thousands, except per share
amounts):
|
YEAR
ENDED AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
Net
income (loss)
|
$
|
10,186
|
$
|
(10,150
|
)
|
$
|
(45,253
|
)
|
||
|
Non-convertible
preferred stock dividends
|
(3,903
|
)
|
||||||||
|
Convertible
preferred stock dividends
|
(4,367
|
)
|
(8,735
|
)
|
(8,735
|
)
|
||||
|
Loss
on recapitalization of preferred stock
|
(7,753
|
)
|
||||||||
|
Net
loss attributable to common shareholders
|
$
|
(5,837
|
)
|
$
|
(18,885
|
)
|
$
|
(53,988
|
)
|
|
|
Undistributed
income (loss) through February 26, 2005
|
$
|
4,244
|
$
|
-
|
$
|
-
|
||||
|
Common
stock ownership on an “as converted” basis
|
76
|
%
|
-
|
-
|
||||||
|
Common
shareholder interest in undistributed income through February
26,
2005
|
3,225
|
|||||||||
|
Undistributed
loss in fiscal year indicated
|
(10,081
|
)
|
$
|
(18,885
|
)
|
$
|
(53,988
|
)
|
||
|
Common
shareholder interest in undistributed loss(1)
|
$
|
(6,856
|
)
|
$
|
(18,885
|
)
|
$
|
(53,988
|
)
|
|
|
Weighted
average common shares outstanding - Basic
|
19,949
|
19,734
|
20,041
|
|||||||
|
Common
share equivalents(2)
|
-
|
-
|
-
|
|||||||
|
Weighted
average common shares outstanding - Diluted
|
19,949
|
19,734
|
20,041
|
|||||||
|
Basic
EPS Common
|
$
|
(.34
|
)
|
$
|
(.96
|
)
|
$
|
(2.69
|
)
|
|
|
Diluted
EPS Common
|
$
|
(.34
|
)
|
$
|
(.96
|
)
|
$
|
(2.69
|
)
|
|
(1)
Preferred
shareholders do not participate in any undistributed losses with common
shareholders; therefore, no adjustments to the fiscal 2004 or fiscal
2003 loss
per share information were made.
(2)
For
the
fiscal years ended August 31, 2005, 2004 and 2003, conversion of common
share
equivalents is not assumed because such conversion would be
anti-dilutive.
Due
to
their anti-dilutive effect, the following incremental shares from Series
A
preferred stock calculated on an “as converted” basis and the potential common
stock equivalents resulting from options to purchase common stock and
unvested
stock deferred compensation awards that were calculated using the treasury
stock
method have been excluded from the diluted EPS calculation (in
thousands):
|
YEAR
ENDED AUGUST
31,
|
2005
|
2004
|
2003
|
|||||||
|
Number
of Series A preferred stock shares on an “as converted”
basis
|
-
|
6,239
|
6,239
|
|||||||
|
Common
stock equivalents from the assumed exercise of “in-the-money” stock
options
|
58
|
22
|
2
|
|||||||
|
Common
stock equivalents from unvested stock deferred
compensation
|
175
|
-
|
-
|
|||||||
|
233
|
6,261
|
6,241
|
||||||||
At
August
31, 2005, 2004, and 2003, we had approximately 2.0
million,
0.8
million,
and 1.1
million
stock options outstanding (Note 3) which were not included in the computation
of
diluted weighted average shares outstanding because the options’ exercise prices
were greater than the average market price of the Company’s common stock. Also,
as a result of the preferred stock recapitalization (Note 9), we issued
6.2
million common stock warrants during fiscal 2005 with an exercise price
of $8.00
per share that were not included in the diluted EPS calculation because
their
exercise price was higher than the average market price of the Company’s common
stock. These warrants, which expire in eight years, may have a dilutive
impact
on our EPS calculation in future periods.
Reportable
Segments
The
Company has two segments: the Consumer and Small Business Unit (CSBU)
and the
Organizational Solutions Business Unit (OSBU). The following is a description
of
our segments, their primary operating components, and their significant
business
activities:
Consumer
and Small Business Unit
- This
business unit is primarily focused on sales to individual customers and
small
business organizations and includes the results of our domestic retail
stores,
consumer direct operations (catalog and eCommerce), wholesale operations,
and
other related distribution channels, including government product sales
and
domestic printing and publishing sales. The CSBU results of operations
also
include the financial results of our paper planner manufacturing operations.
Although CSBU sales primarily consist of products such as planners, binders,
software, and handheld electronic planning devices, virtually any component
of
our leadership, productivity, and strategy execution solutions may be
purchased
through CSBU channels. During fiscal 2005, we have expanded our efforts
to
increase sales to small businesses through our CSBU channels, including
the
addition of a sales force dedicated to small business
organizations.
Organizational
Solutions Business Unit
- The
OSBU is primarily responsible for the development, marketing, sale, and
delivery
of strategic execution, productivity, leadership, sales force performance,
and
communication training and consulting solutions directly to organizational
clients, including other companies, the government, and educational
institutions. The OSBU includes the financial results of our domestic
sales
force and our international operations. The domestic sales force is responsible
for the sale and delivery of our training and consulting services in
the United
States. Our international sales group includes the financial results
of our
directly owned foreign offices and royalty revenues from licensees.
Our
chief
operating decision maker is the CEO, and each of the segments has a president
who reports directly to the CEO. The primary measurement tool used in
business
unit performance analysis is earnings before interest, taxes, depreciation,
and
amortization (EBITDA), which may not be calculated as similarly titled
amounts
are calculated by other companies. For segment reporting purposes, our
consolidated EBITDA can be calculated as our income or loss from operations
excluding depreciation and amortization charges.
In
the
normal course of business, we may make structural and cost allocation
revisions
to our segment information to reflect new reporting responsibilities
within the
organization. All prior period segment information has been revised to
conform
to the most recent classifications and organizational changes. We account
for
our segment information on the same basis as the accompanying consolidated
financial statements.
