UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2007.2008. |
| | OR |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___ |
Franklin Covey Co.
(Exact name of registrant as specified in its charter)
| Utah | | 1-11107 | | 87-0401551 |
(State(State or other jurisdiction of incorporation or organization) | | (Commission(Commission File No.) | | (IRS(IRS Employer Identification No.) |
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 817-1776
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | | Name of Each Exchange on Which Registered |
Common Stock, $.05 Par Value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Series A Preferred Stock, no par value
Title of Class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oNo þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitiondefinitions of "accelerated“large accelerated filer,” “accelerated filer” and large accelerated filer"“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
oLarge accelerated filer
| £ | Accelerated filer | | þAccelerated filer
| o
|
| Non-accelerated filer | £ | (Do not check if a smaller reporting company) | Smaller reporting company | £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of March 2, 2007,February 29, 2008, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $119.3$124.1 million, which was based upon the closing price of $7.49$7.72 per share as reported by the New York Stock Exchange.
As of November 1, 2007,3, 2008, the Registrant had 19,476,42616,879,498 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders, which is scheduled to be held on January 18, 2008,16, 2009, are incorporated by reference in Part III of this Form 10-K.
| | | |
| | | Business | |
| | | Risk Factors | |
| | | Unresolved Staff Comments | |
| | | Properties | |
| | | Legal Proceedings | |
| | | Submission of Matters to a Vote of Security Holders | |
| | | |
| | | Market For the Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities | |
| | | Selected Financial Data | |
| | | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| | | Quantitative and Qualitative Disclosures About Market Risk | |
| | | Financial Statements and Supplementary Data | |
| | | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure | |
| | | Controls and Procedures | |
| Item 9B. | Other Information | |
| | | |
| | | Directors, and Executive Officers of the Registrant and Corporate Governance | |
| | | Executive Compensation | |
| | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| | | Certain Relationships and Related Transactions, and Director Independence | |
| | | Principal Accountant Fees and Services | |
| | | |
| | | Exhibits and Financial Statement Schedules | |
| | | |
General
General
Franklin Covey Co. (the Company, we, us, our or FranklinCovey) enableshas enabled greatness in people and organizations everywhere byand is a worldwide leader in helping organizations, families, and individuals the world over achieve their own great purposes through teaching the principles and practices of effectiveness and by providing reinforcement tools like the FranklinCovey Planning System. Nearly 1,500SystemTM. Over 600 FranklinCovey associates world-wide delivered timeless and universal curriculum and effectiveness tools to millions of customers in fiscal 2007.2008. We strive to excel in this endeavorour efforts to enable greatness because we believe that:
·
■ | People are inherently capable, aspire to greatness, and have the power to choose. |
·
| |
| ■ | Principles are timeless and universal and are the foundation to lasting effectiveness. |
·
| |
| ■ | 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. |
·
| |
| ■ | Habits of effectiveness come only from the committed use of integrated processes and tools. |
·
| |
| ■ | Sustained superior performance requires a balance of performance and performance capability (P/PC BalanceÒ) - a focus on achieving results and building capability. |
Our business has historically been comprised of the Consumer Solutions Business Unit (CSBU) and the Organizational Solutions Business Unit (OSBU). The CSBU was primarily focused on sales to individual customers and small business organizations and included the results of our domestic retail stores, consumer direct operations (primarily Internet sales and call center), wholesale operations, international product channels in certain countries, and other related distribution channels, including government product sales and domestic printing and publishing sales. Although CSBU sales primarily consisted of products such as planners, binders, software, totes, and related accessories, virtually any component of our leadership, productivity, and strategy execution solutions may have been purchased through the CSBU channels.
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, public programs, and certain 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.
Over the past several years, the strategic focus of our CSBU, which was focused primarily on the sales of our products, and our OSBU, which was focused on the development and delivery of training, consulting, and related services, has changed significantly. As a consequence of these changes in strategic direction, we determined that the extent of overlap between our training and consulting offerings and our products has diminished. After significant analysis and deliberation, we decided that these business units would be able to operate more effectively as separate companies, each with clear and distinct objectives, market definitions, and competitive products and services. This conclusion persuaded us to sell substantially all of the operations of CSBU in fiscal 2008.
During the fourth quarter of fiscal 2008, we completed the sale of substantially all of the assets of our CSBU to a newly formed entity, Franklin Covey Products, LLC (Refer to Note 2 to our Consolidated Financial Statements in Item 8 for further details). Franklin Covey Products, which is controlled by Peterson Partners, purchased the CSBU assets for $32.0 million in cash, subject to adjustments for working capital on the closing date of the sale, which was effective July 6, 2008. On the date of the sale closing, the Company invested approximately $1.8 million to purchase a 19.5 percent voting interest in Franklin Covey Products, made a $1.0 million priority capital contribution with a 10 percent return, and will have the opportunity to earn contingent license fees if Franklin Covey Products achieves specified performance objectives. We recognized a gain of $9.1 million on the sale of the CSBU assets and we deferred a portion of the gain equal to our investment in Franklin Covey Products.
Following the sale of CSBU, our business primarily consists of training, consulting, assessment services, and related products to help organizations achieve superior results by focusing on and executing on top priorities, building the capability of knowledge works, and aligning business processes.
Late in the fourth quarter of fiscal 2008, we also initiated a restructuring plan that included the closing of two domestic sales offices, our Canadian office, and our Sales Performance Group office. Our Canadian sales associates and Sales Performance Group personnel will be absorbed into our remaining five Domestic sales offices. In connection with these office closures, we have also decentralized certain sales support functions. During the fourth quarter of fiscal 2008 we expensed $2.1 million for anticipated severance costs necessary to complete the restructuring plan, which is expected to be substantially completed in fiscal 2009.
The Opportunity
Corporations, organizations and individuals cumulatively purchased more than $13 billion(1) in 2007 and it is estimated that they will purchase nearly $15 billion in 2008Our fiscal year ends on August 31 of professional performance training curricula, books, tapes, CD’s and other tools in an efforteach year. Unless otherwise noted, references to improve their effectiveness and productivity. The training industry is divided into two segments – information technology training and performance skills training. The performance skills training segmentfiscal years apply to the 12 months ended August 31 of the industry represented over $7 billion in sales in 2007 and is expected to grow to exceed $8 billion in 2008 through sales of 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.specified year.
(1) SimbaOur principal executive offices are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331 and our telephone number is (801) 817-1776.
Industry Information Corporate Training Market 2007: Forecast and Analysis. (2007)
FranklinCovey isWe are engaged in the performance skills segment of the training industry. OurOne of our competitive advantageadvantages in this highly fragmented industry stems from our fully integrated training curricula, measurement methodologies and implementation tool offeringstools to help individualsorganizations and organizationsindividuals measurably improve their effectiveness. This advantage allows FranklinCoveyus to deliver not only training to both corporations and individuals, but also to implement the training through the use of powerful behavior changing tools with the capability to then measure the impact of the delivered training and tools.
In fiscal 2007,2008, we provided products and services to 90 percent97 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 also provide training curricula, measurement services and implementation tools internationally, either through directly operated offices, or through independent licensed providers. OnAt August 31, 2007,2008, we had direct operationsdirectly owned offices in Australia, Canada, Japan, and the United Kingdom. We also had licensed operations in 8799 countries and licensed rights in more than 140 countries. Nearly 500,000 individuals world-wide were trained during the fiscal year ended August 31, 2007.
Our principal executive offices are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331 and our telephone number is (801) 817-1776.
FranklinCovey ProductsTraining and Consulting Services
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 linerange of renewal planning pages, formstraining programs designed to measurably improve the effectiveness of organizations, families, and binders in various sizes and styles. The FranklinCovey Planning System broadened as we developed additional planning toolsindividuals. Our offerings are oriented 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,organizational, managerial, interpersonal, and personal management pages forneeds. In addition, we believe that our learning process provides an entire year. FranklinCovey Planning Pages are offered in a number of designs to appeal to various customer segments. The Starter Pack,engaging and behavior-changing experience, which includes personal management tabs and pages, a guide tofrequently generates additional business. During fiscal 2008, over one million individuals were trained through our direct offices using the planner, a pagefinder and weekly compass cards, combined with a storage binder, completes the basic FranklinCovey Planning System.
Binders and Totes.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, and smart phones or used as a stand-alone planning and information management system. The FranklinCovey PlanPlusÔ 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, XP and Vista operating systems. The FranklinCovey PlanPlusÔ 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.
FranklinCovey PlanPlusÔ is now also available in a web-based system called PlanPlusÔ Online. This latest offering allows customers to access the FranklinCovey Planning System from any web browser in the world. It also includes nearly all of the planning features foundCompany’s curricula in our desktop software productssingle and some additional features, including sales management tools. The software has both online planning toolsmultiple–day workshops and customer relationship management (CRM) tools. This new online offering also allows customers with smart phonesseminars.
Our training and consulting services are designed to access key information from any smart phone with a web browser, including the iPhone, Treo, Blackberryinspire organizations, communities, and Window Mobile devices.individuals to become measurably more efficient and effective through our various leadership and
We also provide productivity courses including: The 7 Habits of Highly Effective PeopleÒ; Leadership: Great Leaders—Great Teams—Great Resultsä; The 4 Disciplines of ExecutionTM; FOCUS: Achieving Your Highest Priorities; The 8 Habits of a Successful Marriage; Building Business Acumen; Championing Diversity; Leading at the Speed of Trust; Writing Advantage, and Presentation Advantage. The Company is also in the process of developing curriculum based on the book The Leader in Me by Stephen R Covey, which is aimed at helping principals and teachers implement The 7 Habits of Effective People in their schools. Curriculum and tools are also being developed to assist companies to increase customer loyalty.
Our most popular courses are based on the material presented in The 7 Habits of Highly Effective People® and includes our three-day 7 Habits of Highly Effective People Signature Program. We offer several other variations of this course including The 7 Habits for Managers: Managing Yourself, Leading Others, Unleashing Potential, The 7 Habits of Highly Effective People, Introductory Course for Associates, and other courses targeted for families, teens, and college students. In addition to the principles taught in the best-selling book, these courses contain various teaching aids including several award-winning videos which demonstrate the principles being taught. During fiscal 2008 we released a web-based interactive version of this course, making the principles and content taught in our course accessible to individuals and organizations world-wide without the expense of a facilitator, training room, and the opportunity cost of taking individuals out of the workforce for multiple days.
Our training and consulting offerings include the following.
The 7 Habits of Highly Effective People is one of our best-known offerings and is designed to help organizations and individuals achieve sustained superior results by focusing on making individuals and leaders more effective. Participants gain hands-on experience applying timeless principles that yield greater productivity, improved communication, strengthened relationships, increased influence, and focus on critical priorities. This offering is the basis for some of our other courses and includes over 30 award winning video segments.
Leadership: Great Leaders—Great Teams—Great Resultsä is built on the foundation that people are capable of greatness, that they can make dramatic contributions and that they offer their best when they live by the four imperatives of great leaders, which are 1) that they inspire trust, 2) that they clarify purpose, 3) that they insure systems are aligned, and 4) that they unleash talent.
The 4 Disciplines of Executionäcourse teaches that execution succeeds or fails on the basis of four critical disciplines, which include 1) focus on the most important goals, 2) acting on the key measures that influence outcome, 3) track the progress on a compelling scoreboard which makes progress visible, and 4) holding individuals accountable. Our Execution products help organizations adopt and implement an operating system for achieving their most pressing objectives measurably and predictably.
Our productivity course FOCUS: Achieving Your Highest Priorities focuses on helping individuals understand their personal values so they can accomplish their most important tasks, both personally and professionally. Our training is based on a productivity pyramid that helps individuals identify their values, set achievable goals, and then build a system of weekly and daily planning, which helps individuals achieve their highest priorities.
We offer a series of pre- and post-assessment surveys and assessments to measure and track key principles and actions taught in our course that directly relate to individual and organizational effectiveness. These products include xQä, (Execution QuotientÔ), LQÔ (Leadership Quotient), tQÔ (Trust Quotient), and the 7 Habits Profile. These surveys, which are administered through a Web-based system, search for details to uncover underlying focus and teamwork barriers or issues.
We also provide The 7 Habits of Highly Effective Teensä 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. We are currently developing a new curriculum entitled The Leader in Meä, which will help elementary
schools incorporate The 7 Habits principles into their lessons to help students develop the life skills they need to be successful.
In addition to providing consultants and presenters, we train and certify client facilitators to teach our workshops within their organizations. We believe client–facilitated training is important to our fundamental strategy of creating pervasive on-going client relationships, which results in perpetual revenue streams. After having been certified by attending one of our certification workshops and completing certain requirements, client facilitators can purchase manuals, profiles, planners and other products to conduct training workshops within their organization without incurring the costs of one of our presenters, which makes it more cost-effective to distribute our curriculum within all departments of their organization. Since 1988, we have trained approximately 25,000 client facilitators.
Software
During fiscal 2008, we launched a new web-based interactive version of The 7 Habits of Highly Effective People® course which was developed through a partnership with Personnel Decisions International (formerly 9th House), a leading firm which uses technology to create engaging learning experiences. During the three-hour online instruction, participants engage in interactive exercises that illustrate how to use The 7 Habits® in real work situations. Participants then get to test their new skills in a state-of-the-art virtual simulation that shows the real-world triumphs and challenges associated with the choices they have made. Participants can also join a live one-day application workshop to dive deeper in the content and practice what they have learned.
The 7 Habits of Highly Effective People® course is also available on a CD-ROM versions.version. This edition delivers the content from the 3-day classroom workshop in a flexible self-paced version via the Internet or CD-ROM thatand is available when and where employees need it. The Online Editiononline 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.
Personal DevelopmentBooks 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.Audio
Books.The principles we teach in our curriculum have also been published in book, audiotape and CD formats.formats, and can be downloaded from various Internet sites. 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, The 8th Habit: From Effectiveness to Greatness, and the latest book, Everyday Greatness, The Leader in Me, 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, The 6 Most Important Decisions You’ll Ever Make, and The 7 Habits of Happy Kids 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, audio book websites, as well as through our own catalog, e-commerce Internet site at www.franklincovey.com and retail stores.www.franklincovey.com.
Training and Consulting ServicesSegment Information
We offer training and consulting services for organizations through a combinationPrior to the sale of assessment instruments, including the xQä (Execution QuotientÔ) Profile and the 7 Habits Profile, and training courses including FOCUS: Achieving Your Highest Priorities; The 4 Disciplines of Executionä; The 4 Roles of Leadershipä; 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 2007, approximately 500,000 individuals were trained using the Company’s curricula in our 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 in corporate and public seminars throughout the United States and in many foreign countries. It is also delivered by our clients’ certified in-house trainers for their employees. 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, primarilyCSBU in the leadership area. Included in these offerings is the three–day 7 Habits workshop based upon the material presented in The 7 Habitsfourth quarter 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 offiscal 2008, 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 recurring 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.
We also provide The 7 Habits of Highly Effective People® training course in online and CD-ROM versions. The need for reaching more employees faster and less expensively 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.
Segment Information
To help us fulfill our mission of enabling greatness in people and organizations everywhere, we havebusiness was organized our business in two segments: (1) the Consumer Solutions Business Unit (CSBU)CSBU, which was designed to reachsell products to individual consumers and small businesses; and (2) the Organizational Solutions Business Unit (OSBU)OSBU, which is designed to serve organizational clients. The following table sets forth, for the fiscal periods indicated, the Company'sCompany’s sales from external customers for each of itsthese operating segments (in thousands):
| | | 2007 | | | 2006 | | | 2005 | |
Consumer Solutions Business Unit | | | | | | | | | |
| Retail Stores | | $ | 54,316 | | | $ | 62,156 | | | $ | 74,331 | |
| Consumer Direct | | | 59,790 | | | | 65,480 | | | | 62,873 | |
| Wholesale | | | 17,991 | | | | 17,782 | | | | 17,936 | |
| CSBU International | | | 7,342 | | | | 7,716 | | | | 7,009 | |
| Other | | | 5,565 | | | | 4,910 | | | | 3,757 | |
| Total CSBU | | | 145,004 | | | | 158,044 | | | | 165,906 | |
Organizational Solutions Business Unit | | | | | | | | | | | | |
| Domestic | | | 81,447 | | | | 71,595 | | | | 70,572 | |
| International | | | 57,674 | | | | 48,984 | | | | 47,064 | |
| Total OSBU | | | 139,121 | | | | 120,579 | | | | 117,636 | |
| Total | | $ | 284,125 | | | $ | 278,623 | | | $ | 283,542 | |
YEAR ENDED AUGUST 31, | | 2008 | | | Percent change from prior year | | | 2007 | | | Percent change from prior year | | | 2006 | |
| Organizational Solutions Business Unit: | | | | | | | | | | | | | | | |
| Domestic | | $ | 91,287 | | | | (2 | ) | | $ | 93,308 | | | | 10 | | | $ | 84,904 | |
| International | | | 59,100 | | | | 2 | | | | 57,674 | | | | 18 | | | | 48,984 | |
| | | | 150,387 | | | | - | | | | 150,982 | | | | 13 | | | | 133,888 | |
| | | | | | | | | | | | | | | | | | | | | |
| Consumer Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | |
Retail stores | | | 42,167 | | | | (22 | ) | | | 54,316 | | | | (13 | ) | | | 62,156 | |
Consumer direct | | | 38,662 | | | | (19 | ) | | | 48,018 | | | | (8 | ) | | | 52,171 | |
Wholesale | | | 16,970 | | | | (6 | ) | | | 17,991 | | | | 1 | | | | 17,782 | |
CSBU International | | | 7,295 | | | | (1 | ) | | | 7,342 | | | | (5 | ) | | | 7,716 | |
Other CSBU | | | 4,611 | | | | (16 | ) | | | 5,476 | | | | 12 | | | | 4,910 | |
| | | | 109,705 | | | | (18 | ) | | | 133,143 | | | | (8 | ) | | | 144,735 | |
| Total net sales | | $ | 260,092 | | | | (8 | ) | | $ | 284,125 | | | | 2 | | | $ | 278,623 | |
We market products and services to organizations, schools and individuals both domestically and internationally through FranklinCovey retail stores, our consumer direct channel (which includes call center operations, our Internet website at www.franklincovey.com, and public seminar programs), our organizational and educational sales forces and other distribution channels. 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. 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 19).
ConsumerOrganizational Solutions Business Unit
We sell FranklinCovey productsThe following is a more detailed description of our OSBU and other productivity tools to individual consumers primarily through our retail stores, through FranklinCovey consumer direct channels, through selected wholesale channels,its primary operations, which consist of domestic and through international operations.
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.Domestic Operations
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 softwareIn general, 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 our sales force.
At August 31, 2007, FranklinCovey had 87 domestic retail stores located in 33 states. We closed 2 retail stores in the United States during fiscal year 2007. The Company anticipates that it may close additional stores in fiscal year 2008. We also had 4 retail stores located in countries where we maintain direct operations at year-end.
Consumer Direct. We sell products and services through catalog call center operations, Internet sales operations and public seminar programs. 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. The customer service representatives have 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.
Public seminars are planned and coordinated with training consultants by a staff of marketing and administrative personnel at our corporate offices. Public 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.
Wholesale. We have created strategic alliances to sell our products through more than 9,900 retail office supply stores and department stores. 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 manufacture, market and distribute selected products into Sam’s Club, Costco, and an under-brand label “DayOne by FranklinCovey” product line that is sold through WalMart stores.
CSBU International. FranklinCovey also markets its products to clients in four countries where it maintains wholly owned product sales operations; Australia, Canada, Mexico and the United Kingdom. Products are produced in styles and languages of the native countries and are sold through retail stores, catalog operations and through Internet portals.
Other CSBU Sales.Other CSBU sales include sales of printing services by FranklinCovey Printing, a wholly-owned subsidiary, miscellaneous licensing rights of FranklinCovey products and brands to various marketing customers, and sub-lease revenues from third-party tenants at our corporate headquarters campus.
Organizational Solutions Business Unit
Domestic Training. We sell effectiveness and productivity solutions to organizations and schoolsour customers through our own direct sales forces.force. We then deliver training services to organizations, schools and individuals in one of fourfive ways:
| 1. | | FranklinCoveyOur consultants provide on-site coaching, consulting or training classes for organizations and schools.classes. In these situations, our consultant canconsultants tailor the curriculum to our client’s specific business and objectives.
|
| | |
| 2. | | 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 knowledgeable advocates of our curriculum in organizations. |
2.3. | | Our consultants provide training to individuals or small groups of individuals through executive coaching sessions. In these sessions, our consultants are able to deliver course content in greater detail and can help adapt our course principles to the specific needs of the organization. |
| 4. | | We conduct public seminars in more than 100 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-commerceInternet web-site retail stores, and by direct mail. |
3. | | 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.
|
4.5. | | We also offer The 7 Habits of Highly Effective People® training course in online and CD-ROM formats. This self-paced e-learning alternative providesThese products provide the flexibility thatrequired by 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.organizations. |
Our 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. Consultantssolutions and are required to follow up with client service teams working with them to develop lasting client impact and ongoing business opportunities.
We employ 111over 150 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 54 sales professionals and business developers outside of the United States in four countries.developers. 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 callare calling upon our clients’ executive leadership or line leaders.leaders as they educate our clients on the value of our solutions. Our sales professionals work closely with training consultants in their territories to schedule and tailor seminars and workshops to meet the specific objectives of our institutional clients. FranklinCoveyWe currently employs 110employ over 150 training consultants in major metropolitan areas
worldwide. 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.
International Operations
We also provide The 7 Habits of Highly Effective Teensä as a workshop or as a year-long curriculum to schoolsdeliver training services 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 wholly-owned operations and offices in Australia, Canada, Japan, and the United Kingdom. We also have licensed operations in Argentina, Angola, Austria, Bahrain, Bangladesh, Belgium, Bermuda, Bolivia, Botswana, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic, Cyprus, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, Finland, France, Germany, Greece, Guatemala, Hong Kong, Hungary, India, Iceland, Indonesia, Israel, Italy, Jordon, Kenya, Kuwait, Latvia, Lebanon, Lesotho, Lithuania, Luxembourg, Madagascar, Malaysia, Mauritius, Mexico, Mozambique, Namibia, Nepal, Netherlands, Nicaragua, Nigeria, Norway, Oman, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Puerto Rico, Romania, Russia, Qatar, Saudi Arabia, Serbia, Singapore, Slovak Republic, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Swaziland, Sweden, Switzerland, Tanzania, Taiwan, Thailand, Trinidad/Tobago, Turkey, UAE, Ukraine, Uruguay, Venezuela, Vietnam, and Vietnam.Zambia. There are also licensee retail operations in Hong Kong and South Korea. Our sevennine 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 Teen, The 8th Habit: From Effectiveness to Greatness, and The Six Most Important Decisions You’ll Ever Makes are currently published in multiple languages. Financial information about our foreign operations is contained in Note 19 to our consolidated financial statements.
Strategic Distribution Alliances. 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; 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 to the commercial and retail office supply channels and in to Target; PalmOneÔ to serve as the official training organization for its PalmOneÔ products; Agilix Labs in development of the PlanPlusÔ Software; Microsoft in conjunction with PlanPlusÔ marketing; and Heritage Travelware. Ltd. to manufacture, market and distribute selected FranklinCovey products to the retail office supply channels as well as to Sams Club, Costco and WalMart.Clients
Clients
We have a relatively broad base of institutionalorganizational and individual clients. We have more than 2,000 institutional6,000 organizational clients consisting of corporations, governmental agencies, educational institutions, and other organizations. We believe that our products, workshops, and seminars encourage strong client loyalty. Employees in each of our domestic and international distribution channels focus on providing timely and courteous responses to client requests and inquiries. Institutional clients may chooseDue 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’sour business, and distribution channels, the Company does not have, nor has it had, a significant backlog of firm orders.
Competition
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 $7 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'sour fiscal 2007 organizational2008 OSBU sales of approximately $139$150.4 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,American Management Association, Wilson Learning, 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 or cell-phones with electronic organization capabilities, 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 FranklinCovey 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 andour training markets,market, the number of competitors could increase, many of whom may imitate existing methods of distribution, products and seminars, or could 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 relatedour products compete primarily on the basis of user appeal,quality, proven results, content, 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 productscurriculum based upon best-selling books, which encompasses relevant high-quality video segments, has become a competitive advantage. This advantage is strengthened and enhanced by our ability to easily train individuals within organizations to become client facilitators who in turn can effectively relay our curriculum throughout their organization. Moreover, we believe that we are a market leader in the United
States among a small number of integrated providers ofin productivity, leadership and time managementexecution products and services. Increased competition from existing and future competitors could, however, have a material adverse effect on our sales and profitability.
Manufacturing and Distribution
The manufacturing operationsFollowing the sale of FranklinCovey consist primarilyCSBU in fiscal 2008, we no longer manufacture a significant portion of printing, collating, assemblingour products. We purchase our training materials 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,related products from various vendors and suppliers located both domestically and internationally who can meetand we are not dependent upon any one vendor for the production of our quality standards, thereby facilitating efficient delivery of product in a global market.training and related materials as the raw materials for these products are readily available. We currently 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,that we have gained greater control of production costs, schedulesgood relationships with our suppliers and quality control of printed materials.contractors.
During fiscal 2001, we entered into a long-term contract with EDSElectronic Data Systems (EDS) to provide warehousing and distribution services for our product line.training products and related accessories. EDS maintains a facility at the Company’s headquarters as well as at other locations throughout North America.
Binders and totes are produced using leather, simulated leather, fabrics, and other synthetic materials. These binders and totes are produced by multiple product suppliers. We currently enjoy good relations with our suppliers and vendors and do not anticipate any difficulty in obtaining the required binders, totes and materials needed for our business. We have implemented special procedures to ensure a high standard of quality for our products, 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.
Research and Development
FranklinCovey believes that the development of new productscurricula and curricularelated products 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.
We expense in the same year incurred part of the costs to develop new curricula and products. Curriculum costs are only capitalized when a course is developed that will result in significant future benefits or when there is a major revision to a course or course materials. Our research and development expenditures totaled $4.6 million, $3.3 million, $2.3 million, and $2.2$2.3 million in fiscal years 2008, 2007, and 2006 and 2005 respectively, and we capitalized certainrespectively. Capitalized curriculum development costs totaling $5.1 million, $4.0are reported as a component of other long-term assets in our consolidated balance sheets and totaled $6.8 million and $2.2$8.6 million respectively, for the same years.at August 31, 2008 and 2007. Amortization of capitalized curriculum development costs is reported as a component of cost of sales.
Trademarks, Copyrights, and Intellectual Property
We seek to protect our intellectual property through a combination of trademarks, copyrights, and confidentiality agreements. We claim rights for 12880 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 andother electronic media 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 enterswe enter into written confidentiality agreements with certain executives, product developers, sales professionals, training consultants, other employees and licensees. Although we believe the protective measures with respect to our proprietary rights are important, there can be no assurance that such measures will provide significant protection from competitors.
Employees
As ofAt August 31, 2007,2008, FranklinCovey had approximately 1,425 fullover 600 full- and part-time associates including 835located in sales, marketingthe United States of America, Japan, the United Kingdom, Canada, and training; 315 in customer service and retail; 90 in production operations and distribution; and 185 in administration and support staff.Australia. During fiscal 2002, the Company2001, we outsourced a significant part of itsour 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.
Available Information
The Company'sCompany’s principal executive offices are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331 and our telephone number is (801) 817-1776.
We regularly file reports with the Securities Exchange Commission (SEC). These reports include, but are not limited to, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and security transaction reports on Forms 3, 4, or 5. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company’s reports, proxy and information statements, and other information that the Company files with the SEC on its website at www.sec.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 reasonable practicable after we file or furnish these reports with the SEC.
Our business environment, current domestic and international economic conditions, and other specific risks may affect our future business decisions and financial performance. The matters discussed below may cause our future results to differ from past results or those described in forward-looking statements and could have a material adverse effect on our business, financial condition, liquidity, results of operations, and stock price, and should be considered in evaluating our company.
The following list of potential risks does not contain the only risks currently facing us. Additional business risks and uncertainties that are not presently known to us or that are not currently believed to be material may also harm our business operations and financial results in future periods.
Our results of operations could be adversely affected by economic and political conditions and the effects of these conditions on our clients’ businesses and their levels of business activity.
Global economic and political conditions affect our clients’ businesses and the markets in which they operate. A serious and/or prolonged economic downturn combined with a negative or uncertain political climate could adversely affect our clients’ financial condition and the business activity of our clients. These conditions may reduce the demand for our services and solutions or depress the pricing of those services and have a material adverse impact on our results of operations. Changes in global economic conditions may also shift demand to services for which we do not have competitive advantages, and this could negatively affect the amount of business that we are able to obtain. Such economic, political, and client spending conditions are influenced by a wide range of factors that are beyond our control and that we have no comparative advantage in forecasting. If we are unable to successfully anticipate these changing conditions, we may be unable to effectively plan for and respond to those changes, and our business could be adversely affected.
Our business success also depends in part upon continued growth in the use of training and consulting services in business by our current and prospective clients. In challenging economic environments, our clients may reduce or defer their spending on new services and consulting solutions in order to focus on other priorities. At the same time, many companies have already invested substantial resources in their current means of conducting their business and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel and/or processes. If the growth in the general use of training and consulting services in business or our clients’ spending on these items declines, or if we cannot convince our clients or potential clients to embrace new services and solutions, our results of operations could be adversely affected.
In addition, our business tends to lag behind economic cycles and, consequently, the benefits of an economic recovery following a period of economic downturn may take longer for us to realize than other segments of the economy.
We operate in an intensely competitive industriesindustry and our competitors may develop courses that adversely affect our ability to sell our offerings.
The training and consulting services industry and personal organizer industry areis intensely competitive with relatively easy entry. Competitors continually introduce new programs and productsservices that may compete directly with our offerings or that may make our offerings uncompetitive or obsolete. Larger and better capitalized competitors may have superior abilities to compete for clients and skilled professionals, reducing our ability to deliver quality work to our clients. In
addition, one or more of our competitors may develop and implement training courses or methodologies that may adversely affect our ability to sell our curricula and products to new clients. Any one of these circumstances could have a material adverse effect on our ability to obtain new business and successfully deliver client work or products.our services and solutions.
We have experienced net lossesOur results of operations may be negatively affected if we cannot expand and develop our services and solutions in recent fiscal yearsresponse to client demand.
Our success depends upon our ability to develop and wedeliver services and consulting solutions that respond to rapid and continuing changes in client needs. We may not be ablesuccessful in anticipating or responding to maintain consistent profitability
Although we reported net incomethese developments on a timely basis and our offerings may not be successful in fiscal 2007the marketplace. The implementation and fiscal 2006, weintroduction of new programs and solutions may entail more risk than supplying existing offerings to our clients. In addition, the introduction of new or competing services or solutions by current or future competitors may render our service or solution offerings obsolete. Any one of these circumstances may have experienced significant net losses in recent yearsan adverse impact upon our business and we cannot assure you that we will maintain consistently profitableresults of operations.
During previous years we have faced numerous challenges that haveOur business could be adversely affected if our operating results. Specifically, we have experienced, and may continue to experience the following:clients are not satisfied with our services.
· | Declining traffic in our retail stores and consumer direct channel
|
· | Risk of excess and obsolete inventories
|
· | Operating expenses that, as a percentage of sales, have exceeded our desired business model
|
· | Costs associated with exiting unprofitable or underperforming retail stores
|
The success of our business model significantly depends on our ability to attract new work from our base of existing clients, as well as new work from prospective clients. Our business model also depends on the relationships our senior executives and sales personnel develop with our clients so that we can understand our clients’ needs and deliver services and solutions that are specifically tailored to those needs. If a client is not satisfied with the quality of work performed by us, or with the type of services or solutions delivered, then we may incur additional costs to remediate the situation, the profitability of that work might be decreased, and the client’s dissatisfaction with our services could damage our ability to obtain additional work from that client. In particular, clients that are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date and could direct future business to our competitors. In addition, negative publicity related to our client relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new contracts with current and prospective clients.
Our profitability could decrease if we are unable to maintain profitable operations we may be required to reestablish valuation allowances oncontrol our deferred tax assets if it becomes more likely than not that we would not be able to realize the benefits of those assets. The reestablishment of deferred tax assets would have an unfavorable impact upon our reported net income.
If we do not achieve the appropriate cost structure our profitability could decreasecosts.
Our future success and profitability depend in part on our ability to achieve the appropriate cost structure and be efficientimprove our efficiency in the highly competitive training, consulting, and personal organizer industries.services industry in which we compete. We regularly monitor our operating costs and develop initiatives and business models that impact our operations and are designed to improve our profitability. Our recent initiatives have included redemptions of preferred stock, reconfiguration of our printing operations, exiting non-core businesses, asset sales, headcount reductions, and other internal initiatives designed to reduce our operating costs. If we do not achieve targeted business model cost levels and manage our costs and processes to achieve additional efficiencies, our competitiveness and profitability could decrease.
Our results of operations are materially affected by economic conditions, levels of business activity, and other changes experienced by our clients
Uncertain economic conditions may affect 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:
·
| The overall demand for training, consulting, and our related products
|
·
| Conditions and trends in the training and consulting industry
|
·
| General economic and business conditions
|
·
| General political developments, such as the war on terrorism, and their impacts upon our business both domestically and internationally
|
·
| Natural or man-made disasters
|
A prolonged economic downturn, particularly in the United States, could increase these effects on our business.
In addition, our business tends to lag behind economic cycles and, consequently, the benefits of an economic recovery following a period of economic downturn may take longer for us to realize than other segments of the economy.
Our 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 (primarily catalog call center and eCommerce), wholesale, and government product channels, have historically been very profitable for us. However, due to recent sales declines, we have reevaluated our product business and have taken steps to restore its profitability. These initiatives have included retail store closures, active efforts to transition 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 increase. If product sales continue to decline or gross margins on these sales decline, our product sales strategies may not be adequate to return our product delivery channels to past profitability levels.
Our work with governmental clients exposes us to additional risks that are inherent in the government contracting processprocess.
Our clients include national, provincial, state, and local governmental entities and our work with these governmental entities has various risks inherent in the government contracting process. These risks include, but are not limited to, the following:
· | GovernmentGovernmental entities typically fund projects through appropriated monies. While these projects are often planned and executed as multi-year projects, the government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and at their convenience. Changes in government or political developments could result in changes in scope or in termination of our projects.
|
· | Government entities often reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and investigations of our business practices with respect to our government contracts. If the governmental entity finds that the costs are not reimbursable, then we will not be allowed to bill for thesethose costs or the cost must be refunded to the client if it has already been paid to us. Findings from an audit also may result in our being required to prospectively adjust previously agreed rates for our work and may affect our future margins. |
· | If a government client discovers improper activities in the course of audits or investigations, we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government. The inherent limitations of internal controls may not prevent or detect all improper or illegal activities, regardless of their adequacy. |
· | Political and economic factors such as pending elections, revisions to governmental tax policies and reduced tax revenues can affect the number and terms of new government contracts signed. |
The occurrences or conditions described above could affect not only our business with the particular governmental agency involved, but also our business with other agencies of the same or other governmental entities. Additionally, because of their visibility and political nature, government projects may present a heightened risk to our reputation. Any of these factors could have a material adverse effect on our business or our results of operations.
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,Our profitability will suffer if we are not able to prevent further sales declinesmaintain our pricing and utilization rates and control our costs.
Our profit margin on our services and solutions is largely a function of the rates we are able to recover for our services and the utilization, or achievechargeability, of our growth objectives,trainers, client partners, and consultants. Accordingly, if we will needare unable to further reducemaintain sufficient pricing for our costs. An unintended consequence of additionalservices or an appropriate utilization rate for our training professionals without corresponding cost reductions, may be reduced sales. Ifour profit margin and overall profitability will suffer. The rates that we are not able to effectively reducerecover for 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. 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.services are affected by a number of factors, including:
| · | Our clients’ perceptions of our ability to add value through our programs and products |
| · | General economic conditions |
| · | Introduction of new programs or services by us or our competitors |
| · | Our ability to accurately estimate, attain, and sustain engagement sales, margins, and cash flows over longer contract periods |
Our cash balances have significantly decreased, which may reduce our ability to adequately respond to future adverse changes in our business and operationsutilization rates are also affected by a number of factors, including:
| · | Seasonal trends, primarily as a result of scheduled training |
| · | Our ability to forecast demand for our products and services and thereby maintain an appropriate headcount in our employee base |
| · | Our ability to manage attrition |
During the year ended August 31, 2007,recent periods we utilized substantially all of our available cash on hand combined with proceeds from a newly acquired line of credit to redeem all of the remaining outstanding shares of Series A preferred stock. As a consequence of this transaction, our cash balances have significantly decreased, which may reduce our ability to adequately respond to future adverse changes in our business and operations, whether anticipated or unanticipated.
Failure to comply with the terms and conditions of our credit facility may have an adverse effect upon our business and operations
Our newly acquired line of credit facility requires us to be in compliance with customary non-financial terms and conditions as well as specified financial ratios. Failure to comply with these terms and conditions or maintain adequate financial performance to comply with specific financial ratios entitles the lenders to certain remedies, including the right to immediately call due any amounts outstanding on the line of credit. Such events would have an adverse effect upon our business and operations asmaintained favorable utilization rates. However, there can be no assurance that we maywill be able to obtain other forms of financing or raise additional capitalmaintain favorable utilization rates in future periods. Additionally, we may not achieve a utilization rate that is optimal for us. If our utilization rate is too high, it could have an adverse effect on terms that would be acceptable to us.employee engagement and attrition. If our utilization rate is too low, our profit margin and profitability could suffer.
If our pricing structures do not accurately anticipate the cost and complexity of performing our services, then our contracts may become unprofitable.
We negotiate pricing terms with our clients utilizing a range of pricing structures and conditions. Depending on the particular contract and service to be provided, these include time-and-materials pricing, fixed-price pricing, and contracts with features of both of these pricing models. Our pricing is highly dependent on our internal forecasts and predictions about our projects and the marketplace, which might be based on limited data and could turn out to be inaccurate. If we do not accurately estimate the costs and time necessary to deliver our work, our contracts could prove unprofitable for us or yield lower profit margins than anticipated. There is a risk that we may under price our contracts, fail to accurately estimate the costs of performing the work, or fail to accurately assess the risks associated with potential contracts. In particular, any increased or unexpected costs, delays or failures to achieve anticipated cost savings, or unexpected risks we encounter in connection with the performance of our work, including those caused by factors outside our control, could make these contracts less profitable or unprofitable, which could have an adverse effect on our profit margin.
Our global operations pose complex management, foreign currency, legal, tax, and economic risks, which we may not adequately addressaddress.
We have Company-owned offices in Australia, 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:
· | Restrictions on the movement of cash |
· | Burdens of complying with a wide variety of national and local laws |
· | The absence in some jurisdictions of effective laws to protect our intellectual property rights |
· | Currency exchange rate fluctuations |
· | 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 may experience foreign currency gains and losseslosses.
Our sales outside of the United States totaled $65.0$62.9 million, or 2324 percent of total sales, for the year ended August 31, 2007.2008. As our international operations continue to grow and become a larger component of our overall financial results, our revenues and operating results may be adversely affected when the dollar strengthens relative to other currencies and may be positively affected when the dollar weakens. In order to manage a portion of our foreign currency risk, we make limited use of foreign currency derivative contracts to hedge certain transactions and translation exposure. There can be no guarantee that our foreign currency risk management strategy will be effective in reducing the risks associated with foreign currency transactions and translation.
Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and violation of these regulations could harm our businessbusiness.
Because we provide services to clients in many countries, we are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, government affairs, internal and disclosure control obligations, data privacy and labor relations. Violations of these regulations in the conduct of our business could result in fines, criminal sanctions against us or our officers, prohibitions on doing business, and damage to our reputation. Violations of these regulations in connection with the performance of our obligations to our clients also could result in liability for monetary damages, fines and/or criminal prosecution, unfavorable publicity, restrictions on our ability to process information and allegations by our clients that we have not performed our contractual obligations. Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws might be insufficient to protect our rights.
Legislation related to certain non-U.S. corporations has been enacted in various jurisdictions in the United States. Additional legislative proposals remain under consideration in various legislatures which, if enacted, could limit or even prohibit our eligibility to be awarded state or Federal government contracts in the United States in the future. Changes in laws and regulations applicable to foreign corporations could also mandate significant and costly changes to the way we implement our services and solutions. These changes could threaten our ability to continue to serve certain markets.
In many parts of the world, including countries in which we operate, practices in the local business community might not conform to international business standards and could violate anticorruption regulations, including the U.S. Foreign Corrupt Practices Act, which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have policies and procedures to ensure legal and regulatory compliance, our employees, subcontractorslicensee operators, and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, including fines and suspension or disqualification from U.S. federal procurement contracting, any of which could have a material adverse effect on our business.
We could have liability or our reputation could be damaged if we do not protect client data or if our information systems are breached
We are dependent on information technology networksFailure to comply with the terms and systems to process, transmit and store electronic information and to communicate among our locations around the world and with our clients. Security breaches of this infrastructure could lead to shutdowns or disruptionsconditions of our systemscredit facility may have an adverse effect upon our business and potential unauthorized disclosure of confidential information. We are also required at times to manage, utilize and store sensitive or confidential client or employee data. As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state laws governing the protection of health or other individually identifiable information. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients.
Our profitability will suffer if we are not able to maintain our pricing and utilization rates and control our costsoperations.
Our profit margin on training services is largely a functionline of credit facility requires us to be in compliance with customary non-financial terms and conditions as well as specified financial ratios. Failure to comply with these terms and conditions or maintain adequate financial performance to comply with specific financial ratios entitles the rates we are ablelender to recover for our services andcertain remedies, including the utilization, or chargeability, of our trainers, client partners, and consultants. Accordingly, if we are unableright to maintain sufficient pricing for our services or an appropriate utilization rate for our training professionals without corresponding cost reductions, our profit margin and overall profitability will suffer. The rates that we are able to recover for our services are affected by a number of factors, including:
·
| Our clients’ perceptions of our ability to add value through our programs and products
|
·
| Competition
|
·
| General economic conditions
|
·
| Introduction of new programs or services by us or our competitors
|
·
| Our ability to accurately estimate, attain, and sustain engagement sales, margins, and cash flows over longer contract periods
|
Our utilization rates are also affected by a number of factors, including:
·
| Seasonal trends, primarily as a result of scheduled training
|
·
| Our ability to forecast demand for our products and services and thereby maintain an appropriate headcount in our employee base
|
·
| Our ability to manage attrition
|
Our training program profitability is also a function of our ability to control costs and improve our efficiency in the delivery of our 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. Additionally, we have invested in our existing programs in order to refresh these programs and keep them relevant in the marketplace, including certain programs basedimmediately call due any amounts outstanding on the newly revised The 7 Habitsline of Highly Effective People curriculum. 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 significantly change our business strategy.