SEGMENT
INFORMATION
(in
thousands)
|
|
Consumer
and Small Business Unit
|
Organizational
Solutions Business Unit
|
|||||||||||||||||||||||
|
Year
Ended August
31, 2005
|
Retail
|
|
|
Consumer
Direct
|
|
|
Wholesale
|
|
|
Other
CSBU
|
|
|
Domestic
|
|
|
International
|
|
|
Corporate
and
Eliminations
|
|
|
Consolidated
|
|||
|
Sales
to external customers
|
$
|
74,331
|
$
|
55,575
|
$
|
19,691
|
$
|
3,757
|
$
|
76,114
|
$
|
54,074
|
$
|
283,542
|
|||||||||||
|
Gross
margin
|
42,455
|
32,157
|
9,184
|
(1,388
|
)
|
49,515
|
36,772
|
168,695
|
|||||||||||||||||
|
EBITDA
|
4,425
|
23,828
|
8,408
|
(23,303
|
)
|
6,773
|
12,772
|
$
|
(12,013
|
)
|
20,890
|
||||||||||||||
|
Depreciation
|
2,589
|
527
|
1
|
663
|
306
|
1,295
|
2,393
|
7,774
|
|||||||||||||||||
|
Amortization
|
344
|
3,816
|
7
|
6
|
4,173
|
||||||||||||||||||||
|
Segment
assets
|
7,992
|
76
|
5,387
|
86,514
|
21,180
|
112,084
|
233,233
|
||||||||||||||||||
|
Capital
expenditures
|
996
|
72
|
166
|
501
|
740
|
1,704
|
4,179
|
||||||||||||||||||
|
Year
Ended August
31, 2004
|
|||||||||||||||||||||||||
|
Sales
to external customers
|
$
|
87,922
|
$
|
55,059
|
$
|
21,081
|
$
|
2,007
|
$
|
61,047
|
$
|
48,318
|
$
|
275,434
|
|||||||||||
|
Gross
margin
|
47,420
|
31,172
|
9,544
|
(3,933
|
)
|
38,555
|
33,043
|
155,801
|
|||||||||||||||||
|
EBITDA
|
793
|
19,753
|
8,623
|
(22,958
|
)
|
(627
|
)
|
10,073
|
$
|
(8,774
|
)
|
6,883
|
|||||||||||||
|
Depreciation
|
3,385
|
1,053
|
1
|
1,137
|
604
|
1,383
|
4,211
|
11,774
|
|||||||||||||||||
|
Amortization
|
344
|
3,816
|
7
|
6
|
4,173
|
||||||||||||||||||||
|
Segment
assets
|
9,867
|
550
|
7,760
|
90,783
|
23,807
|
94,858
|
227,625
|
||||||||||||||||||
|
Capital
expenditures
|
220
|
257
|
1,534
|
127
|
741
|
1,091
|
3,970
|
||||||||||||||||||
|
Year
Ended August
31, 2003
|
|||||||||||||||||||||||||
|
Sales
to external customers
|
$
|
112,054
|
$
|
56,177
|
$
|
16,915
|
$
|
7,020
|
$
|
74,306
|
$
|
40,688
|
$
|
307,160
|
|||||||||||
|
Gross
margin
|
56,598
|
31,181
|
7,330
|
(1,552
|
)
|
48,398
|
28,428
|
170,383
|
|||||||||||||||||
|
EBITDA
|
(4,020
|
)
|
17,663
|
6,314
|
(27,134
|
)
|
(1,861
|
)
|
7,031
|
$
|
(14,877
|
)
|
(16,884
|
)
|
|||||||||||
|
Depreciation
|
11,291
|
2,423
|
6
|
2,173
|
1,707
|
1,110
|
7,685
|
26,395
|
|||||||||||||||||
|
Amortization
|
365
|
4,007
|
7
|
7
|
4,386
|
||||||||||||||||||||
|
Significant
non-cash items:
|
|||||||||||||||||||||||||
|
Provision
for losses on management stock loan program
|
3,903
|
3,903
|
|||||||||||||||||||||||
|
Recovery
of investment in unconsolidated subsidiary
|
(1,644
|
)
|
(1,644
|
)
|
|||||||||||||||||||||
|
Loss
on impaired assets
|
872
|
872
|
|||||||||||||||||||||||
|
Segment
assets
|
20,598
|
1,365
|
12,547
|
95,068
|
19,580
|
112,988
|
262,146
|
||||||||||||||||||
|
Capital
expenditures
|
905
|
1,137
|
210
|
112
|
786
|
1,051
|
4,201
|
||||||||||||||||||
A
reconciliation of reportable segment EBITDA to consolidated income (loss)
before
taxes is provided below (in thousands):
|
YEAR
ENDED AUGUST
31,
|
2005
|
2004
|
2003
|
|||||||
|
Reportable
segment EBITDA
|
$
|
32,903
|
$
|
15,657
|
$
|
(2,007
|
)
|
|||
|
Provision
for losses on management stock loans
|
(3,903
|
)
|
||||||||
|
Gain
on disposal of investment in unconsolidated subsidiary
|
500
|
|||||||||
|
Corporate
expenses
|
(12,513
|
)
|
(8,774
|
)
|
(10,974
|
)
|
||||
|
Consolidated
EBITDA
|
20,890
|
6,883
|
(16,884
|
)
|
||||||
|
Depreciation
|
(7,774
|
)
|
(11,774
|
)
|
(26,395
|
)
|
||||
|
Amortization
|
(4,173
|
)
|
(4,173
|
)
|
(4,386
|
)
|
||||
|
Consolidated
income (loss) from operations
|
$
|
8,943
|
$
|
(9,064
|
)
|
$
|
(47,665
|
)
|
||
|
Equity
in earnings (losses) of unconsolidated subsidiary
|
(128
|
)
|
||||||||
|
Interest
income
|
944
|
481
|
665
|
|||||||
|
Interest
expense
|
(786
|
)
|
(218
|
)
|
(248
|
)
|
||||
|
Other
expense, net
|
(414
|
)
|
||||||||
|
Income
(loss) before income taxes
|
$
|
9,101
|
$
|
(8,801
|
)
|
$
|
(47,790
|
)
|
||
Interest
expense and interest income are primarily generated at the corporate
level and
are not allocated to the segments. Income taxes are likewise calculated
and paid
on a corporate level (except for entities that operate in foreign jurisdictions)
and are not allocated to segments for analysis.