Our training contracts could be unprofitable if our pricing structures do not accurately anticipate the cost and complexity of performing our work
We negotiate pricing terms with our clients utilizing a range of pricing structures and conditions. Depending on the particular contract, these include time-and-materials pricing, fixed-price pricing, and contracts with features of both of these pricing models. Our pricing is highly dependent on our internal forecasts and predictions about our projects and the marketplace, which might be based on limited data and could turn out to be inaccurate or used ineffectively. If we do not accurately estimate the costs and timing for completing projects, our contracts could prove unprofitable for us or yield lower profit margins than anticipated. In particular, any increased or unexpected costs, delays or failures to achieve anticipated cost savings in connection with the performance of such work, including delays caused by factors outside our control, could make our training contracts less profitable or unprofitable, whichcredit. Such events would have an adverse effect upon our business and operations as there can be no assurance that we may be able to obtain other forms of financing or raise additional capital on our profit margin.terms that would be acceptable to us.
Our strategy to focus on training and consulting services may not be successful and may not lead to the desired financial results.
During the fourth quarter of fiscal 2008, we sold substantially all of the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed entity, Franklin Covey Products. Although we believe the sale of the CSBU assets will allow us to focus our resources and abilities on our services and solutions offerings, many of the aspects of this plan, including future economic conditions and the business strength of our clients, are not within our control and we may not achieve our expected financial results within our anticipated timeframe.
If we are unable to attract, retain, and motivate high-quality employees, including training consultants and other key training representatives, we will not be able to compete effectively and will not be able to grow our businessbusiness.
Due to our reliance on customer satisfaction, our overallOur success and ability to grow are dependent, in part, on our ability to hire, retain and motivate sufficient numbers of talented people with the necessaryincreasingly diverse skills needed to serve our clients and grow our business. The inabilityCompetition for skilled personnel is intense at all levels of experience and seniority. To address this competition, we may need to attract qualified employees in sufficient numbers to meet particular demands orfurther adjust our compensation practices, which could put upward pressure on our costs and adversely affect our profit margins. At the loss of a significant numbersame time, the profitability of our employees could have a serious adverse effectbusiness model is partially dependent on us, including our ability to obtaineffectively utilize personnel with the right mix of skills and successfully complete important client engagementsexperience to effectively deliver our programs and thus maintaincontent. There is a risk that at certain points in time and in certain geographical regions, we will find it difficult to hire and retain a sufficient number of employees with the skills or backgrounds we require, or that it will prove difficult to retain them in a competitive labor market. If we are unable to hire and retain talented employees with the skills, and in the locations, we require, we might not be able to deliver our content and solutions services. If we need to re-assign personnel from other areas, it could increase our sales.costs and adversely affect our profit margins.
WeIn order to retain key personnel, we continue to offer a variable component of compensation, the payment of which is dependent upon our sales performance and profitability. We adjust our compensation levels and have adopted different methods of compensation in order to attract and retain appropriate numbers of employees with the necessary skills to serve our clients and grow our business. We may also use equity-based performance incentives as a component of our executives’ compensation, which may affect amounts of cash compensation. Variations in any of these areas of compensation may adversely impact our operating performance.
If we are unable to collect our accounts receivable on a timely basis, our results of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for services performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against our receivables and unbilled services that we believe are adequate to reserve for potentially uncollectible amounts. However, actual losses on client balances could differ from those that we currently anticipate and as a result we might need to adjust our allowances and there is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic conditions could also result in financial difficulties for our clients, and as a result could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or not pay their obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments and bill and collect our invoiced revenues. If we
are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.
We have only a limited ability to protect our intellectual property rights, which are important to our successsuccess.
Our financial success depends, in part, upon our ability to protect our proprietary training methodologies product designs, and other intellectual property. The existing laws of some countries in which we provide services might offer only limited protection of our intellectual property rights. To protect our intellectual property, we rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements, and patent, copyright and trademark laws to protect our intellectual property rights. The steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights, especially in foreign jurisdictions.
The loss of proprietary methodologies or the unauthorized use of our intellectual property may create greater competition, loss of revenue, adverse publicity, and may limit our ability to reuse that intellectual property for other clients. Any limitation on our ability to provide a service or solution could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future projects.engagements.
Our strategy of outsourcing certain functions and operations may fail to reduce our costs for these servicesservices.
We have an outsourcing contract with Electronic Data Systems (EDS) to provide warehousing, distribution, and information systems, and call centersystem operations. Under the terms of the outsourcing contract and its addendums, EDS operates our primary call center, provides warehousing and distribution services and supports our various information systems. Due to the nature of our outsourced operations, we are unable to exercise the same level of control over outsourced functions and the actions of EDS employees in outsourced roles as our own employees. As a result, the inherent risks associated with these outsourced areas of operation may be increased.
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 also contain early termination provisions that we may exercise under certain conditions. However, in order to exercise the early termination provisions, we would have to pay specified penalties to 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 declinedecline.
At August 31, 20072008 we had $75.9$72.3 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 the carrying basis of these intangibles, if our sales and corresponding cash flows decline, we may be faced with significant asset impairment charges that would have an adverse impact upon our profit margin.operating margin and overall results of operations.
Our business could be negatively affected if we incur legal liability in connection with providing our solutions and servicesservices.
If we fail to meet our contractual obligations, fail to disclose our financial or other arrangements with our alliancebusiness partners or otherwise breach obligations to clients, or if our subcontractors dispute the terms of our agreements with them, we could be subject to legal liability. We may enter into non-standard agreements because we perceive an important economic opportunity or because our personnel did not adequately adhere to our guidelines. We may also find ourselves committed to providing services that we are unable to deliver or whose delivery will cause us financial loss. If we cannot, or do not perform our obligations, we could face legal liability and our contracts might not always protect us adequately through limitations on the scope of our potential liability. If we cannot meet our contractual obligations to provide solutionsservices and services,solutions, and if our exposure is not adequately limited through the terms of our agreements, then we might face significant legal liability and our business could be adversely affected.
We depend on key personnel, the loss of whom could harm our business.
Our future success will depend, in part, on the continued service of key executive officers and personnel. The loss of the services of any key individuals could harm our business. Our future success also depends on our ability to identify, attract, and retain additional qualified senior personnel. Competition for such individuals in our industry is intense and we may not be successful in attracting and retaining such personnel.
Our future quarterly operating results are subject to factors that can cause fluctuations in our stock priceprice.
Historically, our stock price has experienced significant volatility. We expect that our stock price may continue to experience volatility in the future due to a variety of potential factors that may include the following:
· | Fluctuations in our quarterly results of operations and cash flows |
| · | Increased overall market volatility |
· | Variations between our actual financial results and market expectations |
· | Changes in our key balances, such as cash and cash equivalents |
· | Currency exchange rate fluctuations |
· | Unexpected asset impairment charges |
· | Lack of analyst coverage |
In addition, the stock market has recently experienced substantial price and volume fluctuations over the past several years that has had some impact uponhave impacted our stock and other stockequity 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 price in the future.
We may need additional capital in the future, and this capital may not be available to us on favorable termsterms.
We may need to raise additional funds through public or private debt offerings or equity financings in order to:
· | Develop new services, programs, or productsofferings |
· | Take advantage of opportunities, including expansion of the business |
· | Respond to competitive pressures |
WeAny additional capital raised through the sale of equity could dilute current shareholders’ ownership percentage in us. Furthermore, we may be unable to obtain the necessary capital on terms or conditions that are favorable to us.us, or at all.
We are the creditor for a management common stock loan program that may not be fully collectiblecollectible.
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 10the notes to our consolidated financial statements as found in Item 8 of this Annual Report on Form 10-K. Our inability to collect all, or a portion, of these receivables could have an adverse impact upon our financial position and future cash flows compared to full collection of the loans.
We may have exposure to additional tax liabilitiesliabilities.
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, value-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 could have liability or our reputation could be damaged if we do not protect client data or if our information systems are breached.
We are dependent on information technology networks and systems to process, transmit and store electronic information and to communicate among our locations around the world and with our clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information. We are also required at times to manage, utilize and store sensitive or confidential client or employee data. As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state laws governing the protection of health or other individually identifiable information. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients.
International hostilities, terrorist activities, and natural disasters may prevent us from effectively serving our clients and thus adversely affect our operating results.
Acts of terrorist violence, armed regional and international hostilities, and international responses to these hostilities, natural disasters, global health risks or pandemics or the threat of or perceived potential for these events, could have a negative impact on our directly owned or licensee operations. These events could adversely affect our clients’ levels of business activity and precipitate sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our people and to physical facilities and operations around the world, whether the facilities are ours or those of our alliance partners or clients. By disrupting communications and travel and increasing the difficulty of obtaining and retaining highly skilled and qualified personnel, these events could make it difficult or impossible for us or our licensee partners to deliver services to clients. Extended disruptions of electricity, other public utilities or network services at our facilities, as well as system failures at, or security breaches in, our facilities or systems, could also adversely affect our ability to serve our clients. While we plan and prepare to defend against each of these occurrences, we might be unable to protect our people, facilities and systems against all such occurrences. We generally do not have insurance for losses and interruptions caused by terrorist attacks, conflicts and wars. If these disruptions prevent us from effectively serving our clients, our operating results could be adversely affected.
A natural or man-made disaster in Salt Lake City, Utah could have a materialan adverse effect on our businessbusiness.
We have productsmanufacture and ship training materials manufactured at numerous sites located around the world. However, a significant portion of our products (especially paper products)training materials are manufactured and shipped from facilities located in Salt Lake City, Utah. In the event that these facilities were severely damaged or destroyed as a result of a natural or man-made disaster, we would be forcedcould suffer significant disruptions to rely solely on third-party manufacturers. Such an event could disrupt our ability to producemanufacture and ship products which could leadtraining materials to our clients. Such events may have a material adverse impacteffect on our business prospects, results of operations, and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIESProperties
FranklinCovey’sFranklin Covey’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 (6(5 locations) – all leased
International Administrative/Sales Offices:
Canada (1 location) – owned
Asia Pacific (4 locations) – all leased
England (1 location) – leased
International Distribution Facilities:
Canada (1 location) – owned
Asia Pacific (3 locations) – all leased
England (1 location) – leased
Consumer Solutions Business Unit
Retail Stores:
United States (87 locations in 33 states) – all leased
Mexico (3 locations) – all leased
Canada (1 location) - owned
Manufacturing Facilities:
Salt Lake City, Utah (at corporate headquarters) – leased
International Administrative/Sales Office:
Mexico (1 location) – leased
International Distribution Facility:
Mexico (1 location) – leased
A significant portion of our corporate headquarters campus is subleased to several unrelated entities.
We lease space for retail locations in areas of high shopper density and where we believe that our operations will attract customers. Our domestic retail stores average 1,900 square feet each to provide a comfortable shopping experience for our clients. We also lease space for regional and international administrative and sales offices in locations that are conducive for such operations. We consider our existing facilities to be in good condition and suitable for our current and anticipated level of operations in the upcoming fiscal year.
SignificantA significant portion of our corporate headquarters campus located in Salt Lake City, Utah is subleased to several unrelated entities.
The following significant developments related to our propertiesoccurred during fiscal 2007 consisted of the following:2008 that affected our properties:
| · | During fiscal 2007, we completed a project to reconfigure our printing operations to improve our printing services’ efficiency, reduce operating costs, and improve our printing services’ flexibility in order to increase external printing service sales. Our reconfiguration plan included moving our printing operations a short distance from its existing location to our corporate headquarters campus and the sale of the manufacturing facility and certain printing presses. We completed the sale of the manufacturing facility during the second quarter of fiscal 2007. The sale price was $2.5 million and, after deducting customary closing costs, the net proceeds to the Company from the sale totaled $2.3 million in cash. The carrying value of the manufacturing facility at the date of sale was $1.1 million and accordingly, we recognized a $1.2 million gain on the sale of the manufacturing facility. |
· | During fiscal 2007, we closed 2 domestic retail store locations and may close additional retail locations during fiscal 2008 and future periods.
|
· | We sold our wholly-owned subsidiary in Brazil and our training operations in Mexico during the fourth quarter of fiscal 2007 and exited certain leased space in those countries. Our product sales business in Mexico was transferred to2008, we completed the sale of our Consumer Solutions Business Unit, during fiscal 2007which operated retail stores both domestically and continues to operate under our direction.
in certain international locations. |
| · | In connection with a restructuring plan initiated in the fourth quarter of fiscal 2008, we closed one domestic regional sales office and intend to close our Canadian facility in fiscal 2009. |
ITEMITEM 3. LEGAL PROCEEDINGSLegal Proceedings
In August 2005, EpicRealm Licensing (EpicRealm) filed an action in the United States District Court for the Eastern District of Texas against the Company for patent infringement. The action allegesalleged that FranklinCoveythe Company infringed upon two of EpicRealm’s patents directed to managing dynamic web page requests from clients to a web server that in turn uses a page server to generate a dynamic web page from content retrieved from a data source. The Company deniesdenied liability in the patent infringement and believes thatfiled counter-claims related to the case subsequent to the filing of the action in District Court. However, during the fiscal year
ended August 31, 2008, the Company paid EpicRealm claims are invalid. The claim fileda one-time license fee of $1.0 million for a non-exclusive, irrevocable, perpetual, and royalty-free license to use any product, system, or invention covered by EpicRealm has not specified relief or damages at this time. This litigation is still in the discovery phasedisputed patents. In connection with the purchase of the license, EpicRealm and the Company continues to vigorously defend this matter.
In fiscal 2002, we filed legal action against World Marketing Alliance, Inc., a Georgia corporation (WMA), and World Financial Group, Inc., a Delaware corporation and purchaser of substantially all assets of WMA, for breach of contract. The case proceeded to trial and 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. During our fiscal quarter ended May 28, 2005, we received payment in cash from WMA for the total verdict amount, including legal fees and interest. However, shortly after paying the verdict amount, WMA appealed the jury decision to the 10th Circuit Court of Appeals and we recorded receipt of the verdict amount plus legal fees and interest with a corresponding increase to accrued liabilities and deferred the gain until the case was finally resolved. On December 30, 2005, the Company entered into a settlement agreement with WMA. Under the terms of the settlement agreement, WMA agreed to dismiss its appeal. As a result of this settlement agreementtheir claims with prejudice and dismissal of WMA’s appeal, we recorded a $0.9 million gainthe Company is released from the legal settlement in the quarter ended February 25, 2006. We also recorded a $0.3 million reduction in selling, general and, administrative expenses for recovered legal expenses.further action regarding these patents.
The Company is also the subject of certain other legal actions, which we consider routine to our business activities. At August 31, 2007,2008, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSubmission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of our fiscal year ended August 31, 2007.2008.
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 per share for our common stock, as reported on the NYSE, Composite Tape, for the fiscal years ended August 31, 20072008 and 2006.2007.
| | | | High | | | Low | |
| Fiscal Year Ended August 31, 2008: | | | | | | | |
Fourth Quarter | | | $ | 9.32 | | | $ | 7.35 | |
Third Quarter | | | 8.76 | | | 6.72 | |
Second Quarter | | | 8.00 | | | 6.86 | |
First Quarter | | | 7.75 | | | 5.91 | |
| | High | Low | | | | | | | | |
| Fiscal Year Ended August 31, 2007: | | | | | | | | | | |
Fourth Quarter | $ 8.99 | $ 6.97 | | $ | 8.99 | | | $ | 6.97 | |
Third Quarter | 9.01 | 7.10 | | 9.01 | | | 7.10 | |
Second Quarter | 8.15 | 5.66 | | 8.15 | | | 5.66 | |
First Quarter | 6.18 | 4.96 | | 6.18 | | | 4.96 | |
| | | | |
| Fiscal Year Ended August 31, 2006: | | | |
Fourth Quarter | $ 8.37 | $ 5.16 | |
Third Quarter | 9.79 | 7.00 | |
Second Quarter | 7.79 | 6.00 | |
First Quarter | 7.35 | 6.42 | |
On November 3, 2008, our common stock closed at $5.25 per share. Subsequent to our fiscal year end on August 31, 2008 the stock market in the United States experienced increased volatility and suffered significant losses primarily as a result of the credit and liquidity crises. Due to the serious and unpredictable nature of these factors affecting the stock market, we are unable to determine what, if any, impact these external factors may have upon our stock price in future periods.
We did not pay or declare dividends on our common stock during the fiscal years ended August 31, 2007 and 2006.2008 or 2007. We currently anticipate that we will retain all available funds to
repay our line of credit obligation, finance future growth and business opportunities, and to purchase shares of our common stock. We do not intend to pay cash dividends on our common stock in the foreseeable future.
As of November 1, 2007,3, 2008, the Company had 19,476,42616,879,498 shares of common stock outstanding, which were held by 413392 shareholders of record.
Purchases of Common Stock
The following table summarizes Company purchases of common stock during the fiscal quarter ended August 31, 2007:2008:
Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands) | |
June 1, 2008 to July 5, 2008 | | | - | | | $ | - | | | none | | | $ | 2,413 | |
| | | | | | | | | | | | | | | | |
July 6, 2008 to August 2, 2008 | | | - | | | | - | | | none | | | | 2,413 | |
| | | | | | | | | | | | | | | | |
August 3, 2008 to August 31, 2008 | | | 3,027,027 | (1) | | | 9.32 | | | | 3,027,027 | | | | 2,413 | (2) |
| | | | | | | | | | | | | | | | | |
Total Common Shares | | | 3,027,027 | | | $ | 9.32 | | | | 3,027,027 | | | | | |
| Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands) | |
| Common Shares: | | | | | | | | | | |
| June 3, 2007 to July 7, 2007 | | | - | | | $ | - | | none | | $ | 2,413 | |
| | | | | | | | | | | | | | |
| July 8, 2007 to August 4, 2007 | | | 7,396 | (2) | | | 8.62 | | none | | | 2,413 | |
| | | | | | | | | | | | | | |
| August 5, 2007 to August 31, 2007 | | | - | | | | - | | none | | | 2,413 | (1) |
| | | | | | | | | | | | | | |
| Total Common Shares | | | 7,396 | | | $ | 8.62 | | none | | | | |
| | | | | | | | | | | | | | |
| Total Preferred Shares | | none(3) | | | none | | | | | | |
| (1) | During August 2008, we completed a modified “Dutch Auction” tender offer in which we were able to purchase 3,027,027 shares of our common stock for $9.25 per share plus costs necessary to conduct the tender offer. |
(1)
(2) | In January 2006, our Board of Directors approved the purchase of up to $10.0 million of our outstanding common stock. All previous authorized common stock purchase plans were canceled. Following the approval of this common stock purchase plan, we have purchased a total of 1,009,300 shares of our common stock for $7.6 million through August 31, 2007. |
(2)
| Shares were received from an employee2008 under the terms of the Company as consideration to exercise stock options and were valued based upon the closing share price of our common stock on the date of exercise.
|
(3)
| On April 4, 2007, we redeemed all of the remaining outstanding shares of Series A preferred stock at the liquidation preference of $25.00 per share plus accrued dividends through the redemption date. Following this redemption of preferred stock, we have no shares of Series A or Series B preferred stock outstanding and no further preferred stock dividend obligations.
plan. |
Performance Graph
The following graph shows a comparison of cumulative total shareholder return indexed to August 31, 2002,2003, calculated on a dividend reinvested basis, for the five fiscal years ended August 31, 2007,2008, for Franklin Covey Co. common stock, the S&P SmallCap 600 Index, and the S&P Diversified Commercial Services Index. The Company was previously included in the S&P 600 SmallCap Index and was assigned to the S&P Diversified Commercial and Professional Services Index within the S&P 600 SmallCap Index. The Company believes that if it were included in an index it would be included in the indices where it was previously listed. The Diversified Commercial Services Index consists of 7 companies similar in size and nature to Franklin Covey. The Company is no longer a part of the S&P 600 SmallCap Index but believes that the S&P 600 SmallCap Index and the Diversified
Commercial Services Index continues to provide appropriate benchmarks with which to compare our stock performance.
ITEM 6. SELECTED FINANCIAL DATASelected Financial Data
The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of Franklin Covey and the related footnotes as found in Item 8 of this report on Form 10-K. During fiscal 2008, we sold substantially all of the assets of our Consumer Solutions Business Unit (CSBU), which was primarily responsible for the sale of our products to consumers. Based upon applicable accounting guidance, the operations of CSBU did not qualify for discontinued operations presentation and therefore no prior periods were adjusted to reflect the sale of the CSBU assets.
| August 31, | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
In thousands, except per share data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 284,125 | | | $ | 278,623 | | | $ | 283,542 | | | $ | 275,434 | | | $ | 307,160 | | | $ | 260,092 | | | $ | 284,125 | | | $ | 278,623 | | | $ | 283,542 | | | $ | 275,434 | |
| Income (loss) from operations | | 18,084 | | | 14,046 | | | 8,443 | | | (9,064 | ) | | (47,665 | ) | | 16,760 | | | 18,084 | | | 14,046 | | | 8,443 | | | (9,064 | ) |
| Net income (loss) before income taxes | | 15,665 | | | 13,631 | | | 9,101 | | | (8,801 | ) | | (47,790 | ) | | 13,834 | | | 15,665 | | | 13,631 | | | 9,101 | | | (8,801 | ) |
Income tax benefit (provision)(1) | | (8,036 | ) | | 14,942 | | | 1,085 | | | (1,349 | ) | | 2,537 | | | (7,986 | ) | | (8,036 | ) | | 14,942 | | | 1,085 | | | (1,349 | ) |
Net income (loss)(1) | | 7,629 | | | 28,573 | | | 10,186 | | | (10,150 | ) | | (45,253 | ) | | 5,848 | | | 7,629 | | | 28,573 | | | 10,186 | | | (10,150 | ) |
Net income (loss) available to common shareholders(1) | | 5,414 | | | 24,188 | | | (5,837 | ) | | (18,885 | ) | | (53,988 | ) | | 5,848 | | | 5,414 | | | 24,188 | | | (5,837 | ) | | (18,885 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .28 | | | $ | 1.20 | | | $ | (.34 | ) | | $ | (.96 | ) | | $ | (2.69 | ) | | $ | .30 | | | $ | .28 | | | $ | 1.20 | | | $ | (.34 | ) | | $ | (.96 | ) |
| Diluted | | $ | .27 | | | $ | 1.18 | | | $ | (.34 | ) | | $ | (.96 | ) | | $ | (2.69 | ) | | $ | .29 | | | $ | .27 | | | $ | 1.18 | | | $ | (.34 | ) | | $ | (.96 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total current assets | | $ | 70,103 | | | $ | 87,120 | | | $ | 105,182 | | | $ | 92,229 | | | $ | 110,057 | | | $ | 67,911 | | | $ | 70,103 | | | $ | 87,120 | | | $ | 105,182 | | | $ | 92,229 | |
| Other long-term assets | | 14,441 | | | 12,249 | | | 9,051 | | | 7,305 | | | 10,472 | | | 11,768 | | | 14,542 | | | 12,249 | | | 9,051 | | | 7,305 | |
| Total assets | | 196,631 | | | 216,559 | | | 233,233 | | | 227,625 | | | 262,146 | | | 178,927 | | | 196,631 | | | 216,559 | | | 233,233 | | | 227,625 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term obligations | | 35,178 | | | 35,347 | | | 46,171 | | | 13,067 | | | 15,743 | | | 38,762 | | | 35,178 | | | 35,347 | | | 46,171 | | | 13,067 | |
| Total liabilities | | 95,712 | | | 83,210 | | | 100,407 | | | 69,146 | | | 84,479 | | | 100,173 | | | 95,712 | | | 83,210 | | | 100,407 | | | 69,146 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred stock(2) | | - | | | 37,345 | | | 57,345 | | | 87,203 | | | 87,203 | | | - | | | - | | | 37,345 | | | 57,345 | | | 87,203 | |
| Shareholders’ equity | | 100,919 | | | 133,349 | | | 132,826 | | | 158,479 | | | 177,667 | | | 78,754 | | | 100,919 | | | 133,349 | | | 132,826 | | | 158,479 | |
| (1) | Net income in fiscal 2006 includes the impact of deferred tax asset valuation allowance reversals totaling $20.3 million. |
| (2) | During fiscal 2007, we redeemed all remaining outstanding shares of Series A preferred stock at its liquidation preference of $25 per share plus accrued dividends. |
ITEMITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management’s current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995.”
The Company suggests that the following discussion and analysis be read in conjunction with the Consolidated Financial Statements and related notes as presented in Item 8 of this report on Form 10-K.
INTRODUCTION
The following management’s discussion and analysis is intended to provide a summary of the principal factors affecting the results of operations, liquidity and capital resources, contractual obligations, and the critical accounting policies of Franklin Covey Co. (also referred to as the Company, we, us, our, and 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 believes that great organizations consist of great people who form great teams that produce great results. To achieve great results, we seek to improve the effectiveness of organizations and individuals and we are a worldwide leader in providing integrated learning and performance solutions to organizations and individuals that are designed to enhance leadership, strategic execution, productivity, sales force effectiveness, communications, and other skills. Each solution may includeHistorically, our solutions included products and services that encompassencompassed training and consulting, assessment, and various application tools that arewere generally available in electronic or paper-based formats. Our products and services arewere available through professional consulting services, public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com. Historically, and our best-known offerings includein the marketplace included the FranklinCovey Planner™, and a suite of individual-effectiveness and leadership-development training products based on the best-selling book The 7 Habits of Highly Effective People. We also offer a range
Over the past several years, the strategic focus of both our Consumer Solutions Business Unit (CSBU), which was focused primarily on sales of our products, and our Organizational Solutions Business Unit (OSBU), which was focused on the development and delivery of training, consulting, and related services, has changed significantly. As a consequence of these changes in strategic direction, we determined that the extent of overlap between our training and consulting offerings and our products has diminished. After significant analysis and deliberation, it became apparent that these business units would be able to operate more effectively as separate companies, each with clear and distinct strategic objectives, market definitions, and competitive products and services. This conclusion persuaded us to sell substantially all of the operations of the CSBU. During the fourth quarter of our fiscal year ended August 31, 2008, we completed the sale of the CSBU to a newly formed entity, Franklin Covey Products, LLC and reported a gain of $9.1 million from the transaction. Franklin Covey Products, LLC was formed with the objective of expanding the worldwide sales of Franklin Covey products through proprietary channels and through third-party retailers as governed by a comprehensive license agreement with the Company.
Following the sale of the CSBU, we will be able to focus our full resources on the continued expansion of our training, consulting, content-rich media, and thought leadership businesses, which currently operate in 147 countries. Our business will primarily consist of training, consulting, and assessment services and products to help organizations and individuals achieve superior results by focusing on and executing on top priorities, building the capability of knowledge workers, and aligning business processes. TheseOur training, consulting, and assessment offerings include services based upon the popular workshop The 7 Habits of Highly Effective PeopleÒ; Leadership: Great Leaders—Great Teams—Great
Resultsä; The 4 Disciplines of ExecutionTM; FOCUS: Achieving Your Highest Priorities™, ;The 4 Disciplines8 Habits of Execution™, The 4 Roles of Leadership™, a Successful Marriage;Building Business Acumen: WhatAcumen; Championing Diversity; Leading at the CEO Wants YouSpeed of Trust; Writing Advantage, and Presentation Advantage. During fiscal 2008, we introduced a new suite of services designed to Know™, the Advantage Series communication workshops,help our clients improve their sales through increased customer loyalty. We also consistently seek to create, develop, and the Execution Quotient (xQ™) organizational assessment tool.introduce new services and products that will help our clients achieve greatness.
Our fiscal year ends on August 31, and unless otherwise indicated, fiscal 2007, fiscal 2006, and fiscal 2005, refers to the twelve-month periods ended August 31, 2007, 2006, and 2005.
KeyThe 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, binders, electronic planning devices, 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 develop and provide meaningful training and related products to our clients.
RESULTS OF OPERATIONS
OverviewThe sale of Fiscalthe CSBU assets was completed with approximately two months left in our fiscal year ended August 31, 2008, and based upon continuing involvement we will not present the financial results of the CSBU in a discontinued operations format. Refer to Note 2 of the Notes to the Consolidated Financial Statements in Item 8 for a discussion of the components of the gain and the accounting treatment of the sale of the CSBU assets. Since the CSBU accounted for approximately 47 percent of our consolidated sales in fiscal 2007, the sale of the CSBU had a significant impact on our fiscal 2008 financial results and will have an even more pronounced comparative impact on our financial statements in future periods.
Our fiscal year ends on August 31, and unless otherwise indicated, fiscal 2008, fiscal 2007, and fiscal 2006, refers to the twelve-month periods ended August 31, 2008, 2007, and 2006.
RESULTS OF OPERATIONS
Overview of the Fiscal Year ended August 31, 2008
Our fiscal 2008 operating results reflected year-over-year improvement comparedwere significantly affected by the fourth quarter sale of our CSBU operations, which is described above. The sale of our CSBU operations primarily affected our financial statements through reduced product sales in the fourth quarter, a corresponding reduction in our gross profit, reduced selling, general, and administrative expenses, and the recognition of a $9.1 million gain. We used substantially all of the net proceeds from the sale of the CSBU to purchase approximately 3.0 million shares of our common stock for $28.2 million through a modified “Dutch Auction” tender offer that was completed close to August 31, 2008. Since the tender offer was completed so near the end of our fiscal 2006 and continuedyear, it did not have a significant impact on our weighted average shares outstanding or our calculation of earnings per common share for the trend of improving operating results that began in prior years. Ouryear.
For the year ended August 31, 2008, our consolidated sales increased $5.5decreased to $260.1 million compared to $284.1 million compared to $278.6 million in fiscal 2006.2007. The increasedecrease in sales was primarily due to the sale of CSBU combined with declining product sales during the fiscal year, which were partially offset by improved training and consulting service sales, which offset declining product sales. For the year ended August 31, 2007,2008, we reported income from operations of $18.1$16.8 million, including the gain from the sale of CSBU, compared to $14.0$18.1 million in fiscal 2006,2007, and our income before taxes increaseddecreased to $13.8 million compared to $15.7 million compared to $13.6 million in the prior year. However, with the favorable impact of reduced preferred dividends resulting from the fiscal 2006. However, due primarily to2007 redemption of the reversal of valuation allowances on our deferred income tax assets in fiscal 2006, which favorably impacted our reported income taxes by $20.4 million (refer to the discussion below) and changes in our effective tax rate,remaining preferred stock, our net income available to common shareholders declinedincreased to $5.8 million compared to $5.4 million in fiscal 2007 compared to $24.2 million in the prior year. The changes in our effective income tax rate offset reduced preferred stock dividends resulting from the redemption of all remaining outstanding shares of preferred stock during the third quarter of fiscal 2007.
The following information is intended to provide an overview of the primary factors that influenced our financial results for the fiscal year ended August 31, 2007:2008:
· | Sales Performance– Our consolidated sales increased $5.5decreased $24.0 million compared to the prior year onprimarily due to the strengthsale of improved trainingCSBU and consulting service sales.declining product sales that occurred during fiscal 2008. Our training and consulting services sales increased by $15.3$0.4 million compared to fiscal 2006,2007, which was primarily attributable to improvements in both domestic andsales through our international delivery channels. Increased training and consulting service sales were partially offset by continuing declines in product sales. Our overall product sales declined by $9.8 million, primarily due to performance in our retail stores and consumer direct channels. |
· | Gross Profit– Consolidated gross profit increased $7.0 milliondecreased to $174.4$161.8 million compared to $167.4$175.1 million in fiscal 2006.2007. However, our gross margin, which is gross profit stated as a percentage of sales, increased to 62.2 percent compared to 61.6 percent in the prior year. The increase in gross margin was due to increased training and consulting services as a percent of total sales during fiscal 2007, which also favorably affected2008 since the majority of our training and consulting services have higher gross margin percentage compared to the prior year.margins than our product sales. |
· | Operating Costs– Our operating costs, increasedexcluding the gain on the sale of CSBU and the fiscal 2007 gain on the manufacturing facility, decreased by $4.2$4.1 million compared to fiscal 2006, not including the impact of the sale of a manufacturing facility.2007. The increasedecrease in operating costs was attributable to a $4.5$7.9 million increasedecrease in selling, general, and administrative expenses,expense, which was primarily due to increased commissions and related compensation expense from improved training and consulting service sales. Increased SG&A costs werethe sale of CSBU, that was partially offset by a $0.1$2.1 million decreaserestructuring charge, a $1.5 million impaired asset charge, and a $0.3 million increase in depreciation expense, and a $0.2 million decline in amortization expense. During fiscal 2007, we sold a manufacturing facility that was previously used for printing operations and recognized a $1.2 million gain from the sale, which improved our income from operations compared to the prior year. |
·
| Income Taxes – Our income tax provision for fiscal 2007 totaled $8.0 million compared to a tax benefit of $14.9 million in fiscal 2006. The comparability of our current year income tax expense was primarily affected by the determination during the fourth quarter of fiscal 2006 to reverse substantially all of the valuation allowances on our deferred income tax assets. Prior to the reversal of these valuation allowances, our income tax provisions were affected by reductions in our deferred income tax valuation allowance as we utilized net operating loss carryforwards. The fiscal 2006 income tax provision was further reduced by the reversal of tax contingency reserves during the third quarter of that year. No material corresponding reversals of valuation allowance or tax contingency reserves occurred during fiscal 2007. Our effective tax rate for the year ended August 31, 2007 of approximately 51 percent was higher than statutory combined rates primarily due to the accrual of taxable interest income on the management stock loan program and withholding taxes on royalty income from foreign licensees. Since the Company is currently utilizing net operating loss carryforwards, we are unable to reduce our domestic tax liability through the use of foreign tax credits, which normally result from the payment of foreign withholding taxes.
|
·
| Preferred Stock Redemption– During the third quarter of fiscal 2007, we used substantially all of our cash on hand, combined with proceeds from a newly obtained $25.0 million line of credit, to redeem all of our remaining preferred stock. The final redemption of preferred stock totaled $37.3 million and as a result of this redemption we will have no further preferred stock dividend obligation. We believe that the redemption of our preferred stock and elimination of the corresponding dividend obligation will improve our reported net income and cash flows in future periods.
|
Further details regarding these items can be found in the comparative analysis of fiscal 2008 compared to fiscal 2007 as discussed in this management’s discussion and analysis.
The following table sets forth, for the fiscal years indicated, the percentage of total sales represented by the line items through income before income taxes in our consolidated income statements:
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | |
| Training and consulting services sales | | | 53.1 | % | | 48.5 | % | | 43.9 | % |
| Product sales | | 51.5 | % | | 56.1 | % | | 59.0 | % | | | 46.9 | | | | 51.5 | | | | 56.1 | |
| Training and consulting services sales | | | 48.5 | | | | 43.9 | | | | 41.0 | | |
| Total sales | | 100.0 | | | 100.0 | | | 100.0 | | | 100.0 | | | 100.0 | | | 100.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Training and consulting services cost of sales | | | 17.2 | | | 15.2 | | | 14.6 | |
| Product cost of sales | | 23.4 | | | 25.3 | | | 27.2 | | | | 20.6 | | | | 23.2 | | | | 25.1 | |
| Training and consulting services cost of sales | | | 15.2 | | | | 14.6 | | | | 13.3 | | |
| Total cost of sales | | | 38.6 | | | | 39.9 | | | | 40.5 | | | | 37.8 | | | | 38.4 | | | | 39.7 | |
| Gross profit | | 61.4 | | | 60.1 | | | 59.5 | | | 62.2 | | | 61.6 | | | 60.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general, and administrative | | 52.5 | | | 52.0 | | | 52.3 | | | 54.3 | | | 52.5 | | | 52.0 | |
| Gain on sale of CSBU assets | | | (3.5 | ) | | - | | | - | |
| Gain on sale of manufacturing facility | | (0.4 | ) | | - | | | - | | | - | | | (0.4 | ) | | - | |
| Restructuring costs | | | 0.8 | | | - | | | - | |
| Impairment of assets | | | 0.6 | | | - | | | - | |
| Depreciation | | 1.6 | | | 1.7 | | | 2.7 | | | 2.2 | | | 1.8 | | | 1.9 | |
| Amortization | | | 1.3 | | | | 1.4 | | | | 1.5 | | | | 1.4 | | | | 1.3 | | | | 1.4 | |
| Total operating expenses | | | 55.0 | | | | 55.1 | | | | 56.5 | | | | 55.8 | | | | 55.2 | | | | 55.3 | |
| Income from operations | | | 6.4 | | | | 5.0 | | | | 3.0 | | | | 6.4 | | | | 6.4 | | | | 5.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | 0.3 | | | 0.5 | | | 0.3 | | | 0.1 | | | 0.3 | | | 0.5 | |
| Interest expense | | (1.2 | ) | | (0.9 | ) | | (0.3 | ) | | (1.2 | ) | | (1.2 | ) | | (0.9 | ) |
| Recovery from legal settlement | | - | | | 0.3 | | | - | | | | - | | | | - | | | | 0.3 | |
| Gain on disposal of investment in unconsolidated subsidiary | | | - | | | | - | | | | 0.2 | | |
| Income before income taxes | | | 5.5 | % | | | 4.9 | % | | | 3.2 | % | | | 5.3 | % | | | 5.5 | % | | | 4.9 | % |
Segment Review
We haveDuring the majority of fiscal 2008 we had two reportingoperating segments: the Organizational Solutions Business Unit (OSBU) and the Consumer Solutions Business Unit (CSBU) and. However, during the Organizational Solutions Business Unit (OSBU).fourth quarter of fiscal 2008, we completed the sale of substantially all of the assets of the CSBU, which reduced amounts reported by that segment in fiscal 2008 by approximately two monthly reporting periods. The following
is a brief description of these segments, and their primary operating activities.components, and their significant business activities during the periods reported:
Consumer Solutions Business Unit– This business unit is primarily focused on sales of products to individual customers and small business organizations and includes the results of our domestic retail stores, consumer direct operations (primarily eCommerce, call center, and public programs), wholesale operations, international product channels in certain countries, and other related distribution channels, including government product sales and domestic printing and publishing sales. The CSBU results of operations also include the financial results of our paper planner manufacturing operations. Although CSBU sales primarily consist of products such as planners, binders, software, totes, and related accessories, virtually any component of our leadership, productivity, and strategy execution solutions may be purchased through our CSBU channels.
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, public programs, and certain international operations. The domestic sales force is responsible for the sale and delivery of our training and consulting solutions services in the United States. Our international sales group includes the financial results of our wholly-owneddirectly owned foreign offices and royalty revenues from licensees.
Consumer Solutions Business Unit – This business unit was primarily focused on sales to individual customers and small business organizations and included the results of our domestic retail stores, consumer direct operations (primarily Internet sales and call center), wholesale operations, international product channels in certain countries, and other related distribution channels, including government product sales and domestic printing and publishing sales. The CSBU results of operations also included the financial results of our paper planner manufacturing operations. Although CSBU sales primarily consisted of products such as planners, binders, software, totes, and related accessories, virtually any component of our leadership, productivity, and strategy execution solutions may have been purchased through our CSBU channels.
The following table sets forth sales data by category and for our operating segments for the periods indicated. For further information regarding our reporting segments and geographic information, refer to Note 19 to our consolidated financial statements as found in Item 8 of this report on Form 10-K (in thousands).