Corporate
assets, such as cash, accounts receivable, and other assets are not generally
allocated to business segments for business analysis purposes. However,
inventories, intangible assets, goodwill, identifiable fixed assets,
and certain
other assets are classified by segment. A reconciliation of segment assets
to
consolidated assets is as follows (in thousands):
|
AUGUST
31,
|
2005
|
|
2004
|
|
2003
|
|||||
|
Reportable
segment assets
|
$
|
121,149
|
$
|
132,767
|
$
|
149,158
|
||||
|
Corporate
assets
|
113,478
|
95,823
|
113,780
|
|||||||
|
Intercompany
accounts receivable
|
(1,394
|
)
|
(965
|
)
|
(792
|
)
|
||||
|
$
|
233,233
|
$
|
227,625
|
$
|
262,146
|
|||||
Enterprise-Wide
Information
Our
revenues are derived primarily from the United States. However, we also
operate
directly owned offices or contract with licensees to provide products
and
services in various countries throughout the world. Our consolidated
revenues
and long-lived assets were as follows (in thousands):
|
AS
OF OR FOR YEAR
ENDED AUGUST
31,
|
2005
|
2004
|
2003
|
|||||||
|
Net
sales:
|
||||||||||
|
United
States
|
$
|
229,469
|
$
|
227,116
|
$
|
262,463
|
||||
|
Japan/Greater
China
|
22,251
|
18,625
|
15,026
|
|||||||
|
United
Kingdom
|
9,707
|
9,251
|
7,521
|
|||||||
|
Canada
|
6,910
|
7,093
|
7,701
|
|||||||
|
Mexico
|
4,181
|
3,609
|
5,030
|
|||||||
|
Australia
|
3,944
|
3,642
|
3,428
|
|||||||
|
Brazil/South
America
|
2,053
|
1,559
|
1,859
|
|||||||
|
Singapore
|
985
|
1,189
|
999
|
|||||||
|
Others
|
4,042
|
3,350
|
3,133
|
|||||||
|
$
|
283,542
|
$
|
275,434
|
$
|
307,160
|
|||||
|
Long-lived
assets:
|
||||||||||
|
United
States
|
$
|
122,937
|
$
|
129,416
|
$
|
145,009
|
||||
|
Americas
|
2,620
|
2,484
|
2,531
|
|||||||
|
Japan
|
1,527
|
2,409
|
3,414
|
|||||||
|
United
Kingdom
|
641
|
694
|
671
|
|||||||
|
Australia
|
326
|
393
|
464
|
|||||||
|
$
|
128,051
|
$
|
135,396
|
$
|
152,089
|
|||||
Inter-segment
sales were immaterial and were eliminated in consolidation.
During
November 2004, our Board of Directors approved a proposal to change a
number of
items in the CEO’s employment agreement. At the request of the CEO, this new
compensation arrangement included the following:
|
l
|
The
previously existing CEO employment agreement, which extended
until 2007,
was canceled and the CEO became an “at-will” employee.
|
|
l
|
The
CEO signed a waiver forgoing claims on past compensation not
taken.
|
|
l
|
The
CEO agreed to be covered by change in control and severance
policies
provided for other Company executives rather than the “golden parachute”
severance package in his previously existing agreement.
|
|
l
|
In
accordance with the provisions of the Sarbanes-Oxley Act of
2002, the CEO
will not be entitled to obtain a loan in order to exercise
his stock
options.
|
In
return
for these changes to the CEO’s compensation structure and in recognition of the
CEO’s leadership in achieving substantial improvements in our operating results,
the following compensation terms were approved:
|
l
|
The
CEO’s cash compensation, both base compensation and incentive
compensation, remained essentially unchanged.
|
|
l
|
Acceleration
of the vesting on the CEO’s 1.6 million stock options with an exercise
price of $14.00 per share (Note 3).
|
|
l
|
A
grant of 225,000 shares of unvested stock was awarded as a
long-term
incentive consistent with the unvested stock awards made to
other key
employees in January 2004. In addition, the Company granted
the CEO
187,000 shares of common stock that is fully vested. The compensation
cost
of both of these awards was $0.9 million, of which $0.4 million
was
expensed and the other $0.5 million was initially recorded
as deferred
compensation in shareholders’ equity and amortized over five years,
subject to accelerated vesting if certain performance thresholds
are met
(Note 3).
|
|
l
|
We
have provided life insurance and disability coverage in an
amount equal to
2.5 times the CEO’s cash compensation, using insurance policies that are
similar to those approved for other
executives.
|
These
changes were approved and enacted during fiscal 2005.
Effective
March 29, 2005, Val J. Christensen, Executive Vice-President, General
Counsel
and Secretary of the Company, terminated his service as an executive
officer and
employee of the Company. Under the terms of the corresponding Separation
Agreement, we paid Mr. Christensen a lump-sum severance amount totaling
$0.9
million, less applicable withholdings. In addition, he received the cash
performance bonus he would have been entitled to for the current fiscal
year as
if he had remained employed in his prior position and his performance
objectives
for the year were met, which is estimated to be $0.2 million. In addition
to
these payments, his shares of unvested stock were fully vested and he
received a
bonus of $0.1 million, which was equivalent to other bonuses awarded
in the
January 2004 unvested stock award, to offset a portion of the income
taxes
resulting from the vesting of this award. The Company also waived the
requirement that his fully-vested stock options be exercised within 90
days of
his termination and allowed the options to be exercised through the term
of the
option agreement. We accounted for the stock option modifications under
APB
Opinion 25 and related pronouncements and did not recognize additional
compensation expense in our financial statements as the fair value of
the
Company’s stock was less than the exercise price of the modified stock options
on the re-measurement date. However, the fair value of these stock option
modifications using guidance in SFAS No. 123 was approximately $0.1 million
and
was included in the pro forma stock-based compensation expense reported
in Note
3.
Subsequent
to his separation, the Board of Directors approved modifications to his
management stock loan substantially similar to the modifications granted
to
other loan participants by the Board of Directors in May 2004 under which
the
Company will forego certain of its rights under the terms of the loans
in order
to potentially improve the participants’ ability to pay, and our ability to
collect, the outstanding balances of the loans (Note 11).
Subsequent
to entering into the Separation Agreement, the Company and Mr. Christensen
entered into a Legal Services Agreement that is effective March 29, 2005.
Under
terms of the Legal Services Agreement, we retained Mr. Christensen as
independent legal counsel to provide services for a minimum of 1,000
hours per
year. The Legal Services Agreement allows the Company to benefit from
Mr.
Christensen’s extensive institutional knowledge and experience gained from
serving as our General Counsel as well as his experience representing
us as
external counsel for several years prior to joining the Company. We will
pay Mr.
Christensen an annual retainer in the amount of $0.2 million, the equivalent
of
$225 per hour for each hour of legal services, and $325 per hour for
every hour
of legal services, if any, provided in excess of 1,000 hours in any given
year.
Further, Mr. Christensen will be an independent contractor and not entitled
to
Company benefits for performing these services.
The
Company, under a long-term agreement, leased office space in buildings
that were
owned by partnerships, the majority interest of which were owned by the
Vice-Chairman of the Board of Directors and certain other employees and
former
employees of the Company. During fiscal 2005 we exercised an option,
available
under our master lease agreement, to purchase, and simultaneously sell,
the
office facility to the current tenant, an unrelated party. The negotiated
purchase price with the landlord was $14.0
million
and the tenant agreed to purchase the property for $12.5
million.
These prices were within the range of estimated fair values of the buildings
as
determined by an independent appraisal obtained by the Company. We paid
the
difference between the sale and purchase prices, plus other closing costs,
which
were included as a component of our restructuring plan accrual (Note
15). We
paid rent and related building expenses to the partnership totaling $0.5
million,
$2.4
million,
and $2.0
million,
for the fiscal years ended August 31, 2005, 2004, and 2003. Following
completion
of this sale, we have no further obligations to the related
partnerships.
The
Company pays the Vice-Chairman and a former Vice-Chairman of the Board
of
Directors a percentage of the proceeds received for seminars that they
present.
During the fiscal years ended August 31, 2005, 2004, and 2003, we expensed
charges totaling $3.3
million,
$1.6
million,
and $0.9
million,
to the Vice-Chairman and former Vice Chairman for their seminar presentations.
At August 31, 2005 and 2004, we had accrued $1.7
million
and $0.4
million
payable to the Vice-Chairman and former Vice-Chairman under these agreements.
These amounts were included in our accrued liabilities in the accompanying
consolidated balance sheets.
During
the fiscal year ended August 31, 2003, our CEO chose to forgo his salary,
which
totaled $0.5
million.
In accordance with SEC rules and regulations, we recorded compensation
expense
for the unpaid salary and recorded a corresponding increase to paid-in
capital.
During fiscal 2004, at the urging of our Board of Directors, the CEO
elected to
resume receipt of his salary.
As
part
of a preferred stock offering to a private investor, an affiliate of
the
investor, who was then a director of the Company, was named as the Chairman
of
the Board of Directors and was later elected as CEO. This individual
continues
to serve as the Company’s Chairman of the Board and CEO at August 31, 2005. In
addition, two affiliates of the private investor were named to our Board
of
Directors. In connection with the preferred stock offering, we paid an
affiliate
of the investor $0.4
million
per year for monitoring fees, which will be reduced by redemptions of
outstanding Series A preferred stock.
During
fiscal 2002, we entered into a consulting agreement with a member of
the Board
of Directors to assist the Company with various projects and transactions,
including the sale of Premier and new product offerings. The consulting
agreement expired in December 2002 and we paid $0.1 million during fiscal
2003
for services under terms of the agreement.
During
fiscal 2003, we issued a non-exclusive license agreement for certain
intellectual property to a former officer and member of the Board. The
Company
received a nominal amount to establish the license agreement and license
payments required to be paid under terms of this license agreement were
insignificant during fiscal years 2005 and 2004.
During
fiscal 2002, the Company licensed certain intellectual property, on a
non-exclusive basis, to a company in which a former Vice-Chairman of
the Board
of Directors was a principal shareholder. Under terms of the non-exclusive
license agreement, which expires on September 1, 2007, we will not receive
payments from the use of this intellectual property.
As
part
of a severance agreement with a former CEO, the Company offered the former
CEO
the right to purchase 121,250 shares of our common stock for $0.9 million.
In
order to facilitate the purchase of these shares, we received a non-recourse
promissory note, which was due September 2003, and bore interest at 10.0
percent. During September 2003, the former CEO declined the opportunity
to
purchase these shares and the note receivable, which was recorded as
a reduction
of shareholders’ equity at August 31, 2003, was canceled. The shares, which were
held by the Company pending the purchase of the shares, were returned
to
treasury stock during fiscal 2004.
|
22.
|
On
October 21, 2005, we announced that we had given notice to the holders
of our
Series A Preferred Stock for the redemption of $10.0 million, or approximately
400,000 shares, of currently outstanding Series A Preferred Stock. The
preferred
stock was redeemed on November 11, 2005.