YEAR ENDED AUGUST 31, | | 2007 | | | Percent change from prior year | | | 2006 | | | Percent change from prior year | | | 2005 | | | 2008 | | | Percent change from prior year | | | 2007 | | | Percent change from prior year | | | 2006 | |
Sales by Category: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Training and consulting services | | | $ | 138,112 | | | - | | | $ | 137,708 | | | 12 | | | $ | 122,418 | |
| Products | | $ | 146,417 | | | (6 | ) | | $ | 156,205 | | | (7 | ) | | $ | 167,179 | | | | 121,980 | | | (17 | ) | | | 146,417 | | | (6 | ) | | | 156,205 | |
| Training and consulting services | | | 137,708 | | | | 12 | | | | 122,418 | | | | 5 | | | | 116,363 | | |
| | | | $ | 260,092 | | | | (8 | ) | | $ | 284,125 | | | | 2 | | | $ | 278,623 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Organizational Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | |
| Domestic | | | $ | 91,287 | | | (2 | ) | | $ | 93,308 | | | 10 | | | $ | 84,904 | |
| International | | | | 59,100 | | | | 2 | | | | 57,674 | | | | 18 | | | | 48,984 | |
| | | $ | 284,125 | | | | 2 | | | $ | 278,623 | | | | (2 | ) | | $ | 283,542 | | | | 150,387 | | | | - | | | | 150,982 | | | | 13 | | | | 133,888 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail stores | | $ | 54,316 | | | (13 | ) | | $ | 62,156 | | | (16 | ) | | $ | 74,331 | | | 42,167 | | | (22 | ) | | 54,316 | | | (13 | ) | | 62,156 | |
Consumer direct | | 59,790 | | | (9 | ) | | 65,480 | | | 4 | | | 62,873 | | | 38,662 | | | (19 | ) | | 48,018 | | | (8 | ) | | 52,171 | |
Wholesale | | 17,991 | | | 1 | | | 17,782 | | | (1 | ) | | 17,936 | | | 16,970 | | | (6 | ) | | 17,991 | | | 1 | | | 17,782 | |
CSBU International | | 7,342 | | | (5 | ) | | 7,716 | | | 10 | | | 7,009 | | | 7,295 | | | (1 | ) | | 7,342 | | | (5 | ) | | 7,716 | |
Other CSBU | | | 5,565 | | | | 13 | | | | 4,910 | | | | 31 | | | | 3,757 | | | | 4,611 | | | | (16 | ) | | | 5,476 | | | | 12 | | | | 4,910 | |
| | | | 145,004 | | | | (8 | ) | | | 158,044 | | | | (5 | ) | | | 165,906 | | | | 109,705 | | | | (18 | ) | | | 133,143 | | | | (8 | ) | | | 144,735 | |
Organizational Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | |
Domestic | | 81,447 | | | 14 | | | 71,595 | | | 1 | | | 70,572 | | |
International | | | 57,674 | | | | 18 | | | | 48,984 | | | | 4 | | | | 47,064 | | |
| | | | 139,121 | | | | 15 | | | | 120,579 | | | | 3 | | | | 117,636 | | |
| Total net sales | | $ | 284,125 | | | | 2 | | | $ | 278,623 | | | | (2 | ) | | $ | 283,542 | | | $ | 260,092 | | | | (8 | ) | | $ | 284,125 | | | | 2 | | | $ | 278,623 | |
FISCAL 2008 COMPARED TO FISCAL 2007
Sales
FISCAL 2007 COMPARED TO FISCAL 2006Training and Consulting Services – We offer a variety of training courses, training related products, and consulting services focused on leadership, productivity, strategy execution, sales force performance, and effective communications that are provided both domestically and internationally through the OSBU. Our consolidated training and consulting service sales increased by $0.4 million compared to the prior year. Training and consulting service sales performance in fiscal 2008 was primarily influenced by the following factors in our domestic and international OSBU operations:
Sales| · | Domestic – Our domestic training sales decreased $2.0 million, or two percent, compared to fiscal 2007, primarily due to lower sales from our sales performance group, public programs, and our book and audio divisions. Decreased sales from these groups were partially offset by increased sales from our combined geographical and vertical market sales offices and by increased sales from specialized seminar events. During fiscal 2008, sales through our direct sales offices improved over the prior year as acceptance of our core product offerings, which includes The Seven Habits of Highly Effective People, Leadership: Great Leaders, Great Teams, Great Results, and The 4 Disciplines of Execution, continued to strengthen. |
Four of our seven domestic offices generated increased year-over-year sales and sales of our training materials to our client facilitators improved four percent compared to the prior year. Revenue from the number of training and consulting days delivered increased two percent over the prior year as our average revenue per day received increased. The number of training days delivered, however, declined three percent compared to fiscal 2007.
| · | International – International sales increased $1.4 million compared to the prior year. Sales from our four remaining directly owned foreign offices as well as from licensee royalty revenues increased $6.9 million, or 14 percent, compared to the prior year as each of these units achieved double-digit growth. Partially offsetting these increases was the elimination of sales from our wholly owned subsidiary in Brazil and our training operations located in Mexico. We sold these operations to external licensees during fiscal 2007 and we now only receive royalty revenue from their operations based upon gross sales. The conversion of these operations to licensees had a $5.4 million unfavorable impact on our international sales but improved our income from these operations compared to the prior year. The translation of foreign sales to United States dollars had a $3.7 million favorable impact on our consolidated sales as foreign currencies strengthened against the United States dollar during fiscal 2008. |
Product Sales–OverallConsolidated product sales, which primarily consist of planners, binders, totes, software and related accessories that are generallyprimarily sold through our CSBU channels, declined $24.4 million compared to the prior year. The decline in overall product sales during fiscal 2008 was primarily due to the sale of our CSBU operations in fiscal 2008 combined with the following performance in CSBU delivery channels prior to the effective date of the sale.
| · | Retail Stores – Prior to the sale of the CSBU operations, our retail sales decreased compared to the prior year primarily due to reduced traffic in our retail locations, which was partially due to a significant increase in the number of wholesale outlets that sold our products and competed directly against our retail stores, reduced demand for technology and related products, and fewer store locations, which had a $2.5 million impact on retail sales. Our retail store traffic, or the number of consumers entering our retail locations, declined by approximately 18 percent on a comparable basis (for stores which were open during the comparable periods) and resulted in decreased sales of “core” products (e.g. planners, binders, totes, and accessories). Due to declining demand for electronic handheld planning products, during late fiscal 2007 we decided to exit the low-margin handheld |
device and related electronics accessories business, which reduced retail sales by $0.9 million compared to the prior year. These factors combined to produce a 7 percent decline in year-over-year comparable store sales versus the prior year.
| · | Consumer Direct – Sales through our consumer direct channels (primarily the Internet and call center) decreased primarily due to a decline in the number of customers visiting our website and a decline in the number of orders that are being processed through the call center. Visits to our website decreased from the prior year by approximately 12 percent. Declining consumer orders through the call center continues a long-term trend and decreased by approximately 14 percent compared to the prior year, which we believe was partially the result of a transition of customers to our other product channels. |
| · | Wholesale – Sales through our wholesale channel, which included sales to office superstores and other retail chains, decreased primarily due to the transition of a portion of our wholesale business to a new distributor and the timing of sales as the new distributor built inventories. |
| · | CSBU International – This channel includes the product sales of our directly owned international offices in Canada, the United Kingdom, Mexico, and Australia. Product sales were flat through these channels compared to the prior year before the sale of CSBU. |
| · | Other CSBU – Other CSBU sales consist primarily of domestic printing and publishing sales and building sublease revenues. The decline in other CSBU sales was primarily due to decreased external printing sales, which was partially offset by a $0.3 million increase in sublease revenue. |
Following completion of the sale of our CSBU assets to Franklin Covey Products, we expect that our product sales will decline sharply as the majority of sales reported through the above channels are transitioned to Franklin Covey Products.
Gross Profit
Gross profit consists of net sales less the cost of goods sold or the cost of services provided. 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 profit 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 our consolidated selling, general, and administrative expenses. Therefore, our consolidated gross profit may not be comparable with the gross profit of other companies that include similar costs in their cost of sales.
For fiscal 2008, our consolidated gross profit decreased to $161.8 million compared to $175.1 million in fiscal 2007. The decrease was primarily attributable to the sale of CSBU and declining product sales during fiscal 2008 prior to the sale of CSBU. Our consolidated gross margin, which is gross profit stated in terms of a percentage of sales, improved to 62.2 percent of sales compared to 61.6 percent in fiscal 2007. The slight increase in gross margin percentage was primarily attributable to the continuing shift toward increased training and consulting sales, as a percent of total sales, since training and consulting sales generally have higher margins than our product sales. Training and consulting service sales increased to 53 percent of total sales during fiscal 2008 compared to 49 percent in the prior year.
During fiscal 2008, our training and consulting services gross margin decreased to 67.6 percent compared to 68.7 percent in the prior year. The slight decrease was primarily attributable to increased amortization of capitalized curriculum costs during the fiscal year, which was partially offset by increased licensee royalty revenues, which have virtually no corresponding cost of sales.
For the fiscal year ended August 31, 2008, our gross margin on product sales was 56.1 percent of sales compared to 55.0 percent in the prior year.
Operating Expenses
Selling, General and Administrative – Consolidated SG&A expenses decreased $7.9 million, or 5 percent, compared to the prior year (excluding the gain on the sale of CSBU assets in fiscal 2008 and a gain on the sale of a manufacturing facility in fiscal 2007). The decrease in SG&A expenses was primarily due to 1) the fiscal 2008 sale of the CSBU, which reduced CSBU SG&A expenses by $9.7 million in the fourth quarter of fiscal 2008 compared to the prior year; 2) a $1.7 million decrease in share-based compensation primarily due to the determination that no shares will be awarded under our fiscal 2006 or fiscal 2007 long-term incentive plans and the corresponding reversal of share-based compensation expense from those plans; 3) a $1.1 million decrease in bonuses and commissions based on sales performance in the OSBU during the year; and 4) smaller decreases in SG&A spending in various other areas of our operations. These decreases were partially offset by 1) a $2.7 million increase in associate compensation primarily resulting from the payment of awards and bonuses subsequent to the sale of CSBU; 2) a $1.4 million increase in promotional costs in our OSBU, which were primarily comprised of increased spending for “Greatness Summit” programs for our clients and increased spending on public programs promotional materials; 3) a $0.9 million increase in legal fees primarily related to the EpicRealm litigation; and 4) a $0.6 million increase in retail store closure costs that were primarily incurred in connection with the buyout of two leases.
Following the sale of the CSBU, we expect SG&A spending to decrease in fiscal 2009 compared to the corresponding periods of fiscal 2008.
Gain on Sale of CSBU Assets – During the fourth quarter of fiscal 2008, we sold substantially all of the assets of our CSBU to Franklin Covey Products for $32.0 million in cash, subject to adjustments for working capital on the closing date of the sale, which was effective July 6, 2008. On the date of the sale closing, the Company invested approximately $1.8 million to purchase a 19.5 percent voting interest in Franklin Covey Products, made a $1.0 million priority capital contribution with a 10 percent return, and will have the opportunity to earn contingent license fees if Franklin Covey Products achieves specified performance objectives. We recognized a gain of $9.1 million on the sale of the CSBU assets and according to specific accounting guidance, we deferred a portion of the gain equal to our investment in Franklin Covey Products. We will recognize the deferred gain over the life of the long-term assets acquired by Franklin Covey Products or when cash is received for payment of the priority contribution. The gain on the sale of CSBU assets also includes a $3.5 million note receivable for reimbursable transaction costs and excess working capital that is due in January 2009. The note receivable bears interest at Franklin Covey Products’ effective borrowing rate, which was approximately 6.0 percent at August 31, 2008.
Restructuring Costs – Following the sale of our CSBU, we initiated a restructuring plan that reduces the number of our domestic regional sales offices, decentralizes certain sales support functions, and significantly changes the operations of our Canadian subsidiary. The restructuring plan is intended to strengthen the remaining domestic sales offices and reduce our overall operating costs. During fiscal 2008 we expensed $2.1 million for anticipated severance costs necessary to complete the restructuring plan and we expect that the restructuring plan will be substantially completed during fiscal 2009.
Impairment of Assets – In the fourth quarter of fiscal 2008 we analyzed the expected future revenues and corresponding cash flows expected to be generated from our The7 Habits of Highly Effective People interactive program and concluded that the expected future revenues, less direct costs, were insufficient to cover the carrying value of the capitalized development costs. Accordingly, in the fourth quarter of fiscal 2008 we recorded a $1.5 million impairment charge to write this program down to its net realizable value.
Depreciation and Amortization – Consolidated depreciation expense increased to $5.7 million compared to $5.4 million in fiscal 2007. The increase in our depreciation expense in fiscal 2008 was primarily due to the acceleration of $0.3 million of depreciation on a payroll software module that had a revision to its estimated useful life as we decided to outsource our payroll services and an impairment charge totaling $0.3 million for software that did not function as anticipated and was written off. Depreciation expense in the prior year also included an impairment charge totaling $0.3 million that we recorded to reduce the carrying value of one of our printing presses to be sold to its anticipated sale price. Based upon the sale of CSBU assets and anticipated capital spending in the remainder of fiscal 2008, we expect that total depreciation expense in future periods will decrease compared to fiscal 2008 depreciation expense levels. During the fourth quarter of fiscal 2008 we determined that it was appropriate to reclassify depreciation expense on our subleased corporate campus from cost of sales to depreciation expense. The depreciation expense reclassified from product cost of sales totaled $0.7 million, $0.7 million, and $0.6 million for the fiscal years ended August 31, 2008, 2007, and 2006.
Amortization expense from definite-lived intangible assets totaled $3.6 million for the fiscal years ended August 31, 2008 and 2007. Absent any unforeseen intangible asset impairments, we expect that intangible asset amortization expense will total $3.6 million in fiscal 2009.
Following completion of the sale of CSBU assets, we anticipate that our consolidated operating expenses in future periods will decline compared to fiscal 2008 expense levels.
Interest Income and Expense
Interest Income – Our interest income decreased compared to the prior year primarily due to reduced cash balances compared to the prior year and a reduction of interest rates on our depository accounts.
Interest Expense – Interest expense remained consistent with the prior year and was reflective of borrowings on our line of credit facility and payments made on our building lease (financing obligation) during fiscal 2008.
Income Taxes
Our income tax provision for the fiscal years ended August 31, 2008 and 2007 totaled $8.0 million. Our effective tax rate for fiscal 2008 of approximately 58 percent was higher than statutory combined rates primarily due to the accrual of taxable interest income on the management stock loan program and withholding taxes on royalty income from foreign licensees. Since the Company is currently utilizing net operating loss carryforwards, we are unable to reduce our domestic tax liability through the use of foreign tax credits, which normally result from the payment of foreign withholding taxes. However, the utilization of domestic loss carryforwards has, and will continue to, minimize cash outflows related to domestic income taxes until they are exhausted.
On September 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (Fin 48), which had an immaterial impact on our financial statements. Refer to Note 17 in the Notes to Consolidated Financial Statements for further details regarding our income taxes.
Preferred Stock Dividends
Our preferred stock dividends declined $2.2 million compared to fiscal 2007. The decrease in preferred stock dividends was due to the redemption of all remaining outstanding shares of preferred stock during the third quarter of fiscal 2007.
FISCAL 2007 COMPARED TO FISCAL 2006
Sales
Training and Consulting Services – Our consolidated training and consulting service sales increased $15.3 million compared to the prior year and maintained the favorable momentum in training and consulting sales that began in fiscal 2005. Training and consulting service sales performance during fiscal 2007 was primarily influenced by the following results in our OSBU divisions:
| · | Domestic – Our domestic training, consulting, and related sales reported through the OSBU continued to show improvement over the prior year and increased by $8.4 million, or 10 percent. The improvement was primarily due to the December 2006 launch of our new course, Leadership: Great Leaders, Great Teams, Great Results and increased sales in our individual effectiveness product lines, which contain our signature course based upon principles found in The 7 Habits of Highly Effective People. Our execution product lines, which are primarily based on our 4 Disciplines of Execution curriculum and our Helping Clients Succeed sales training program also showed year-over-year improvements and contributed to improved training and consulting service sales. |
Generally, our training programs and consulting services continued to gain widespread acceptance in the marketplace during fiscal 2007 and all five of our geographic regions generated increased year-over-year sales. Furthermore, the number of training and coaching days delivered increased 23 percent and the average revenue per day received increased six percent. Sales of training materials to our client facilitators also improved over the prior year.
| · | International – International sales increased $8.7 million compared to fiscal 2006. Sales from our wholly-owned foreign offices and royalty revenues from third-party licensees all grew compared to fiscal 2006. The translation of foreign sales to the United States dollar also helped to improve reported sales and had a $0.6 million favorable impact on our consolidated sales as certain foreign currencies strengthened against the United States dollar during the year ended August 31, 2007. Our wholly-owned subsidiary in Japan generated the largest year-over-year improvement, and grew its revenues 12 percent, including the effects of foreign exchange, compared to the prior year. |
Product Sales – Consolidated product sales declined by $9.8 million, or six percent, compared to fiscal 2006. The decline in overall product sales was primarily due to continuing decreases in retail store sales and declining sales through our consumer direct channels when compared to prior periods. The following is a description of sales performance in our various CSBU channels for the year ended August 31, 2007:
· | Retail Sales– The $7.8 million decline in retail sales was primarily due to the impact of closed stores, reduced sales of technology and specialty products, and decreased store traffic. Based upon various analyses, we closed certain retail store locations in late fiscal 2006 and during fiscal 2007, which had a $4.6 million unfavorable impact on our overall retail sales in fiscal 2007. Due to declining demand for electronic handheld planning products, we decided to exit the low margin handheld device and accessories business, which reduced retail sales by $2.1 million compared to the prior year. For the remaining retail stores, the decline in sales was primarily due to reduced traffic, or consumers entering our retail locations. Our retail store traffic declined by approximately 12 percent from fiscal 2006 and resulted in decreased sales of “core” products (e.g. planners, binders, totes, and accessories) compared to the prior year. These factors combined to produce a six percent decline in year-over-year comparable store (stores which were open during the comparable periods) sales in fiscal 2007 as compared to fiscal 2006. At August 31, 2007, we were operating 87 domestic retail locations compared to 89 locations at August 31, 2006. |
· | Consumer Direct– Sales through our consumer direct channels decreased $5.7$4.2 million, primarily due to a decline in the conversion rate of customers visiting our website, decreased consumer traffic through the call center channel, and decreased public seminar sales. Although visits to our website increased from the prior year, the conversion of those visits to sales decreased to 6.0 percent in fiscal 2007 compared from 6.8 percent in fiscal 2006. We believe that the increase in customer visits and decrease in conversion rate is primarily a function of the increase in promotionally oriented shoppers, or those who visit the website frequently, but only purchase when desired products are on sale. Declining consumer traffic through the call center channel continues a long-term trend and decreased by approximately four percent, which we believe is primarily a result of the transition of customers to our website. Public seminar sales decreased $1.4 million due to fewer scheduled events and decreased participation in those seminars. |
website increased from the prior year, the conversion of those visits to sales decreased to 6.0 percent in fiscal 2007 compared from 6.8 percent in fiscal 2006. We believe that the increase in customer visits and decrease in conversion rate is primarily a function of the increase in promotionally oriented shoppers, or those who visit the website frequently, but only purchase when desired products are on sale. Declining consumer traffic through the call center channel continues a long-term trend and decreased by approximately four percent, which we believe was primarily a result of the transition of customers to our website.
· | Wholesale Sales – Sales through our wholesale channel, which includes sales to office superstores and other retail chains, were up approximately one percent over the prior year. The increase was primarily due to an increase in the number of retail outlets serviced through our wholesale channel and increased demand for our products in those locations. |
· | CSBU International – This channel includes the product sales of our directly owned international offices in Canada, the United Kingdom, Mexico, and Australia. Sales performance through these channels decreased slightly compared with the prior year. We separated the product sales operations from the OSBU in these international locations during fiscal 2007 to utilize existing product sales and marketing expertise in an effort to improve overall product sales performance at these offices. |
· | 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 due to improved external domestic printing sales, which increased $0.4 million compared to the prior year. The increase was due to additional printing contracts obtained during fiscal 2007. In fiscal 2007, we reported $2.1 million of sublease revenues as a component of product sales in our consolidated financial statements compared to $1.9 million in the prior year. |
Training and Consulting Services– We offer a variety of training courses, training related products, and consulting services focused on leadership, productivity, strategy execution, sales force performance, and effective communications that are provided both domestically and internationally through the OSBU. Our consolidated training and consulting service sales increased $15.3 million compared to the prior year and maintained the favorable momentum in training and consulting sales that began in fiscal 2005. Training and consulting service sales performance during fiscal 2007 was primarily influenced by the following factors in our OSBU divisions:
·
| Domestic– Our domestic training, consulting, and related sales reported through the OSBU continued to show improvement over the prior year and increased by $9.9 million, or 14 percent. The improvement was primarily due to the December 2006 launch of our new course, Leadership: Great Leaders, Great Teams, Great Results and increased sales in our individual effectiveness product lines, which contain our signature course based upon principles found in The Seven Habits of Highly Effective People. Our execution product lines, which are primarily based on our 4 Disciplines of Execution curriculum and our Helping Clients Succeed sales training program also showed year over year improvements and contributed to improved training and consulting service sales.
Generally, our training programs and consulting services continue to gain widespread acceptance in the marketplace and all five of our geographic regions generated increased year-over-year sales. Furthermore, the number of training and coaching days delivered increased 23 percent and the average revenue per day received increased six percent. Sales of training materials to our client facilitators also improved over the prior year. Our current outlook for fiscal 2008 remains strong. We believe that the introduction of new programs and refreshed existing programs will continue to have a favorable impact on training and consulting service sales in future periods. For instance, we have developed an interactive training tool based on The Seven Habits of Highly Effective People, which will be released to the general public during fiscal 2008.
|
·
| International – International sales increased $8.7 million compared to fiscal 2006. Sales from our wholly-owned foreign offices and royalty revenues from third-party licensees all grew compared to fiscal 2006. The translation of foreign sales to the United States dollar also helped to improve reported sales and had a $0.6 million favorable impact on our consolidated sales as certain foreign currencies strengthened against the United States dollar during the year ended August 31, 2007. Our wholly-owned subsidiary in Japan generated the largest year-over-year improvement, and grew its revenues 12 percent, including the effects of foreign exchange, compared to the prior year.
On August 31, 2007, we finalized the sales and conversions of our wholly-owned subsidiary in Brazil and the training and consulting operations of our Mexico office into licensees. We sold these operations to external licensee operations and we will receive royalties from their operations based upon gross sales. Although we anticipate a decline in future International sales resulting from the conversion of these offices to licensees, we expect operating income from these countries to increase in future periods.
|
Gross Profit
Gross profit consists of net sales less the cost of goods sold or the cost of services provided. 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 profit 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 our consolidated selling, general, and administrative expenses. Therefore, our consolidated gross profit may not be comparable with the gross profit of other retailers that include similar costs in their cost of sales.Profit
Our consolidated gross profit totaled $174.4$175.1 million for fiscal 2007 compared to $167.4$168.0 million in the prior year. The increase in our gross profit was primarily attributable to increased training and consulting service sales through our OSBU. Our consolidated gross margin, which is gross profit stated in terms of a percentage of sales, was 61.461.6 percent of sales compared to 60.160.3 percent in fiscal 2006. The improvement in gross margin was primarily attributable to the continuing shift toward increased training and consulting sales, which generally have higher margins than the majority of our product sales. Training and consulting service sales increased to 49 percent of total sales in fiscal 2007 compared to 44 percent in the prior year.
Our gross margin on product sales declined slightly to 54.5 percent compared to 54.9 percent in fiscal 2006.
During fiscal 2007, our training and consulting services gross margin was 68.7 percent compared to 66.7 percent in the prior year. The improvement in training and consulting services gross margin was primarily due to changes in the mix of training programs sold as certain programs and training courses have higher gross margins than other programs.
Our gross margin on product sales declined slightly to 55.0 percent compared to 55.2 percent in fiscal 2006.
Operating Expenses
Selling, General, and Administrative– Our consolidated selling, general, and administrative (SG&A)SG&A expenses increased $4.5 million, or 3 percent, compared to the prior year. The increase in SG&A expenses consisted primarily of 1) increased associate expenses; 2) increased development costs; 3) increased legal fees; and 4) increased accounting fees. Our associate expenses increased $3.2 million primarily due to increased commissions and bonuses on improved OSBU sales and additional OSBU sales personnel, which totaled $2.6 million, and increased share-based compensation costs totaling $0.6 million, which was primarily attributable to performance awards granted in fiscal 2007. We spent an additional $0.8 million for non-capitalized curriculum development to make adjustments and minor improvements to certain programs and courses during fiscal
2007. Our legal fees increased primarily due to the effects of a non-recurring benefit recorded in fiscal 2006 from the WMA legal settlement and increased legal costs for ongoing litigation that had a net impact on our operating expenses totaling $0.7 million. During fiscal 2006, we were required to begin complying with Section 404 of the Sarbanes Oxley Act of 2002 (SOX 404), which resulted in $0.4 million of additional auditing and related consulting fees in fiscal 2007 compared with the prior year. These increases in SG&A expense were partially offset by reduced costs in various other areas of the Company.
Gain on Sale of Manufacturing Facility– In August 2006, we initiated a project to reconfigure our printing operations to improve our printing services’ efficiency, reduce operating costs, and improve our printing services’ flexibility to potentially increase external printing service sales. Our reconfiguration plan included moving our printing operations a short distance from its existing location to our corporate headquarters campus and the sale of the manufacturing facility and certain printing presses. During fiscal 2007, we completed the sale of the manufacturing facility. The sale price was $2.5 million and, after deducting customary closing costs, the net proceeds to the Company from the sale totaled $2.3 million in cash. The carrying value of the manufacturing facility at the date of sale was approximately $1.1 million and we recognized a $1.2 million gain on the sale of the manufacturing facility during the year ended August 31, 2007.
Depreciation and Amortization– Depreciation expense decreased $0.1 million, or 2 percent,was essentially flat compared to the prior year. During recent fiscal years our depreciation expense has declined due to the full depreciation or disposal of certain property and equipment (including retail stores) and the effects of significantly reduced capital expenditures. However, these declines stabilized during fiscal 2007 primarily due to increased capital expenditures for property and equipment and an impairment charge totaling $0.3 million that we recorded during fiscal 2007 to reduce the carrying value of one of our printing presses that was sold to its anticipated sale price.
Amortization expense from definite-lived intangible assets totaled $3.6 million compared to $3.8 million in fiscal 2006. The decrease was due to certain intangible assets becoming fully depreciated during the first two quarters of fiscal 2006. We anticipate that intangible asset amortization expense will total $3.6 million in fiscal 2008.
Interest Income and Expense
Interest Income – Our interest income decreased by $0.6 million primarily due to reduced cash and cash equivalents held during the third and fourth quarters of fiscal 2007. During the third quarter of fiscal 2007, we used substantially all of our available cash on hand combined with proceeds from a newly acquired line of credit to redeem the remaining outstanding shares of Series A preferred stock.
Interest Expense – Interest expense increased $0.5 million compared to the prior year primarily due to line of credit borrowings that were used in conjunction with available cash to redeem the remaining shares of preferred stock in the third quarter of fiscal 2007.
Income Taxes
Our income tax provision for fiscal 2007 totaled $8.0 million compared to a tax benefit of $14.9 million in fiscal 2006. The comparability of our fiscal 2007 income tax expense was primarily affected by the determination during the fourth quarter of fiscal 2006 to reverse substantially all of the valuation allowances on our deferred income tax assets. Prior to the reversal of these valuation allowances, our income tax provisions were affected by reductions in our deferred income tax valuation allowance as we utilized net operating loss carryforwards. The fiscal 2006 income tax provision was further reduced by the reversal of tax contingency reserves during the third quarter of that year. No material corresponding reversals of valuation allowance or tax contingency reserves occurred during fiscal 2007. Our effective tax rate has been unusual in recent years due tofor the effectyear ended August 31, 2007 of operating losses and changes in valuation allowances. Absent extraordinary, unforeseen events, we expect our effective income tax rate in future years to be approximately 51 percent was higher than statutory combined rates primarily due to the effectaccrual of permanent book versus tax differencestaxable interest income on the management stock loan program and withholding taxes on royalty income from foreign licensees. However,Since the utilizationCompany is
currently utilizing net operating loss carryforwards, will minimize cash outflows relatedwe are unable to reduce our domestic income taxes until they are exhausted.tax liability through the use of foreign tax credits, which normally result from the payment of foreign withholding taxes.
Refer to the discussion in the overview of fiscal 2007 for information regarding our income tax provision and its impact upon our fiscal 2007 operations compared to the prior year.
Preferred Stock Dividends
Our preferred stock dividends totaled $2.2 million for fiscal 2007 compared to $4.4 million during the prior year. The decrease in preferred stock dividends was due to fiscal 2006 preferred stock redemptions totaling $20.0 million and the redemption of all remaining outstanding shares of preferred stock during the third quarter of fiscal 2007. We have no further preferred stock dividend obligations following the redemption of the remaining preferred stock.
FISCAL 2006 COMPARED TO FISCAL 2005
Sales
Product Sales – Our consolidated product sales declined $11.0 million compared to fiscal 2005. The decline in product sales was primarily due to decreased retail store sales resulting from store closures that occurred during fiscal 2006 and 2005. The following is a description of sales performance in our CSBU delivery channels during the year ended August 31, 2006:
·
| Retail Sales– The decline in retail sales was primarily due to store closures, which had a $12.5 million unfavorable impact on our retail store sales in fiscal 2006. Our retail stores also sold $1.7 million less technology and specialty products when compared to the prior year, primarily due to declining demand for electronic handheld planning products. Although store closures and reduced technology and specialty product sales caused total retail sales to decline compared to the prior year, we recognized a 1 percent improvement in year-over-year comparable store (stores which were open during the comparable periods) sales in fiscal 2006 as sales of “core” products (e.g. planners, binders, totes, and accessories) increased compared to the prior year. At August 31, 2006, we were operating 89 domestic retail locations compared to 105 locations at August 31, 2005.
|
·
| Consumer Direct– Sales through our consumer direct segment increased primarily due to increased public seminar sales and increased sales of core products. Increased public seminar sales resulted from additional seminars held during fiscal 2006 and an increase in the number of participants attending these programs.
|
·
| Wholesale Sales – Sales through our wholesale channel, which includes sales to office superstores and other retail chains, were essentially flat compared to the prior year.
|
·
| CSBU International – This channel includes the product sales of our directly owned international offices in Canada, the United Kingdom, Mexico, and Australia. Sales increased in these countries primarily due to increased demand for products during the fiscal year.
|
·
| Other CSBU Sales – The increase in other CSBU sales was primarily attributable to increased sublease income from additional sublease contracts obtained during fiscal 2006. We have subleased a substantial portion of our corporate headquarters in Salt Lake City, Utah and have recognized $1.9 million of sublease revenue during fiscal 2006, compared to $1.1 million in fiscal 2005.
|
Training and Consulting Services Sales – Our consolidated training and consulting service sales totaled $122.4 million in fiscal 2006, an increase of $6.1 million compared to fiscal 2005. The improvement in training sales was reflected in both domestic and international training program and consulting sales. The following is a description of our sales performance in the OSBU channels:
·
| Domestic – Our domestic sales performance improved in nearly all sales regions and was primarily attributable to increased sales of the refreshed The 7 Habits of Highly Effective People training course and the expansion of our sales force. Domestic sales also increased $0.7 million as a result of additional Symposium conferences that were held during the third and fourth quarter of fiscal 2006. These sales increases were partially offset by reduced sales force performance training, due to decreased demand in fiscal 2006, and decreased sales from seminars presented by Dr. Stephen R. Covey. In fiscal 2005, Dr. Covey presented more seminars to coincide with the publication of his new book, The 8th Habit.
|
·
| International – Total international sales improved by $2.6 million, primarily due to increased sales at our wholly-owned operations in Japan, Canada, and Brazil, as well as increased licensee royalty revenues. International sales improvements from these sources were partially offset by decreased sales in the United Kingdom and Mexico, unfavorable currency translation rates, and the correction of misstatements at our Mexico subsidiary. During fiscal 2006, certain foreign currencies, particularly the Japanese Yen, weakened against the United States dollar, which had an unfavorable impact on reported sales. The unfavorable impact of currency translation on reported international sales totaled $1.0 million for the fiscal year ended August 31, 2006. During the third quarter of fiscal 2006, we determined that our Mexico subsidiary misstated its financial results in prior periods by recording improper sales transactions and not recording all operating expenses in proper periods. We determined that the misstatements occurred during fiscal 2002 through fiscal 2006 in various amounts. The correction of these misstatements, which primarily occurred in prior fiscal years, resulted in a $0.5 million decrease in international sales in fiscal 2006.
|
Gross Profit
Our consolidated gross profit decreased $3.6 million compared to fiscal 2005, primarily due to decreased product sales. However, our consolidated gross margin improved to 60.1 percent in fiscal 2006, compared to 59.5 percent in the prior year. The gross margin improvement was primarily attributable to improved margins on product sales, which was partially offset by declining margins on our training and consulting sales. Our gross margin on product sales improved to 54.9 percent compared to 53.9 percent in fiscal 2005. The improvement in product sales gross margin was primarily due to improved inventory management processes, which reduced obsolescence, scrap, and other related charges, and changes in our product mix as sales of lower margin technology and specialty products continued to decline while sales of higher margin core products increased compared to the prior year.
Our overall gross margin on training and consulting services declined to 66.7 percent of sales compared to 67.5 percent in the prior year. The decrease in training and consulting services gross margin was primarily attributable to increased sales of lower-margin Symposium conferences and decreased sales of higher-margin sales performance training products during fiscal 2006. These unfavorable gross margin items were partially offset by decreased sales of lower-margin seminars presented by Dr. Covey in the fiscal year.
Operating Expenses
Selling, General, and Administrative– Our consolidated SG&A expenses decreased $3.6 million compared to the prior year. The decrease in SG&A expenses was primarily due to reduced retail store costs resulting from operating fewer stores, reductions in executive severance costs, reduced stock-based compensation costs, and the favorable results of initiatives to reduce overall operating costs. Our retail store SG&A expenses decreased $5.1 million primarily due to store closures that occurred during fiscal 2006 and in prior periods (refer to discussion below). During fiscal 2005 we incurred and expensed $0.9 million of severance costs to our former general counsel and we did not incur any similar executive severance charges in fiscal 2006. Our stock-based compensation costs declined $0.4 million due to a fully vested stock award granted to the CEO and accelerated vesting on unvested stock awards during fiscal 2005. The overall decrease in stock-based compensation cost was partially offset by expenses from our long-term incentive plan (see discussion below) during fiscal 2006. In addition to these decreases, we continue to implement strategies designed to reduce our overall operating costs. The favorable impact of these efforts has resulted in reduced SG&A expenses in many areas of the Company during the fiscal year ended August 31, 2006. These cost reductions were partially offset by additional spending on growth initiatives that resulted in increased travel expenses resulting from further employee training and sales leadership events, which totaled $1.3 million, and increased OSBU associate costs totaling $1.1 million resulting primarily from hiring additional sales personnel. We also corrected misstated operating expenses at our Mexico subsidiary, which had a $0.5 million unfavorable impact on our SG&A expenses in fiscal 2006.
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 16 stores during fiscal 2006. 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 $0.5 million in fiscal 2006 compared to $1.0 million in fiscal 2005, when we closed 30 retail locations. Store closure costs are expensed as incurred and were included as a component of our SG&A expense.
During fiscal 2006 our shareholders approved a long-term incentive plan (LTIP) that permits the grant of annual unvested share awards of common stock to certain employees. These LTIP share awards granted during fiscal 2006 cliff vest on August 31, 2008, which is the completion of a three-year performance period. The number of shares that are finally awarded to participants is variable and is based entirely upon the achievement of a combination of performance objectives related to sales growth and operating income during the three-year performance period. The award was initially for 378,665 shares (target award) of common stock. The award shares were valued at $6.60 per share, and the corresponding initial compensation cost totaled $2.5 million. However, the number of shares that will ultimately vest under the LTIP will vary depending on whether the performance criteria are met or exceeded. The award will be reviewed quarterly and the value may be adjusted, depending on the performance of the Company compared to the award criteria. Based upon fiscal 2006 financial performance and estimated performance through the remaining service period, the number of performance awards granted during fiscal 2006 was reduced during the fourth quarter of fiscal 2006 to 337,588 shares, which resulted in a cumulative adjustment to our fiscal 2006 operating results of $0.1 million. The compensation cost of the award is being expensed over the three-year service period of the award and increased our stock-based compensation cost in fiscal 2006 by $0.5 million. The continued amortization of the fiscal 2006 award and any future LTIP grants may increase our SG&A expense during the vesting period.
On September 1, 2005, we adopted the provisions of SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. Statement 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. Although the additional compensation expense resulting from the adoption of SFAS No. 123R was immaterial to our fiscal year ended August 31, 2006, our operating expenses may be unfavorably affected in future periods if we grant additional stock options or participation in our employee stock purchase program increases.
Depreciation and Amortization– Depreciation expense decreased $3.0 million, or 39 percent, compared to fiscal 2005 primarily due to the full depreciation or disposal of certain property and equipment and the effects of significantly reduced capital expenditures during preceding fiscal years.
Amortization expense on definite-lived intangible assets totaled $3.8 million for fiscal 2006 compared to $4.2 million in the prior year. The decline was due to the full amortization of certain intangible assets during fiscal 2006 and in prior periods. During fiscal 2006, we reduced the remaining estimated useful life of customer lists acquired in the merger with the Covey Leadership Center based upon expected future sales from these customers. This change in accounting estimate increased our amortization expense in fiscal 2006 by $0.6 million.
Other Income and Expense Items
Interest Income– Our interest income increased $0.4 million primarily due to increased interest rates on our interest-bearing cash accounts.
Interest Expense– Our interest expense increased $1.8 million primarily due to the sale of our corporate headquarters facility and the resulting interest component of the financing obligation in our lease payments to the landlord.
Legal Settlement– In fiscal 2002, we filed legal action against World Marketing Alliance, Inc., a Georgia corporation (WMA), and World Financial Group, Inc., a Delaware corporation and purchaser of substantially all assets of WMA, for breach of contract. The case proceeded to trial and the jury rendered a verdict in our favor and against WMA 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. We received payment in cash from WMA for the total verdict amount, including legal fees and interest. However, shortly after paying the verdict amount, WMA appealed the jury decision to the 10th Circuit Court of Appeals and we recorded receipt of the verdict amount plus legal fees and interest with a corresponding increase to accrued liabilities and deferred the gain until the case was finally resolved. On December 30, 2005, we entered into a settlement agreement with WMA. Under the terms of the settlement agreement, WMA agreed to dismiss its appeal. As a result of this settlement agreement and dismissal of WMA’s appeal, we recorded a $0.9 million gain from the legal settlement.
Income Taxes
The increase in our income tax benefit in fiscal 2006 was due to the reversal of the majority of our valuation allowances on our deferred income tax assets, which totaled $20.3 million. The fiscal 2006 income tax benefit was partially offset by taxes withheld on royalties from foreign licensees and taxes paid in foreign jurisdictions by our profitable directly owned foreign operations. The income tax benefit in fiscal 2005 was primarily due to the reversal of accruals related to the resolution of certain tax matters and was partially offset by taxes withheld on royalties from foreign licensees and taxes paid in foreign jurisdictions resulting from profitable foreign operations.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated financial data for the years ended August 31, 20072008 and 2006.2007. The quarterly consolidated financial data reflects, in the opinion of management, all adjustments necessary to fairly present the results of operations for such periods. The information presented in the following table includes the reclassification of depreciation expense on our subleased property from cost of sales to depreciation expense as previously discussed. Results of any one or more quarters are not necessarily indicative of continuing trends.
Quarterly Financial Information:
| YEAR ENDED AUGUST 31, 2008 | | | | | | | | | | | | | |
| | | | December 1 | | | March 1 | | | May 31 | | | August 31 | |
| In thousands, except per share amounts | | | | | | | | | | | | | |
| Net sales | | | $ | 73,574 | | | $ | 75,127 | | | $ | 59,061 | | | $ | 52,330 | |
| Gross profit | | | 46,127 | | | 46,870 | | | 35,939 | | | 32,853 | |
| Selling, general, and administrative expense | | | 38,771 | | | 37,652 | | | 34,210 | | | 30,685 | |
| Gain on sale of consumer solutions business unit | | | - | | | - | | | - | | | (9,131 | ) |
| Restructuring costs | | | - | | | - | | | - | | | 2,064 | |
| Impairment of assets | | | - | | | - | | | - | | | 1,483 | |
| Depreciation | | | 1,380 | | | 1,532 | | | 1,679 | | | 1,101 | |
| Amortization | | | 899 | | | 901 | | | 902 | | | 901 | |
| Income (loss) from operations | | | 5,077 | | | 6,785 | | | (852 | ) | | 5,750 | |
| Income (loss) before income taxes | | | 4,176 | | | 6,039 | | | (1,522 | ) | | 5,141 | |
| Net income (loss) | | | 2,059 | | | 3,082 | | | (1,511 | ) | | 2,218 | |
| | | | | | | | | | | | | | | | | | |
| Earnings (loss) per share available to common shareholders: | | | | | | | | | | | | | | | | | |
| Basic | | | $ | .11 | | | $ | .16 | | | $ | (.09 | ) | | $ | .11 | |
| Diluted | | | $ | .10 | | | $ | .16 | | | $ | (.09 | ) | | $ | .11 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| YEAR ENDED AUGUST 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 2 | | | March 3 | | | June 2 | | | August 31 | | | December 2 | | | March 3 | | | June 2 | | | August 31 | |
In thousands, except per share amounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 75,530 | | | $ | 76,876 | | | $ | 64,509 | | | $ | 67,210 | | | $ | 75,530 | | | $ | 76,876 | | | $ | 64,509 | | | $ | 67,210 | |
| Gross profit | | 46,398 | | | 47,189 | | | 39,636 | | | 41,154 | | | 46,573 | | | 47,364 | | | 39,811 | | | 41,330 | |
| Selling, general, and administrative expense | | 40,849 | | | 36,666 | | | 35,287 | | | 36,418 | | | 40,849 | | | 36,666 | | | 35,287 | | | 36,418 | |
| Gain on sale of manufacturing facility | | - | | | (1,227 | ) | | - | | | - | | | - | | | (1,227 | ) | | - | | | - | |
| Depreciation | | 1,037 | | | 1,366 | | | 1,060 | | | 1,230 | | | 1,212 | | | 1,541 | | | 1,235 | | | 1,406 | |
| Amortization | | 902 | | | 900 | | | 906 | | | 899 | | | 902 | | | 900 | | | 906 | | | 899 | |
| Income from operations | | 3,610 | | | 9,484 | | | 2,383 | | | 2,607 | | | 3,610 | | | 9,484 | | | 2,383 | | | 2,607 | |
| Income before income taxes | | 3,150 | | | 9,166 | | | 1,640 | | | 1,709 | | | 3,150 | | | 9,166 | | | 1,640 | | | 1,709 | |
| Net income | | 1,416 | | | 4,714 | | | 887 | | | 612 | | | 1,416 | | | 4,714 | | | 887 | | | 612 | |
| Preferred stock dividends | | (934 | ) | | (934 | ) | | (348 | ) | | - | | | (934 | ) | | (934 | ) | | (348 | ) | | - | |
| Income available to common shareholders | | 482 | | | 3,780 | | | 539 | | | 612 | | | 482 | | | 3,780 | | | 539 | | | 612 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings (loss) per share available to common shareholders: | | | | | | | | | | | | | | | | | |
| Basic | | $ | .02 | | | $ | .19 | | | $ | .03 | | | $ | .03 | | |
| Diluted | | $ | .02 | | | $ | .19 | | | $ | .03 | | | $ | .03 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| YEAR ENDED AUGUST 31, 2006 | | | | | | | | | | | | | | | | | |
| | | November 26 | | | February 25 | | | May 27 | | | August 31 | | |
In thousands, except per share amounts | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 72,351 | | | $ | 78,333 | | | $ | 63,282 | | | $ | 64,657 | | |
| Gross profit | | 44,406 | | | 48,173 | | | 36,292 | | | 38,514 | | |
| Selling, general, and administrative expense | | 37,767 | | | 35,488 | | | 35,629 | | | 35,863 | | |
| Depreciation | | 1,408 | | | 1,221 | | | 1,134 | | | 1,016 | | |
| Amortization | | 1,095 | | | 908 | | | 908 | | | 902 | | |
| Income (loss) from operations | | 4,136 | | | 10,556 | | | (1,379 | ) | | 733 | | |
| Income (loss) before income taxes | | 3,823 | | | 11,085 | | | (1,735 | ) | | 458 | | |
| Net income | | 3,233 | | | 9,213 | | | 1,019 | | | 15,108 | | |
| Preferred stock dividends | | (1,379 | ) | | (1,139 | ) | | (934 | ) | | (933 | ) | |
| Income available to common shareholders | | 1,854 | | | 8,074 | | | 85 | | | 14,175 | | |
| | | | | | | | | | | | | | | | | | |
| Earnings per share available to common shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .09 | | | $ | .40 | | | $ | .00 | | | $ | .71 | | | $ | .02 | | | $ | .19 | | | $ | .03 | | | $ | .03 | |
| Diluted | | $ | .09 | | | $ | .39 | | | $ | .00 | | | $ | .70 | | | $ | .02 | | | $ | .19 | | | $ | .03 | | | $ | .03 | |
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.
Due to our modified 52/53-week fiscal calendar, our quarter ended December 2, 2007 had five additional business days than the quarter ended November 26, 2006. Our quarter ended August 31, 2007 had a corresponding five fewer business days than the quarter ended August 31, 2006.
During theThe fourth quarter of fiscal 2006, we reversed valuation allowances2008 reflects the sale of CSBU assets, which reduced sales and corresponding costs associated with the operations of the CSBU. We recognized a $9.1 million gain on certain deferred income taxthe sale of the CSBU assets, which had a $20.3 million favorable impact on our net income and net income available to common shareholders for that period.
During the quarter ended May 27, 2006,period’s operating results. In future periods we determinedexpect that our Mexico subsidiary had misstated its financial results in prior periods by recording improperquarterly sales transactionswill be less seasonal since they will not include product sales that are sold primarily during November, December, and not recording all operating expenses in proper periods. We determined that the misstatements occurred during fiscal 2002 through fiscal 2006 in various amounts. The Audit Committee engaged an independent legal firm to investigate the misstatements and they concluded that such misstatements were intentional. The Company determined that the impact of these misstatements was immaterial to previously issued financial statements and we recorded a $0.5 million decrease to international sales and a $0.5 million increase in selling, general, and administrative expenses during the quarter ended May 27, 2006 to correct these misstatements. We have taken actions as recommended by the investigators to prevent future misstatements, which included enhancements to internal control over foreign operations.January.
Quarterly fluctuations may also be affected by other factors including the introduction of new products or training seminars,offerings, the addition of new institutionalorganizational customers, the timing of large corporate orders,and the elimination of unprofitable products or training services, and the closure of retail stores.underperforming offerings.
LIQUIDITY AND CAPITAL RESOURCES
Summary
At August 31, 20072008 we had $6.1$15.9 million of cash and cash equivalents compared to $30.6$6.1 million at August 31, 20062007 and our net working capital (current assets less current liabilities) decreased to $5.8 million at August 31, 2008 compared to $8.9 million at August 31, 2007 compared to $38.7 million2007. Our net working capital at August 31, 2006. The decline in cash and working capital2008 was due toaffected by proceeds received from the redemptionsale of all remaining shares of preferred stockCSBU assets during the thirdfourth quarter of fiscal 2007. We used substantially all2008, which impacted available cash and other remaining assets and liabilities, and the completion of a modified “Dutch auction” tender offer near the end of the fiscal year that required us to record a $28.2 million current liability at August 31, 2008 for shares of our common stock acquired through the tender offer. The obligation for the shares acquired through the tender offer was paid subsequent to August 31, 2008.
Our primary sources of liquidity are cash on hand combined withflows from the sale of services in the normal course of business and proceeds from a newly obtainedour $25.0 million revolving line of credit. In connection with the sale of the CSBU assets during the fourth quarter of fiscal 2008, our line of credit agreements with our previous lenders were modified (the Modified Credit Agreement). The Modified Credit Agreement removed one lender from the credit facility, but continues to redeem the remaining outstanding sharesprovide a total of Series A preferred stock at its liquidation preference of $25 per share plus accrued dividends. The final preferred stock redemption totaled $37.3 million and we obtained a $25.0 million line of creditborrowing capacity until June 30, 2009, when the borrowing capacity will be reduced to facilitate$15.0 million. In addition, the transaction. Although we will incur additional interest expense on line of credit borrowings, we believe that the redemption of our remaining preferred stock and elimination of the corresponding 10.0 percent dividend obligation will improve our cash flows and reported results of operations in future periods.
Our debt structure consists of a $25.0 million line of credit that may be used for working capital and other general needs, a long-term variable rate mortgage on our Canadian building, and a long-term lease on our corporate campus that is accounted for as a financing obligation. The $25.0 million line of credit carries an interest rate equal toon the credit facility increased from LIBOR plus 1.10 percent (weighted average rate of 6.6to LIBOR plus 1.50 percent (4.0 percent at August 31, 2007)2008), which was effective on the date of the modification agreement. The fiscal 2007 line of credit obligation was classified as a component of current liabilities primarily due to our intention to repay amounts outstanding before the agreement expires. The Modified Credit Agreement expires on March 14, 2010. We2010 (no change) and we may draw on the line of credit facility,facilities, repay, and draw again, on a revolving basis, up to the maximum loan amount of $25.0 millionavailable so long as no event of default has occurred and is continuing. We may use the line of credit facility for general corporate purposes as well as for other transactions, unless prohibited by the terms of the Modified Credit Agreement. The working capital line of credit also contains customary representations and guarantees as well as provisions for repayment and liens.
In addition to customary non-financial terms and conditions, our line of credit requires us to be in compliance with specified financial covenants, including: (i) a funded debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a limitation on annual capital expenditures; and (iv) a defined amount of minimum net worth. In the event of noncompliance with these financial covenants and other defined events of default, the lenders are entitled to certain remedies, including acceleration of the repayment of
amounts outstanding on the line of credit. During fiscal 2007,2008, we believe that we were in compliance with the terms and financial covenants of our credit facilities. At August 31, 2007,2008, we had $16.0 milliondid not have any borrowings outstanding on the line of credit.
During fiscal 2008, many banks in the United States and in foreign countries experienced financial and solvency difficulties that lead to significant reductions in the amount of available credit which was classifiedin the general market. We believe that the lender on our line of credit facility is financially sound and we expect to be able to borrow available amounts on the line of credit. However, the availability of cash from our line of credit lender is not within our control and additional borrowings may not be available in future periods.
In addition to our $25.0 million line of credit, we have a long-term variable rate mortgage on our Canadian building and a long-term lease on our corporate campus that is accounted for as a current liability on our consolidated balance sheet primarily due to our intention to repay the outstanding amount during fiscal 2008.long-term financing obligation.
The following table summarizes our cash flows from operating, investing, and financing activities for the past three years (in thousands):
| Year Ended August 31, | | 2007 | | | 2006 | | | 2005 | | |
| YEAR ENDED AUGUST 31, | | | 2008 | | | 2007 | | | 2006 | |
| Total cash provided by (used for): | | | | | | | | | | | | | | | | | | |
| Operating activities | | $ | 13,358 | | | $ | 17,009 | | | $ | 22,262 | | | $ | 7,828 | | | $ | 13,358 | | | $ | 17,009 | |
| Investing activities | | (11,480 | ) | | (8,267 | ) | | 4,867 | | | 18,520 | | | (11,480 | ) | | (8,267 | ) |
| Financing activities | | (26,376 | ) | | (29,903 | ) | | (5,957 | ) | | (16,159 | ) | | (26,376 | ) | | (29,903 | ) |
| Effect of exchange rates on cash | | | 37 | | | | 58 | | | | (656 | ) | | | (411 | ) | | | 37 | | | | 58 | |
| Increase (decrease) in cash and cash equivalents | | $ | (24,461 | ) | | $ | (21,103 | ) | | $ | 20,516 | | | $ | 9,778 | | | $ | (24,461 | ) | | $ | (21,103 | ) |
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, 2007.2008.
Cash Flows from Operating Activities
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 favorablyunfavorably affected by increasedcash spent to complete the CSBU asset sale and on behalf of Franklin Covey Products, which generated a $7.7 million receivable that is expected to be substantially collected by January 2009, a $7.2 million increase in our accounts receivable resulting primarily from seasonally heavy training product sales in August of each year, and improved operating income compared to fiscal 2006. However, the additional cash provided by improved operations was offset by changesa $1.5 million decrease in working capital as cash was used to reduceour accounts payable and accrued liabilitiesliabilities. However, these uses of cash were partially offset by $4.4cash generated through a $7.1 million decrease in other assets and a $2.9 million decrease in our inventories. Following the sale of the CSBU in fiscal 2008, we expect that our seasonal fluctuations in cash used for purchasesand provided by operating activities will stabilize since we will not be required to purchase and accumulate inventory for seasonally busy product sales months of additional inventory items totaling $2.4 million,November, December, and used to finance the impact of $3.6 million of increased accounts receivable that were primarily the result of increased OSBU training and consulting sales during the fourth quarter of fiscal 2007.January.
Cash Flows from Investing Activities and Capital Expenditures
Our cash flows provided by investing activities were primarily affected by cash received from the sale of CSBU assets in the fourth quarter of fiscal 2008, which totaled $28.2 million net of transaction costs and cash transferred to Franklin Covey Products. Our primary uses of cash for investing activities were purchases of property and equipment totaling $9.1$4.2 million and expenditures for curriculum development totaling $5.1$4.0 million. Purchases of property and equipment consisted primarily of payments for new printing pressescomputer hardware, new computer software, and related printing equipment resulting from the reconfiguration of our printing services, leasehold improvements in relocated retail stores and at the corporate campus for sublease tenants, new computer hardware, and additional computer software. During fiscal 2007, we used cash for further investment in curriculum development, primarily related(prior to new online learning modules and the development of new interactive leadership curriculum based upon principles found in The 7 Habits of Highly Effective People. Partially offsetting these uses of cash for investing activities was the receipt of $2.6 million from sales of property and equipment. The proceeds from sales of property and equipment were generated primarily from the sale of CSBU assets) and for subleases on our printing manufacturing facilitycorporate campus facility. We also invested $2.8 million in Franklin Covey Products to purchase ownership rights and certain printing equipment in connection with the reconfigurationfor a $1.0 million priority contribution.
During fiscal 2008,2009, we expect to spend $4.4$2.3 million on purchases of property and equipment and $3.0$1.4 million on curriculum development activities. Purchases of property and equipment are expected to consist primarily of additionalnew computer software, computer hardware, and software, leasehold improvements in new stores, and in other areas as deemed necessary. However, actual capital spending is based upon a variety of factors and may differ from these estimates.
Cash Flows from Financing Activities
Our primary usesuse and source of cash flows for financing activities included 1)were payments made and proceeds obtained from our $25.0 million line of credit facility. Primarily as a result of the redemptionsale of CSBU assets in the fourth quarter of fiscal 2008, we were able to repay amounts outstanding on our remaining outstanding sharesline of Series A preferred stock for $37.3 million; 2) purchases totaling 328,000 sharescredit, which totaled $16.0 million during fiscal 2008. In addition to payments on our line of our common stock for treasury through our Board of Director authorized plan for $2.5 million; 3) payment of preferred stock dividends totaling $2.2 million; and 4)credit, we made principal payments totaling $0.6 million on our long-term debt and financing obligation.obligation and received payments totaling $0.5 million from sales of our common stock, which primarily consisted of proceeds received from participants in our employee stock purchase plan.
These usesAs previously mentioned, we completed a tender offer for shares of cash for financing activities were partially offset by proceeds obtained through our linecommon stock near the end of credit facility obtained duringthe fourth quarter of fiscal 2007. Our net proceeds from the new line of credit totaled $16.02008 and recorded a $28.2 million current liability for the year endedshares acquired. We paid for the shares acquired through the tender offer subsequent to August 31, 2007.2008.
Sources of Liquidity
Going forward, we will continue to incur costs necessary for the operation and potential growth of the business. We anticipate using cash on hand, cash provided by the sale of goods and services to our clients on the condition that we can continue to generate positive cash flows from operating activities, proceeds from our line of credit, and other financing alternatives, if necessary, for these expenditures. 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, purchases of our common stock, 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.terms, or at all.
Contractual Obligations
The Company has not structured any special purpose or variable interest entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. Required contractual payments primarily consist of lease payments resulting from the sale of our corporate campus (financing obligation); payments to EDS for outsourcing services related to information systems, warehousing, and distribution and call center operations; lease payments resulting from the sale of our corporate campus (financing obligation);services; minimum rent payments for retail storeoffice and sales officewarehouse space; mortgage payments on certain buildings and property; and short-term purchase obligations for inventory items and other products and services used in the ordinary course of business. Our expected payments on these obligations over the next five fiscal years and thereafter are as follows (in thousands):
| | | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | | | | | | | |
| Contractual Obligations | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | Thereafter | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | |
| Minimum required payments to EDS for outsourcing services | | $ | 15,791 | | | $ | 16,129 | | | $ | 16,099 | | | $ | 16,150 | | | $ | 19,147 | | | $ | 77,717 | | | $ | 161,033 | |
| Required lease payments on corporate campus | | | 3,045 | | | | 3,045 | | | | 3,055 | | | | 3,115 | | | | 3,178 | | | | 46,780 | | | | 62,218 | |
| Minimum operating lease payments | | | 8,302 | | | | 6,559 | | | | 5,064 | | | | 3,453 | | | | 2,577 | | | | 5,720 | | | | 31,675 | |
Line of credit (1) | | | 16,527 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 16,527 | |
Long-term mortgage payments(2) | | | 153 | | | | 146 | | | | 139 | | | | 133 | | | | 126 | | | | 277 | | | | 974 | |
Contractual computer hardware purchases(3) | | | 703 | | | | 721 | | | | 748 | | | | 682 | | | | 789 | | | | 3,320 | | | | 6,963 | |
| Purchase obligations | | | 15,099 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 15,099 | |
Total expected contractual obligation payments | | $ | 59,620 | | | $ | 26,600 | | | $ | 25,105 | | | $ | 23,533 | | | $ | 25,817 | | | $ | 133,814 | | | $ | 294,489 | |
38
| | | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | | | Fiscal | | | | | | | |
| Contractual Obligations | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | Thereafter | | | Total | |
| Required lease payments on corporate campus | | $ | 3,045 | | | $ | 3,055 | | | $ | 3,116 | | | $ | 3,178 | | | $ | 3,242 | | | $ | 43,537 | | | $ | 59,173 | |
Minimum required payments to EDS for outsourcing services(1) | | | 4,138 | | | | 4,138 | | | | 4,138 | | | | 4,138 | | | | 4,138 | | | | 11,246 | | | | 31,936 | |
Minimum operating lease payments(2) | | | 1,671 | | | | 1,620 | | | | 1,608 | | | | 1,517 | | | | 1,178 | | | | 3,427 | | | | 11,021 | |
Tender offer obligation(3) | | | 28,222 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 28,222 | |
Long-term mortgage payments(4) | | | 136 | | | | 131 | | | | 126 | | | | 121 | | | | 116 | | | | 154 | | | | 784 | |
| Purchase obligations | | | 4,564 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,564 | |
Total expected contractual obligation payments | | $ | 41,776 | | | $ | 8,944 | | | $ | 8,988 | | | $ | 8,954 | | | $ | 8,674 | | | $ | 58,364 | | | $ | 135,700 | |
(1) | Interest expense onOur obligation for outsourcing services contains an annual escalation based upon changes in the lineEmployment Cost Index, the impact of credit payments was calculated at 6.6 percent, which was not estimated in the weighted-average interest rate onabove table. We are also contractually allowed to collect amounts from Franklin Covey Products that reduce the amounts shown in the table above.
|
| (2) | The operating agreement with Franklin Covey Products provides for reimbursement of a portion of the warehouse leasing costs, the impact of which is not included in the lease obligations in the table above. |
| (3) | We completed a tender offer for shares of our common stock near the end of the fourth quarter of fiscal 2008 and recorded a $28.2 million current liability for the shares acquired. We paid for the shares acquired through the tender offer subsequent to August 31, 2007. The obligation disclosure assumes that the August 31, 2007 line of credit balance and corresponding interest will be repaid evenly through the fiscal year ended August 31, 2008. |
(2)
(4) | Our long-term variable-rate mortgage obligation includes interest payments at 6.3%,4.8 percent, which was the applicable interest rate at August 31, 2007. |
(3)
| We are contractually obligated by our EDS outsourcing agreement to purchase the necessary computer hardware to keep such equipment up to current specifications. Amounts shown are estimated capital purchases of computer hardware, which may change based upon systems related projects, under terms of the EDS outsourcing agreement and its amendments.
2008. |
Our contractual obligations presented above exclude unrecognized tax benefits under FIN 48 of $4.2 million for which we cannot make a reasonably reliable estimate of the amount and period of payment. For further information regarding the adoption of FIN 48, refer to the Notes to the Consolidated Financial Statements as presented in Item 8 of this report on Form 10-K.
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 10 inthe notes to our consolidated financial statements.statements as found in Item 8 of this report on Form 10-K. The inability of the Company to collect all, or a portion, of these receivables could have an adverse impact upon our financial position and future cash flows compared to full collection of the loans.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting polices that we used to prepare our consolidated financial statements are outlined in Note 1 to the consolidated financial statements, which are presented in Part II, Item 8 of this Annual Report on Form 10-K. Some of those accounting policies require us to make assumptions and use judgments that may affect the amounts reported in our consolidated financial statements. Management regularly evaluates its estimates and assumptions and bases those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America. Actual results may differ from these estimates under different assumptions or conditions, including changes in economic and political conditions and other circumstances that are not in our control, but which may have an impact on these estimates and our actual financial results.
The following items require the most significant judgment and often involve complex estimates:
Revenue Recognition
We derive revenues primarily from the following sources:
· | Products– We sell planners, binders, planner accessories, handheld electronic devices, and other related products that are primarily sold through our CSBU channels.
|
·
| Training and Consulting Services– We provide training and consulting services to both organizations and individuals in leadership, productivity, strategic execution, goal alignment, sales force performance, and communication effectiveness skills. These training programs and services are primarily sold through our OSBU channels. |
| · | Products – We sold planners, binders, planner accessories, handheld electronic devices, and other related products that were primarily sold through our CSBU channels prior to the fourth quarter of fiscal 2008. |
The Company recognizesWe recognize revenue in accordance with SAB No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition. Accordingly, 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 andor 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 salesales 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. InFor transactions that contain more than one element, we recognize revenue in accordance with Emerging Issues Task Force (EITF)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 theDeliverables. When fair value of undelivered items; and 3) delivery of any undelivered item is probable. Theexists for all contracted elements, the overall contract consideration is allocated among the separate units of accounting based upon their relative fair values,values. Revenue for these units is recognized in accordance with our general revenue policies once it has been determined that the amount allocateddelivered items have standalone value 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.customer. If the fair value of all undelivered elements exits, but fair value does not exist for one or moreall contracted elements, revenue for the delivered elements,items is recognized using the residual method, which generally means that revenue recognition is used.postponed until the point is reached when the delivered items have standalone value and fair value exists for the undelivered items. Under the residual method, the amount of consideration allocated to the delivered items equalsrevenue considered for recognition under our general revenue policies is the total contract considerationamount, 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’sour existing training programs, consulting services, and other products, which are generally the prices of the items when sold separately.
Our international strategy includes the use of licensees in countries where we do not have a wholly-owned operation. Licensee companies are unrelated entities that have been granted a license to translate our content and curriculum, adapt the content and curriculum to the local culture, and sell our training seminars and products in a specific country or region. Licensees are required to pay us royalties based upon a percentage of the licensee’s sales. We recognize royalty income each period based upon the sales information reported to the Company from the licensee. Royalty revenue is reported as a component of training and consulting service sales in our consolidated income statements.
Revenue is recognized on software sales in accordance with Statement of Position (SOP)SOP 97-2, Software Revenue Recognition as amended by SOP 98-09. SOPStatement 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 the Company doeswe do not have VSOE for either the license or support elements of itsour 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.
Our international strategy includes the use40
Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns.
Share-Based Compensation
During fiscal 2006, we granted performance basedperformance-based compensation awards to certain employees in a Board of Director approved long-term incentive plan (the LTIP). These performance-based share awards allow each participant the right to receive a certain number of shares of common stock based upon the achievement of specified financial goals at the end of a predetermined performance period. The LTIP awards vest on August 31 of the third fiscal year from the grant date, which corresponds to the completion of a three-year performance cycle. For example, the LTIP awards granted in fiscal 2006 vest on August 31, 2008. The number of shares that are finally awarded to LTIP participants is variable and is based entirely upon the achievement of a combination of performance objectives related to sales growth and cumulative operating income during the performance period. Due to the variable number of shares that may be issued under the LTIP, we reevaluatereevaluated the LTIP grants on a quarterly basis and adjust the number of shares expected to be awarded for each grant based upon financial results of the Company as compared to the performance goals set for the award. Adjustments to the number of shares awarded, and to the corresponding compensation expense, are based upon estimated future performance and are made on a cumulative basis at the date of adjustment based upon the probable number of shares to be awarded.
The Compensation Committee initially granted awards for 378,665 shares (the Target Award) of common stock under the LTIP during fiscal 2006. However, the actual number of shares finally awarded will range from zero shares, if a minimum level of performance is not achieved, to 200 percent of the target award, if specifically defined performance criteria is achieved during the three-year performance period. The minimum sales growth necessary for participants to receive any shares under the fiscal 2006 LTIP is 7.5 percent and the minimum cumulative operating income is $36.2 million. The number of shares finally awarded to LTIP participants under the fiscal 2006 LTIP grant is based upon the combination of factors as shown below:
| Sales Growth | Percent of Target Shares Awarded |
| 30.0% | 115% | 135% | 150% | 175% | 200% |
| 22.5% | 90% | 110% | 125% | 150% | 175% |
| 15.0% | 65% | 85% | 100% | 125% | 150% |
| 11.8 % | 50% | 70% | 85% | 110% | 135% |
| 7.5% | 30% | 50% | 65% | 90% | 115% |
| | $36.20 | $56.80 | $72.30 | $108.50 | $144.60 |
| | Cumulative Operating Income (millions) |
Based upon actual financial performance through August 31,December 1, 2007 the sale of our Brazil and Mexico subsidiaries, and estimated performance through the remaining service period of the fiscal 2006 LTIP grant, (fiscal 2007 and 2008), the numberCompany determined that no shares of performance awards granted during fiscal 2006 was decreased to 182,779 shares, which resulted in cumulative adjustments to decrease our operating expenses totaling $0.3 million during fiscal 2007. At August 31, 2007, there was a total of $0.5 million of unrecognized compensation cost related to our fiscal 2006 LTIP grant. The total compensation costcommon stock would be awarded under the terms of the fiscal 2006 LTIP willgrant. We determined that our anticipated sales growth in training and consulting sales would be equalinsufficient to offset forecast product sales declines, which were revised using actual product sales levels late in our first fiscal quarter and early second fiscal quarter, and the numberimpact of eliminated sales resulting from the disposal and conversion of our subsidiary in Brazil and our training operations in Mexico to licensees. Although we expected sufficient levels of cumulative operating income to be recognized for the fiscal 2006 award, anticipated sales growth was below the minimum 7.5 percent threshold for shares finally issued multipliedto be awarded under the plan. As a result of this determination, we recorded a cumulative adjustment in the quarter ended December 1, 2007 that reduced our selling, general, and administrative expenses by $6.60 per share, which$0.7 million and no compensation expense was recognized from the fair value offiscal 2006 LTIP award during the commonquarters ended March 1, 2008, May 31, 2008, or August 31, 2008. The fiscal 2006 LTIP award expired on August 31, 2008 with no shares determined at the grant date.granted under this award.
During fiscal 2007, the Compensation Committee granted performance awards for 429,312 shares of common stock under the terms of the LTIP. Consistent with the fiscal 2006 LTIP grant, theThe Company must achieve minimum levels of sales growth and cumulative operating income in order for participants to receive any shares under the fiscal 2007 LTIP grant. The minimum sales growth for the fiscal 2007 LTIP iswas 10.0 percent (fiscal 2009 compared to fiscal 2006)2007) and the minimum cumulative operating income total isduring the service period was $41.3 million. We will recordrecorded compensation expense on the fiscal 2007 LTIP using a 5 percent estimated forfeiture rate during the vesting period. However, the total amount of compensation expense recorded for the fiscal 2007 LTIP will equalwould have equaled the number of shares awarded multiplied by $5.78 per share.
Based primarily upon the saleour assessment of our Brazil and Mexico subsidiaries, and actual operating performance in fiscal 2007, the number of performance awards granted in connection with the fiscal 2007 grant was decreasedLTIP at May 31, 2008, we determined that no shares of common stock would be awarded to 357,617 shares, which resulted in cumulative adjustments to decrease our operating expenses by $0.1 million duringparticipants under the year ended August 31, 2007. At August 31, 2007 there was $1.5 millionterms of unrecognized compensation cost related to the fiscal 2007 LTIP grant. Consistent with the analysis of the fiscal 2006 LTIP grant, we expected sufficient levels of operating income to be recognized for the fiscal 2007 award, but expected sales growth was determined to be insufficient for any shares to be awarded under this plan. The numberrevised sales projections included actual performance through May 31, 2008 and estimated sales performance through fiscal 2009 based upon revised assumptions, which were adversely affected by slowing economic conditions in the United States and other countries in which the Company has operations. As a result of this determination, we recorded cumulative adjustments totaling $0.6 million to reduce selling, general, and administrative expenses
during the fiscal year ended August 31, 2008. We do not expect any shares finally awarded to LTIP participantsvest under the terms of the fiscal 2007 LTIP grant is based upon the combination of factors as shown below:
| Sales Growth | Percent of Target Shares Awarded |
| 40.0% | 115% | 135% | 150% | 175% | 200% |
| 30.0% | 90% | 110% | 125% | 150% | 175% |
| 20.0% | 65% | 85% | 100% | 125% | 150% |
| 15.7% | 50% | 70% | 85% | 110% | 135% |
| 10.0% | 30% | 50% | 65% | 90% | 115% |
| | $41.30 | $64.90 | $82.60 | $123.90 | $165.20 |
| | Cumulative Operating Income (millions) |
The analysis of our LTIP plans containscontained uncertainties because we arewere required to make assumptions and judgments about the eventual number of shares that willwould vest in each LTIP grant. The assumptions and judgments that are essential to the analysis include forecasted sales and operating income levels during the LTIP service periods. The evaluation of LTIP performance awards and corresponding use of estimated amounts may produceproduced additional volatility in our consolidated financial statements as we recordrecorded cumulative adjustments to the estimated number of common shares to be awarded under the LTIP grants. Actual results could differ, and differ materially, from estimates made during the service, or vesting, period.grants as described above.
We estimate the value of our stock option awards on the date of grant using the Black-Scholes option pricing model. However, the Company did not grant any stock options during the fiscal years ended August 31, 2008, 2007, or 2006, or 2005 and thewe did not have any remaining costunrecognized compensation expense associated with our unvested stock options at August 31, 2007 was insignificant.2008.
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 past due, which exceed a specified dollar amount, are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the probability for recovery is considered remote. We do not have any off-balance sheet credit exposure related to our customers.
Our allowance for doubtful accounts calculation containscalculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the collectibility of customer accounts, which may be influenced by a number of factors that are not within our control, such as the financial health of each customer. We regularly review the collectibility assumptions of our allowance for doubtful accounts calculation and compare them against historical collections. Adjustments to the assumptions are then based upon the comparison, which may either increase or decrease our total allowance for doubtful accounts. For example, a 10 percent increase to our allowance for doubtful accounts at August 31, 20072008 would reduce our reported income from operations by approximately $0.1 million.
Inventory Valuation
OurAt August 31, 2008, following the sale of our CSBU, our inventories arewere comprised primarily of dated calendar productstraining materials and other non-dated products such as binders, stationery, training products, and otherrelated accessories. Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventories are reduced to their fair market value through the use of inventory loss reserves, which are recorded during the normal course of business.
Our inventory loss reserve calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding a number of factors, including future inventory demand requirements and pricing strategies. During the evaluation process we consider historical sales patterns and current sales trends, but these may not be indicative of future inventory losses. While we have not made material changes to our inventory reserve calculationsreserves methodology during the past three years, our inventory requirements may change based on projected customer demand, technological and product life cycle changes, longer or shorter than expected usage periods, and other factors that could affect the valuation of our inventories. If our estimates regarding consumer demand and other factors are inaccurate, we may be exposed to losses that may have a materially adverse impact upon our financial position and results of operations. For instance, a 10 percent increase in our inventory loss reserves at August 31, 20072008 would reduce our income from operations by approximately $0.4$0.1 million.
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 the carrying value of the Covey trade name exceeds the fair value of its discounted estimated future cash flows,royalties on trade name related revenues, an impairment loss is recognized for the difference between the carrying value and the fair value of the discounted future cash flows.difference. The adjusted basis becomes the carrying value until a future impairment assessment determines that additional impairment charges are necessary.
Our impairment evaluation calculation for the Covey trade name contains uncertainties because it requires us to make assumptions and apply judgment in order to estimate future cash flows, to estimate an appropriate royalty rate, and to select a discount rate that reflects the inherent risk of future cash flows. Our valuation methodology for the Covey trade name was developed by an independent valuation firm and has remained materially unchanged during the past three years. However, if forecasts and assumptions used to support the carrying value of our indefinite-lived intangible asset change in future periods, significant impairment charges could result that would have an adverse effect upon our results of operations and financial condition. Based upon the fiscal 20072008 evaluation of the Covey trade name, our trade-name related revenues and licensee royalties would have to suffer significant reductions before we would be required to impair the Covey trade name.
Impairment of Long-Lived Assets
Long-lived tangible assets and definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use an estimate of undiscounted future net cash flows of the assets over their remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the anticipated future cash flows of the assets, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based upon discounted cash flows over the estimated remaining useful life of the asset. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes itits new cost basis, which is then depreciated or amortized over the remaining useful life of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets.
Our impairment evaluation calculations contain uncertainties because they require us to make assumptions and apply judgment in order to estimate future cash flows, forecast the useful lives of the assets, and select a discount rate that reflects the risk inherent in future cash flows. Although we have not made any material changes to our long-lived assets impairment assessment methodology during the past three years, if forecasts and assumptions used to support the carrying value of our long-lived tangible and definite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.
Income Taxes
We regularly evaluate our United States federal and various state and foreign jurisdiction income tax exposures. On September 1, 2007, we adopted the provisions of FIN 48, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the provisions of FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits of tax exposure items are not recognized in the provisionfinancial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon final settlement. The provisions of FIN 48 also provide guidance on de-recognition, classification, interest, and penalties on income taxes,
accounting for income taxes unless it is probable that the benefits will be sustained, without regard to the likelihoodin interim periods, and requires increased disclosure of tax examination. A tax exposure reserve represents the difference between the recognition of benefits related to exposure items forvarious income tax reporting purposes and financial reporting purposes. The tax exposure reserve is classified as a component of the current income taxes payable account. The Company adds interest and penalties, if applicable, each period to the reserve.items. Taxes and penalties are a componentcomponents of theour overall income tax provision. InterestPrior to the adoption of FIN 48, interest on income tax items iswas recorded as a component of consolidated interest expense. However, uponBeginning on September 1, 2007, in conjunction with the adoption of FIN No. 48, in fiscal 2008, interest on income taxes willis included as a component of overall income tax expense.
The Company recognizes therecords previously unrecognized tax benefits of the tax exposure items in the financial statements that is, the reserve is reversed, when it becomes probablemore likely than not (greater than a 50 percent likelihood) that the tax position will be sustained. To assess the probability of sustaining a tax position, the Company considers all available positive evidence. In many instances, sufficient positive evidence willmay not be available until the expiration of the statute of limitations for Internal Revenue Service audits by taxing jurisdictions, at which time the entire benefit will be recognized as a discrete item in the applicable period.
Our unrecognized tax exposure reserve contains uncertainties becausebenefits result from uncertain tax positions about which we are required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions. The calculation of our income tax provision or benefit, as applicable, requires estimates of future taxable income or losses. During the course of the fiscal year, these estimates are compared to actual financial results and adjustments may be made to our tax provision or benefit to reflect these revised estimates. Our effective income tax rate is also affected by changes in tax law and the results of tax audits by various jurisdictions. Although we believe that our judgments and estimates discussed herein are reasonable, actual results could differ, and we could be exposed to losses or gains that could be material.
We regularly assess the need for valuation allowances against our deferred income tax assets, considering recent profitability, known trends and events, and expected future transactions. For several years prior to the year ended August 31, 2006, our history of significant operating losses precluded us from demonstrating that it was more likely than not that the related benefits from deferred income tax deductions and foreign tax carryforwards would be realized. Accordingly, we recorded valuation allowances on the majority of our deferred income tax assets.
In fiscal 2006 we reversed the majority of these valuation allowances. Due to improved operating performance, business models, and expectations regarding future taxable income, the Company has concluded that it is more likely than not that the benefits of domestic operating loss carryforwards, together with the benefits of other deferred income tax assets will be realized. Thus, we reversed the valuation allowances on certain of our domestic deferred income tax assets, except for $2.2 million related to foreign tax credits. However, events and circumstances may change in future periods, requiring us to record valuation allowances on our deferred income tax assets. These deferred tax valuation allowances could have a material impact upon our reported financial position and results of operations.
ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED
Uncertain Tax Positions– In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109. This interpretation prescribes a consistent recognition threshold and measurement standard, as well as criteria for subsequently recognizing, derecognizing, and measuring tax positions for financial statement purposes. This interpretation also requires expanded disclosure with respect to the uncertainties as they relate to income tax accounting and is effective for fiscal years beginning after December 15, 2006. The Company will adopt the provisions of FIN No. 48 on September 1, 2007 (fiscal 2008) and the cumulative effect from the adoption of FIN No. 48, if any, will be an adjustment to beginning retained earnings in the year of adoption. We do not expect the adoption of FIN No. 48 to have a material impact on our consolidated financial statements.
Fair Value Measures – In September 2006, the FASB issued SFAS No. 157, Fair Value Measures. This statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. Statement No. 157 only applies to fair-value measurements that are already required or permitted by other accounting standards except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. This statement is effective for the specified fair value measures for financial statements issued for fiscal years beginning after November 15, 2007, and will thus be effective for the Company in fiscal 2009. We have not yet completed our analysis of the impact of SFAS No. 157 on our financial statements.
Fair Value Option for Financial Assets and Financial Liabilities – In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115. Statement No.159 permits entities to choose to measure many
financial instruments and certain other items at fair value. The provisions of SFAS No. 159 will become effective for the Company in fiscal 2009 and we have not yet completed our analysis of the impact of SFAS No. 159 on our financial statements.
Business Combinations – In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. These standards aim to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of SFAS No. 141R and SFAS No. 160 are effective for our fiscal year beginning September 1, 2009. We do not currently anticipate that these statements will have a material impact upon our financial condition or results of operations.
Derivatives Disclosures – In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. Statement No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective for our third quarter of fiscal 2009. The Company is currently evaluating the impact of the provisions of SFAS No. 161, but due to our limited use of derivative instruments we do not currently anticipate that the provisions of SFAS No. 161 will have a material impact on our financial statements.
REGULATORY COMPLIANCE
The Company is registered in states in which we do business that have a sales tax and collects and remits sales or use tax on retail sales made through its stores and catalog sales. Compliance with environmental laws and regulations has not had a material effect on our operations.
INFLATION AND CHANGING PRICES
Inflation has not had a material effect on our operations. However, future inflation may have an impact on the price of materials used in the production of plannerstraining products and related products,accessories, including paper and leatherrelated raw materials. We may not be able to pass on such increased costs to our customers.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain written and oral statements made by the Company or our representatives in this report other reports, filings with the Securities and Exchange Commission, press releases, conferences, internet web casts, 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 as amended (the Exchange Act). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or phrases of similar meaning. In our reports and filings we may make forward looking statements regarding future producttraining and trainingconsulting sales activity, anticipated expenses, projected cost reduction and strategic initiatives, our expectations about the effect of the sale of the CSBU on our business, our expectations about our restructuring plan, expected levels of depreciation expense, expectations regarding tangible and intangible asset valuation expenses, the seasonality of future sales, the seasonal fluctuations in cash used for and provided by operating activities, expected improvements in cash flows from operating activities, the adequacy of our existing capital resources, future compliance with the terms and conditions of our line of credit, expected fiscal 2008 repayment of the ability to borrow on our line of credit, expected repayment of our line of credit in future periods, estimated capital expenditures, the adequacy of our existing capital resources, and cash flow estimates used to determine the fair value of long-lived assets. These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual 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 in Item 1A of this report on Form 10-K for the fiscal year ended August 31, 2007,2008, entitled “Risk Factors.” In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas: unanticipated costs or capital expenditures; difficulties encountered by 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, including the risk factors noted in Item 1A of this report on Form 10-K.performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management’s expectations as of the date made, and the Company does not undertake any responsibility to update any of these statements in the future except as required by law. Actual future performance and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.
Market Risk of Financial Instruments
We are exposed to financial instrument market risk primarily through fluctuations in foreign currency exchange rates and interest rates. To manage risks associated with foreign currency exchange and interest rates, we make limited use of derivative financial instruments. Derivatives are financial instruments that derive their value from one or more underlying financial instruments. As a matter of policy, our derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. In addition, we do not enter into derivative contracts for trading or speculative purposes, nor are we party to any leveraged derivative instrument. The notional amounts of derivatives do not represent actual amounts exchanged by the parties to the instrument, and, thus, are not a measure of exposure to us through our use of derivatives. Additionally, we enter into derivative agreements only with highly rated counterparties and we do not expect to incur any losses resulting from non-performance by other parties.
Foreign Exchange Sensitivity
Due to the global nature of our operations, we are subject to risks associated with transactions that are denominated in currencies other than the United States dollar, as well as the effects of translating amounts denominated in foreign currencies to United States dollars as a normal part of the reporting process. The objective of our foreign currency risk management activities is to reduce foreign currency risk in the consolidated financial statements. In order to manage foreign currency risks, we make limited use of foreign currency forward contracts and other foreign currency related derivative instruments. Although we cannot eliminate all aspects of our foreign currency risk, we believe that our strategy, which includes the use of derivative instruments, can reduce the impacts of foreign currency 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, 2008, 2007, 2006, and 2005,2006, 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 income statements and had the following net impact on the periods indicated (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | | | | |
| Losses on foreign exchange contracts | | $ | (249 | ) | | $ | (346 | ) | | $ | (437 | ) |
| Gains on foreign exchange contracts | | | 119 | | | | 415 | | | | 127 | |
| Net gain (loss) on foreign exchange contracts | | $ | (130 | ) | | $ | 69 | | | $ | (310 | ) |
YEAR ENDED AUGUST 31, | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
Losses on foreign exchange contracts | | $ | (487 | ) | | $ | (249 | ) | | $ | (346 | ) |
Gains on foreign exchange contracts | | | 36 | | | | 119 | | | | 415 | |
Net gain (loss) on foreign exchange contracts | | $ | (451 | ) | | $ | (130 | ) | | $ | 69 | |
At August 31, 2007,2008, 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.approximated the notional amounts of the contracts due to the proximity of the end of the contract to our fiscal year end on August 31, 2008. The notional amounts of our foreign currency sell contracts that did not qualify for hedge accounting were as follows at August 31, 20072008 (in thousands):
Contract Description | | Notional Amount in Foreign Currency | | | Notional Amount in U.S. Dollars | | | Notional Amount in Foreign Currency | | | Notional Amount in U.S. Dollars | |
| | | | | | | | | | | | | |
| Mexican Pesos | | 13,500 | | | $ | 1,204 | | |
| British Pounds | | | 450 | | | $ | 809 | |
| Japanese Yen | | 100,000 | | | 864 | | | 27,000 | | | 254 | |
| Australian Dollars | | 457 | | | 374 | | | 125 | | | 117 | |
Net Investment Hedges– During fiscal 2005 we entered into foreign currency forward contracts that were designed to manage foreign currency risks related to the value of our net investment in wholly-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 we recognized the following net losses on our net investment hedging contracts (in thousands):
YEAR ENDED AUGUST 31, | | 2005 | |
| | | | |
| Losses on net investment hedge contracts | | $ | (384 | ) |
| Gains on net investment hedge contracts | | | 66 | |
| Net losses on investment hedge contracts | | $ | (318 | ) |
As of August 31, 2005, we had settled our net investment hedge contracts and we did not utilize any net investment hedge contracts in fiscal 2007 or fiscal 2006. However, we may 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 interest rates primarily due to our line of credit borrowings and long-term mortgage obligation in Canada. At August 31, 2007,2008, our debt obligations consisted primarily of a long-term lease agreement (financing obligation) associated with the sale of our corporate headquarters facility, a variable-rate line of credit arrangement, and a variable rate long-term mortgage on certain of our buildings and property in Canada. The addition of the variable-rate line of credit in fiscal 2007 increased our interest rate sensitivity and in the future our overall interest rate sensitivity will be influenced by the amounts borrowed on the line of credit and the prevailing interest rates, which may create additional expense if interest rates increase in future periods. The financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent.
The line of credit had a weighted average interest rate of 6.6 percent at August 31, 2007 and our variable-rate mortgage has interest charged at the Canadian Prime Rate (6.3(4.8 percent at August 31, 2007)2008) and requires payments through January 2015. At August 31, 2007 borrowing levels following the payment of the $28.2 million tender offer obligation, a one percent increase to the interest rates on our variable rate debtline of credit and mortgage obligation would increase our interest expense over the next year by approximately $0.2 million.
During the fiscal years ended August 31, 2008, 2007, 2006, and 2005,2006, we were not party to any interest rate swap agreements or similar derivative instruments.
IITEMTEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Franklin Covey Co.:
We have audited Franklin Covey Co’sCo.’s internal control over financial reporting as of August 31, 2007,2008, based on criteria established inInternal Control -– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Franklin Covey Co.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Franklin Covey Co. maintained, in all material respects, effective internal control over financial reporting as of August 31, 2007,2008, based on criteria established in Internal Control -– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Franklin Covey Co. and subsidiaries as of August 31, 20072008 and 2006,2007, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2007,2008, and our report dated November 14, 20072008 expressed an unqualified opinion on those consolidated financial statements.statements.
/s/ KPMG LLP
Salt Lake City, UtahUT
November 14, 20072008
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Franklin Covey Co.:
We have audited the accompanying consolidated balance sheets of Franklin Covey Co. andsubsidiaries as of August 31, 20072008 and 2006,2007, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended August 31, 2007.2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Franklin Covey Co. andsubsidiaries as of August 31, 20072008 and 2006,2007, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 2007,2008, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Franklin Covey Co.’s internal control over financial reporting as of August 31, 2007,2008, based on criteria established inInternal Control —– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 14, 20072008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.reporting.