We
also
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,
or $25
per share plus accrued dividends. The amendment would extend the current
redemption deadline from March 8, 2006 to December 31, 2006. The extension
agreement 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. Knowledge Capital, an entity
which
holds nearly all of our outstanding preferred stock, has signed an agreement
to
vote in favor of the proposal to extend the redemption
period.
None.
|
Item
9A.
|
During
the preparation of our fiscal 2005 consolidated financial statements,
we
determined that due to errors in our deferred income tax calculations, the
Company’s consolidated financial statements as of August 31, 2004 and 2003 and
for each of the years in the three year period ended August 31, 2004
as
contained in the Company’s fiscal 2004 Form 10-K, and all subsequent interim
periods during fiscal 2005, contained material misstatements. As a result,
and
in consultation with our Audit Committee, we determined that restatements
were
necessary to our consolidated financial statements. These errors only
affected
our fiscal 2005 interim consolidated balance sheets and did not impact
our
consolidated statements of operations or cash flows. These restatements,
as well
as specific information regarding their impact upon our consolidated
financial
statements, are discussed in Note 2 - Restatement to our consolidated
financial
statements.
In
light
of the restatement, management has concluded that, as of August 31, 2005,
a
material weakness in the Company’s internal control over financial reporting
existed related to the accounting for income taxes. Specifically, our
accounting
personnel lacked sufficient technical expertise to properly account for
income
taxes in accordance with generally accepted accounting principles and
our
monitoring and review controls were inadequate.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange
Act
of 1934, as amended (the Exchange Act), is recorded, processed, summarized,
and
reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
As
required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls
and
procedures as of August 31, 2005. Based on this evaluation, and as a
result of
the material weakness in our internal control over financial reporting
related
to accounting for income taxes, the Chief Executive Officer and the Chief
Financial Officer have concluded that our disclosure controls and procedures
were not effective as of August 31, 2005.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during
the
quarter ended August 31, 2005 that materially affected, or were reasonably
likely to materially affect, our internal control over financial reporting.
Subsequent to the discovery of the misstatement described above, however,
we are
in the process of improving our internal control over financial reporting
regarding income taxes in an effort to remediate the material weakness
through
additional training on accounting for income taxes and establishing additional
monitoring and review controls. Additional work is needed to fully remedy
this
material weakness and we intend to continue our efforts to improve and
strengthen our control processes and procedures.
On
September 21, 2005, the SEC extended the compliance dates related to
Section 404
of the Sarbanes-Oxley Act for non-accelerated filers. Under this extension
a
company that is not required to file its annual and quarterly reports
on an
accelerated basis (non-accelerated filer) must begin to comply with the
internal
control over financial reporting requirements for its first fiscal year
ending
on or after July 15, 2007. The Company currently anticipates that it
could be an
accelerated filer in fiscal 2006 and therefore we would be required to
comply
with these requirements for our fiscal year ending August 31, 2006. We
are
currently in the process of documenting our internal control structure.
|
Item
9B.
|
None.
PART
III
Certain
information required by this Item is incorporated by reference to the
sections
entitled “Election of Directors” and “Executive Officers” in our definitive
Proxy Statement for the annual meeting of shareholders, which is scheduled
to be
held on January 20, 2006. The definitive Proxy Statement will be filed
with the
Securities and Exchange Commission pursuant to Regulation 14A of the
Securities
Exchange Act of 1934, as amended.
The
Board
of Directors has determined that one of the Audit Committee members,
Robert
Daines, is a “financial expert” as defined in Regulation S-K 401(h) adopted
under the Securities Exchange Act of 1934, as amended.
We
have
adopted a code of ethics for our senior financial officers that include
the
Chief Executive Officer, the Chief Financial Officer, and other members
of the
Company’s financial leadership team. This code of ethics is available on our
website at www.franklincovey.com.
We
intend to satisfy the disclosure requirement regarding any amendment
to, or a
waiver of, any provision of the Company’s code of ethics through filing a
current report on Form 8-K for such events if they occur.
|
Item
11.
|
The
information required by this Item is incorporated by reference to the
sections
entitled “Election of Directors” and “Executive Compensation” in the Company’s
definitive Proxy Statement for the annual meeting of shareholders, which
is
scheduled to be held on January 20, 2006.
|
Item
12.
|
|
Plan
Category
|
[a]
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
|
[b]
Weighted-average
exercise price of outstanding options, warrants, and
rights
|
[c]
Number
of securities remaining available for future issuance under
equity
compensation plans (excluding securities reflected in column
[a])
|
|||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||
|
Equity
compensation plans approved by security holders
(1)
|
2,677
|
$
|
11.57
|
994
|
||||||
|
Equity
compensation plans not approved by security holders
(2)
|
18
|
$
|
2.78
|
None
|
||||||
(1)
Includes 409,295 unvested stock awards which were valued at the August
31, 2005
closing price of $7.00 per share.
(2)
Shares in the equity compensation plans not approved by security holders
consist
of non-qualified options issued to employees from principal stockholders
of the
Company. There have been no non-qualified options issued since
1992.
The
remaining information required by this Item is incorporated by reference
to the
section entitled “Principal Holders of Voting Securities” in the Company’s
definitive Proxy Statement for the annual meeting of shareholders, which
is
scheduled to be held on January 20, 2006.
The
information required by this Item is incorporated by reference to the
section
entitled “Certain Relationships and Related Transactions” in the Company’s
definitive Proxy Statement for the annual meeting of shareholders, which
is
scheduled to be held on January 20, 2006.
The
information required by this Item is incorporated by reference to the
section
entitled “Selection of Auditor” in the Company’s definitive Proxy Statement for
the annual meeting of shareholders, which is scheduled to be held on
January 20,
2006.
PART
IV
|
(a)
|
List
of documents filed as part of this
report:
|
|
1.
|
Financial
Statements.