/s/ KPMG LLP
Salt Lake City, UtahUT
November 14, 20072008
FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS
| AUGUST 31, | | 2007 | | | 2006 | | | 2008 | | | 2007 | |
In thousands, except per share data | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| ASSETS | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 6,126 | | | $ | 30,587 | | | $ | 15,904 | | | $ | 6,126 | |
| Accounts receivable, less allowance for doubtful accounts of $821 and $979 | | 27,239 | | | 24,254 | | |
| Accounts receivable, less allowance for doubtful accounts of $1,066 and $821 | | | 28,019 | | | 27,239 | |
| Inventories | | 24,033 | | | 21,790 | | | 8,742 | | | 24,033 | |
| Deferred income taxes | | 3,635 | | | 4,130 | | | 2,472 | | | 3,635 | |
| Receivable from equity method investee | | | 7,672 | | | - | |
| Prepaid expenses and other assets | | | 9,070 | | | | 6,359 | | | | 5,102 | | | | 9,070 | |
| Total current assets | | 70,103 | | | 87,120 | | | 67,911 | | | 70,103 | |
| | | | | | | | |
Property and equipment, net | | 36,063 | | | 33,318 | | | 26,928 | | | 36,063 | |
| Intangible assets, net | | 75,923 | | | 79,532 | | | 72,320 | | | 75,923 | |
| Deferred income taxes | | 101 | | | 4,340 | | |
| Other long-term assets | | | 14,441 | | | | 12,249 | | | | 11,768 | | | | 14,542 | |
| | | $ | 196,631 | | | $ | 216,559 | | | $ | 178,927 | | | $ | 196,631 | |
| | | | | | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Current portion of long-term debt and financing obligation | | $ | 629 | | | $ | 585 | | | $ | 670 | | | $ | 629 | |
| Line of credit | | 15,999 | | | - | | | - | | | 15,999 | |
| Accounts payable | | 12,190 | | | 13,769 | | | 8,713 | | | 12,190 | |
| Income taxes payable | | 2,244 | | | 1,924 | | | 1,057 | | | 2,244 | |
| Tender offer obligation | | | 28,222 | | | - | |
| Accrued liabilities | | | 30,101 | | | | 32,170 | | | | 23,419 | | | | 30,101 | |
| Total current liabilities | | 61,163 | | | 48,448 | | | 62,081 | | | 61,163 | |
| | | | | | | | |
Long-term debt and financing obligation, less current portion | | 32,965 | | | 33,559 | | | 32,291 | | | 32,965 | |
| Other liabilities | | 1,019 | | | 1,192 | | | 1,229 | | | 1,019 | |
| Deferred income tax liabilities | | | 565 | | | | 11 | | | | 4,572 | | | | 565 | |
| Total liabilities | | 95,712 | | | 83,210 | | | | 100,173 | | | | 95,712 | |
| | | | | | | | | | | | | | | | | |
| Commitments and contingencies (Notes 1, 6, 7, and 11) | | | | | | | | | |
| Commitments and contingencies (Notes 1, 8, 9, and 12) | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | | | | | | |
| Preferred stock – Series A, no par value; 4,000 shares authorized, zero and 1,494 shares issued and outstanding; liquidation preference totaling zero and $38,278 | | - | | | 37,345 | | |
| Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued | | 1,353 | | | 1,353 | | | 1,353 | | | 1,353 | |
| Additional paid-in capital | | 185,890 | | | 185,691 | | | 184,313 | | | 185,890 | |
| Common stock warrants | | 7,602 | | | 7,611 | | | 7,597 | | | 7,602 | |
| Retained earnings | | 19,489 | | | 14,075 | | | 25,337 | | | 19,489 | |
| Accumulated other comprehensive income | | 970 | | | 653 | | | 1,058 | | | 970 | |
| Treasury stock at cost, 7,296 shares and 7,083 shares | | | (114,385 | ) | | | (113,379 | ) | |
| Treasury stock at cost, 10,203 shares and 7,296 shares | | | | (140,904 | ) | | | (114,385 | ) |
| Total shareholders’ equity | | | 100,919 | | | | 133,349 | | | | 78,754 | | | | 100,919 | |
| | | $ | 196,631 | | | $ | 216,559 | | | $ | 178,927 | | | $ | 196,631 | |
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | |
In thousands, except per share amounts | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net sales: | | | | | | | | | | | | | | | | | | |
Training and consulting services | | | $ | 138,112 | | | $ | 137,708 | | | $ | 122,418 | |
Products | | $ | 146,417 | | | $ | 156,205 | | | $ | 167,179 | | | | 121,980 | | | | 146,417 | | | | 156,205 | |
Training and consulting services | | | 137,708 | | | | 122,418 | | | | 116,363 | | |
| | | | 284,125 | | | | 278,623 | | | | 283,542 | | | | 260,092 | | | | 284,125 | | | | 278,623 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of sales: | | | | | | | | | | | | | | | | | | | | | | | | |
Training and consulting services | | | 44,738 | | | 43,132 | | | 40,722 | |
Products | | 66,616 | | | 70,516 | | | 77,074 | | | | 53,565 | | | | 65,915 | | | | 69,940 | |
Training and consulting services | | | 43,132 | | | | 40,722 | | | | 37,773 | | |
| | | | 109,748 | | | | 111,238 | | | | 114,847 | | | | 98,303 | | | | 109,047 | | | | 110,662 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | 174,377 | | | 167,385 | | | 168,695 | | | 161,789 | | | 175,078 | | | 167,961 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general, and administrative | | 149,220 | | | 144,747 | | | 148,305 | | | 141,318 | | | 149,220 | | | 144,747 | |
| Gain on sale of consumer solutions business unit | | | (9,131 | ) | | - | | | - | |
| Gain on sale of manufacturing facility | | (1,227 | ) | | - | | | - | | | - | | | (1,227 | ) | | - | |
| Restructuring costs | | | 2,064 | | | - | | | - | |
| Impairment of assets | | | 1,483 | | | - | | | - | |
| Depreciation | | 4,693 | | | 4,779 | | | 7,774 | | | 5,692 | | | 5,394 | | | 5,355 | |
| Amortization | | | 3,607 | | | | 3,813 | | | | 4,173 | | | | 3,603 | | | | 3,607 | | | | 3,813 | |
Income from operations | | | 18,084 | | | | 14,046 | | | | 8,443 | | | 16,760 | | | 18,084 | | | 14,046 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | 717 | | | 1,334 | | | 944 | | | 157 | | | 717 | | | 1,334 | |
| Interest expense | | (3,136 | ) | | (2,622 | ) | | (786 | ) | | (3,083 | ) | | (3,136 | ) | | (2,622 | ) |
| Recovery from legal settlement | | - | | | 873 | | | - | | | | - | | | | - | | | | 873 | |
| Gain on disposal of investment in unconsolidated subsidiary | | | - | | | | - | | | | 500 | | |
Income before income taxes | | | 15,665 | | | | 13,631 | | | | 9,101 | | | 13,834 | | | 15,665 | | | 13,631 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax benefit (provision) | | | (8,036 | ) | | | 14,942 | | | | 1,085 | | | | (7,986 | ) | | | (8,036 | ) | | | 14,942 | |
Net income | | | 7,629 | | | | 28,573 | | | | 10,186 | | | 5,848 | | | 7,629 | | | 28,573 | |
| Preferred stock dividends | | (2,215 | ) | | (4,385 | ) | | (8,270 | ) | | | - | | | | (2,215 | ) | | | (4,385 | ) |
| Loss on recapitalization of preferred stock | | | - | | | | - | | | | (7,753 | ) | |
Net income (loss) available to common shareholders | | $ | 5,414 | | | $ | 24,188 | | | $ | (5,837 | ) | |
Net income available to common shareholders | | | $ | 5,848 | | | $ | 5,414 | | | $ | 24,188 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income available to common shareholders per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | .28 | | | $ | 1.20 | | | $ | (.34 | ) | | $ | .30 | | | $ | .28 | | | $ | 1.20 | |
Diluted | | $ | .27 | | | $ | 1.18 | | | $ | (.34 | ) | | $ | .29 | | | $ | .27 | | | $ | 1.18 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of common shares: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | 19,593 | | | 20,134 | | | 19,949 | | | 19,577 | | | 19,593 | | | 20,134 | |
Diluted | | 19,888 | | | 20,516 | | | 19,949 | | | 19,922 | | | 19,888 | | | 20,516 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| COMPREHENSIVE INCOME | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 7,629 | | | $ | 28,573 | | | $ | 10,186 | | | $ | 5,848 | | | $ | 7,629 | | | $ | 28,573 | |
| Adjustment for fair value of hedge derivatives | | - | | | - | | | (318 | ) | |
| Foreign currency translation adjustments | | | 458 | | | | 97 | | | | (152 | ) | | | 88 | | | | 458 | | | | 97 | |
| Comprehensive income | | $ | 8,087 | | | $ | 28,670 | | | $ | 9,716 | | | $ | 5,936 | | | $ | 8,087 | | | $ | 28,670 | |
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | |
In thousands | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | |
Net income | | $ | 7,629 | | | $ | 28,573 | | | $ | 10,186 | | | $ | 5,848 | | | $ | 7,629 | | | $ | 28,573 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | 10,030 | | | 10,289 | | | 13,939 | | | 9,533 | | | 10,030 | | | 10,289 | |
Gain on disposal of investment in unconsolidated subsidiary | | - | | | - | | | (500 | ) | |
Restructuring cost reversal | | - | | | - | | | (306 | ) | |
Gain on sale of consumer solutions business unit assets | | | (9,131 | ) | | - | | | - | |
Deferred income taxes | | 5,274 | | | (15,435 | ) | | (410 | ) | | 4,152 | | | 5,274 | | | (15,435 | ) |
Compensation cost of CEO fully-vested stock grant | | - | | | - | | | 404 | | |
Share-based compensation cost | | 1,394 | | | 843 | | | 791 | | |
Gains on disposals of assets | | (1,247 | ) | | - | | | - | | |
Share-based compensation cost (benefit) | | | (259 | ) | | 1,394 | | | 843 | |
Loss (gain) on disposals of assets | | | 460 | | | (1,247 | ) | | - | |
Restructuring charges | | | 2,064 | | | - | | | - | |
Impairment of assets | | | 1,483 | | | - | | | - | |
Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Increase in accounts receivable, net | | (3,574 | ) | | (1,919 | ) | | (3,481 | ) | | (7,204 | ) | | (3,574 | ) | | (1,919 | ) |
Decrease (increase) in inventories | | (2,427 | ) | | (845 | ) | | 2,813 | | | 2,853 | | | (2,427 | ) | | (845 | ) |
Decrease (increase) in prepaid expenses and other assets | | 514 | | | 1,458 | | | (526 | ) | |
Increase (decrease) in accounts payable and accrued liabilities | | (4,388 | ) | | (3,697 | ) | | 532 | | |
Increase in receivable from investment in equity method investee | | | (7,672 | ) | | - | | | - | |
Decrease in prepaid expenses and other assets | | | 7,109 | | | 514 | | | 1,458 | |
Decrease in accounts payable and accrued liabilities | | | (1,512 | ) | | (4,388 | ) | | (3,697 | ) |
Increase (decrease) in income taxes payable | | 304 | | | (2,081 | ) | | (1,832 | ) | | 255 | | | 304 | | | (2,081 | ) |
Increase (decrease) in other long-term liabilities | | | (151 | ) | | | (177 | ) | | | 652 | | | | (151 | ) | | | (151 | ) | | | (177 | ) |
Net cash provided by operating activities | | | 13,358 | | | | 17,009 | | | | 22,262 | | | | 7,828 | | | | 13,358 | | | | 17,009 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from the sale of consumer solutions business unit assets, net | | | 28,241 | | | - | | | - | |
Purchases of property and equipment | | (9,138 | ) | | (4,350 | ) | | (4,179 | ) | | (4,164 | ) | | (9,138 | ) | | (4,350 | ) |
Purchases of short-term investments | | - | | | - | | | (10,653 | ) | |
Sales of short-term investments | | - | | | - | | | 21,383 | | |
Capitalized curriculum development costs | | (5,088 | ) | | (4,010 | ) | | (2,184 | ) | | (4,042 | ) | | (5,088 | ) | | (4,010 | ) |
Proceeds from disposal of consolidated subsidiary | | 150 | | | - | | | - | | |
Proceeds from disposal of unconsolidated subsidiary | | - | | | - | | | 500 | | |
Proceeds from sale of property and equipment, net | | | 2,596 | | | | 93 | | | | - | | |
Investment in equity method investee | | | (2,755 | ) | | - | | | - | |
Proceeds from disposal of consolidated subsidiaries | | | 1,180 | | | 150 | | | - | |
Proceeds from sales of property and equipment, net | | | | 60 | | | | 2,596 | | | | 93 | |
Net cash provided by (used for) investing activities | | | (11,480 | ) | | | (8,267 | ) | | | 4,867 | | | | 18,520 | | | | (11,480 | ) | | | (8,267 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from line of credit borrowing | | 50,951 | | | - | | | - | | | 69,708 | | | 50,951 | | | - | |
Payments on line of credit borrowings | | (34,952 | ) | | - | | | - | | | (85,707 | ) | | (34,952 | ) | | - | |
Proceeds from sale and financing of corporate campus (net of restricted cash of $699) | | - | | | - | | | 32,422 | | |
Redemptions of Series A preferred stock | | (37,345 | ) | | (20,000 | ) | | (30,000 | ) | | - | | | (37,345 | ) | | (20,000 | ) |
Change in restricted cash | | - | | | 699 | | | - | | | - | | | - | | | 699 | |
Principal payments on long-term debt and financing obligation | | (605 | ) | | (1,111 | ) | | (216 | ) | | (622 | ) | | (605 | ) | | (1,111 | ) |
Purchases of common stock for treasury | | (2,625 | ) | | (5,167 | ) | | (91 | ) | | - | | | (2,625 | ) | | (5,167 | ) |
Proceeds from sales of common stock from treasury | | 388 | | | 427 | | | 109 | | | 462 | | | 388 | | | 427 | |
Proceeds from management stock loan payments | | 27 | | | 134 | | | 839 | | | - | | | 27 | | | 134 | |
Payment of preferred stock dividends | | | (2,215 | ) | | | (4,885 | ) | | | (9,020 | ) | | | - | | | | (2,215 | ) | | | (4,885 | ) |
Net cash used for financing activities | | | (26,376 | ) | | | (29,903 | ) | | | (5,957 | ) | | | (16,159 | ) | | | (26,376 | ) | | | (29,903 | ) |
| Effect of foreign currency exchange rates on cash and cash equivalents | | | 37 | | | | 58 | | | | (656 | ) | | | (411 | ) | | | 37 | | | | 58 | |
| Net increase (decrease) in cash and cash equivalents | | (24,461 | ) | | (21,103 | ) | | 20,516 | | | 9,778 | | | (24,461 | ) | | (21,103 | ) |
| Cash and cash equivalents at beginning of the year | | | 30,587 | | | | 51,690 | | | | 31,174 | | | | 6,126 | | | | 30,587 | | | | 51,690 | |
Cash and cash equivalents at end of the year | | $ | 6,126 | | | $ | 30,587 | | | $ | 51,690 | | | $ | 15,904 | | | $ | 6,126 | | | $ | 30,587 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for income taxes | | $ | 2,370 | | | $ | 2,615 | | | $ | 1,549 | | | $ | 3,549 | | | $ | 2,370 | | | $ | 2,615 | |
Cash paid for interest | | 2,973 | | | 2,662 | | | 606 | | | 3,146 | | | 2,973 | | | 2,662 | |
| Non-cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition of treasury stock from tender offer through liabilities | | | $ | 28,222 | | | $ | - | | | $ | - | |
Accrued preferred stock dividends | | $ | - | | | $ | 934 | | | $ | 1,434 | | | - | | | - | | | 934 | |
Promissory notes received from sales of consolidated subsidiaries | | 1,513 | | | - | | | - | | | - | | | 1,513 | | | - | |
Purchases of property and equipment financed by accounts payable | | 895 | | | - | | | - | | | 314 | | | 895 | | | - | |
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | Series A Preferred Stock Shares | | | Series A Preferred Stock Amount | | | Common Stock Shares | | | Common Stock Amount | | | Additional Paid-In Capital | | | Common Stock Warrants | | | Retained Earnings (Accumulated Deficit) | | | Deferred Compensa-tion | | | Accumulated Other Comprehensive Income (Loss) | | | Treasury Stock Shares | | | Treasury Stock Amount | | | Series A Preferred Stock Shares | | | Series A Preferred Stock Amount | | | Common Stock Shares | | | Common Stock Amount | | | Additional Paid-In Capital | | | Common Stock Warrants | | | Retained Earnings (Accumulated Deficit) | | | Deferred Compensa-tion | | | Accumulated Other Comprehensive Income | | | Treasury Stock Shares | | | Treasury Stock Amount | |
In thousands | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at August 31, 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 | ) | | 2,294 | | | $ | 57,345 | | | 27,056 | | | $ | 1,353 | | | $ | 190,760 | | | $ | 7,611 | | | $ | (14,498 | ) | | $ | (1,055 | ) | | $ | 556 | | | (6,465 | ) | | $ | (109,246 | ) |
| Preferred stock dividends | | | | | | | | | | | | | | | | | | (4,385 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,385 | ) | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock redemptions | | (800 | ) | | (20,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (800 | ) | | (20,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | |
| Issuance of common stock from treasury | | | | | | | | | | | | | | | | | | (334 | ) | | | | | | | | | | | | | | | | | | 69 | | | 743 | | | | | | | | | | | | | | | | | | | (334 | ) | | | | | | | | | | | | | | | | | | 69 | | | 743 | |
| Purchase of treasury shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (690 | ) | | (5,167 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (690 | ) | | (5,167 | ) |
| Unvested stock award | | | | | | | | | | | | | | | | | | (458 | ) | | | | | | | | | | | | | | | | | | 27 | | | 458 | | |
| Stock-based compensation | | | | | | | | | | | | | | | | | | 862 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unvested share award | | | | | | | | | | | | | | | | | | | (458 | ) | | | | | | | | | | | | | | | | | | 27 | | | 458 | |
| Share-based compensation | | | | | | | | | | | | | | | | | | | 862 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reclassification of deferred compensation upon adoption of SFAS 123R | | | | | | | | | | | | | | | | | | (1,055 | ) | | | | | | | | | | 1,055 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,055 | ) | | | | | | | | | | 1,055 | | | | | | | | | | | | | |
| Receipt of common stock as consideration for payment on management common stock loans | | | | | | | | | | | | | | | | | | 301 | | | | | | | | | | | | | | | | | | | (24 | ) | | (167 | ) | | | | | | | | | | | | | | | | | | 301 | | | | | | | | | | | | | | | | | | | (24 | ) | | (167 | ) |
| Cumulative translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 97 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 97 | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 28,573 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 28,573 | | | | | | | | | | | | | | | | | |
| Balance at August 31, 2006 | | 1,494 | | | $ | 37,345 | | | 27,056 | | | $ | 1,353 | | | $ | 185,691 | | | $ | 7,611 | | | $ | 14,075 | | | $ | - | | | $ | 653 | | | (7,083 | ) | | $ | (113,379 | ) | | 1,494 | | | $ | 37,345 | | | 27,056 | | | $ | 1,353 | | | $ | 185,691 | | | $ | 7,611 | | | $ | 14,075 | | | $ | - | | | $ | 653 | | | (7,083 | ) | | $ | (113,379 | ) |
| Preferred stock dividends | | | | | | | | | | | | | | | | | | | | | | | | | | (2,215 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,215 | ) | | | | | | | | | | | | | | | | |
| Preferred stock redemptions | | (1,494 | ) | | (37,345 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,494 | ) | | (37,345 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock from treasury | | | | | | | | | | | | | | | | | | (708 | ) | | | | | | | | | | | | | | | | | | 100 | | | 1,096 | | | | | | | | | | | | | | | | | | | (708 | ) | | | | | | | | | | | | | | | | | | 100 | | | 1,096 | |
| Purchase of treasury shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (345 | ) | | (2,603 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (345 | ) | | (2,603 | ) |
| Unvested stock award | | | | | | | | | | | | | | | | | | (501 | ) | | | | | | | | | | | | | | | | | | 32 | | | 501 | | |
| Stock-based compensation | | | | | | | | | | | | | | | | | | 1,394 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unvested share award | | | | | | | | | | | | | | | | | | | (501 | ) | | | | | | | | | | | | | | | | | | 32 | | | 501 | |
| Share-based compensation | | | | | | | | | | | | | | | | | | | 1,394 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments on management common stock loans | | | | | | | | | | | | | | | | | | 27 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 27 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 458 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 458 | | | | | | | | | |
| Common stock warrant activity | | | | | | | | | | | | | | | | | | (13 | ) | | (9 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (13 | ) | | (9 | ) | | | | | | | | | | | | | | | | | | | | |
| Sale of Brazil subsidiary | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (141 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (141 | ) | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,629 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,629 | | | | | | | | | | | | | | | | | |
Balance at August 31, 2007 | | | - | | | $ | - | | | | 27,056 | | | $ | 1,353 | | | $ | 185,890 | | | $ | 7,602 | | | $ | 19,489 | | | $ | - | | | $ | 970 | | | | (7,296 | ) | | $ | (114,385 | ) | | - | | | $ | - | | | 27,056 | | | $ | 1,353 | | | $ | 185,890 | | | $ | 7,602 | | | $ | 19,489 | | | $ | - | | | $ | 970 | | | (7,296 | ) | | $ | (114,385 | ) |
| Issuance of common stock from treasury | | | | | | | | | | | | | | | | | | | (746 | ) | | | | | | | | | | | | | | | | | | 96 | | | 1,234 | |
| Purchase of treasury shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (12 | ) | | (103 | ) |
| Treasury shares acquired through tender offer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,027 | ) | | (28,222 | ) |
| Unvested share award | | | | | | | | | | | | | | | | | | | (572 | ) | | | | | | | | | | | | | | | | | | 36 | | | 572 | |
| Share-based compensation | | | | | | | | | | | | | | | | | | | (259 | ) | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 88 | | | | | | | | | |
| Common stock warrant activity | | | | | | | | | | | | | | | | | | | | | | | (5 | ) | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,848 | | | | | | | | | | | | | | | | | |
| Balance at August 31, 2008 | | | | - | | | $ | - | | | | 27,056 | | | $ | 1,353 | | | $ | 184,313 | | | $ | 7,597 | | | $ | 25,337 | | | $ | - | | | $ | 1,058 | | | | (10,203 | ) | | $ | (140,904 | ) |
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Franklin Covey Co. (hereafter referred to as us, we, our, or the Company) believes that great organizations consist of great people who form great teams that produce great results. To enable organizations and individuals to achieve great results, we provide integrated consulting, training, and performance solutions focused on leadership, strategy execution, productivity, sales force effectiveness, effective communications,communication, 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 services and products arehave historically been available through professional consulting services, public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com. Our and our best-known offerings in the marketplace includehave included the FranklinCovey Planner™, and a suite of individual-effectiveness and leadership-development training products based on the best-selling book, The 7 Habits of Highly Effective People.
During the fourth quarter of fiscal 2008, we completed the sale of substantially all of the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed entity, Franklin Covey Products, LLC (Note 2). We also offer a rangeThe CSBU was primarily responsible for the sale of our products, including the FranklinCovey Planner™, to consumers through retail stores, catalogs, and our Internet site. Following the sale of the CSBU, our business primarily consists of training, consulting, and assessment services and products to help organizations achieve superior results by focusing on and executing on top priorities, building the capability of knowledge workers, and aligning business processes. TheseOur training, consulting, and assessment offerings include services based upon the popular workshop The 7 Habits of Highly Effective PeopleÒ; Leadership: Great Leaders—Great Teams—Great Results™; The 4 Disciplines of Execution™; FOCUS: Achieving Your Highest Priorities™, ;The 4 Disciplines8 Habits of Execution™, The 4 Roles of a Successful Marriage;Leadership™, Building Business Acumen: WhatAcumen; Championing Diversity; Leading at the CEO Wants YouSpeed of Trust; Writing Advantage, and Presentation Advantage. During fiscal 2008, we introduced a new suite of services designed to Know™, the Advantage Series communication workshops,help our clients improve their sales through increased customer loyalty. We also consistently seek to create, develop, and the Execution Quotient (xQ™) organizational assessment tool.introduce new services and products that will help our clients achieve greatness.
Fiscal Year
The Company utilizes a modified 52/53-week fiscal year that ends on August 31 of each year. Corresponding quarterly periods generally consist of 13-week periods that ended on December 2, 2006,1, 2007, March 3, 2007,1, 2008, and June 2, 2007May 31, 2008 during fiscal 2007.2008. Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and itsour subsidiaries, which consistconsisted of Franklin Covey Printing, Franklin Development Corp., and our wholly-owned operations in Canada, Japan, the United Kingdom, Australia, and Mexico.Mexico (product sales) during fiscal 2008. Intercompany balances and transactions are eliminated in consolidation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. These reclassifications included a change in the classification of the gain on the salebuilding depreciation costs related to subleased office space from product cost of investment in an unconsolidated subsidiarysales to depreciation expense. The depreciation expense reclassified from operating income to non-operating income inproduct cost of sales totaled $0.7 million and $0.6 million for the fiscal 2005 consolidated income statement.years ended August 31, 2007 and 2006, respectively.
Cash and Cash Equivalents
We consider highly liquid investments with insignificant interest rate risk and original maturities to the Company of three months or less to be cash equivalents. Our cash equivalents consisted primarily of commercial paper and money market funds that totaled $19.5 million at August 31, 2006. As a result of reduced cash balances, at August 31, 2007 weWe did not hold a significant amount of investments that would be considered cash equivalent instruments.instruments at August 31, 2008 or 2007.
As of August 31, 2007,2008, we had demand deposits at various banks in excess of the $100,000$250,000 limit for insurance by the Federal Deposit Insurance Corporation (FDIC). Subsequent to August 31, 2008 we utilized substantially all of our available cash to pay the $28.2 million tender offer obligation.
Restricted Cash
Our restricted cash consisted of a portion of the proceeds from the fiscal 2005 sale of our corporate campus 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.
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. 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. OurCash flows from the sales of inventory are included in cash flows provided by operating activities in our consolidated cash flows statements. Following the sale of our Consumer Solutions Business Unit in the fourth quarter of fiscal 2008, our inventories are comprised primarily of dated calendar productstraining materials, books, and other non-dated products such as binders, stationery, training products, and otherrelated accessories and were comprised of the following (in thousands):
| AUGUST 31, | | 2007 | | | 2006 | | | 2008 | | | 2007 | |
| Finished goods | | $ | 20,268 | | | $ | 18,464 | | | $ | 8,329 | | | $ | 20,268 | |
| Work in process | | 743 | | | 706 | | | - | | | 743 | |
| Raw materials | | | 3,022 | | | | 2,620 | | | | 413 | | | | 3,022 | |
| | | $ | 24,033 | | | $ | 21,790 | | | $ | 8,742 | | | $ | 24,033 | |
Provision is made to reduce excess and obsolete inventories to their estimated net realizable value. At August 31, 20072008 and 2006,2007, our reserves for excess and obsolete inventories totaled $4.3$1.1 million and $3.3$4.3 million. In assessing the realization of inventories, we make judgments regarding future demand requirements and compare these estimates with current and committed inventory levels. Inventory requirements may change based on projected customer demand, technological and product life cycletraining curriculum 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 expense, which includes depreciation on our corporate campus that is accounted for as a financing obligation (Note 2)3) and the amortization of assets recorded under capital lease obligations, is calculated using the straight-line method over the expected useful life of the asset. The Company generally uses the following depreciable lives for our major classifications of property and equipment:
| Description | Useful Lives |
| Buildings | 15-39 years |
| Machinery and equipment | 3-7 years |
| Computer hardware and software | 3 years |
| Furniture, fixtures, and leasehold improvements | 5-8 years |
Leasehold improvements are amortized over the lesser of the useful economic life of the asset or the contracted lease period. We expense costs for repairs and maintenance as incurred. Gains and losses resulting from the sale of property and equipment are recorded in current operations.
Indefinite-Lived Intangible Assets
Intangible assets that are deemed to have an indefinite life are not amortized, but rather are tested for impairment on an annual basis, or more often if events or circumstances indicate that a potential impairment exists. The Covey trade name intangible asset (Note 3)4) has been deemed to have an indefinite life. This intangible asset is assigned to the Organizational Solutions Business Unit and is tested for impairment using the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars and work sessions, international licensee sales, and related products. No impairment charge to the Covey trade name was recorded during the fiscal years ended August 31, 2008, 2007, 2006, or 2005.2006.
Capitalized Curriculum Development Costs and Impairment of Assets
During the normal course of business, we develop training courses and related materials that we sell to our customers. Capitalized curriculum development costs include certain expenditures to develop course materials such as video segments, course manuals, and other related materials. CurriculumGenerally, curriculum costs are only capitalized when a coursenew offering is developed that will result in future benefits or when there is a major revision to aan existing course orthat requires a significant re-write of the course materials or curriculum.
Costs incurred to maintain existing offerings are expensed when incurred. In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, and Emerging Issues Task Force (EITF) Issue 96-6, Accounting for the Film and Software Costs Associated with Developing Entertainment and Educational Software Products,addition, development costs incurred in the research and development of new curriculum and software products to be sold, leased, or otherwise marketed are expensed as incurred until technological feasibility has been established.established in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, and Emerging Issues Task Force (EITF) Issue 96-6, Accounting for the Film and Software Costs Associated with Developing Entertainment and Educational Software Products.
During fiscal 2007,2008, we capitalized certain costs incurred for the development of a new 7 Habitscustomer loyalty offering, leadership offerings, including The Speed of Highly Effective People interactive programTrust and The Leader in Me, as well as new and continued development of projects related to leadership, goal alignment, and execution.other courses. Capitalized development costs are generally amortized over a five-year life, which is based on numerous factors, including expected cycles of major changes to curriculum. Capitalized curriculum development costs are reported as a component of our other long-term assets in our consolidated balance sheetsheets and totaled $8.6$6.8 million and $5.9$8.6 million at August 31, 20072008 and 2006.2007. Amortization of capitalized curriculum development costs is reported as a component of cost of sales.
In fiscal 2008 we analyzed the expected future revenues and corresponding cash flows expected to be generated from our The 7 Habits of Highly Effective People interactive program and concluded that the expected future revenues, less direct selling and maintenance costs, were insufficient to cover the
carrying value of the corresponding capitalized development costs. Accordingly, we recorded a $1.5 million impairment charge in the fourth quarter of fiscal 2008 to write the carrying value of this program down to its net realizable value.
Restricted Investments
The Company’s restricted investments consist of insurance contracts and investments in mutual funds that are held in a “rabbi trust” and are restricted for payment to the participants of our deferred compensation plan (Note 16). We account for our restricted investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. As required by SFAS No. 115, the Company determines the proper classification of its investments at the time of purchase and reassesses such designations at each balance sheet date. For the periods presented in this report, our restricted investments were classified as trading securities and consisted of insurance contracts and mutual funds. The fair value of these restricted investments totaled $0.7$0.5 million and $1.2$0.7 million at August 31, 20072008 and 2006,2007, and were recorded as components of other long-term assets in the accompanying consolidated balance sheets.
In accordance with SFAS No. 115, our unrealized losses on restricted investments, which were immaterial during fiscal years 2008, 2007, 2006, and 2005,2006, were recognized in the accompanying consolidated income statements as a component of selling, general, and administrative expense.
Impairment of Long-Lived Assets
Long-lived tangible assets and definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use an estimate of undiscounted future net cash flows of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the anticipated future cash flows of the assets, we recognize an impairment loss equal to the difference between the carrying values of the assets and their estimated fair values. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets. The evaluation of long-lived assets requires us to use estimates of future cash flows. If forecasts and assumptions used to support the realizability of our long-lived tangible and definite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.
Accrued Liabilities
Significant components of our accrued liabilities were as follows (in thousands):
| AUGUST 31, | | 2007 | | | 2006 | | | 2008 | | | 2007 | |
| Accrued compensation | | $ | 6,807 | | | $ | 7,567 | | |
| Unearned revenue | | 4,709 | | | 5,275 | | | $ | 4,564 | | | $ | 4,709 | |
| Outsourcing contract costs payable | | 4,357 | | | 4,111 | | | 4,446 | | | | 4,357 | |
| Accrued compensation | | | 4,152 | | | 6,807 | |
| Customer credits | | 2,570 | | | 2,632 | | | 2,191 | | | 2,570 | |
| Accrued preferred stock dividends | | - | | | 934 | | |
| Restructuring costs | | | 2,055 | | | - | |
| Other accrued liabilities | | | 11,658 | | | | 11,651 | | | | 6,011 | | | | 11,658 | |
| | | $ | 30,101 | | | $ | 32,170 | | | $ | 23,419 | | | $ | 30,101 | |
Restructuring Costs
Following the sale of our CSBU in the fourth quarter of fiscal 2008, we initiated a restructuring plan that reduces the number of our domestic regional sales offices, decentralizes certain sales support functions, and significantly changes the operations of our Canadian subsidiary. The restructuring plan is intended to strengthen the remaining domestic sales offices and reduce our overall operating costs. During fiscal 2008 we expensed $2.1 million for anticipated severance costs necessary to complete the restructuring
plan, of which $2.1 million was recorded as a component of accrued liabilities at August 31, 2008. The composition and utilization of the accrued restructuring charge was as follows at August 31, 2008 (in thousands):
Description | | Accrued Restructuring Costs | |
| Balance at August 31, 2007 | | $ | - | |
| Restructuring charges | | | 2,064 | |
| Amounts utilized – employee severance | | | (9 | ) |
| Balance at August 31, 2008 | | $ | 2,055 | |
We intend to complete the majority of the restructuring plan activities during the year ending August 31, 2009.
Foreign Currency Translation and Transactions
The functional currencies of the Company’s foreign operations are the reported local currencies. Translation adjustments result from translating our foreign subsidiaries’ financial statements into United States dollars. The balance sheet accounts of our foreign subsidiaries are translated into United States dollars using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated using average exchange rates for each month during the fiscal year. The resulting translation gains or losses were recorded as a component of accumulated other comprehensive income in shareholders’ equity. Foreign currency transaction losses totaled $0.1 million $0.1 million, and $0.3 million, during each of the fiscal years ended August 31, 2008, 2007, 2006, and 2005, respectively,2006, and were reported as a component of our selling, general, and administrative expenses.
Derivative Instruments
Derivative instruments are accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as modified by SFAS No. 138, Accounting for Certain Derivative and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. During the normal course of business, we are exposed to risks associated with foreign currency exchange rate and interest rate fluctuations. Foreign currency exchange rate exposures result from the Company’s operating results, assets, and liabilities that are denominated in currencies other than the United States dollar. In order to limit our exposure to these elements, we have made limited use of derivative instruments. Each derivative instrument that is designated as a hedge instrument is recorded on the balance sheet at its fair value. Changes in the fair value of derivative instruments that qualify for hedge accounting are recorded in accumulated other comprehensive income, which is a component of shareholders’ equity. Changes in the fair value of derivative instruments that are not designated as hedge instruments are immediately
recognized as a component of selling, general, and administrative expense in our consolidated income statements. At August 31, 2008 we were not party to any financial instruments that qualified for hedge accounting.
Sales Taxes
We collect sales tax on qualifying transactions with customers based upon applicable sales tax rates in various jurisdictions. The Company accounts for its sales taxes collected using the net method as defined by Emerging Issues Task Force (EITF)EITF Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) and accordingly, we do not include sales taxes in net sales reported in our consolidated financial statements.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition. Accordingly,
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 andor determinable, and 4) collectibility is reasonably assured. For training and service sales, these conditions are generally met upon presentation of the training seminar or delivery of the consulting services. For product sales, these conditions are generally met upon shipment of the product to the customer or by completion of the sales transaction in a retail store. 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. InFor transactions that contain more than one element, we recognize revenue in accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, 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 theDeliverables. When fair value of undelivered items; and 3) delivery of any undelivered item is probable. Theexists for all contracted elements, the overall contract consideration is allocated among the separate units of accounting based upon their relative fair values. IfRevenue for these units is recognized in accordance with our general revenue policies once it has been determined that the fairdelivered items have standalone value of all undelivered elements exists, butto the customer. If fair value does not exist for one or moreall contracted elements, revenue for the delivered elements,items is recognized using the residual method, which generally means that revenue recognition is used.postponed until the point is reached when the delivered items have standalone value and fair value exists for the undelivered items. Under the residual method, the amount of consideration allocated to the delivered items equalsrevenue considered for recognition under our general revenue policies is the total contract considerationamount, 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 over the support period. During fiscal 2007, 2006, and 2005, we had software sales totaling $3.2 million, $3.3 million, and $4.6 million, which are included as a component of product sales in our consolidated income statements.
Our international strategy includes the use of licensees in countries where we do not have a wholly-owned operation. Licensee companies are unrelated entities that have been granted a license to translate our content and curriculum, adapt the content and curriculum to the local culture, and sell our training seminars and products in a specific country or region. Licensees are required to pay us royalties based upon a percentage of the licensee’s sales.their sales to clients. We recognize royalty income each period based upon the sales information reported to the Companyus from the licensee.our licensees. Licensee royalty revenues are included as a component of training sales and totaled $10.1 million, $7.6 million, $6.1 million, and $5.2$6.1 million, for the fiscal years ended August 31, 2008, 2007, and 2006.
Revenue is recognized on software sales in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition as amended by SOP 98-09. Statement 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements such as software products and support to be allocated to each element based on the relative fair value of the elements based on vendor specific objective evidence (VSOE). Nearly all of the Company’s software sales consist of ready to use “off-the-shelf” software products that have multiple elements, including a license and post contract customer support (PCS). Currently we do not have VSOE for either the license or support elements of our software sales. Accordingly, revenue is deferred until the only undelivered element is PCS and the total arrangement fee is recognized over the support period. During fiscal 2008, 2007, and 2006, we had software sales totaling $2.5 million, $3.2 million, and 2005.$3.3 million, which are included as a component of product sales in our consolidated income statements.
Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns.
Share-Based Compensation
At the beginning of fiscal 2006 we adoptedWe account for our share-based compensation costs according to the provisions of SFAS No. 123 (Revised 2004) Share BasedShare-Based Payment (SFAS No. 123R), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. Generally, this new statement follows the approach previously defined in SFAS No. 123. However,In general, SFAS No. 123R requires all share based-payments to employees and non-employees, including grants of stock options and the compensatory elements of employee stock purchase plans, to be recognized in the income statement based upon their fair values.
We previously accounted for our share-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 for fiscal years prior to the adoption of SFAS No. 123R. We adopted SFAS No. 123R using the modified prospective transition method. Under this method, share-based awards that are granted, modified, or settled after the date of adoption are measured and accounted for in accordance with Statement No. 123R and prior period financial results are not retroactively adjusted. The accounting treatment for unvested share awards remains essentially unchanged. The following table presents the pro forma share-based compensation amounts that would have been included in our income statements for fiscal 2005 had share-based compensation expense been determined in accordance with the fair value method prescribed by SFAS No. 123 (in thousands):
YEAR ENDED AUGUST 31, | | 2005 | |
| Net loss attributable to common shareholders, as reported | | $ | (5,837 | ) |
| Add: Share-based compensation expense included in reported net income, net of related tax effects | | | 791 | |
| Deduct: Stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects | | | (3,019 | ) |
| Net loss attributable to common shareholders, pro forma | | $ | (8,065 | ) |
| | | | | |
| Basic and diluted net loss per share, as reported | | $ | (.34 | ) |
| | | | | |
| Basic and diluted net loss per share, pro forma | | $ | (.46 | ) |
In connection with changes to our Chief Executive Officer’s (CEO) compensation (Note 20), 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 fair value of stock-based compensation as shown in the table above by $1.9 million during fiscal 2005.
For more information on our share-based compensation plans, refer to Note 12.13.
Shipping and Handling Fees and Costs
All shipping and handling fees billed to customers are recorded as a component of net sales. All costs incurred related to the shipping and handling of products are recorded in cost of sales.
Advertising Costs
Costs for newspaper, television, radio, and other advertising are expensed as incurred or recognized over the period of expected benefit for direct response and catalog advertising. Direct response advertising costs, which consist primarily of printing and mailing costs for catalogs and seminar mailers, are charged to expense over the
period of projected benefit, which ranges from three to 12 months. Advertising costs included in selling, general, and administrative expenses totaled $15.5 million, $15.9 million, $16.0 million, and $16.2$16.0 million, for the fiscal years ended August 31, 2008, 2007, 2006, and 2005.2006. Our direct response advertising costs reported in other current assets totaled $2.2$0.5 million and $2.5$2.2 million at August 31, 20072008 and 2006.2007.
Research and Development Costs
We expense research and development costs as incurred. During the fiscal years ended August 31, 2008, 2007, 2006, and 2005,2006, we expensed $4.6 million, $3.3 million, $2.3 million, and $2.2$2.3 million of research and development costs that were recorded as components of cost of sales and selling, general, and administrative expenses in our consolidated income statements.
Income Taxes
Our income tax provision has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The income tax provision represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred income taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for tax rates and tax laws when changes are enacted. A valuation allowance is provided against deferred income tax assets when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), on September 1, 2007. Following the adoption of FIN 48, interest and penalties related to uncertain tax positions are recognized as components of income tax expense.
The Company provides for income taxes, net of applicable foreign tax credits, on temporary differences in our investment in foreign subsidiaries, which consist primarily of unrepatriated earnings.
Comprehensive Income
Comprehensive income includes changes to equity accounts that were not the result of transactions with shareholders. Comprehensive income is comprised of net income or loss and other comprehensive income and loss items. Our comprehensive income and losses generally consist of changes in the fair value of derivative instruments and changes in the cumulative foreign currency translation adjustment.