The consolidated financial statements of the Company and Report
of
Independent Registered Public Accounting Firm thereon included
in the
Annual Report to Shareholders on Form 10-K for the year ended
August 31,
2005, are as follows:
|
||
|
Report
of Independent Registered Public Accounting Firm
|
|||
|
Consolidated
Balance Sheets at August 31, 2005 and 2004
|
|||
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for
the years
ended August 31, 2005, 2004, and 2003
|
|||
|
Consolidated
Statements of Shareholders’ Equity for the years ended August 31, 2005,
2004, and 2003
|
|||
|
Consolidated
Statements of Cash Flows for the years ended August 31, 2005,
2004, and
2003
|
|||
|
Notes
to Consolidated Financial Statements
|
|||
|
2.
|
Financial
Statement Schedules:
|
||
|
Schedule
II - Valuation and Qualifying Accounts and Reserves (Filed
as Exhibit 99.2
to this Report on Form 10-K)
|
|||
|
Other
financial statement schedules are omitted because they are
not required or
applicable, or the required information is shown in the financial
statements or notes thereto, or contained in this report.
|
|||
|
3.
|
Exhibit
List.
|
|
Exhibit
No.
|
Exhibit
|
Incorporated
By Reference
|
Filed
Herewith
|
|
3.1
|
Revised
Articles of Incorporation of the Registrant
|
(1)
|
|
|
3.2
|
Amended
and Restated Bylaws of the Registrant
|
(1)
|
|
|
3.3
|
Articles
of Amendment to Revised Articles of Incorporation of the
Registrant
|
(5)
|
|
|
3.4
|
Articles
of Restatement dated March 4, 2005 amending and restating the
Company’s
Articles of Incorporation
|
(9)
|
|
|
4.1
|
Specimen
Certificate of the Registrant’s Common Stock, par value $.05 per
share
|
(2)
|
|
|
4.2
|
Stockholder
Agreements, dated May 11, 1999 and June 2, 1999
|
(5)
|
|
|
4.3
|
Registration
Rights Agreement, dated June 2, 1999
|
(5)
|
|
|
4.4
|
Restated
Shareholders Agreement, dated as of March 8, 2005, between
the Company and
Knowledge Capital Investment Group
|
(9)
|
|
|
4.5
|
Restated
Registration Rights Agreement, dated as of March 8, 2005, between
the
Company and Knowledge Capital Investment Group
|
(9)
|
|
|
10.1
|
Amended
and Restated 1992 Employee Stock Purchase Plan
|
(3)
|
|
|
10.2
|
First
Amendment of Amended and Restated 1992 Stock Incentive
Plan
|
(4)
|
|
|
10.3
|
Forms
of Nonstatutory Stock Options
|
(1)
|
|
|
10.4
|
Amended
and Restated 2000 Employee Stock Purchase Plan
|
(6)
|
|
|
10.5
|
Lease
Agreements, as amended and proposed to be amended, by and between
Covey
Corporate Campus One, L.L.C. and Covey Corporate Campus Two,
LLC
(Landlord) and Covey Leadership Center, Inc. (Tenant) which
were assumed
by Franklin Covey Co. in the Merger with Covey Leadership,
Inc.
|
(7)
|
|
|
10.6
|
Amended
and Restated Option Agreement, dated December 8, 2004, by and
between the
Company and Robert A. Whitman
|
(8)
|
|
|
10.7
|
Agreement
for the Issuance of Restricted Shares, dated as of December
8, 2004, by
and between Robert A. Whitman and the Company
|
(8)
|
|
|
10.8
|
Letter
Agreement regarding the cancellation of Robert A. Whitman’s Employment
Agreement, dated December 8, 2004
|
(8)
|
|
|
10.9
|
Restated
Monitoring Agreement, dated as of March 8, 2005, between the
Company and
Hampstead Interests, LP
|
(9)
|
|
|
10.10
|
Warrant,
dated March 8, 2005, to purchase 5,913,402 shares of Common
Stock issued
by the Company to Knowledge Capital Investment Group
|
(9)
|
|
|
10.11
|
Form
of Warrant to purchase shares of Common Stock to be issued
by the Company
to holders of Series A Preferred Stock other than Knowledge
Capital
Investment Group
|
(9)
|
|
|
10.12
|
Franklin
Covey Co. 2004 Non-Employee Directors’ Stock Incentive
Plan
|
(10)
|
|
|
10.13
|
Form
of Option Agreement for the 2004 Non-Employee Directors Stock
Incentive
Plan
|
(10)
|
|
|
10.14
|
Form
of Restricted Stock Agreement for the 2004 Non-Employees Directors
Stock
Incentive Plan
|
(10)
|
|
|
10.15
|
Separation
Agreement between the Company and Val J. Christensen, dated
March 29,
2005
|
(11)
|
|
|
10.16
|
Legal
Services Agreement between the Company and Val J. Christensen,
dated March
29, 2005
|
(11)
|
|
|
10.17
|
Master
Lease Agreement between Franklin SaltLake LLC (Landlord) Franklin
Development Corporation (Tenant)
|
(12)
|
|
|
10.18
|
Purchase
and Sale Agreement and Escrow Instructions between Levy Affiliated
Holdings, LLC (Buyer) and Franklin Development Corporation
(Seller) and
Amendments
|
(12)
|
|
|
10.19
|
Redemption
Extension Voting Agreement between Franklin Covey Co. and Knowledge
Capital Investment Group, dated October 20, 2005
|
(13)
|
|
|
**
|
|||
|
**
|
|||
|
**
|
|||
|
**
|
|||
|
**
|
|||
|
**
|
|
(1)
|
Incorporated
Registration by reference to Registration Statement on Form
S-1 filed with
the Commission on April 17, 1992, No. 33-47283.
|
|
(2)
|
Incorporated
by reference to Amendment No. 1 to Registration Statement on
Form S-1
filed with the Commission on May 26, 1992, Registration No.