Accounting Pronouncements Issued Not Yet Adopted
Uncertain Tax Positions– In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109. This interpretation prescribes a consistent recognition threshold and measurement standard, as well as criteria for subsequently recognizing, derecognizing, and measuring tax positions for financial statement purposes. This interpretation also requires expanded disclosure with respect to the uncertainties as they relate to income tax accounting and is effective for fiscal years beginning after December 15, 2006. The Company will adopt the provisions of FIN No. 48 on September 1, 2007 (fiscal 2008) and the cumulative effect from the adoption of FIN No. 48, if any, will be an adjustment to beginning retained earnings in the year of adoption. Based on our analysis, we do not expect the adoption of FIN No. 48 to have a material impact on our consolidated financial statements.
Fair Value Measures – In September 2006, the FASB issued SFAS No. 157, Fair Value Measures. This statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. Statement No. 157 only applies to fair-value measurements that are already required or permitted by other accounting standards except for measurements of share-based payments and measurements that are similar to, but not intended
to be, fair value. This statement is effective for the specified fair value measures for financial statements issued for fiscal years beginning after November 15, 2007, and will thus be effective for the Company in fiscal 2009. We have not yet completed our analysis of the impact of SFAS No. 157 on our financial statements.
Fair Value Option for Financial Assets and Financial Liabilities – In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115. Statement No.159 permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS No. 159 will become effective for the Company in fiscal 2009 and we have not yet completed our analysis of the impact of SFAS No. 159 on our financial statements.
Business Combinations – In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. These standards aim to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of SFAS No. 141R and SFAS No. 160 are effective for our fiscal year beginning September 1, 2009. We do not currently anticipate that these statements will have a material impact upon our financial condition or results of operations.
Derivatives Disclosures – In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. Statement No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective for our third quarter of fiscal 2009. The Company is currently evaluating the impact of the provisions of SFAS No. 161, but due to our limited use of derivative instruments we do not currently anticipate that the provisions of SFAS No. 161 will have a material impact on our financial statements.
2. | SALE OF THE CONSUMER SOLUTIONS BUSINESS UNIT |
During fiscal 2008, we joined with Peterson Partners to create a new company, Franklin Covey Products, LLC (Franklin Covey Products). This new company purchased substantially all of the assets of our Consumer Solutions Business Unit (CSBU) with the objective of expanding the worldwide sales of Franklin Covey products as governed by a comprehensive license agreement between us and Franklin Covey Products. The CSBU was primarily responsible for sales of our products to both domestic and international consumers through a variety of channels, including retail stores, a call center, and the Internet (Note 19). Franklin Covey Products, which is controlled by Peterson Partners, purchased the CSBU assets for $32.0 million in cash plus a $1.2 million adjustment for working capital delivered on the closing date of the sale, which was effective July 6, 2008. We also incurred $3.7 million of direct costs related to the sale of the CSBU assets, a portion of which is reimbursable from Franklin Covey Products. At August 31, 2008, we have a $3.5 million note receivable for these reimbursable transaction costs and excess working capital that is due in January 2009. The note receivable bears interest at Franklin Covey Products’ effective borrowing rate, which was approximately 6.0 percent at August 31, 2008.
On the date of the sale closing, the Company invested approximately $1.8 million to purchase a 19.5 percent voting interest in Franklin Covey Products, made a $1.0 million priority capital contribution with a 10 percent return, and will have the opportunity to earn contingent license fees if Franklin Covey Products achieves specified performance objectives. We recognized a gain of $9.1 million on the sale of the CSBU assets and according to guidance found in EITF Issue No. 01-2, Interpretations of APB Opinion No. 29, we deferred a portion of the gain equal to our investment in Franklin Covey Products. We will recognize the deferred gain over the life of the long-term assets acquired by Franklin Covey Products or when cash is received for payment of the priority contribution.
The carrying amounts of the assets and liabilities of the CSBU that were sold to Franklin Covey Products were as follows (in thousands):
| Description | | | |
| Cash and cash equivalents | | $ | 38 | |
| Accounts receivable, net | | | 6,675 | |
| Inventories | | | 12,665 | |
| Other current assets | | | 2,291 | |
| Property and equipment, net | | | 8,435 | |
| Other assets | | | 158 | |
| Total assets sold | | $ | 30,262 | |
| | | | | |
| Accounts payable | | $ | 3,589 | |
| Accrued liabilities | | | 6,748 | |
| Total liabilities sold | | $ | 10,337 | |
Based upon the guidance found in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations, and SAB 103, Topic 5Z4, Disposal of Operation with Significant Interest Retained, we determined that the operations of CSBU should not be reported as discontinued operations because we will continue to have significant influence over the operations of Franklin Covey Products and may participate in future cash flows. As a result of this determination, we have not presented the financial results of the CSBU as discontinued operations in the accompanying consolidated financial statements and we do not anticipate discontinued operations presentation in future interim and annual reporting periods.
As a result of Franklin Covey Products’ structure as a limited liability company with separate owner capital accounts and the guidance found in EITF Issue No. 03-16, Accounting for Investments in Limited Liability Companies and SOP 78-9, Accounting for Investments in Real Estate Ventures, we determined that the Company’s investment in Franklin Covey Products is more than minor and that we are required to account for our investment in Franklin Covey Products using the equity method of accounting. We record our share of Franklin Covey Products’ profit and loss based upon specified allocations as defined in the associated operating agreement. Our ownership interest may be diluted in future periods if ownership shares of Franklin Covey Products granted to certain members of its management vest.
The following unaudited summary financial information for Franklin Covey Products is presented as of and for the two months ending August 31, 2008 (in thousands):
| Balance Sheet | | | |
| Total assets | | $ | 45,588 | |
| Total liabilities | | | 37,013 | |
| | | | | |
| Income Statement | | | | |
| Sales | | | 13,149 | |
| Net loss | | | (1,437 | ) |
Following the sale of the CSBU assets, we do not have any obligation to fund the losses of Franklin Covey Products and therefore our portion of the net loss in fiscal 2008 was not recorded in our consolidated income statement. Under the terms of the agreements associated with the sale of the CSBU assets, we are entitled to receive reimbursement for certain operating costs, such as warehousing and distribution costs, which are billed to the Company by third party providers. At August 31, 2008 we had a $7.7 million receivable from Franklin Covey Products, which consisted of $3.5 million of reimbursable costs associated with the sale transaction as described above, and $4.2 million of reimbursable operating costs.
Our property and equipment were comprised of the following (in thousands):
| AUGUST 31, | | 2007 | | | 2006 | | | 2008 | | | 2007 | |
| Land and improvements | | $ | 1,639 | | | $ | 1,869 | | | $ | 1,626 | | | $ | 1,639 | |
| Buildings | | 34,536 | | | 35,063 | | | 34,573 | | | 34,536 | |
| Machinery and equipment | | 29,026 | | | 31,709 | | | 2,969 | | | 29,026 | |
| Computer hardware and software | | 45,623 | | | 42,532 | | | 20,010 | | | 45,623 | |
| Furniture, fixtures, and leasehold improvements | | | 32,579 | | | | 32,831 | | | | 9,640 | | | | 32,579 | |
| | | 143,403 | | | 144,004 | | | 68,818 | | | 143,403 | |
| Less accumulated depreciation | | | (107,340 | ) | | | (110,686 | ) | | | (41,890 | ) | | | (107,340 | ) |
| | | $ | 36,063 | | | $ | 33,318 | | | $ | 26,928 | | | $ | 36,063 | |
In addition to the CSBU property and equipment that was sold to Franklin Covey Products during the fourth quarter of fiscal 2008, we disposed of certain computer hardware and software that was replaced or rendered obsolete during the year. Substantially all of this computer hardware and software was fully depreciated at the time of disposal. In addition, we also transferred ownership of fully depreciated warehouse equipment to a third party warehouse services provider (Note 9) as required by the outsourcing contract.
During fiscal 2007, we completed a project to reconfigure our printing operations to improve our printing services’ efficiency, reduce operating costs, and improve our printing services’ flexibility in order to increase external printing service sales. Our reconfiguration plan included moving our printing operations a short distance from its existing location to our corporate headquarters campus and the sale of the manufacturing facility and certain printing presses. We completed the sale of the manufacturing facility during the second quarter of fiscal 2007. The sale price was $2.5 million and, after deducting customary closing costs, the net proceeds to the Company from the sale totaled $2.3 million in cash. The carrying value of the manufacturing facility at the date of sale was $1.1 million and accordingly, we recognized a $1.2 million gain on the sale of the manufacturing facility. The manufacturing facility assets sold were primarily reported as a component of corporate assets for segment reporting purposes. Due to a lower-than-expected sale price on one of the printing presses to be sold, we recorded an impairment charge totaling $0.3 million to reduce the carrying value of the printing press to its anticipated sale price. The impairment charge was included as a component of depreciation expense in our consolidated income statement for the fiscal year ended August 31, 2007.
In connection with the fiscal 2005 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. The master lease agreement contains six five-year renewal options, which will allow us to maintain our operations at our current location for up to 50 years. Although the corporate headquarters facility was formally sold and the Company has no legal ownership of the property, SFAS No. 98, Accounting for Leases, precluded us from recording the transaction as a sale since we have subleased more than a minor portion of the property. Pursuant to this accounting guidance, we have accounted for the sale as a financing transaction, which required us to continue reporting the corporate headquarters facility as an asset and to depreciate the property over the life of the master lease agreement. We also recorded a financing obligation to the purchaser (Note 5)7) for the sale price. At August 31, 2007,2008, the carrying value of the corporate headquarters facility was $20.3$19.1 million.
As a result of projected negative cash flows at certain retail stores, we recorded impairment charges totaling $0.2 million during fiscal 2005 to reduce the carrying values of these stores’ long-lived assets to their estimated fair values. The 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 income statement. We did not record any impairment charges on our retail store property and equipment during the fiscal years ended August 31, 2007 or 2006.
Certain land and buildings are collateral for mortgage debt obligations (Note 5)7).
Our intangible assets were comprised of the following (in thousands):
AUGUST 31, 2008 | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
| Definite-lived intangible assets: | | | | | | | | | | |
| License rights | | | $ | 27,000 | | | $ | (9,292 | ) | | $ | 17,708 | |
| Curriculum | | | 58,237 | | | (29,896 | ) | | 28,341 | |
| Customer lists | | | 14,684 | | | (11,413 | ) | | 3,271 | |
| Trade names | | | | 377 | | | | (377 | ) | | | - | |
| | | | 100,298 | | | (50,978 | ) | | 49,320 | |
| Indefinite-lived intangible asset: | | | | | | | | | | | | | |
| Covey trade name | | | | 23,000 | | | | - | | | | 23,000 | |
| | | | $ | 123,298 | | | $ | (50,978 | ) | | $ | 72,320 | |
| | | | | | | | | | | | | | |
AUGUST 31, 2007 | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | | | | | | | | | | | |
Definite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | |
| License rights | | $ | 27,000 | | | $ | (8,355 | ) | | $ | 18,645 | | | $ | 27,000 | | | $ | (8,355 | ) | | $ | 18,645 | |
| Curriculum | | 58,230 | | | (28,361 | ) | | 29,869 | | | 58,230 | | | (28,361 | ) | | 29,869 | |
| Customer lists | | 18,124 | | | (13,715 | ) | | 4,409 | | | 18,124 | | | (13,715 | ) | | 4,409 | |
| Trade names | | | 1,277 | | | | (1,277 | ) | | | - | | | | 1,277 | | | | (1,277 | ) | | | - | |
| | | 104,631 | | | (51,708 | ) | | 52,923 | | | 104,631 | | | (51,708 | ) | | 52,923 | |
Indefinite-lived intangible asset: | | | | | | | | | | | | | | | | | | | | | | | | |
| Covey trade name | | | 23,000 | | | | - | | | | 23,000 | | | | 23,000 | | | | - | | | | 23,000 | |
| | | $ | 127,631 | | | $ | (51,708 | ) | | $ | 75,923 | | | $ | 127,631 | | | $ | (51,708 | ) | | $ | 75,923 | |
| | | | | | | | | | | | | | |
| AUGUST 31, 2006 | | | | | | | | | | | | | |
Definite-lived intangible assets: | | | | | | | | | | | | | |
| License rights | | $ | 27,000 | | | $ | (7,417 | ) | | $ | 19,583 | | |
| Curriculum | | 58,229 | | | (26,826 | ) | | 31,403 | | |
| Customer lists | | 18,774 | | | (13,228 | ) | | 5,546 | | |
| Trade names | | | 1,277 | | | | (1,277 | ) | | | - | | |
| | | 105,280 | | | (48,748 | ) | | 56,532 | | |
Indefinite-lived intangible asset: | | | | | | | | | | | | | |
| Covey trade name | | | 23,000 | | | | - | | | | 23,000 | | |
| | | $ | 128,280 | | | $ | (48,748 | ) | | $ | 79,532 | | |
Our intangible assets are amortized on a straight-line basis over the estimated useful life of the asset. 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, 20072008 were as follows:
Category of Intangible Asset | | Range of Remaining Estimated Useful Lives | | Weighted Average Amortization Period |
| | | | | |
| License rights | 19 | 18 years | | 30 years |
| Curriculum | 12 | 11 to 1918 years | | 26 years |
| Customer lists | 4 | 3 years | 13 | 14 years |
Our aggregate amortization expense from definite-lived intangible assets totaled $3.6 million, $3.8$3.6 million, and $4.2$3.8 million, for fiscal years 2008, 2007, 2006, and 2005.2006. Amortization expense for our intangible assets over the next five years is expected to be as follows (in thousands):
YEAR ENDING AUGUST 31, | | | | | | |
| 2008 | | $ | 3,602 | | |
| 2009 | | 3,601 | | | $ | 3,601 | |
| 2010 | | 3,598 | | | 3,598 | |
| 2011 | | 3,456 | | | 3,456 | |
| 2012 | | 2,458 | | | 2,458 | |
| 2013 | | | 2,449 | |
5. TENDER OFFER OBLIGATION
During the fourth quarter of fiscal 2008, we conducted a modified “Dutch Auction” tender offer to purchase up to $28.0 million of shares of our common stock at a specified range of prices (Note 10).
The tender offer closed on August 27, 2008 as intended and we announced the preliminary results of the tender offer on August 28, 2008. The final results of the tender offer were announced on September 5, 2008 and we completed the payment process for the shares of common stock shortly thereafter. Based upon guidance found in SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, we believe that an obligation to purchase the tender offer shares had been created prior to August 31, 2008. As a result of this determination, at August 31, 2008 we recorded a $28.2 million liability in current liabilities for the tender offer obligation, which includes $0.2 million of customary transaction costs for broker fees, legal services, and printing services, etc. We recorded a corresponding increase to treasury stock for the shares acquired in the tender offer in our shareholders’ equity section of our consolidated balance sheet.
4.
6. | CURRENT LINES OF CREDIT |
During the third quarter of fiscal 2007, we entered into secured revolving line-of-credit agreements with JPMorgan Chase Bank N.A. and Zions First National Bank that provided a combined total of $25.0 million of borrowing capacity to the Company. In connection with the sale of the CSBU assets (Note 2), during the fourth quarter of fiscal 2008, the credit agreements with these lenders were modified (the Modified Credit Agreements)Agreement). The Modified Credit AgreementsAgreement removed Zions First National Bank as a lender, but continues to provide a total of $25.0 million of borrowing capacity until June 30, 2009, when the borrowing capacity will be reduced to $15.0 million. In addition, the Company at an interest rate equal toon the credit facility increased from LIBOR plus 1.10 percent to LIBOR plus 1.50 percent, effective on the date of the modification agreement (weighted average rate of 4.0 percent and 6.6 percent at August 31, 2007)2008 and 2007, respectively). The Modified Credit Agreements expireAgreement expires on March 14, 2010 (no change) and we may draw on the credit facilities, repay, and draw again, on a revolving basis, up to the maximum loan amount of $25.0 million so long as no event of default has occurred and is continuing. BasedThe Company may use the Credit Agreements for general corporate purposes as well as for other transactions, unless prohibited by the terms of the Modified Credit Agreement. The fiscal 2007 line of credit obligation was classified as a component of current liabilities primarily upondue to our intentionsintention to repay amounts outstanding onbefore the agreement expires.
We accounted for the Modified Credit Agreement using the guidance found in EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments and EITF 98-14, Debtor’s Accounting for Changes in Line-of-Credit or Revolving Debt Arrangements and expensed unamortized debt issuance costs in accordance with these pronouncements. The Credit Agreements duringadditional expense was recorded as a component of interest expense in the fourth quarter of fiscal 2008 we classifiedand was immaterial to the outstanding balance as a current liability at August 31, 2007. The Credit Agreements also contain customary representations and guarantees as well as provisions for repayment and liens.Company’s consolidated financial statements.
In addition to customary non-financial terms and conditions, the Modified Credit Agreements requireAgreement requires us to be in compliance with specified financial covenants, which did not change for the original credit agreements, including: (i) a funded debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a limitation on annual capital expenditures; and (iv) a defined amount of minimum net worth. In the event of noncompliance with these financial covenants and other defined events of default, the lenders arelender is entitled to certain remedies, including acceleration of the repayment of amounts outstanding on the Modified Credit Agreements.Agreement. The Modified Credit Agreement also contains customary representations and guarantees as well as provisions for repayment and liens. We believe that we were in compliance with the terms and covenants of the Modified Credit Agreement at August 31, 2008.
In connection with the Credit Agreements,original credit agreements, the Company entered into separatea promissory notes,note, a security agreement, repayment guaranty agreements, and a pledge and security agreement. These agreements remain in place with the remaining lender and pledge substantially all of the Company’s assets located in the United States and a certain foreign location to the lenderslender in the Modified Credit Agreements.
The Company may use the Credit Agreements for general corporate purposes and during fiscal 2007 we used a portion of the credit available through the Credit Agreements to redeem the remaining shares of our outstanding Series A preferred stock as described in Note 9.Agreement.
In addition to the linesline of credit described above, we obtained a CDN $500,000 (approximately $473,000)$471,000) revolving line of credit with a Canadian Bank through our wholly-owned Canadian subsidiary (the Canadian Line of Credit) during fiscal 2007. The Canadian Line of Credit bears interest at the Canadian
prime rate and is a revolving line of credit that may be repeatedly borrowed against and repaid during the life of the agreement. The Canadian Line of Credit may be used for general corporate purposes and requires our Canadian subsidiary to maintain a specified financial covenant for minimum debt service coverage or the payment of the loan may be accelerated. As of August 31, 20072008 we had not yet drawn upon the Canadian Line of Credit.
5.
7. | LONG-TERM DEBT AND FINANCING OBLIGATION |
Our long-term debt and financing obligation were comprised of the following (in thousands):
| AUGUST 31, | | 2007 | | | 2006 | | | 2008 | | | 2007 | |
| 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 | | $ | 32,807 | | | $ | 33,291 | | | $ | 32,283 | | | $ | 32,807 | |
| Mortgage payable in monthly installments of $9 CDN ($9 USD at August 31, 2007), plus interest at the CDN prime rate (6.3% at August 31, 2007) through January 2015, secured by real estate | | | 787 | | | | 853 | | |
| Mortgage payable in monthly installments of $9 CDN ($9 USD at August 31, 2008), plus interest at the CDN prime rate (4.8% at August 31, 2008) through January 2015, secured by real estate | | | | 678 | | | | 787 | |
| | | 33,594 | | | 34,144 | | | 32,961 | | | 33,594 | |
| Less current portion | | | (629 | ) | | | (585 | ) | | | (670 | ) | | | (629 | ) |
| Total long-term debt and financing obligation, less current portion | | $ | 32,965 | | | $ | 33,559 | | | $ | 32,291 | | | $ | 32,965 | |
The mortgage loan on our Canadian facility requires the Company to maintain certain financial ratios at our wholly-owned Canadian operation.
Future principal maturities of our long-term debt and financing obligation were as follows at August 31, 20072008 (in thousands):
YEAR ENDING AUGUST 31, | | | | | | |
| 2008 | | $ | 629 | | |
| 2009 | | 671 | | | $ | 670 | |
| 2010 | | 727 | | | 726 | |
| 2011 | | 840 | | | 839 | |
| 2012 | | 963 | | | 963 | |
| 2013 | | | 1,097 | |
| Thereafter | | | 29,764 | | | | 28,666 | |
| | | $ | 33,594 | | | $ | 32,961 | |
During fiscal 2005, we completedIn connection with 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,Utah, we entered into a 20-year master lease agreement with the purchaser, an unrelated private investment group. The 20-year master lease agreement also contains six five-year renewal options that will allow us to maintain our operations at the current location for up to 50 years. 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 2)3) and to 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, | | | | | | |
| 2008 | | $ | 3,045 | | |
| 2009 | | 3,045 | | | $ | 3,045 | |
| 2010 | | 3,055 | | | 3,055 | |
| 2011 | | 3,115 | | | 3,116 | |
| 2012 | | 3,178 | | | 3,178 | |
| 2013 | | | 3,242 | |
| Thereafter | | | 46,780 | | | | 43,537 | |
| Total future minimum financing obligation payments | | 62,218 | | | 59,173 | |
| Less interest | | | (30,723 | ) | | | (28,202 | ) |
| Present value of future minimum financing obligation payments | | $ | 31,495 | | | $ | 30,971 | |
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 of our financial statements.
Lease Expense
In the normal course of business, we lease office space retail store locations, and warehouse and distribution facilities under non-cancelable operating lease agreements. We rent office space, primarily for international and domestic regional sales administration offices, in commercial office complexes that are conducive to sales and administrative operations. 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 warehousing and distribution facilities at certain international locations that are designed to provide secure storage and efficient distribution of our products to areas outside of the United States.products. 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, 2007,2008, we had operating leases that have remaining terms ranging from less than one year to approximately 8 years. Following the sale of oneour CSBU assets (Note 2), we no longer lease retail store space and Franklin Covey Products is contractually obligated to 10 years.pay a portion of our minimum rental payments on certain warehouse and distribution facilities. The following table summarizes our future minimum lease payments under operating lease agreements and the lease amounts receivable from Franklin Covey Products at August 31, 20072008 (in thousands):
YEAR ENDING AUGUST 31, | | | | | Required Minimum Lease Payments | | | Receivable from Franklin Covey Products | | | Net Required Minimum Lease Payments | |
| 2008 | | $ | 8,302 | | |
| 2009 | | 6,559 | | | $ | 1,671 | | | $ | (390 | ) | | $ | 1,281 | |
| 2010 | | 5,064 | | | 1,620 | | | (404 | ) | | 1,216 | |
| 2011 | | 3,453 | | | 1,608 | | | (422 | ) | | 1,186 | |
| 2012 | | 2,577 | | | 1,517 | | | (475 | ) | | 1,042 | |
| 2013 | | | 1,178 | | | (529 | ) | | 649 | |
| Thereafter | | | 5,720 | | | | 3,427 | | | | (1,751 | ) | | | 1,676 | |
| | | $ | 31,675 | | | $ | 11,021 | | | $ | (3,971 | ) | | $ | 7,050 | |
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 recorded in selling, general, and administrative expense from operating lease agreements was $8.7 million, $10.8 million, $11.2 million, and $13.5$11.2 million for the years ended August 31, 2008, 2007, 2006, and 2005.2006. Additionally, certain retail store leases containcontained 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, 2008, 2007, 2006, and 2005.2006.
Lease Income
We have subleased a significant portion of our corporate headquarters office space located in Salt Lake City, Utah to multiple, unrelated tenants.tenants as well as to Franklin Covey Products. The cost basis of the office space available for lease was $24.0$33.2 million and had a carrying value of $15.1$17.7 million at August 31, 2007. We
2008. During fiscal 2008, we also havehad sublease agreements on two retail store locations that we have exited, but still have a remaining lease obligation. However, this obligation, and future sublease income, was assumed by Franklin Covey Products. Future minimum lease payments due to us from theseour sublease agreements at August 31, 2007,2008, are as follows (in thousands):
YEAR ENDING AUGUST 31, | | | | | | |
| 2008 | | $ | 2,546 | | |
| 2009 | | 2,488 | | | $ | 3,585 | |
| 2010 | | 1,667 | | | 2,897 | |
| 2011 | | 1,026 | | | 2,020 | |
| 2012 | | 1,037 | | | 2,085 | |
| 2013 | | | 1,837 | |
| Thereafter | | | 648 | | | | 15,361 | |
| | | $ | 9,412 | | | $ | 27,785 | |
Sublease payments made to the Company totaled $2.7 million, $2.4 million, and $2.0 million, and $1.9 million induring the fiscal years ended August 31, 2008, 2007, 2006, and 20052006 of which $0.3$0.2 million, $0.3 million, and $0.8$0.3 million was recorded as a reduction of rent expense associated with underlying lease agreements in our selling, general, and administrative expense in the years ended August 31,fiscal 2008, 2007, 2006, and 2005.2006. Sublease income from the leases at our corporate headquarters was reported as a component of product sales in our consolidated income statements and in other Consumer Solutions Business Unit sales in our segment reporting (Note 19).
7.
9. | COMMITMENTS AND CONTINGENCIES |
EDS Outsourcing Contract
The Company has an outsourcing contract with Electronic Data Systems (EDS) to provide warehousing, distribution, information systems,technology system support and call center operations. Under terms of the outsourcing contract and its addendums, EDS operates our primary call center, providesproduct warehousing and distribution services,services. Subsequent to August 31, 2008, 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 $161.0 million, which are payable over the lifeprimarily as a result of the contract. During fiscal 2006,sale of CSBU assets, we amended the terms of the outsourcing agreementcontract with EDS. OneUnder terms of the key provisions of this amendment is reduced required minimum annual payments foramended outsourcing contract with EDS: 1) the outsourcing contract and its addendums will continue to expire on June 30, 2016; 2) Franklin Covey and Franklin Covey Products will have separate information systems support. Althoughservices support contracts; 3) we may pay more thanwill no longer be required to purchase specified levels of computer hardware technology; and 4) our warehouse and distribution costs will consist of an annual fixed charge, which is partially reimbursable by Franklin Covey Products, plus variable charges for actual activity levels. The warehouse and distribution fixed charge contains an annual escalation clause based upon changes in the Employment Cost Index. The following schedule summarizes our estimated minimum required payments dueinformation systems support and fixed warehouse and distribution charges, without the effect of estimated escalation charges, to actual usage and other factors, the contractually required minimum annual payments were reduced by a total of $84.2 millionEDS for services over the remaining life of the outsourcing agreement. contract (in thousands):
YEAR ENDING AUGUST 31, | | Estimated Gross Minimum and Fixed Charges | | | Receivable from Franklin Covey Products | | | Estimated Net Minimum and Fixed Charges | |
| 2009 | | $ | 4,138 | | | $ | (2,159 | ) | | $ | 1,979 | |
| 2010 | | | 4,138 | | | | (2,159 | ) | | | 1,979 | |
| 2011 | | | 4,138 | | | | (2,159 | ) | | | 1,979 | |
| 2012 | | | 4,138 | | | | (2,159 | ) | | | 1,979 | |
| 2013 | | | 4,138 | | | | (2,159 | ) | | | 1,979 | |
| Thereafter | | | 11,246 | | | | (6,114 | ) | | | 5,132 | |
| | | $ | 31,936 | | | $ | (16,909 | ) | | $ | 15,027 | |
Our actual payments to EDS include a variable charge for certain warehousing and distribution activities and may fluctuate in future periods based upon actual sales and activity levels.
During fiscal years 2008, 2007, 2006, and 2005,2006, we expensed $26.7 million, $30.1 million, $30.6 million, and $30.4$30.6 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 $8.8 million, $9.6 million, $9.8 million, and $9.6$9.8 million during the years ended August 31, 2008, 2007, and 2006, and 2005, respectively. The following schedule summarizes our estimated required minimum payments to EDS for services over the life of the outsourcing contract and its addendums (in thousands):
YEAR ENDING AUGUST 31, | | | |
| 2008 | | $ | 15,791 | |
| 2009 | | | 16,129 | |
| 2010 | | | 16,099 | |
| 2011 | | | 16,150 | |
| 2012 | | | 19,147 | |
| Thereafter | | | 77,717 | |
| | | $ | 161,033 | |
Our estimated minimum payments are based on contractually negotiated amounts and may fluctuate in future periods based upon actual sales and activity levels.
Under terms of the outsourcing agreement with EDS, we are contractually obligated to purchase the necessary computer hardware to keep such property and equipment up to certain specifications. Amounts shown below are estimated required capital purchases of computer hardware under terms of the EDS outsourcing agreement and its amendments (in thousands):
YEAR ENDING AUGUST 31, | | | |
| 2008 | | $ | 703 | |
| 2009 | | | 721 | |
| 2010 | | | 748 | |
| 2011 | | | 682 | |
| 2012 | | | 789 | |
| Thereafter | | | 3,320 | |
| | | $ | 6,963 | |
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.
Purchase Commitments
During the normal course of business, we issue purchase orders to various external vendors for products (inventory) to be delivered at times that coincide with our seasonally busy months of November, December, and January as well as for other products and services during the fiscal year.services. At August 31, 2007,2008, we had purchase commitments totaling $15.1$4.6 million for products and services to be delivered primarily in fiscal 2008.2009. Other purchase commitments for materials, supplies, and other items incident to the ordinary conduct of business were immaterial, both individually and in aggregate, to the Company’s operations at August 31, 2007.2008.
Legal Matters
In August 2005, EpicRealm Licensing (EpicRealm) filed an action in the United States District Court for the Eastern District of Texas against the Company for patent infringement. The action allegesalleged that FranklinCoveythe Company infringed upon two of EpicRealm’s patents directed to managing dynamic web page requests from clients to a web server that in turn uses a page server to generate a dynamic web page from content retrieved from a data source. The Company deniesdenied liability in the patent infringement and believes thatfiled counter-claims related to the case subsequent to the filing of the action in District Court. However, during the fiscal year ended August 31, 2008, the Company paid EpicRealm claims are invalid. This litigation is still ina one-time license fee of $1.0 million for a non-exclusive, irrevocable, perpetual, and royalty-free license to use any product, system, or invention covered by the discovery phasedisputed patents. In connection with the purchase of the license, EpicRealm and the Company continuesagreed to vigorously defenddismiss their claims with prejudice and the matter.Company was released from further action regarding these patents.
The Company is also the subject of certain legal actions, which we consider routine to our business activities. At August 31, 2007,2008, 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.
8.
10. | PREFERRED STOCK RECAPITALIZATION
|
Overview
At the Annual Meeting of Shareholders held on March 4, 2005 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 was no longer convertible into common stock, and a warrant to purchase shares of common stock. The new Series A preferred stock retained its common-equivalent voting rights and automatically converted to shares of Series B preferred stock if the holder of the original Series A preferred stock sold, or transferred, the preferred stock to another party. Series B preferred stock does not have common-equivalent voting rights, but retained 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 are exercisable over an eight-year term.
The preferred stock recapitalization transaction enabled the Company to:
·
| Have the conditional right to redeem shares of preferred stock;
|
·
| 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 (March 2013), compared to the perpetual right of previously existing Series A preferred stock to convert to shares of common stock;
|
·
| Increase its 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;
|
·
| 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
|
·
| Eliminate the requirement to pay common stock dividends to preferred shareholders on an “as converted” basis.
SHAREHOLDERS’ EQUITY |
In accordance with terms and provisions of the preferred stock recapitalization, we have redeemed all outstanding shares of Series A preferred stock (Note 9). At August 31, 2007, there were no shares of Series A or Series B preferred stock issued or outstanding.Preferred Stock
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 included the following:
·
| Liquidation Preference– Both Series A and Series B preferred stock have a liquidation preference of $25.00 per share plus accrued unpaid dividends, which would have been paid in preference to the liquidation rights of all other equity classes.
|
·
| Conversion – Neither Series A nor Series B preferred stock was convertible to shares of common stock. Series A preferred stock converted into shares of Series B preferred stock only upon the sale or transfer of the Series A shares. Series B preferred stock does not have any conversion rights.
|
·
| Dividends– Both Series A and Series B preferred stock accrued dividends at 10.0 percent, which were payable quarterly, in preference to dividends on all other equity classes. If dividends would have been in arrears for six or more quarters, the number of the Company’s Board of Directors would have been increased by two and the Series A and Series B preferred shareholders would have had the ability to select these additional directors. Series A and Series B preferred stock could not have participated in dividends paid to common stockholders.
|
·
| Redemption – Under the original recapitalization agreements, we were only permitted to 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 would have been allowed to purchase preferred shares (up to $30.0 million in aggregate) only from Knowledge Capital, which held the majority of our preferred stock, at a premium that increased one percentage point annually. After the sixth anniversary of the recapitalization, we could have redeemed shares of preferred stock at 101 percent of the liquidation preference on the date of redemption.
At our Annual Meeting of Shareholders held in January 2006, we obtained shareholder approval of an amendment to our articles of incorporation that extended the period during which we had the right to redeem outstanding shares of preferred stock at 100 percent of its liquidation preference. The amendment extended the original redemption deadline from March 8, 2006 to December 31, 2006 and also provided 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. On February 13, 2006 we redeemed $10.0 million of preferred stock, which satisfied the additional extension provision and the Company redeemed all remaining preferred stock prior to December 31, 2007.
|
·
| Change in Control– In the event of any change in control of the Company, Knowledge Capital, to the extent that it still held shares of Series A preferred stock, would have had 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 had no such option.
|
·
| Voting Rights– Although the new Series A preferred shareholders did not have conversion rights, they were still entitled to voting rights. The holder of each new share of Series A preferred stock was entitled to the voting rights they would have had if they held two shares of common stock. The cumulative number of votes was 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 exercised a warrant to purchase the Company’s common stock, their Series A voting rights would have been reduced by the number of the common shares issued upon exercise of the warrant. This feature was designed to prevent the holders of Series A preferred stock from increasing their voting influence through the acquisition of additional shares of common stock resulting from the exercise of the warrants.
|
·
| 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, 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 continued to be classified as a component of shareholders’ equity since their conversion into cash or common stock was solely within the Company’s control as there were no provisions in the recapitalization documents that would have obligated 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 were no circumstances under which a third party could have acquired controlling voting power of the Company’s stock without consent of our Board of Directors and thus trigger our obligation to redeem the shares of new preferred stock. Due to the significant modifications to existing shares of Series A and Series B preferred stock, we determined 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 and consistent with other equity instruments, the carrying value of the new preferred stock was not 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 were considering additional redemptions of preferred stock at the liquidation preference. Based upon these considerations and other factors, including the improvements in our operating results, we determined that the liquidation preference ($25.00 per share) was 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. These warrants expire in March 2013.
Derivatives - The modified preferred stock agreement contained a feature that allowed 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 was not a derivative because the contract was both 1) indexed in our stock, and 2) was classified as a component of stockholders’ equity on our consolidated balance sheet.
A separate agreement existed with Knowledge Capital, the entity that held the majority of the Series A preferred stock, which contained 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 was a derivative and met 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 redemption of $30.0 million 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) was 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 was required to be adjusted to fair value at each reporting period and had an initial value of zero on the date of the recapitalization transaction. The fair value of this derivative-based liability was zero through the final redemption of outstanding preferred stock.
Preferred Stock
Series A– In accordance with the terms and provisions of the preferred stock recapitalization (Note 8),approved in fiscal 2005, we redeemed all remaining outstanding shares of Series A preferred stock during the third quarter of fiscal 2007 at the liquidation preference of $25 per share plus accrued dividends. In accordance with the terms and provisions of the recapitalization, we redeemed the outstanding shares of Series A preferred stock as shown below (in thousands):
Fiscal Year | | Shares of Preferred Stock Redeemed | | | Carrying Value of Redeemed Preferred Shares | |
| 2007 | | | 1,494 | | | $ | 37,345 | |
| 2006 | | | 800 | | | | 20,000 | |
| 2005 | | | 1,200 | | | | 30,000 | |
| | | | 3,494 | | | $ | 87,345 | |
Series B– The preferred stock recapitalization completed in fiscal 2005 significantly changed the rights and preferences of our Series B preferred stock. The newNew shares of Series A preferred stock would have automatically converted to shares of Series B preferred stock if the holder of the original Series A
preferred stock sold, or transferred, 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, 2007,2008, there were 4.0 million shares of Series B preferred stock authorized, andbut no shares of Series B preferred stock outstanding.
Common Stock Warrants
Pursuant to the terms of the preferred stock recapitalization plan, in fiscal 2005 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 that expires in March 2013. These 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 years ended August 31, 2008 and 2007, and 2006,our common stock warrant activity was immaterial.insignificant.
Treasury Stock
Following the completion of the sale of CSBU assets (Note 2), we used substantially all of the net proceeds from the sale to conduct a modified “Dutch Auction” tender offer (the Tender Offer) to purchase up to $28.0 million of our common stock at a price not less than $9.00 per share or greater than $10.50 per share. The Tender Offer closed fully subscribed on August 27, 2008 and we were able to purchase 3,027,027 shares of our common stock at $9.25 per share plus normal transaction costs that were added to the cost basis of the shares. We recorded a $28.2 million current liability at August 31, 2008 for these shares (Note 5) with a corresponding increase in treasury stock.
During fiscal 2006, our Board of Directors authorized the purchase of up to $10.0 million of our currently outstanding common stock and canceled all previously approved common stock purchase plans. Common stock purchases under this approved plan are made at our discretion for prevailing market prices and are subject to customary regulatory requirements and considerations. The Company does not have a timetable for the purchase of these common shares and the authorization by the Board of Directors does not have an expiration date. During the fiscal years ended August 31, 2007 and 2006 we purchased 328,000 and 681,300 shares of our common stock under the terms of the fiscal 2006 plan for $2.5 million and $5.1 million, respectively. AtWe did not purchase any shares of our common stock under this purchase plan during fiscal 2008 and at August 31, 2007,2008, we had $2.4 million was remaining for future purchases under the terms of this approved plan. We also purchased 7,900 common shares for $0.1 million during fiscal 2006 for exclusive distribution to participants in our employee stock purchase plan.
We have issued shares of treasury stock to participants in our employee stock purchase plan (ESPP) and for stock options and warrants as shown below (in thousands, except for share amounts):
Fiscal Year | | Shares Issued to ESPP Participants | | | Shares Issued from the Exercise of Stock Options | | | Total Treasury Shares Issued | | | Cash Proceeds Received from the Issuance of Treasury Shares | | | Shares Issued to ESPP Participants | | | Shares Issued from the Exercise of Stock Options and Warrants | | | Total Treasury Shares Issued for Stock Options, Warrants and ESPP | | | Cash Proceeds Received from the Issuance of Treasury Shares | |
| 2008 | | | 68,702 | | | 15,371 | | | 84,073 | | | $ | 462 | |
| 2007 | | 55,513 | | | 37,500 | | | 93,013 | | | $ | 321 | | | 55,513 | | | 37,500 | | | 93,013 | | | 321 | |
| 2006 | | 32,993 | | | 38,821 | | | 71,814 | | | 424 | | | 32,993 | | | 38,821 | | | 71,814 | | | 424 | |
| 2005 | | 27,263 | | | 15,000 | | | 42,263 | | | 108 | | |
In addition to the treasury shares shown above, we issued 36,000; 31,500; 27,000; and 563,09027,000 shares of our common stock held in treasury in connection with unvested and fully-vested stock awards during fiscal years 2008, 2007, and 2006 and 2005 (Note 12)13).
10.
11. | MANAGEMENT COMMON STOCK LOAN PROGRAM |
During fiscal 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, which was the market value of the shares acquired and distributed to loan participants. 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 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 initially accrued interest at 9.4 percent (compounded quarterly), are full-recourse to the participants, and were originally due in March 2005. Although interest continues to accrue on the outstanding balance over the life of the loans to the participants, the Company ceased recording interest receivable (and related interest income) related to these loans during the third quarter of fiscal 2002.
In May 2004, our Board of Directors approved modifications to the terms of the management stock loans. While these changes had 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 chose to forego certain of its rights under the terms of the loans and granted participants the modifications described below in order to potentially improve their ability to pay, and the Company’s ability to collect, the outstanding balances of the loans. These modifications to the management stock loan terms applied 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. During fiscal 2005 the Company collectedmodifications and loans held by those persons, which totaled $0.8 million, which represented payment in full, from an officer and members of the Board of Directors that were required to repay their loansrepaid on the original due date of March 30, 2005.
The May 2004 modifications to the management stock loan terms included the following:
Waiver of Right to Collect – The Company waived 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 (the Breakeven Date).
Waiver of Right to CollectLower 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 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 (the Breakeven Date). |
|
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.
Prior to the May 2004 modifications, the Company accounted for the loans and the corresponding shares using a loan-based accounting model that included guidance found in SAB 102, Selected Loan Loss Allowance Methodology and Documentation Issues; SFAS No. 114, Accounting by Creditors for Impairment of A Loan - an Amendment of FASB Statements No. 5 and 15; and SFAS No. 5, Accounting
for Contingencies. However, due to the nature of the May 2004 modifications, the Company reevaluated its accounting for the management stock loan program. 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. 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. Since the Company was unable to control the underlying management common stock loan shares, the loan program shares continued to be included in Basic earnings per share (EPS) following the May 2004 modifications.
We currently account for the management common stock loans as equity-classified stock option arrangements. Under the provisions of SFAS No. 123R, which we adopted on September 1, 2005, additional compensation expense will be recognized only if the Company takes action that constitutes a modification which increases the fair value of the arrangements. This accounting treatment also precludes us from reversing the amounts expensed as additions to the loan loss reserve, totaling $29.7 million, which were recognizedrecorded in prior periods.
During fiscal 2006, the Company offered participants in the management common stock loan program the opportunity to formally modify the terms of their loans in exchange for placing their shares of common stock purchased through the loan program in an escrow account that allows the Company to have a security interest in the loan program shares. The key modifications to the management common stock loans for the participants accepting the fiscal 2006 offer arewere as follows:
Modification of Promissory Note – The management stock loan due date was changed to be the earlier of (a) March 30, 2013, or (b) the Breakeven Date as defined by the May 2004 modifications. The interest rate on the loans increased from 3.16 percent compounded annually to 4.72 percent compounded annually.
Redemption of Management Loan Program Shares – The Company has the right to redeem the shares on the due date in satisfaction of the promissory notes as follows:
Modification of Promissory Note– The management stock loan due date was changed to be the earlier of (a) March 30, 2013, or (b) the Breakeven Date as defined by the May 2004 modifications. The interest rate on the loans will increase from 3.16 percent compounded annually to 4.72 percent compounded annually.
|
|
Redemption of Management Loan Program Shares– The Company will have the right to redeem the shares on the due date in satisfaction of the promissory notes as follows:
|
· | On the Breakeven Date, the Company has the right to purchase and redeem from the loan participants the number of loan program shares necessary to satisfy the participant’s obligation under the promissory note. The redemption price for each such loan program share will be equal to the closing price of the Company’s common stock on the Breakeven Date. |
· | If the Company’s stock has not closed at or above the breakeven price on or before March 30, 2013, the Company has the right to purchase and redeem from the participants all of their loan program shares at the closing price on that date as partial payment on the participant’s obligation. |
The fiscal 2006 modifications were intended to give the Company a measure of control of the outstanding loan program shares and to facilitate payment of the loans should the market value of the Company’s stock equal the principal and accrued interest on the management stock loans. If a loan participant declines the offer to modify their management stock loan, their loan will continue to have the same terms and conditions that were previously approved in May 2004 by the Company’s Board of Directors and their loans will be due at the earlier of March 30, 2008 or the Breakeven Date. Consistent with the May 2004 modifications, stock loan participants will be unable to realize a gain on the loan program shares unless they pay cash to satisfy the promissory note obligation prior to the due date. As of the closing date of the extension offer, which was substantially completed in June 2006, management stock loan participants holding approximately 3.5 million shares, or 94 percent of the remaining loan
shares, elected to accept the extension offer and placed their management stock loan shares into the escrow account. The Company is currently in the process of collecting amounts due from participants that declined to place their shares in the escrow account during fiscal 2006.
As a result of this modification, the Company reevaluated its accounting treatment regarding the loan shares and their inclusion in Basic EPS. Since the management stock loan shares held in the escrow account continue to have the same income participation rights as other common shareholders, the Company has determined that the escrowed loan shares are participating securities as defined by EITF 03-06, Participating Securities and the Two-Class Method under FASB Statement No. 128. As a result, the management loan shares will beare included in the calculation of Basic EPS in periods of net income and excluded from Basic EPS in periods of net loss beginning in the fourth quarter of fiscal 2006, which was the completion of the escrow agreement modification.
As a resultDuring fiscal 2008, the effective interest rate on the management stock loans was reduced to 2.87 percent, compounded annually, which was the “Mid-Term Applicable Federal Rate” on the date of these loan program modifications, the Company hopes to increase the total value received from loan participants; however, theinterest rate change.
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.
11.
12. | FINANCIAL INSTRUMENTS |
Fair Value of Financial Instruments
The book value of our financial instruments at August 31, 20072008 and 20062007 approximates their fair values. 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, 20072008 or 2006,2007, 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.
Debt Obligations– At August 31, 2007,2008, our debt obligations consisted of a variable-rate line of credit, a tender offer obligation, and a variable-rate mortgage on our Canadian facility. Further information regarding the fair value of these liability instruments is provided below.
Variable-Rate Line of CreditVariable-Rate Line of Credit– The interest rate on our line of credit obtained in fiscal 2007 is variable and is adjusted to reflect current market interest rates that would be available to us for a similar instrument. As a result, the carrying value of the outstanding balance on the line of credit approximates its fair value.
|
|
Variable-Rate Debt– The carrying value of our variable-rate mortgage in Canada approximated its fair value since the prevailing interest rate is adjusted to reflect market rates that would be available to us for a similar debt instrument with a corresponding remaining maturity.
|
Tender Offer Obligation – Due to the very short-term nature of the tender offer obligation, which was paid in September 2008, the carrying value of the obligation approximates its fair value at August 31, 2008.
Variable-Rate Debt – The carrying value of our variable-rate mortgage in Canada approximated its fair value since the prevailing interest rate is adjusted to reflect market rates that would be available to us for a similar debt instrument with a corresponding 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, 2008, 2007, 2006, and 2005,2006, 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 income statements and had the following impact on the periods indicated (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | | | | | | | | | | |
| Losses on foreign exchange contracts | | $ | (249 | ) | | $ | (346 | ) | | $ | (437 | ) | | $ | (487 | ) | | $ | (249 | ) | | $ | (346 | ) |
| Gains on foreign exchange contracts | | | 119 | | | | 415 | | | | 127 | | | | 36 | | | | 119 | | | | 415 | |
| Net gain (loss) on foreign exchange contracts | | $ | (130 | ) | | $ | 69 | | | $ | (310 | ) | | $ | (451 | ) | | $ | (130 | ) | | $ | 69 | |
At August 31, 2007,2008, 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.approximated the notional amounts of the contracts due to the proximity of the end of the contract to our fiscal year end on August 31, 2008. The notional amounts of our foreign currency sell contracts that did not qualify for hedge accounting were as follows at August 31, 20072008 (in thousands):
Contract Description | | Notional Amount in Foreign Currency | | | Notional Amount in U.S. Dollars | | | Notional Amount in Foreign Currency | | | Notional Amount in U.S. Dollars | |
| | | | | | | | | | | | | |
| Mexican Pesos | | 13,500 | | | $ | 1,204 | | |
| British Pounds | | | 450 | | | $ | 809 | |
| Japanese Yen | | 100,000 | | | 864 | | | 27,000 | | | 254 | |
| Australian Dollars | | 457 | | | 374 | | | 125 | | | 117 | |
Net Investment Hedges – During fiscal 2005, we entered into foreign currency forward contracts that were designed to manage foreign currency risks related to the value of our net investment in wholly-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 we recognized the following net loss on our net investment hedging contracts (in thousands):
YEAR ENDED AUGUST 31, | | 2005 | |
| | | | |
| Losses on net investment hedge contracts | | $ | (384 | ) |
| Gains on net investment hedge contracts | | | 66 | |
| Net losses on investment hedge contracts | | $ | (318 | ) |
During fiscal 2007 and fiscal 2006 we did not utilize any net investment hedge contracts. However, we may 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 the fiscal years ended August 31, 2008, 2007, 2006, and 2005.2006.
12.
| SHARE-BASED COMPENSATION PLANS
|
13. SHARE-BASED COMPENSATION PLANS
Overview
We utilize various share-based compensation plans as integral components of our overall compensation and associate retention strategy. Our shareholders have approved various stock incentive plans that permit us to grant performance awards, unvested stock awards, employee stock purchase plan (ESPP) shares, and stock options. In addition, our Board of Directors and shareholders may, from time to time, approve fully vested stock awards. At August 31, 2007,2008, our stock option incentive plan, which permits the granting of performance awards, unvested stock awards to employees, and incentive stock options had approximately 1,386,0001,944,000 shares available for granting (using(including the impact of the cancellation of all long-term performance awards as of August 31, 2007 performance award vesting expectations)2008) and our 2004 ESPP plan had approximately 901,000832,000 shares authorized for purchase by plan participants. The total cost of our share-based compensation plans for the fiscal years ended August 31, 2008, 2007, and 2006 were as follows (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | | | | | | | |
| Performance awards | | $ | 835 | | | $ | 503 | | | $ | (1,338 | ) | | $ | 835 | | | $ | 503 | |
| Unvested share awards | | 481 | | | 296 | | | 969 | | | 481 | | | 296 | |
| Compensation cost of ESPP | | 75 | | | 37 | | |
| Compensation cost of the ESPP | | | 79 | | | 75 | | | 37 | |
| Stock options | | | 3 | | | | 7 | | | | 31 | | | | 3 | | | | 7 | |
| | | $ | 1,394 | | | $ | 843 | | | $ | (259 | ) | | $ | 1,394 | | | $ | 843 | |
The compensation cost of our share-based compensation plans was included in selling, general, and administrative expenses in the accompanying consolidated income statements and no share-based compensation was capitalized during fiscal years 2008, 2007 or 2006. The Company generally issues shares of common stock for its share-based compensation plans from shares held in treasury. The following is a description of our share-based compensation plans.
PerformancePerformance-Based Awards
During fiscal 2006, our shareholders approved a share-based long-term incentive plan (the LTIP) that permits an annual grant of performance-based share awards to certain executive and managerial personnel as directed by the Compensation Committee of the Board of Directors. The LTIP performance awards cliff vest, and are exchanged for shares of our common stock, on August 31 following the completion of a three-year measurement period. For example, performance awards granted in fiscal 2007 will vestmay have vested on August 31, 2009. Compensation expense will be recorded using a five percent and zero percent estimated forfeiture rate during the vesting period for the fiscal 2007 LTIP award and fiscal 2006 LTIP award, respectively. Each fiscal year LTIP award provides for a target number of shares to be awarded if specified financial goals based on a combination of sales growth and cumulative operating income are achieved. However, the number of shares that are finally awarded to LTIP participants is variable and may range from zero shares, if a minimum level of performance is not
achieved, to 200 percent of the target award, if the specifically defined performance criteria is exceeded during the three-year performance period.
The LTIP performance awards are valued at the closing price of our common stock on the grant date. The corresponding compensation cost of each LTIP award is expensed ratably over the measurement period of the award, which is approximately three years. Since the number of shares that may be issued under the LTIP is variable, we reevaluate the LTIP awards on a quarterly basis and adjust the number of shares expected to be awarded based upon financial results of the Company as compared to the performance goals set for the award. Adjustments to the number of shares awarded, and to the corresponding compensation expense, are made on a cumulative basis at the date of adjustment based upon the estimated probable number of shares to be awarded. The following information applies to our LTIP performance awards at August 31, 2007 (in thousands, except share and per share values):
Award Date | Vesting Date | | Target Award | | | Adjusted Award | | | Grant Date Fair Value per Share | | | Unrecognized Compensation | |
| Fiscal 2006 | August 31, 2008 | | | 378,665 | | | | 182,779 | | | $ | 6.60 | | | $ | 467 | |
| Fiscal 2007 | August 31, 2009 | | | 429,312 | | | | 357,617 | | | $ | 5.78 | | | | 1,468 | |
| | | | | 807,977 | | | | 540,396 | | | | | | | $ | 1,935 | |
DuringAs we completed our evaluations of the LTIP awards during fiscal 2007, we adjusted the expected number of shares to vest based upon current year financial performance, estimated performance through the remaining service period, and the sale of our Brazil subsidiary and Mexico training operations. Due primarily to overall sales performance issues and the expected impact from the sale of our Brazil and Mexico subsidiaries,2008, we reduced the number of performance awardsshares expected to vest in ourbe awarded under the fiscal 2007 and fiscal 2006 LTIP grants based on current financial performance and expected future financial performance. As a result of these evaluations, we determined that no shares of common stock were expected to be awarded under any LTIP grant and all previously recognized share-based compensation expense, which resulted in cumulative adjustmentstotaled $1.3 million, was reversed during fiscal 2008. On August 31, 2008, the fiscal 2006 LTIP award expired with no shares granted to reduce ourparticipants and we do not expect any shares to vest under the fiscal 2007 operating expenses totalingLTIP award. Adjustments to decrease share-based compensation resulting from the regular evaluation of LTIP awards totaled $0.4 million. Duringmillion in fiscal 2007 and $0.1 million in fiscal 2006 our cumulative adjustments, which also reduced operating expenses, totaled $0.1 million. Theand all previously recognized tax benefit from LTIP performance awardsbenefits, which totaled $0.3 million and $0.2 million for the fiscal years ended August 31, 2007 and 2006, respectively. The intrinsic valuewere reversed in fiscal 2008. There were no awards granted under the terms of ourthe LTIP performance awards was $4.0 million, which was based upon our closing stock price of $7.49 per share onduring the fiscal year ended August 31, 2007.2008.
Unvested Stock Awards
The fair value of our unvested stock awards is calculated based onby multiplying the number of shares issued andawarded by the closing market price of our common stock on the date of the grant. The corresponding compensation cost of unvested stock awards is amortized to selling, general, and administrative expense on a straight-line basis over the vesting period of the award, which generally ranges from three to five years. The following is a description of our unvested stock awards granted to certain members of our Board of Directors and to our employees.
Board of Director Awards– During January 2006, our shareholders approved changes to ourThe non-employee directors’ stock incentive plan (the Directors’ Plan). The Directors’ plan was is designed to provide non-employee directors of the Company, who are ineligible to participate in our employee stock incentive plan, an opportunity to acquire an interest in the Company through the acquisition of shares of common stock. Under the previous provisions of theThe Directors’ Plan, each non-employee director receivedplan, as approved by our shareholders, allows for an annual unvested stock award with a value (based on the trading pricegrant of the Company’s common stock on the date of the award) equal to $27,500. The primary modification to the Directors’ plan approved by the shareholders changed the annual unvested stock grant to 4,500 shares of common stock rather than the dollar value previously defined in the plan. The amendment also eliminated the limitation on the maximum dollar valueto each eligible member of all awards made under the Directors’ Plan in any given year.our Board of Directors.
Under the provisions of the Directors’ Plan, we issued 36,000 shares, 31,500 shares, 27,000 shares, and 76,09027,000 shares of our common stock to certaineligible members of the Board of Directors during the fiscal years ended August 31, 2008, 2007, 2006, and 2005.2006. The fair value of the shares awarded under the Directors’ Plan was $0.3 million, $0.2 million, perand $0.2 million during fiscal year2008, 2007, and 2006, and was calculated on the grant date with the corresponding compensation cost is being recognized over the vesting period of the awards, which is three years. The cost of the common stock issued from treasury stock for these awards was $0.6 million, $0.5 million, $0.4 million, and $1.3$0.4 million in fiscal years 2008, 2007, 2006, and 2005.2006.
Employee Awards– During fiscal 2005 and in prior periods, we have granted unvested stock awards to certain employees as long-term incentives. These unvested stock awards originally cliff vestvested five years from the grant date or on an accelerated basis if we achieveachieved specified earnings levels. The compensation cost of these unvested stock awards was based on the fair value of our common shares on the grant date and iswas expensed on a straight-line basis over the vesting (service) period of the awards. The recognition of compensation cost iswas accelerated when we believebelieved that it iswas probable that we willwould achieve the specified earnings thresholds and the shares willwould vest.
In connection withthe fourth quarter of fiscal 2008, our Board of Directors accelerated the vesting of all remaining outstanding unvested share awards previously granted to employees. Based upon guidance in SFAS No. 123R, we determined that the accelerated vesting of these unvested stock awards constituted modifications to the participants were 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 millionawards that required separate analysis for awards granted in fiscal 2005, which was expensed asto CSBU employees and for awards granted to Organizational Solutions Business Unit (OSBU) and corporate employees. Since the bonuses were paidunvested share awards granted to CSBU employees would not have vested under the original terms of the award (due to the participantssale of CSBU assets), the CSBU awards were revalued on or aroundthe date of the modification. The fair value of our common stock was higher on the modification date than on the grant date. date, which resulted in $0.4 million of additional share-based compensation expense in the fourth quarter of fiscal 2008. We determined that OSBU and corporate awards would have vested under the original award terms and based upon SFAS No. 123R, we accelerated the remaining unrecognized compensation cost, which increased share-based compensation by $0.2 million during the fourth quarter of fiscal 2008. Following the accelerated vesting of these awards, we do not have any remaining unrecognized compensation cost for unvested share awards granted to employees.
During the fourth quarter of fiscal 2007, the financial performance goals were reached for certain employees and one-half of their awards were accelerated. Other awards were vested during fiscal 2007 in connection with the termination of certain management employees. The accelerated vesting of these awards waswere accounted for as a modification of an awardmodifications under the provisions of SFAS No. 123R during fiscal 2007. The additional share-based compensation expense resulting from the acceleration of these awardsmodifications totaled $0.1 million. In the third quarter of fiscal 2005, we also achieved specified earnings thresholds required to accelerate the vesting for one-half of the unvested stock awards granted to employees in fiscal 2004 and unvested stock awards granted to our CEO in December 2004. Accordingly, during fiscal 2005 we expensed an additional $0.5 million of compensation cost related to the accelerated vesting of these unvested employee stock awards.
The unvested award shares granted to employees in fiscal 2005 were issued from common stock held in treasury and had a cost basis of $5.2 million for the awards granted. The difference between the fair value of the unvested shares granted and their cost, which totaled $4.2 million, was recorded as a reduction to additional paid-in capital.
The following information applies to our unvested stock awards granted to members offor the Board of Directors under the Directors’ Plan and employees during fiscal 2007:year ended August 31, 2008:
| | | Number of Shares | | | Weighted-Average Grant-Date Fair Value Per Share | | | Number of Shares | | | Weighted-Average Grant-Date Fair Value Per Share | |
| Unvested stock awards at August 31, 2006 | | 431,295 | | | $ | 3.46 | | |
| Unvested stock awards at August 31, 2007 | | | 410,670 | | | $ | 3.80 | |
| Granted | | 31,500 | | | 7.90 | | | 36,000 | | | 7.50 | |
| Forfeited | | - | | | - | | | - | | | - | |
| Vested | | | (52,125 | ) | | | 3.45 | | | | (352,170 | ) | | | 3.13 | |
| Unvested stock awards at August 31, 2007 | | | 410,670 | | | $ | 3.80 | | |
| Unvested stock awards at August 31, 2008 | | | | 94,500 | | | $ | 7.73 | |
At August 31, 2007,2008, there was $0.8$0.4 million of total unrecognized compensation cost related to our unvested stock awards granted to our Board of Directors, which is expected to be recognized over the weighted-average vesting period of approximately two years unless specified accelerator thresholds are met.years. Compensation expense related to our unvested stock awards totaled $1.0 million, $0.5 million, $0.3 million, and $0.8$0.3 million, in fiscal years 2008, 2007, 2006, and 20052006, and the total recognized tax benefit from unvested stock awards totaled $0.4 million, $0.2 million, $0.1 million, and $0.3$0.1 million for the fiscal years ended August 31, 2008, 2007, 2006, and 2005,2006, respectively. The intrinsic value of our unvested stock awards at August 31, 20072008 was $3.1$0.8 million.
Employee Stock Purchase Plan
We have an employee stock purchase plan (Note 16) 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 the calendar month in each fiscal quarter. Based upon guidance in SFAS No. 123R, we determined that the discount offered to employees under the ESPP is compensatory and the amount is therefore expensed at each grant date. During the fiscal year ended August 31, 2007,2008, a total of 55,51368,702 shares were issued to participants in the ESPP.
Stock Options
The Company has 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.
Information related to stock option activity during the fiscal year ended August 31, 20072008 is presented below:
| | | Number of Stock Options | | | Weighted Avg. Exercise Price Per Share | | | Weighted Avg. Remaining Contractual Life (Years) | | | Aggregate Intrinsic Value (thousands) | |
Outstanding at August 31, 2007 | | | 2,058,300 | | | $ | 12.72 | | | | | | | |
| Granted | | | - | | | | | | | | | | | |
| Exercised | | | (12,500 | ) | | | 1.70 | | | | | | | |
| Forfeited | | | (18,000 | ) | | | 9.69 | | | | | | | |
Outstanding at August 31, 2008 | | | 2,027,800 | | | $ | 12.82 | | | | 1.8 | | | $ | 439 | |
| | | | | | | | | | | | | | | | | |
| Options vested and exercisable at August 31, 2008 | | | 2,027,800 | | | $ | 12.82 | | | | 1.8 | | | $ | 439 | |
| | | Number of Stock Options | | | Weighted Avg. Exercise Price Per Share | | | Weighted Avg. Remaining Contractual Life (Years) | | | Aggregate Intrinsic Value (thousands) | |
| | | | | | | | | | | | | |
| Outstanding at August 31, 2006 | | | 2,153,688 | | | $ | 12.39 | | | | | | | |
| Granted | | | - | | | | | | | | | | | |
| Exercised | | | (37,500 | ) | | | 1.70 | | | | | | | |
| Forfeited | | | (57,888 | ) | | | 7.43 | | | | | | | |
| | | | | | | | | | | | | | | |
| Outstanding at August 31, 2007 | | | 2,058,300 | | | $ | 12.72 | | | | 2.8 | | | $ | 223.00 | |
| | | | | | | | | | | | | | | | | |
| Options vested and exercisable at August 31, 2007 | | | 2,045,800 | | | $ | 12.79 | | | | 2.8 | | | $ | 150.00 | |
| | | | | | | | | | | | | | | | | |
We expect that allCompany policy generally allows terminated employees 90 days from the date of termination to exercise vested stock options. However, in connection with the sale of our remaining unvestedCSBU (Note 2) during fiscal 2008, we granted extensions to former CSBU employees, who had vested stock options, will vestwhich allow the stock options to be exercised up to the original expiration date. We determined that these extensions were modifications to the stock options under the guidance found in SFAS No. 123R. The incremental compensation expense resulting from the modification of these stock options was calculated through the use of a Black-Scholes valuation model and be exercisable.totaled approximately $31,000, which was expensed during the fourth quarter of fiscal 2008 since the modified stock options were fully vested prior to the modification date.
The Company did not grant any stock options during the fiscal years ended August 31, 2008, 2007 or 2006, or 2005, and thehas no remaining unamortized service cost on previouslyrelated to granted stock options is insignificant in aggregate. Prior to the adoption of SFAS No. 123R, 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 estimated fair value of options granted was subject to the assumptions made in the Black-Scholes option-pricing model and if the assumptions were to change, the estimated fair values of our stock options could be significantly different.options.
The following additional information applies to our stock options outstanding at August 31, 2007:2008:
Range of Exercise Prices | Number Outstanding at August 31, 2007 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Options Exercisable at August 31, 2007 | Weighted Average Exercise Price |
$1.70 – $7.00 | 148,800 | 2.7 | $5.99 | 136,300 | $6.39 |
| $7.75 – $9.69 | 302,500 | 2.1 | 9.17 | 302,500 | 9.17 |
| $14.00 – $14.00 | 1,602,000 | 3.0 | 14.00 | 1,602,000 | 14.00 |
| $17.69 – $17.69 | 5,000 | 1.3 | 17.69 | 5,000 | 17.69 |
Range of Exercise Prices | | | Number Outstanding at August 31, 2008 | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Options Exercisable at August 31, 2008 | | | Weighted Average Exercise Price | |
| $ | 2.78 – $8.19 | | | | 226,300 | | | | 1.6 | | | $ | 7.01 | | | | 226,300 | | | $ | 7.01 | |
| $ | 9.69 – $9.69 | | | | 194,500 | | | | 0.7 | | | | 9.69 | | | | 194,500 | | | | 9.69 | |
| $ | 14.00 – $14.00 | | | | 1,602,000 | | | | 2.0 | | | | 14.00 | | | | 1,602,000 | | | | 14.00 | |
| $ | 17.69 – $17.69 | | | | 5,000 | | | | 0.3 | | | | 17.69 | | | | 5,000 | | | | 17.69 | |
| | | | | | 2,027,800 | | | | | | | | | | | | 2,027,800 | | | | | |
The Company received proceeds totaling approximately $21,000, $0.1 million, and $0.2 million and $26,000 in fiscal 2008, fiscal 2007, and fiscal 2006 and fiscal 2005 from the exercise of common stock options. The intrinsic value of stock options exercised was $0.1 million, $0.3 million, and $0.1 million and $34,300 for the fiscal years ended August 31, 2008, 2007, 2006, and 20052006 and the fair value of options that vested during those periods totaled $9,375 $9,375, and $5.0 million, respectively. The fair value of stock options vested in fiscal 2005 included 1.6 million options that were granted to the CEO in fiscal 2001, which were vested as a result of changes to the CEO’s compensation plan (Note 20).each year.
Fully-Vested Stock Award14. SALE OF OPERATIONS IN BRAZIL AND MEXICO
In connection with changes to our CEO’s compensation plan (Note 20), 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.
13.
| SALE OF OPERATIONS IN BRAZIL AND MEXICO
|
will be required to pay the Company royalties consistent with other foreign licensees. Since we will continue to participate in the cash flows of these subsidiaries through royalty payments, which are based primarily upon the sales recorded by the licensees, and we expect to have significant continuing involvement in the operations of the licensees, we determined that the financial results of these subsidiaries should not be reported as discontinued operations in our consolidated income statements in accordance with guidance found in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The financial results of these subsidiaries were previously reported in the international segment of the Organizational Solutions Business Unit.
The sales of the Brazil and Mexico subsidiaries were structured such that the net assets of the subsidiaries were sold at their carrying values plus reimbursement of severance costs paid in Mexico. The carrying amounts of the assets and liabilities of our Brazil subsidiary and training operations of Mexico, which were sold during the quarter ended August 31, 2007 were as follows (in thousands):
| Description | | Brazil | | | Mexico | | | Total | | | Brazil | | | Mexico | | | Total | |
| Cash | | $ | 95 | | | $ | - | | | $ | 95 | | | $ | 95 | | | $ | - | | | $ | 95 | |
| Accounts receivable, net | | 374 | | | 210 | | | 584 | | | 374 | | | 210 | | | 584 | |
| Inventories | | 155 | | | 134 | | | 289 | | | 155 | | | 134 | | | 289 | |
| Other current assets | | 220 | | | 28 | | | 248 | | | 220 | | | 28 | | | 248 | |
| Property and equipment, net | | 365 | | | 43 | | | 408 | | | 365 | | | 43 | | | 408 | |
| Other assets | | | 51 | | | | 375 | | | | 426 | | | | 51 | | | | 375 | | | | 426 | |
| Total assets held for sale | | $ | 1,260 | | | $ | 790 | | | $ | 2,050 | | |
| Total assets sold | | | $ | 1,260 | | | $ | 790 | | | $ | 2,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 127 | | | $ | - | | | $ | 127 | | | $ | 127 | | | $ | - | | | $ | 127 | |
| Accrued liabilities | | | 260 | | | | - | | | | 260 | | | | 260 | | | | - | | | | 260 | |
| Total liabilities held for sale | | $ | 387 | | | $ | - | | | $ | 387 | | |
| Total liabilities sold | | | $ | 387 | | | $ | - | | | $ | 387 | |
Certain assets and liabilities that were previously held for sale in Mexico were retained by the Company and were reclassified as assets to be held and used at August 31, 2007. We received promissory notes for the sales prices totaling $1.5 million, of which $1.2 million iswas due during fiscal 2008 and iswas reported as a component of other current assets at August 31, 2007. Due to the disposition of these subsidiaries, we recorded a $0.1 million benefit from the cumulative translation adjustment related to assets and liabilities sold, which was offset by expenses necessary to complete the transaction. The net costs to complete the sales transactions resulted in an immaterial loss that was included in consolidated selling, general and administrative expenses for the year ended August 31, 2007.
In fiscal 2002, we filed legal action against World Marketing Alliance, Inc., a Georgia corporation (WMA), and World Financial Group, Inc., a Delaware corporation and purchaser of substantially all assets of WMA, for breach of contract. The case proceeded to trial and 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. During our fiscal quarter ended May 28, 2005, we received payment in cash from WMA for the total verdict amount, including legal fees and interest. However, shortly after paying the verdict amount, WMA appealed the jury decision to the 10th Circuit Court of Appeals and we recorded receipt of the verdict amount plus legal fees and interest with a corresponding increase to accrued liabilities and deferred the gain until the case was finally resolved. On December 30, 2005, the Company entered into a settlement agreement with WMA. Under the terms of the settlement agreement, WMA agreed to dismiss its appeal. As a result of this settlement agreement and dismissal of WMA’s appeal, we recorded a $0.9 million gain from the legal settlement during fiscal 2006. We also recorded a $0.3 million reduction in selling, general and, administrative expenses during fiscal 2006 for recovered legal expenses.
15.
| GAIN ON DISPOSAL OF INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
|
80
During fiscal 2003, the Company purchased approximately 20 percentDuring 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. In fiscal 2006, we reclassified the gain on the sale of our interest in Agilix from operating income to a component of other income and expense on the fiscal 2005 income statement. 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.
16. | EMPLOYEE BENEFIT PLANS |
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 75 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 $1.5 million, $1.3$1.5 million, and $0.8$1.3 million during the fiscal years ended August 31, 2008, 2007, 2006, and 2005.2006. The Company does not have any defined benefit pension plans.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (ESPP) 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 our common stock on the last trading day of each quarter. A total of 68,702; 55,513; 32,993; and 27,26332,993 shares were issued under the ESPP during the fiscal years ended August 31, 2008, 2007, 2006, and 2005,2006, which had a corresponding cost basis of $0.9 million, $0.5 million, $0.2 million, and $0.1$0.2 million, respectively. The Company received cash proceeds from the ESPP participants totaling $0.4 million, $0.3 million, $0.2 million, and $0.1$0.2 million, for fiscal years 2008, 2007, 2006, and 2005.2006.
Deferred Compensation Plan
We have 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 the Company’s 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 $0.7$0.5 million and $1.2$0.7 million at August 31, 20072008 and 2006,2007, while the plan’s liabilities totaled $0.9$0.7 million and $1.1$0.9 million at August 31, 20072008 and 2006.2007. At August 31, 2007,2008, the rabbi trust also held shares of our common stock with a cost basis of $0.5 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 $0.1 million $0.1 million, and $0.8 million during each of the fiscal years ended August 31, 2008, 2007, 2006, and 20052006 related to insurance premiums and external administration costs for 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 deferred compensation 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 to participants under the same rules as in prior periods.
17.
| The benefit (provision) for income taxes consisted of the following (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | | | Current: | | | | | | | | | | | | | | | | | | | | Federal | | $ | (350 | ) | | $ | 1,433 | | | $ | 1,857 | | | $ | (39 | ) | | $ | (350 | ) | | $ | 1,433 | | | State | | (135 | ) | | (23 | ) | | (2 | ) | | (248 | ) | | (135 | ) | | (23 | ) | | Foreign | | | (2,318 | ) | | | (1,903 | ) | | | (1,180 | ) | | | (3,346 | ) | | | (2,318 | ) | | | (1,903 | ) | | | | | (2,803 | ) | | | (493 | ) | | | 675 | | | | (3,633 | ) | | | (2,803 | ) | | | (493 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred: | | | | | | | | | | | | | | | | | | | | | | | | | | Federal | | $ | (4,880 | ) | | $ | (4,380 | ) | | $ | (2,132 | ) | | $ | (4,276 | ) | | $ | (4,880 | ) | | $ | (4,380 | ) | | State | | (433 | ) | | (376 | ) | | (285 | ) | | (205 | ) | | (433 | ) | | (376 | ) | | Foreign | | 49 | | | (132 | ) | | 378 | | | 12 | | | 49 | | | (132 | ) | | Change in valuation allowance | | | 31 | | | | 20,323 | | | | 2,449 | | | | Change in valuationallowance | | | | 116 | | | | 31 | | | | 20,323 | | | | | | (5,233 | ) | | | 15,435 | | | | 410 | | | | (4,353 | ) | | | (5,223 | ) | | | 15,435 | | | | | $ | (8,036 | ) | | $ | 14,942 | | | $ | 1,085 | | | $ | (7,986 | ) | | $ | (8,036 | ) | | $ | 14,942 | |
Income from operations before income taxes consisted of the following (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | | | United States | | $ | 11,914 | | | $ | 10,881 | | | $ | 6,094 | | | $ | 8,857 | | | $ | 11,914 | | | $ | 10,881 | | | Foreign | | | 3,751 | | | | 2,750 | | | | 3,007 | | | | 4,977 | | | | 3,751 | | | | 2,750 | | | | | $ | 15,665 | | | $ | 13,631 | | | $ | 9,101 | | | $ | 13,834 | | | $ | 15,665 | | | $ | 13,631 | |
The differences between income taxes at the statutory federal income tax rate and income taxes reported in our consolidated income statements were as follows:
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | | | Federal statutory income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % | | State income taxes, net of federal effect | | 3.6 | | | 2.9 | | | 3.2 | | | 3.3 | | | 3.6 | | | 2.9 | | | Deferred tax valuation allowance | | - | | | (149.1 | ) | | (26.9 | ) | | - | | | - | | | (149.1 | ) | | Foreign jurisdictions tax differential | | 1.6 | | | 2.2 | | | (2.9 | ) | | 3.8 | | | 1.6 | | | 2.2 | | | Tax differential on income subject to both U.S. and foreign taxes | | 4.2 | | | 1.5 | | | 5.1 | | | 8.0 | | | 4.2 | | | 1.5 | | | Resolution of tax matters | | (0.9 | ) | | (9.4 | ) | | (29.6 | ) | | | Uncertain tax positions | | | (1.5 | ) | | (0.9 | ) | | (9.4 | ) | | Tax on management stock loan interest | | 5.0 | | | 4.5 | | | - | | | 5.0 | | | 5.0 | | | 4.5 | | | Non-deductible executive compensation | | | 2.1 | | | - | | | 0.6 | | | Other | | | 2.8 | | | | 2.8 | | | | 4.2 | | | | 2.0 | | | | 2.8 | | | | 2.2 | | | | | | 51.3 | % | | | (109.6 | )% | | | (11.9 | )% | | | 57.7 | % | | | 51.3 | % | | | (109.6 | )% |
Due to improved operating performance and the availability of expected future taxable income, we have concluded that it is more likely than not that the benefits of deferred income tax assets will be realized. Accordingly, we reversed the valuation allowances on the majority of our net deferred income tax assets during the fourth quarter of fiscal 2006 (see further discussion below).
We paid significant amounts of withholding tax on foreign royalties during fiscal years 2008, 2007, 2006, and 2005.2006. However, no domestic foreign tax credits were available to offset the foreign withholding taxes during those years.
Various incomeuncertain tax matterspositions were resolved during the fiscal years ended August 31, 2008, 2007, 2006, and 2005,2006, which resulted in net tax benefits to the Company. The tax benefit recognized in fiscal 2006 was partially offset by an assessment paid in a foreign tax jurisdiction.
The Company accrues taxable interest income on outstanding management common stock loans (Note 10)11). Consistent with the accounting treatment for these loans, the Company is not recognizing interest income for book purposes, thus resulting in a permanent book versus tax difference.
The significant components of our deferred tax assets and liabilities were comprised of the following (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2008 | | | 2007 | | | | | | | | | | | | | | | | Deferred income tax assets: | | | | | | | | | | | | | | Sale and financing of corporate headquarters | | $ | 12,078 | | | $ | 12,193 | | | $ | 11,912 | | | $ | 12,078 | | | Net operating loss carryforward | | 9,818 | | | 14,321 | | | 7,815 | | | 9,818 | | | Investment in Franklin Covey Products | | | 2,986 | | | - | | | Foreign income tax credit carryforward | | | 2,159 | | | 2,246 | | | Impairment of investment in Franklin Covey Coaching, LLC | | 2,249 | | | 2,787 | | | 1,701 | | | 2,249 | | | Foreign income tax credit carryforward | | 2,246 | | | 2,246 | | | | Bonus and other accruals | | | 1,135 | | | 1,432 | | | Alternative minimum tax carryforward | | | 881 | | | 863 | | | Inventory and bad debt reserves | | 1,515 | | | 1,391 | | | 832 | | | 1,515 | | | Vacation and other accruals | | 1,432 | | | 1,524 | | | | Deferred compensation | | 912 | | | 685 | | | 503 | | | 912 | | | Alternative minimum tax carryforward | | 863 | | | 701 | | | | Sales returns and contingencies | | 468 | | | 689 | | | 414 | | | 468 | | | Intangible asset amortization and impairment | | - | | | 571 | | | | Other | | | 810 | | | | 843 | | | | 559 | | | | 810 | | | Total deferred income tax assets | | 32,391 | | | 37,951 | | | 30,897 | | | 32,391 | | | Less: valuation allowance | | | (2,591 | ) | | | (2,622 | ) | | | (2,475 | ) | | | (2,591 | ) | | Net deferred income tax assets | | | 29,800 | | | | 35,329 | | | | 28,422 | | | | 29,800 | | | | | | | | | | | | | | | | | | | | Deferred income tax liabilities: | | | | | | | | | | | | | | | | | | Intangibles and property and equipment step-ups – definite lived | | (12,821 | ) | | (13,902 | ) | | | Intangibles and property and equipment step-ups – indefinite lived | | (8,633 | ) | | (8,595 | ) | | | Intangibles step-ups – definite lived | | | (11,863 | ) | | (12,821 | ) | | Intangibles step-ups – indefinite lived | | | (8,647 | ) | | (8,633 | ) | | Property and equipment depreciation | | (3,574 | ) | | (3,848 | ) | | (7,294 | ) | | (3,574 | ) | | Intangible asset impairment and amortization | | (893 | ) | | - | | | (2,018 | ) | | (893 | ) | | Unremitted earnings of foreign subsidiaries | | (630 | ) | | (291 | ) | | (586 | ) | | (630 | ) | | Other | | | (78 | ) | | | (234 | ) | | | (85 | ) | | | (78 | ) | | Total deferred income tax liabilities | | | (26,629 | ) | | | (26,870 | ) | | | (30,493 | ) | | | (26,629 | ) | | Net deferred income taxes | | $ | 3,171 | | | $ | 8,459 | | | $ | (2,071 | ) | | $ | 3,171 | |
Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2008 | | | 2007 | | | | | | | | | | | | | | | | | Current assets | | $ | 3,635 | | | $ | 4,130 | | | $ | 2,472 | | | $ | 3,635 | | | Long-term assets | | 101 | | | 4,340 | | | 29 | | | 101 | | | Deferred income tax liability | | | (565 | ) | | | (11 | ) | | | Net deferred income tax asset | | $ | 3,171 | | | $ | 8,459 | | | | Long-term liabilities | | | | (4,572 | ) | | | (565 | ) | | Net deferred income tax asset (liability) | | | $ | (2,071 | ) | | $ | 3,171 | |
A federal net operating loss of $33.3 million was generated in fiscal 2003. InDuring fiscal 2007, 2006, andyears 2005 through 2008, a total of $27.3$30.2 million of the fiscal 2003 loss carryforward was utilized, leaving a remaining loss carryforward from fiscal 2003 of $6.0$3.1 million, which expires on August 31, 2023. The federal net operating loss carryforward generated in fiscal 2004 totaled $20.8 million and expires on August 31, 2024. The total loss carryforward includes $0.8$1.3 million of deductions applicable to additional paid-in capital that will be credited once all loss carryforward amounts are utilized.
The state net operating loss carryforward of $33.3 million generated in fiscal 2003 was reduced by the utilization of $27.3$30.2 million induring fiscal 2007, 2006, andyears 2005 through 2008 for a net carryforward amount of $6.0$3.1 million, which primarily expires between August 31, 2008 and August 31, 2018. The state net operating loss carryforward of $20.8 million generated in fiscal 2004 primarily expires between August 31, 2008 and August 31, 2019.
The amount of federal and state net operating loss carryforwards remaining at August 31, 20072008 and deductible against future years’ taxable income are subject to limitations imposed by Section 382 of the Internal Revenue Code and similar state statutes. As a result ofUnder Section 382, limitations, our loss limitations are estimatedwe estimate that deductible losses will be limited to be $15.7$22.3 million for fiscal 20082009 and $9.5 million per year in subsequent years.years, not to exceed the remaining loss carryforward amounts as of the beginning of each year.
Our foreign income tax credit carryforward of $2.2 million that was generated during fiscal 2002 expires on August 31, 2012.
Valuation Allowance on Deferred Tax Assets
Our deferred income tax asset valuation allowance decreased by $35.6 million during fiscal 2006. In connection with the reduction in our valuation allowance, we removed $15.2 million in deferred income tax assets and the corresponding valuation allowance on the management common stock loans, given the change in the accounting treatment of the management stock loan program (Note 10)11). The remaining reduction in our deferred income tax asset valuation allowance resulted in a tax benefit of $20.4 million in fiscal 2006. Because of the accounting treatment of the management stock loans, if any tax benefit is eventually realized on these loans it will be recorded as an increase to additional paid-in capital, rather than reducing our income tax expense.
We concluded that the realization of our U.S. domestic deferred tax assets, except for foreign tax credit carryforwards, was more likely than not at August 31, 2006. Before August 31, 2006, we were precluded from reversing valuation allowances on our deferred tax assets, because we had a cumulative U.S. domestic pre-tax loss for the preceding three years. However, as of August 31, 2006, we had positive cumulative U.S. pre-tax income for the preceding three years, thus allowing us to consider reversing valuation allowances on our deferred tax assets.
We determined that projected future taxable income at the budget, more likely than not, and probable levels would be more than adequate to allow for realization of all U.S. domestic deferred tax assets, except for those related to foreign tax credits. We considered sources of taxable income described in SFAS No. 109, paragraph 21, including future reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and reasonable, practical tax-planning strategies to generate additional taxable income. We also noted that the Company had nearly met or had exceeded budgeted financial targets for the past two years and that Company leaders had worked extensively and successfully on developing a formal business model, allowing for more reliable budgeting, better fiscal discipline, and more timely ability to identify and resolve problems.
Based on the factors described above, we concluded that realization of our domestic deferred tax assets, except for foreign tax credit carryforwards, was more likely than not at August 31, 2006. Accordingly, we reversed valuation allowances on the applicable deferred tax assets. Since fiscal 2006, we have
continued to be profitable, and we have utilized a significant portion of the deferred income tax assets existing at August 31, 2006, particularly net operating loss carryforwards.
To realize the benefit of our deferred income tax assets, we must generate total taxable income of approximately $94$77 million over the next 2019 years. Taxable income of approximately $66$60 million results from the reversal of temporary taxable differences. The remaining taxable income of approximately $28$17 million must be generated by the operations of the Company. The table below presents the pre-tax book income, significant book versus tax differences, and taxable income for the years ended August 31, 2008, 2007, 2006, and 20052006 (in thousands).
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | | | | | | | | | | | | | | | | | | | | | | | Domestic pre-tax book income | | $ | 11,914 | | | $ | 10,881 | | | $ | 6,094 | | | $ | 8,857 | | | $ | 11,914 | | | $ | 10,881 | | | Sale of corporate headquarters | | - | | | - | | | 11,386 | | | | Deferred taxable loss on sale of assets to Franklin Covey Products | | | 5,203 | | | - | | | - | | | Deferred gain for book purposes on sale of assets to Franklin Covey Products | | | 2,755 | | | - | | | - | | | Interest on management common stock loans | | 2,253 | | | 1,771 | | | 1,683 | | | 1,968 | | | 2,243 | | | 1,771 | | | Property and equipment depreciation and dispositions | | | (10,459 | ) | | 1,170 | | | (3,114 | ) | | Amortization/write-off of intangible assets | | (2,814 | ) | | (1,944 | ) | | (5,402 | ) | | (2,028 | ) | | (2,814 | ) | | (1,944 | ) | | Property and equipment depreciation and dispositions | | 1,152 | | | (3,114 | ) | | 545 | | | | Changes in accrued liabilities | | (928 | ) | | (4,096 | ) | | (625 | ) | | (2,373 | ) | | (1,217 | ) | | (4,096 | ) | | Share-based compensation | | | (1,144 | ) | | 933 | | | 599 | | | Other book versus tax differences | | | (126 | ) | | | (698 | ) | | | (277 | ) | | | (541 | ) | | | (468 | ) | | | (1,297 | ) | | | | $ | 11,451 | | | $ | 2,800 | | | $ | 13,404 | | | $ | 2,238 | | | $ | 11,761 | | | $ | 2,800 | |
To achieve improved operating results, we have worked extensivelyAdoption of FIN 48
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109. This interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on developing formal business models, which provides for improved budgeting, better fiscal discipline, and an improved ability to adjust to changesa tax return should be recorded in the business environment. Due to improved operating performance and expectations regarding future taxable income,financial statements. Under the Company has concluded thatprovisions of FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of domestic operating loss carryforwards, together with the benefitsbeing realized upon ultimate settlement. Interpretation No. 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting for income taxes in interim periods, and requires increased disclosure of other deferredvarious income tax assets will be realized. Accordingly,items.