33-47283.
|
|
(3)
|
Incorporated
by reference to Report on Form 10-K filed November 27, 1992,
for the year
ended August 31, 1992.
|
|
(4)
|
Incorporated
by reference to Registration Statement on Form S-1 filed with
the
Commission on January 3, 1994, Registration No.
33-73728.
|
|
(5)
|
Incorporated
by reference to Schedule 13D (CUSIP No. 534691090 as filed
with the
Commission on June 2, 1999).
|
|
(6)
|
Incorporated
by reference to Report on Form S-8 filed with the Commission
on May 31,
2000, Registration No. 333-38172.
|
|
(7)
|
Incorporated
by reference to Form 10-K filed December 1, 1997, for the year
ended
August 31, 1997.
|
|
(8)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on December
14, 2005.
|
|
(9)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on March 10,
2005.
|
|
(10)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on March 25,
2005.
|
|
(11)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on April 4,
2005.
|
|
(12)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on June 27,
2005.
|
|
(13)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission
on October
24, 2005.
|
|
**
|
Filed
herewith and attached to this
report.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by
the undersigned, thereunto duly authorized, on November 29, 2005.
FRANKLIN
COVEY CO.
|
|
By:
|
/s/
ROBERT A. WHITMAN
|
|
Robert
A. Whitman
Chairman
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the Registrant and
in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/
ROBERT A. WHITMAN
|
Chairman
of the Board and Chief Executive Officer
|
November
29, 2005
|
|
Robert
A. Whitman
|
||
|
/s/
STEPHEN R. COVEY
|
Vice-Chairman
of the Board
|
November
29, 2005
|
|
Stephen
R. Covey
|
||
|
/s/
CLAYTON M. CHRISTENSEN
|
Director
|
November
29, 2005
|
|
Clayton
M. Christensen
|
||
|
/s/
ROBERT H. DAINES
|
Director
|
November
29, 2005
|
|
Robert
H. Daines
|
||
|
/s/
E.J. "JAKE" GARN
|
Director
|
November
29, 2005
|
|
E.J.
“Jake” Garn
|
||
|
/s/
DENNIS G. HEINER
|
Director
|
November
29, 2005
|
|
Dennis
G. Heiner
|
||
|
/s/
DONALD J. MCNAMARA
|
Director
|
November
29, 2005
|
|
Donald
J. McNamara
|
||
|
/s/
JOEL C. PETERSON
|
Director
|
November
29, 2005
|
|
Joel
C. Peterson
|
||
|
/s/
E. KAY STEPP
|
Director
|
November
29, 2005
|
|
E.
Kay Stepp
|
FRANKLIN
COVEY CO.
Subsidiaries
Domestic:
Franklin
Covey Printing, Inc. (a Utah corporation)
Franklin
Development Corporation (a Utah corporation)
Franklin
Covey Mexico, Inc. (a Utah corporation)
Franklin
Covey Travel, Inc. (a Utah corporation)
Franklin
Covey Catalog Sales, Inc. (a Utah corporation)
Franklin
Covey Client Sales, Inc. (a Utah corporation)
Franklin
Covey Product Sales, Inc. (a Utah corporation)
Franklin
Covey Services, L.L.C. (a Utah limited liability company)
Franklin
Covey Marketing, Ltd. (a Utah limited liability company)
International:
Franklin
Covey Canada, Ltd. (a Canada corporation)
Franklin
Covey de Mexico S. de R.L. de C.V. (Mexico)
Franklin
Covey Europe, Ltd. (England, Wales)
Franklin
Covey Proprietary Limited (Queensland Australia)
Franklin
Covey Middle East W.L.L. (Bahrain)
Franklin
Covey Japan Co. Ltd. (Japan)
Franklin
Covey Brasil Ltda. (Brazil)
Franklin
Covey Ireland Limited (Ireland)
Independent
Registered Public Accounting Firm’s Consent
The
Board
of Directors and Shareholders
Franklin
Covey Co.:
We
consent to the incorporation by reference in registration statement Nos.
333-123602, 333-128131, 333-38172, 333-34498, 333-89541, 033-73624, and
033-51314 on Forms S-3 and S-8 of Franklin Covey Co. of our reports dated
November 23, 2005 with respect to the consolidated balance sheets of Franklin
Covey Co. as of August 31, 2005 and 2004, and the related consolidated
statements of operations and comprehensive income (loss), shareholders’ equity,
and cash flows for each of the years in the three-year period ended August
31,
2005, and the related financial statement schedule, which reports appear
in the
annual report on Form 10-K of Franklin Covey Co. for the year ended August
31,
2005.
As
discussed in Note 2, the consolidated financial statements as of August 31,
2004
and for each of the years ended August 31, 2004 and 2003 have been
restated.
KPMG
LLP
Salt
Lake
City, Utah
November
23, 2005
Exhibit
31
CERTIFICATION
OF THE CHIEF EXECUTIVE OFFICER
Pursuant
to Rule 13a-14(a) of the Securities Exchange Act adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert
A. Whitman, certify that:
| 1. |
I
have reviewed this annual report on Form 10-K of Franklin
Covey Co.;
|
| 2. |
Based
on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under
which such statements were made, not misleading with respect to the
period
covered by this report;
|
| 3. |
Based
on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all
material respects the financial condition, results of operations
and cash
flows of the registrant as of, and for, the periods presented in
this
report;
|
| 4. |
The
registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and
procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e))
for
the registrant and have:
|
| a) |
Designed
such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
| b) |
Evaluated
the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about
the
effectiveness of the disclosure controls and procedures, as of the
end of
the period covered by this report based on such evaluation; and
|
| c) |
Disclosed
in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
|
| 5. |
The
registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
|
| a) |
All
significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
| b) |
Any
fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal
control over financial reporting.
|
Date:
November 29, 2005
| /s/ ROBERT A. WHITMAN |
| Robert
A. Whitman Chief Executive Officer |
CERTIFICATION
OF THE CHIEF FINANCIAL OFFICER
Pursuant
to Rule 13a-14(a) of the Securities Exchange Act adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Stephen
D. Young, certify that:
| 1. |
I
have reviewed this annual report on Form 10-K of Franklin
Covey Co.;
|
| 2. |
Based
on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under
which such statements were made, not misleading with respect to the
period
covered by this report;
|
| 3. |
Based
on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all
material respects the financial condition, results of operations
and cash
flows of the registrant as of, and for, the periods presented in
this
report;
|
| 4. |
The
registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and
procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e))
for
the registrant and have:
|
| a) |
Designed
such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
| b) |
Evaluated
the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about
the
effectiveness of the disclosure controls and procedures, as of the
end of
the period covered by this report based on such evaluation; and
|
| c) |
Disclosed
in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
|
| 5. |
The
registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
|
| a) |
All
significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
| b) |
Any
fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal
control over financial reporting.
|
Date:
November 29, 2005
| /s/ STEPHEN D. YOUNG |
| Stephen
D. Young Chief Financial Officer |
Exhibit
32
The
following certifications are being furnished solely to accompany the Report
pursuant to 18 U.S.C. § 1350 and in accordance with SEC Release No. 33-8238.
These certifications shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, whether made before or after
the date hereof, regardless of any general incorporation language in such
filing.
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
OF FRANKLIN COVEY
PURSUANT TO 18 U.S.C. § 1350
CHIEF EXECUTIVE OFFICER
OF FRANKLIN COVEY
PURSUANT TO 18 U.S.C. § 1350
Pursuant
to
18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002,
the undersigned officer of Franklin Covey Co. (the “Company”), hereby certifies,
to his knowledge, that:
| 1. |
the
accompanying annual report on Form 10-K of the Company for the
period ended August 31, 2005 (the “Report”) fully complies with the
requirements of Section 13 (a) or Section 15 (d), as applicable,
of the
Securities Exchange Act of 1934, as amended; and
|
| 2. |
the
information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of
the Company.
|
Dated:
November 29, 2005
| /s/ ROBERT A. WHITMAN |
| Robert
A. Whitman Chief Executive Officer |
CERTIFICATION
OF
CHIEF FINANCIAL OFFICER
OF FRANKLIN COVEY
PURSUANT TO 18 U.S.C. § 1350
CHIEF FINANCIAL OFFICER
OF FRANKLIN COVEY
PURSUANT TO 18 U.S.C. § 1350
Pursuant
to
18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002,
the undersigned officer of Franklin Covey Co. (the “Company”), hereby certifies,
to his knowledge, that:
| 1. |
the
accompanying annual report on Form 10-K of the Company for the
period ended August 31, 2005 (the “Report”) fully complies with the
requirements of Section 13 (a) or Section 15 (d), as applicable,
of the
Securities Exchange Act of 1934, as amended; and
|
| 2. |
the
information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of
the Company.
|
Dated:
November 29, 2005
| /s/ STEPHEN D. YOUNG |
| Stephen
D. Young Chief Financial Officer |
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Franklin
Covey Co.:
Under
date of November 23, 2005, we reported on the consolidated balance sheets
of
Franklin Covey Co. and subsidiaries as of August 31, 2005 and 2004, and the
related consolidated statements of operations and comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the three-year
period ended August 31, 2005, which are included in Franklin Covey Co.’s annual
report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule in the annual report on Form 10-K. The financial
statement schedule is the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In
our
opinion, such financial statement schedule, when considered in relation to
the
basic consolidated financial statements taken as a whole, presents fairly,
in
all material respects, the information set forth therein.
As
discussed in Note 2, the consolidated financial statements as of August 31,
2004
and for each of the years ended August 31, 2004 and 2003 have been
restated.
KPMG
LLP
Salt
Lake
City, Utah
November
23, 2005
SCHEDULE
II
FRANKLIN
COVEY CO.
VALUATION
AND QUALIFYING ACCOUNTS AND RESERVES
For
the Three Years Ended August 31, 2005
(Dollars
in Thousands)
|
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
|||||||||
|
Additions
|
|||||||||||||
|
Description
|
Balance
at Beginning of Period
|
Charged
to Costs and Expenses
|
Deductions
|
Balance
at End of Period
|
|||||||||
|
Year
ended August 31, 2003:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
1,802
|
$
|
912
|
$
|
(890
|
)(1)
|
$
|
1,824
|
||||
|
Allowances
for inventories
|
5,389
|
4,755
|
(5,125
|
)(2)
|
5,019
|
||||||||
|
Reserve
for losses on management stock
loans
|
25,827
|
3,903
|
-
|
29,730
|
|||||||||
|
$
|
33,018
|
$
|
9,570
|
$
|
(6,015
|
)
|
$
|
36,573
|
|||||
|
Year
ended August 31, 2004:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
1,824
|
$
|
491
|
$
|
(1,281
|
)(1)
|
$
|
1,034
|
||||
|
Allowances
for inventories
|
5,019
|
2,844
|
(2,790
|
)(2)
|
5,073
|
||||||||
|
Reserve
for losses on management stock
loans
|
29,730
|
-
|
(29,730
|
)(3)
|
-
|
||||||||
|
$
|
36,573
|
$
|
3,335
|
$
|
(33,801
|
)
|
$
|
6,107
|
|||||
|
Year
ended August 31, 2005:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
1,034
|
$
|
1,287
|
$
|
(896
|
)(1)
|
$
|
1,425
|
||||
|
Allowances
for inventories
|
5,073
|
3,223
|
(2,972
|
)(2)
|
5,324
|
||||||||
|
$
|
6,107
|
$
|
4,510
|
$
|
(3,868
|
)
|
$
|
6,749
|
|||||
(1)
Represents
a write-off of accounts deemed uncollectible
(2) Reduction
in the allowance is due to a write-off of obsolete inventories
(3) Reduction
in loan loss is due to modifications made to the terms of the management stock
loans, which required new accounting treatment