We adopted the provisions of FIN 48 on September 1, 2007 and the implementation of FIN 48 did not result in fiscal 2006 we reverseda material change to our previous liability for unrecognized tax benefits. A reconciliation of the valuation allowances on certain domestic deferredbeginning and ending amount of gross unrecognized tax assets, except for $2.2benefits is as follows (in thousands):
| Description | | | | | Balance at September 1, 2007 | | $ | 4,349 | | | Additions based on tax positions related to fiscal 2008 | | | 267 | | | Additions for tax positions in prior years | | | 31 | | | Reductions for tax positions of prior years resulting from the lapse of applicable statute of limitations | | | (292 | ) | | Other reductions for tax positions of prior years | | | (123 | ) | | Balance at August 31, 2008 | | $ | 4,232 | |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $3.0 million. Included in the ending balance of gross unrecognized tax benefits is $3.1 million related to foreignindividual states’ net operating loss carryforwards. Interest and penalties related to uncertain tax credits.positions are recognized as components of income tax expense. The net accruals and reversals of interest and penalties reduced income tax expense by a total of $0.1 million during fiscal 2008. The balance of interest and penalties included on the balance sheet at August 31, 2008 is $0.1 million. The Company does not expect significant increases or decreases in unrecognized tax benefits during the next 12 months.
As discussedWe file United States federal income tax returns as well as income tax returns in Note 2, we completedvarious states and foreign jurisdictions. The tax years that remain subject to examinations for the saleCompany’s major tax jurisdictions are shown below. Additionally, any net operating losses that were generated in prior years 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, resultingutilized in a taxable gain of $11.4 million.these years may be subject to examination.
Our foreign income tax credit carryforward of $2.2 million that was generated during fiscal 2002 expires on August 31, 2012.| 2001-2008 | Canada | | 2003-2008 | Japan, United Kingdom | | 2004-2008 | United States – state and local income tax | | 2005-2008 | United States – federal income tax |
Basic earnings or loss per 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. FollowingDue to modifications to our management stock loan program (Note 11), we determined that the preferredshares of management stock recapitalization (Note 8)loan participants that were placed in fiscal 2005, our preferred stock was no longer convertible or entitled to participate in dividends payable to holders of common stock. Accordingly, we ceased accounting for the conversion and common dividend rights of the preferred stock using the two-class method of calculating EPSescrow account are participating securities as defined in SFAS No. 128, Earnings Per Share, andby EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, for periods subsequent to February 26, 2005. However, due to modifications to our management stock loan program (Note 10) made during fiscal 2006, we determined that the shares of management stock loan participants that accepted the offer and were placed in an escrow account are participating securities as defined by EITF Issue 03-6 because they continue to have equivalent common stock dividend rights. As a result of this determination, theAccordingly, these management stock loan shares held in escrow are included in our Basicbasic EPS calculation during periods of net income and excluded from the Basicbasic EPS calculation in periods of net loss.
The following table presents the computation of our EPS for the periods indicated (in thousands, except per share amounts):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | Net income | | $ | 7,629 | | | $ | 28,573 | | | $ | 10,186 | | | Non-convertible preferred stock dividends | | | (2,215 | ) | | | (4,385 | ) | | | (3,903 | ) | | Convertible preferred stock dividends | | | - | | | | - | | | | (4,367 | ) | | Loss on recapitalization of preferred stock | | | - | | | | - | | | | (7,753 | ) | | Net income (loss) available to common shareholders | | $ | 5,414 | | | $ | 24,188 | | | $ | (5,837 | ) | | | | | | | | | | | | | | | | Undistributed income 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 income (loss) in fiscal year indicated | | | 5,414 | | | $ | 24,188 | | | $ | (10,081 | ) | | Common shareholder interest in undistributed income (loss) | | $ | 5,414 | | | $ | 24,188 | | | $ | (6,856 | ) | | | | | | | | | | | | | | | | Weighted average common shares outstanding – Basic | | | 19,593 | | | | 20,134 | | | | 19,949 | | Effect of dilutive securities(1): | | | | | | | | | | | | | | Stock options | | | 29 | | | | 52 | | | | - | | | Unvested stock awards | | | 266 | | | | 281 | | | | - | | Common stock warrants (2) | | | - | | | | 49 | | | | - | | | Weighted average common shares outstanding – Diluted | | | 19,888 | | | | 20,516 | | | | 19,949 | | | | | | | | | | | | | | | | | Basic EPS | | $ | .28 | | | $ | 1.20 | | | $ | (.34 | ) | | Diluted EPS | | $ | .27 | | | $ | 1.18 | | | $ | (.34 | ) |
YEAR ENDED AUGUST 31, | | 2008 | | | 2007 | | | 2006 | | | Net income | | $ | 5,848 | | | $ | 7,629 | | | $ | 28,573 | | | Preferred stock dividends | | | - | | | | (2,215 | ) | | | (4,385 | ) | | Net income available to common shareholders | | $ | 5,848 | | | $ | 5,414 | | | $ | 24,188 | | | | | | | | | | | | | | | | | Weighted average common shares outstanding – Basic | | | 19,577 | | | | 19,593 | | | | 20,134 | | | Effect of dilutive securities: | | | | | | | | | | | | | | Stock options | | | 10 | | | | 29 | | | | 52 | | | Unvested stock awards | | | 213 | | | | 266 | | | | 281 | | Common stock warrants(1) | | | 122 | | | | - | | | | 49 | | | Weighted average common shares outstanding – Diluted | | | 19,922 | | | | 19,888 | | | | 20,516 | | | | | | | | | | | | | | | | | Basic EPS | | $ | .30 | | | $ | .28 | | | $ | 1.20 | | | Diluted EPS | | $ | .29 | | | $ | .27 | | | $ | 1.18 | |
(1)
| (1) | For the fiscal year ended August 31, 2005, conversion of common share equivalents is not assumed because conversion of such securities would be anti-dilutive. | (2)
| For the fiscal years ended August 31, 2007, and 2005, the conversion of 6.2 million common stock warrants is not assumed because such conversion would be anti-dilutive.
|
At August 31, 2008, 2007, 2006, and 2005,2006, we had 1.91.8 million, 2.01.9 million, and 2.0 million stock options outstanding (Note 12) which13) that were not included in the calculation of diluted weighted average shares outstanding for those periods because the options’ exercise prices were greater than the average market price of our common stock. In connection with the preferred stock recapitalization (Note 8), we issuedWe also have 6.2 million common stock warrants during fiscal 2005 withoutstanding that have an exercise price of $8.00 per share.share (Note 10). These warrants, which expire in March 2013, and the out of the moneyout-of-the-money stock options described above will have a more pronounced dilutive impact on our EPS calculation in future periods if the market price of our common stock increases.
Reportable Segments
The Company hasDuring the majority of fiscal 2008 we had two segments: the Organizational Solutions Business Unit (OSBU) and the Consumer Solutions Business Unit (CSBU) and. However, during the Organizational Solutions Business Unit (OSBU).fourth quarter of fiscal 2008, we completed the sale of substantially all of the assets of the CSBU (Note 2), which reduced amounts reported by that segment in fiscal 2008. The following is a description of ourthese segments, their primary operating components, and their significant business activities:activities during the periods reported:
Consumer Solutions Business Unit– This business unit is primarily focused on sales to individual customers and small business organizationsOrganizational 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, public programs, and certain 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.
Consumer Solutions Business Unit – This business unit was primarily focused on sales to individual customers and small business organizations and included the results of our domestic retail stores, consumer direct operations (primarily Internet sales and call center), wholesale operations, international product channels in certain countries, and other related distribution channels, including government product sales and domestic printing and publishing sales. The CSBU results of operations also included the financial results of our paper planner manufacturing operations. Although CSBU sales primarily consisted of products such as planners, binders, software, totes, and related accessories, virtually any component of our leadership, productivity, and strategy execution solutions may have been purchased through the results of our domestic retail stores, consumer direct operations (primarily eCommerce, call center, and public programs), wholesale operations, international product channels in certain countries, and other related distribution channels, including government product sales and domestic printing and publishing sales. The CSBU results of operations also include the financial results of our paper planner manufacturing operations. Although CSBU sales primarily consist of products such as planners, binders, software, totes, and related accessories, virtually any component of our leadership, productivity, and strategy execution solutions may be purchased through our CSBU channels. | | 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 certain 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 wholly-owned foreign offices and royalty revenues from licensees.
|
The Company’s chief operating decision maker is the CEO,Chief Executive Officer and each of the segments has a president who reports directly to the CEO. The primary measurement tool used in our business unit performance analysis is earnings before interest, taxes, depreciation, and amortization (EBITDA), which may not be calculated as similarly titled amounts calculated by other companies. For segment reporting purposes, our consolidated EBITDA can be calculated as income from operations excluding depreciation expense, amortization expense, the gain from the sale of CSBU assets, and the gain from the sale of our manufacturing facility.facility in fiscal 2007. The fiscal 2008 restructuring charge, which totaled $2.1 million, was allocated $1.1 million to OSBU domestic and $1.0 million to OSBU international. The $1.5 million asset impairment was attributed to OSBU domestic financial results in the following segment information.
In the normal course of business, wethe Company may make structural and cost allocation revisions to our segment information to reflect new reporting responsibilities within the organization. During fiscal 20072008, we transferred the international product channels in certain countriesour public programs operations from CSBU to OSBU to CSBU, and have made other less significant organizational changes throughout the fiscal year ended August 31, 2007.changes. 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) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended August 31, 2007 | | Sales to External Customers | | | Gross Profit | | | EBITDA | | | Depreciation | | | Amortization | | | Segment Assets | | | Capital Expenditures | | | Fiscal Year Ended August 31, 2008 | | | Sales to External Customers | | | Gross Profit | | | EBITDA | | | Depreciation | | | Amortization | | | Segment Assets | | | Capital Expenditures | | | Organizational Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | | | | Domestic | | | $ | 91,287 | | | $ | 56,684 | | | $ | 259 | | | $ | 1,364 | | | $ | 3,596 | | | $ | 80,916 | | | $ | 4,782 | | | International | | | | 59,100 | | | | 42,517 | | | | 16,892 | | | | 754 | | | | 7 | | | | 21,540 | | | | 535 | | | Total OSBU | | | | 150,387 | | | | 99,201 | | | | 17,151 | | | | 2,118 | | | | 3,603 | | | | 102,456 | | | | 5,317 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail | | $ | 54,316 | | | $ | 31,932 | | | $ | 4,666 | | | $ | 735 | | | $ | - | | | $ | 8,607 | | | $ | 1,761 | | | 42,167 | | | 25,474 | | | 2,849 | | | 697 | | | - | | | - | | | 263 | | | Consumer direct | | 59,790 | | | 35,356 | | | 26,905 | | | 196 | | | - | | | 620 | | | 358 | | | 38,662 | | | 22,657 | | | 14,667 | | | 233 | | | - | | | - | | | 110 | | | Wholesale | | 17,991 | | | 10,087 | | | 9,475 | | | - | | | - | | | - | | | - | | | 16,970 | | | 9,266 | | | 8,788 | | | - | | | - | | | - | | | - | | | CSBU International | | 7,342 | | | 4,373 | | | 894 | | | - | | | - | | | - | | | - | | | 7,295 | | | 3,837 | | | 1,279 | | | 40 | | | - | | | - | | | - | | | Other CSBU | | | 5,565 | | | | 341 | | | | (28,925 | ) | | | 1,304 | | | | - | | | | 9,052 | | | | 5,503 | | | | 4,611 | | | | 1,354 | | | | (18,943 | ) | | | 1,188 | | | | - | | | | - | | | | 912 | | | Total CSBU | | | 145,004 | | | | 82,089 | | | | 13,015 | | | | 2,235 | | | | - | | | | 18,279 | | | | 7,622 | | | | 109,705 | | | | 62,588 | | | | 8,640 | | | | 2,158 | | | | - | | | | - | | | | 1,285 | | | Total operating segments | | | 260,092 | | | 161,789 | | | 25,791 | | | 4,276 | | | 3,603 | | | 102,456 | | | 6,602 | | | Corporate and eliminations | | | | - | | | | - | | | | (8,867 | ) | | | 1,416 | | | | - | | | | 76,471 | | | | 401 | | | Consolidated | | | $ | 260,092 | | | $ | 161,789 | | | $ | 16,924 | | | $ | 5,692 | | | $ | 3,603 | | | $ | 178,927 | | | $ | 7,003 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended August 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Organizational Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Domestic | | 81,447 | | | 52,722 | | | 7,704 | | | 652 | | | 3,599 | | | 81,526 | | | 6,166 | | | $ | 93,308 | | | $ | 60,337 | | | $ | 10,161 | | | $ | 668 | | | $ | 3,599 | | | $ | 81,526 | | | $ | 6,166 | | | International | | | 57,674 | | | | 39,566 | | | | 13,280 | | | | 839 | | | | 8 | | | | 22,588 | | | | 655 | | | | 57,674 | | | | 39,566 | | | | 13,280 | | | | 839 | | | | 8 | | | | 22,588 | | | | 655 | | | Total OSBU | | | 139,121 | | | | 92,288 | | | | 20,984 | | | | 1,491 | | | | 3,607 | | | | 104,114 | | | | 6,821 | | | | 150,982 | | | | 99,903 | | | | 23,441 | | | | 1,507 | | | | 3,607 | | | | 104,114 | | | | 6,821 | | | Total operating segments | | 284,125 | | | 174,377 | | | 33,999 | | | 3,726 | | | 3,607 | | | 122,393 | | | 14,443 | | | | Corporate and eliminations | | | - | | | | - | | | | (8,842 | ) | | | 967 | | | | - | | | | 74,238 | | | | 678 | | | | Consolidated | | $ | 284,125 | | | | 174,377 | | | | 25,157 | | | | 4,693 | | | | 3,607 | | | | 196,631 | | | | 15,121 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended August 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail | | $ | 62,156 | | | $ | 36,059 | | | $ | 4,953 | | | $ | 1,270 | | | $ | - | | | $ | 6,616 | | | $ | 855 | | | 54,316 | | | 31,932 | | | 4,666 | | | 735 | | | - | | | 8,607 | | | 1,761 | | | Consumer direct | | 65,480 | | | 39,003 | | | 30,473 | | | 56 | | | - | | | 538 | | | 517 | | | 48,018 | | | 27,829 | | | 18,509 | | | 222 | | | - | | | 620 | | | 358 | | | Wholesale | | 17,782 | | | 8,820 | | | 8,240 | | | - | | | - | | | - | | | - | | | 17,991 | | | 10,087 | | | 9,475 | | | - | | | - | | | - | | | - | | | CSBU International | | 7,716 | | | 4,682 | | | 1,131 | | | - | | | - | | | - | | | - | | | 7,342 | | | 4,373 | | | 894 | | | - | | | - | | | - | | | - | | | Other CSBU | | | 4,910 | | | | 794 | | | | (29,352 | ) | | | 1,283 | | | | 57 | | | | 6,107 | | | | 1,520 | | | | 5,476 | | | | 954 | | | | (22,283 | ) | | | 1,963 | | | | - | | | | 9,052 | | | | 5,503 | | | Total CSBU | | | 158,044 | | | | 89,358 | | | | 15,445 | | | | 2,609 | | | | 57 | | | | 13,261 | | | | 2,892 | | | | 133,143 | | | | 75,175 | | | | 11,261 | | | | 2,920 | | | | - | | | | 18,279 | | | | 7,622 | | | Total operating segments | | | 284,125 | | | 175,078 | | | 34,702 | | | 4,427 | | | 3,607 | | | 122,393 | | | 14,443 | | | Corporate and eliminations | | | | - | | | | - | | | | (8,844 | ) | | | 967 | | | | - | | | | 74,238 | | | | 678 | | | Consolidated | | | $ | 284,125 | | | $ | 175,078 | | | $ | 25,858 | | | $ | 5,394 | | | $ | 3,607 | | | $ | 196,631 | | | $ | 15,121 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended August 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Organizational Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Domestic | | 71,595 | | | 45,953 | | | 4,569 | | | 359 | | | 3,747 | | | 83,292 | | | 4,614 | | | $ | 84,904 | | | $ | 54,479 | | | $ | 7,828 | | | $ | 376 | | | $ | 3,747 | | | $ | 83,292 | | | $ | 4,614 | | | International | | | 48,984 | | | | 32,074 | | | | 9,337 | | | | 1,197 | | | | 9 | | | | 21,860 | | | | 701 | | | | 48,984 | | | | 32,074 | | | | 9,337 | | | | 1,197 | | | | 9 | | | | 21,860 | | | | 701 | | | Total OSBU | | | 120,579 | | | | 78,027 | | | | 13,906 | | | | 1,556 | | | | 3,756 | | | | 105,152 | | | | 5,315 | | | | 133,888 | | | | 86,553 | | | | 17,165 | | | | 1,573 | | | | 3,756 | | | | 105,152 | | | | 5,315 | | | Total operating segments | | 278,623 | | | 167,385 | | | 29,351 | | | 4,165 | | | 3,813 | | | 118,413 | | | 8,207 | | | | Corporate and eliminations | | | - | | | | - | | | | (6,713 | ) | | | 614 | | | | - | | | | 98,146 | | | | 153 | | | | Consolidated | | $ | 278,623 | | | $ | 167,385 | | | $ | 22,638 | | | $ | 4,779 | | | $ | 3,813 | | | $ | 216,559 | | | $ | 8,360 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended August 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail | | $ | 74,331 | | | $ | 42,455 | | | $ | 4,703 | | | $ | 2,586 | | | $ | - | | | $ | 7,992 | | | $ | 996 | | | 62,156 | | | 36,059 | | | 4,953 | | | 1,270 | | | - | | | 6,616 | | | 855 | | | Consumer direct | | 62,873 | | | 37,340 | | | 23,843 | | | 528 | | | - | | | 90 | | | 72 | | | 52,171 | | | 30,462 | | | 21,308 | | | 48 | | | - | | | 538 | | | 517 | | | Wholesale | | 17,936 | | | 8,543 | | | 7,944 | | | 1 | | | - | | | 2 | | | - | | | 17,782 | | | 8,820 | | | 8,240 | | | - | | | - | | | - | | | - | | | CSBU International | | 7,009 | | | 4,491 | | | 2,096 | | | - | | | - | | | - | | | - | | | 7,716 | | | 4,682 | | | 1,131 | | | - | | | - | | | - | | | - | | | Other CSBU | | | 3,757 | | | | (1,388 | ) | | | (27,093 | ) | | | 2,516 | | | | 344 | | | | 5,495 | | | | 689 | | | | 4,910 | | | | 1,385 | | | | (22,871 | ) | | | 1,850 | | | | 57 | | | | 6,107 | | | | 1,520 | | | Total CSBU | | | 165,906 | | | | 91,441 | | | | 11,493 | | | | 5,631 | | | | 344 | | | | 13,579 | | | | 1,757 | | | | 144,735 | | | | 81,408 | | | | 12,761 | | | | 3,168 | | | | 57 | | | | 13,261 | | | | 2,892 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Organizational Solutions Business Unit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Domestic | | 70,572 | | | 44,971 | | | 6,772 | | | 308 | | | 3,816 | | | 86,910 | | | 2,683 | | | | International | | | 47,064 | | | | 32,283 | | | | 10,678 | | | | 1,295 | | | | 7 | | | | 21,183 | | | | 742 | | | | Total OSBU | | | 117,636 | | | | 77,254 | | | | 17,450 | | | | 1,603 | | | | 3,823 | | | | 108,093 | | | | 3,425 | | | | Total operating segments | | 283,542 | | | 168,695 | | | 28,943 | | | 7,234 | | | 4,167 | | | 121,672 | | | 5,182 | | | 278,623 | | | 167,961 | | | 29,926 | | | 4,741 | | | 3,813 | | | 118,413 | | | 8,207 | | | Corporate and eliminations | | | - | | | | - | | | | (8,553 | ) | | | 540 | | | | 6 | | | | 111,561 | | | | 1,181 | | | | - | | | | - | | | | (6,712 | ) | | | 614 | | | | - | | | | 98,146 | | | | 153 | | | Consolidated | | | 283,542 | | | | 168,695 | | | | 20,390 | | | | 7,774 | | | | 4,173 | | | | 233,233 | | | | 6,363 | | | $ | 278,623 | | | $ | 167,961 | | | $ | 23,214 | | | $ | 5,355 | | | $ | 3,813 | | | $ | 216,559 | | | $ | 8,360 | |
Capital expenditures in our OSBU domestic segment include $4.0 million, $5.1 million, $4.0 million, and $2.2$4.0 million of spending on capitalized curriculum during the fiscal years ended August 31, 2008, 2007 2006 and 2005,2006, respectively.
A reconciliation of reportable segment EBITDA to consolidated income (loss) before taxes is provided below (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | | | Reportable segment EBITDA | | $ | 33,999 | | | $ | 29,351 | | | $ | 28,943 | | | $ | 25,791 | | | $ | 34,702 | | | $ | 29,926 | | | Corporate expenses | | | (8,842 | ) | | | (6,713 | ) | | | (8,553 | ) | | | (8,867 | ) | | | (8,844 | ) | | | (6,712 | ) | | Consolidated EBITDA | | 25,157 | | | 22,638 | | | 20,390 | | | 16,924 | | | 25,858 | | | 23,214 | | | Gain on sale of CSBU assets | | | 9,131 | | | - | | | - | | | Gain on sale of manufacturing facility | | 1,227 | | | - | | | - | | | - | | | 1,227 | | | - | | | Depreciation | | (4,693 | ) | | (4,779 | ) | | (7,774 | ) | | (5,692 | ) | | (5,394 | ) | | (5,355 | ) | | Amortization | | | (3,607 | ) | | | (3,813 | ) | | | (4,173 | ) | | | (3,603 | ) | | | (3,607 | ) | | | (3,813 | ) | | Consolidated income from operations | | 18,084 | | | 14,046 | | | 8,443 | | | 16,760 | | | 18,084 | | | 14,046 | | | Interest income | | 717 | | | 1,334 | | | 944 | | | 157 | | | 717 | | | 1,334 | | | Interest expense | | (3,136 | ) | | (2,622 | ) | | (786 | ) | | (3,083 | ) | | (3,136 | ) | | (2,622 | ) | | Legal settlement | | - | | | 873 | | | - | | | | - | | | | - | | | | 873 | | | Gain on disposal of investment in unconsolidated subsidiary | | | - | | | | - | | | | 500 | | | | Income before income taxes | | $ | 15,665 | | | $ | 13,631 | | | $ | 9,101 | | | $ | 13,834 | | | $ | 15,665 | | | $ | 13,631 | |
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, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | | | Reportable segment assets | | $ | 122,393 | | | $ | 118,413 | | | $ | 121,672 | | | $ | 102,456 | | | $ | 122,393 | | | $ | 118,413 | | | Corporate assets | | 76,047 | | | 99,763 | | | 112,955 | | | 78,010 | | | 76,047 | | | 99,763 | | | Intercompany accounts receivable | | | (1,809 | ) | | | (1,617 | ) | | | (1,394 | ) | | | (1,539 | ) | | | (1,809 | ) | | | (1,617 | ) | | | | $ | 196,631 | | | $ | 216,559 | | | $ | 233,233 | | | $ | 178,927 | | | $ | 196,631 | | | $ | 216,559 | |
Enterprise-Wide Information
Our revenues are derived primarily from the United States. However, we also operate wholly-owned offices or contract with licensees to provide products and services in various countries throughout the world. Our consolidated revenues were derived from the following countries (in thousands):
YEAR ENDED AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | | Net sales: | | | | | | | | | | | | | | | | | | | United States | | $ | 219,152 | | | $ | 221,880 | | | $ | 229,469 | | | $ | 197,181 | | | $ | 219,152 | | | $ | 221,880 | | Japan | | 24,166 | | | 21,569 | | | 20,905 | | | 26,510 | | | 24,166 | | | 21,569 | | | Canada | | | 10,389 | | | 8,400 | | | 8,197 | | United Kingdom | | 9,843 | | | 8,587 | | | 9,707 | | | 10,174 | | | 9,843 | | | 8,587 | | Canada | | 8,400 | | | 8,197 | | | 6,910 | | | | Australia | | | 4,313 | | | 4,016 | | | 3,439 | | Mexico | | 4,362 | | | 3,799 | | | 4,181 | | | 1,905 | | | 4,362 | | | 3,799 | | | Singapore | | | 1,443 | | | 1,306 | | | 1,072 | | Brazil/South America | | 4,314 | | | 3,078 | | | 2,053 | | | 1,283 | | | 4,314 | | | 3,078 | | Australia | | 4,016 | | | 3,439 | | | 3,377 | | | Korea | | 1,377 | | | 1,403 | | | 1,232 | | | 1,234 | | | 1,377 | | | 1,403 | | Singapore | | 1,306 | | | 1,072 | | | 985 | | | Indonesia/Malaysia | | 710 | | | 624 | | | 567 | | | 794 | | | 710 | | | 624 | | Others | | | 6,479 | | | | 4,975 | | | | 4,156 | | | | 4,866 | | | | 6,479 | | | | 4,975 | | | | | $ | 284,125 | | | $ | 278,623 | | | $ | 283,542 | | | $ | 260,092 | | | $ | 284,125 | | | $ | 278,623 | |
The Company hashad wholly-owned offices in Japan, Canada, the United Kingdom, Australia and product sales operations in Mexico.Mexico during fiscal 2008. Our long-lived assets held in these locations were as follows for the periods indicated (in thousands):
| AUGUST 31, | | 2007 | | | 2006 | | | 2005 | | | 2008 | | | 2007 | | | 2006 | | Long-lived assets: | | | | | | | | | | | | | | | | | | | United States | | $ | 121,279 | | | $ | 124,208 | | | $ | 122,937 | | | $ | 106,878 | | | $ | 121,279 | | | $ | 124,208 | | Americas | | 2,433 | | | 2,661 | | | 2,620 | | | 2,230 | | | 2,433 | | | 2,661 | | Japan | | 1,453 | | | 1,489 | | | 1,527 | | | 1,509 | | | 1,453 | | | 1,489 | | United Kingdom | | 976 | | | 735 | | | 641 | | | 258 | | | 976 | | | 735 | | Australia | | | 387 | | | | 346 | | | | 326 | | | | 141 | | | | 387 | | | | 346 | | | | | $ | 126,528 | | | $ | 129,439 | | | $ | 128,051 | | | $ | 111,016 | | | $ | 126,528 | | | $ | 129,439 | |
Inter-segment sales were immaterial and are eliminated in consolidation. 20.
| CEO COMPENSATION AGREEMENT
|
During fiscal 2005, our Board of Directors approved and enacted changes to a number of items in the CEO’s employment agreement. At the request of the CEO, this new compensation arrangement includes the following:
·
20. | The previously existing CEO employment agreement, which extended until 2007, was canceled and the CEO became an “at-will” employee.
| ·
| The CEO signed a waiver forgoing claims on past compensation not taken.
| ·
| 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.
| ·
| 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.
RELATED PARTY TRANSACTIONS |
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:
·
| The CEO’s cash compensation, both base compensation and incentive compensation, remained essentially unchanged.
| ·
| The vesting period of the CEO’s 1.6 million stock options with an exercise price of $14.00 per share was accelerated.
| ·
| 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 fully vested common stock. The compensation cost of both of these awards totaled $0.9 million, of which $0.4 million was expensed on the date of grant with the remainder being amortized over five years, subject to accelerated vesting if certain financial performance thresholds are met (Note 12).
| ·
| The Company will provide 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.
|
21.
| EXECUTIVE SEPARATION AGREEMENT
|
During fiscal 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 totaled $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 our 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 1.
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 10).
Subsequent to entering into the separation agreement, the Company and Mr. Christensen entered into a Legal Services Agreement that was effective on 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 allowed 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. By mutual agreement, the Legal Services Agreement was terminated during fiscal 2006 and Mr. Christensen no longer provides legal services to the Company.
22.
| RELATED PARTY TRANSACTIONS
|
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, 2008, 2007, 2006, and 2005,2006, we expensed charges totaling $2.9 million, $2.0 million, $1.6 million, and $3.0$1.6 million, to the Vice-Chairman and former Vice Chairman for their seminar presentations. We also pay the Vice-Chairman and former Vice-Chairman a percentage of the royalty proceeds received from the sale of certain books that were authored by them. During fiscal 2008, 2007, 2006, and 2005,2006, we expensed $0.2$0.3 million, $0.2 million, and $0.5$0.2 million for royalty payments made to the Vice-Chairman and former Vice-Chairman under these agreements. At August 31, 20072008 and 2006,2007, we had accrued $0.3$0.6 million and $1.6$0.3 million payable to the Vice-Chairman and former Vice-Chairman under the forgoing agreements. These amounts were included inas a component of accrued liabilities in our consolidated balance sheets.
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 our Chairman of the Board and CEO at August 31, 2007. 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 $0.1 million, $0.2 million, and $0.4 million during the years ended August 31, 2007, 2006, and 2005 for monitoring fees, which were reduced by redemptions of outstanding Series A preferred stock. Following the redemption of all remaining preferred stock in fiscal 2007, we do not have any further obligation to pay monitoring fees to the affiliate of the investor.
We pay a son of the Vice-Chairman of the Board of Directors, who is also an employee of the Company, a percentage of the royalty proceeds received from the sales of certain books authored by the son of the Vice-Chairman. During the fiscal years ended August 31, 2008, 2007, 2006, and 2005,2006, we expensed $0.7 million, $0.4 million, $0.3 million, and $0.2$0.3 million to the son of the Vice-Chairman for these royalty payments and had $0.1 million accrued at August 31, 20072008 and 20062007 as payable under the terms of this arrangement. These amounts are included in accrued liabilities in our consolidated balance sheets.
During fiscal 2006, we signed a non-exclusive license agreement for certain intellectual property with a son of the Vice-Chairman of the Board of Directors, who was previously an officer of the Company and a member of our Board of Directors. We are required to pay the son of the Vice-Chairman royalties for the use of certain intellectual property developed by the son of Vice-Chairman. ��Our payments to the son of the Vice-Chairman totaled $0.3 million, $0.2 million, and $0.1 million during the fiscal years ended August 31, 2008, 2007, and 2006, respectively. The license agreement provides for minimum royalty payments during the term of the agreement, which expires in fiscal 2011. The license agreement also contains a provision that allows us to extend the term of the agreement for an additional five years. The minimum royalties are payable as follows (in thousands):
YEAR ENDING AUGUST 31, | | | | | | | | 2008 | | $ | 75 | | | | 2009 | | 100 | | | $ | 100 | | | 2010 | | 100 | | | 100 | | | 2011 | | | 150 | | | | 150 | | | | | $ | 425 | | | $ | 350 | | | | | | | | | | | | | Each fiscal year of extended term | | $ | 150 | | | $ | 150 | |
The license agreement with the son of the Vice-Chairman also contains an option to purchase the organizational channel business at specified periods. In fiscal 2003, we issued a separate non-exclusive license agreement for certain intellectual property to the same son of the Vice-Chairman. 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 2008, 2007, 2006, and 2005.2006.
TheAs part of a preferred stock offering to a private investor, an affiliate of the investor, who was then a director of the Company, under a long-term agreement, leased office space in buildings that were owned by partnerships,was named as the majority interest of which were owned by the Vice-ChairmanChairman of the Board of Directors and certain other employees and former employeeswas later elected as CEO. This individual continues to serve as our Chairman of the Company. During fiscal 2005 we exercised an option, available underBoard and CEO at August 31, 2008. In addition, one of the affiliates of the private investor was named to our master lease agreement,Board of Directors and continues to purchase, and simultaneously sell, the office facility to the current tenant, an unrelated party. The negotiated purchase priceserve in that position. In connection with the landlord was $14.0preferred stock offering, we paid an affiliate of the investor $0.1 million and $0.2 million during 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 previously expensed and accrued. We paid rent and related building expenses to the partnership totaling $0.5 million for the fiscal yearyears ended August 31, 2005.2007 and 2006 for monitoring fees, which were reduced by redemptions of outstanding Series A preferred stock. Following completionthe redemption of all remaining preferred stock in fiscal 2007, we do not have any further obligation to pay monitoring fees to the affiliate of the sale of these buildings, we have no further obligations to the related partnerships.investor.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREChanges in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report.
Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The management of Franklin Covey Co. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (including its consolidated subsidiaries) and all related information appearing in the Company’s annual report on Form 10-K. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that:
| 1. | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
|
| 2. | provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of management and/or of our Board of Directors; and |
| 3. | provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth in
Internal Control—Integrated Framework as issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, our management concluded that our internal control over financial reporting was effective as of the end of the period covered by this annual report on Form 10-K.
Our independent registered public accounting firm, KPMG LLP, has audited the consolidated financial statements included in this annual report on Form 10-K and, as part of their audit, has issued an audit report, included herein, on the effectiveness of our internal control over financial reporting. Their report is included in Item 8 of this Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the fourth quarter ended August 31, 20072008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
There was no information to be disclosed in a current Report on Form 8-K during fourth quarter of fiscal 20072008 that was not previously reported.
Certain information required by this Item is incorporated by reference to the sections entitled "Nominees“Nominees for Election to the Board of Directors," "Directors” “Directors Whose Terms of Office Continue," "Executive” “Executive Officers," "Section” “Section 16(a) Beneficial Ownership Compliance," "Corporate” “Corporate Governance,"” and "Board“Board of Director Meetings and Committees"Committees” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 18, 2008.16, 2009. 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 407(d)(5) adopted under the Securities Exchange Act of 1934, as amended. Our Board of Directors has determined that Mr. Daines is an “independent director” as defined by the New York Stock Exchange (NYSE).
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.
The information required by this Item is incorporated by reference to the sections entitled "Compensation“Compensation Discussion and Analysis," "Compensation” “Compensation Committee Interlocks and Insider Participation,"” and "Compensation“Compensation Committee Report"Report” in the Company’s definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 18, 2008.19, 2009.
| 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)(3) | | | 2,599 | | | $ | 12.72 | | | | 1,386 | |
| | | [a] | | [b] | | [c] |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | | Weighted-average exercise price of outstanding options, warrants, and rights | | 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) | | 2,028 | | $12.82 | | 1,944 |
(1) | Includes 540,396 performance share awards that are expected to be awarded under the terms of a Board of Director approved long-term incentive plan (LTIP). The number of shares eventually awarded to LTIP participants is variable and is based upon the achievement of specified financial performance targets in sales growth and cumulative operating income. The weighted average exercise price of outstanding equity awards presented in column [b] does not take these awards into account. For further information regarding our equity based compensation plans, refer to Note 12 to our consolidated financial statements presented in Item 8 of this report on form 10-K.
|
(2)
| Excludes 410,67094,500 shares of unvested (restricted) stock awards that are subject to forfeiture. |
(3)
| The number of securities remaining available for future issuance presented in column [c] considers the expected number of LTIP shares expected to be awarded at August 31, 2007 and may change in future periods based upon actual and estimated financial performance.
|
| (2) | During the fourth quarter of fiscal 2008, we canceled all outstanding long-term incentive plan (LTIP) awards granted in fiscal 2007 and fiscal 2006 and these previously granted awards have no impact upon the amounts disclosed. |
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 18, 2008.19, 2009.
The information required by this Item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” and "Corporate Governance"“Corporate Governance” in the Company’s definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 18, 2008.19, 2009.
The information required by this Item is incorporated by reference to the section entitled “Principal Accountant Fees” in the Company’s definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 18, 2008.19, 2009.
IITEMTEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESExhibits and Financial Statement Schedules
(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, 2007,2008, are as follows: |
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at August 31, 20072008 and 20062007
Consolidated Income Statements and Statements of Comprehensive Income (Loss) for the years ended August 31, 2008, 2007, 2006, and 20052006
Consolidated Statements of Shareholders’ Equity for the years ended August 31, 2008, 2007, 2006, and 20052006
Consolidated Statements of Cash Flows for the years ended August 31, 2008, 2007, 2006, and 20052006
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.
Exhibit No. | Exhibit | Incorporated By Reference | Filed Herewith |
| 3.1 | Articles of Restatement dated March 4, 2005 amending and restating the Company’s Articles of Incorporation | (9) | |
| 3.2 | Amendment to Amended and Restated Articles of Incorporation of Franklin Covey (Appendix C) | (14) | |
| 3.3 | Amended and Restated Bylaws of the Registrant | (1) | |
| 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* | Amended and Restated 2000 Employee Stock Purchase Plan | (6) | |
| 10.3* | Amended and Restated 2004 Employee Stock Purchase Plan | (17) | |
| 10.4* | Amended and Restated 1992 Stock Incentive Plan | (4) | |
| 10.5* | First Amendment to Amended and Restated 1992 Stock Incentive Plan | (18) | |
| 10.6* | Third Amendment to Amended and Restated 1992 Stock Incentive Plan | (19) | |
| 10.7* | Fifth amendment to the Franklin Covey Co. Amended and Restated 1992 Stock Incentive Plan (Appendix A) | (14) | |
| 10.8* | Forms of Nonstatutory Stock Options | (1) | |
| 10.9 | 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) | |
| 10.10* | Amended and Restated Option Agreement, dated December 8, 2004, by and between the Company and Robert A. Whitman | (8) | |
| 10.11* | Agreement for the Issuance of Restricted Shares, dated as of December 8, 2004, by and between Robert A. Whitman and the Company | (8) | |
| 10.12* | Letter Agreement regarding the cancellation of Robert A. Whitman’s Employment Agreement, dated December 8, 2004 | (8) | |
| 10.13 | Restated Monitoring Agreement, dated as of March 8, 2005, between the Company and Hampstead Interests, LP | (9) | |
| 10.14 | Warrant, dated March 8, 2005, to purchase 5,913,402 shares of Common Stock issued by the Company to Knowledge Capital Investment Group | (9) | |
| 10.15 | 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) | |
| 10.16* | Franklin Covey Co. 2004 Non-Employee Directors’ Stock Incentive Plan | (10) | |
| 10.17* | The first amendment to the Franklin Covey Co. 2004 Non-Employee Director Stock Incentive Plan, (Appendix B) | (14) | |
| 10.18* | Form of Option Agreement for the 2004 Non-Employee Directors Stock Incentive Plan | (10) | |
| 10.19* | Form of Restricted Stock Agreement for the 2004 Non-Employees Directors Stock Incentive Plan | (10) | |
| 10.20* | Separation Agreement between the Company and Val J. Christensen, dated March 29, 2005 | (11) | |
| 10.21* | Legal Services Agreement between the Company and Val J. Christensen, dated March 29, 2005 | (11) | |
| 10.22 | Master Lease Agreement between Franklin SaltLake LLC (Landlord) Franklin Development Corporation (Tenant) | (12) | |
| 10.23 | Purchase and Sale Agreement and Escrow Instructions between Levy Affiliated Holdings, LLC (Buyer) and Franklin Development Corporation (Seller) and Amendments | (12) | |
| 10.24 | Redemption Extension Voting Agreement between Franklin Covey Co. and Knowledge Capital Investment Group, dated October 20, 2005 | (13) | |
| 10.25 | Agreement for Information Technology Services between each of Franklin Covey Co. Electronic Data Systems Corporation, and EDS Information Services LLC, dated April 1, 2001 | (15) | |
| 10.26 | Additional Services Addendum No. 1 to Agreement for Information Technology Services between each of Franklin Covey Co. Electronic Data Systems Corporation, and EDS Information Services LLC, dated June 30, 2001 | (15) | |
| 10.27 | Amendment No. 2 to Agreement for Information Technology Services between each of Franklin Covey Co. Electronic Data Systems Corporation, and EDS Information Services LLC, dated June 30, 2001 | (15) | |
| 10.28 | Amendment No. 6 to the Agreement for Information Technology Services between each of Franklin Covey Co., Electronic Data Systems Corporation, and EDS Information Services L.L.C. dated April 1, 2006 | (16) | |
| 10.29 | Revolving Line of Credit Agreement ($18,000,000) by and between JPMorgan Chase Bank, N.A. and Franklin Covey Co. dated March 14, 2007 | (20) | |
| 10.30 | Secured Promissory Note between JPMorgan Chase Bank, N.A. and Franklin Covey Co. dated March 14, 2007 | (20) | |
| 10.31 | Security Agreement between Franklin Covey Co., Franklin Covey Printing, Inc., Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey Marketing, LTD., and JPMorgan Chase Bank, N.A. and Zions First National Bank, dated March 14, 2007 | (20) | |
| 10.32 | Repayment Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc., Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey Marketing, LTD., and JPMorgan Chase Bank N.A., dated March 14, 2007 | (20) | |
| 10.33 | Pledge and Security Agreement between Franklin Covey Co. and JPMorgan Chase Bank, N.A. and Zions First National Bank, dated March 14, 2007 | (20) | |
| 10.34 | Revolving Line of Credit Agreement ($7,000,000) by and between Zions First National Bank and Franklin Covey Co. dated March 14, 2007 | (20) | |
| 10.35 | Secured Promissory Note between Zions First National Bank and Franklin Covey Co. dated March 14, 2007 | (20) | |
| 10.36 | Repayment Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc., Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey Marketing, LTD., and Zions First National Bank, dated March 14, 2007 | (20) | |
| 10.37 | Credit Agreement between Franklin Covey Canada, Ltd. and Toronto-Dominion Bank dated February 19, 2007 | (20) | |
| Subsidiaries of the Registrant | | éé |
| Consent of Independent Registered Public Accounting Firm | | éé |
| Rule 13a-14(a) Certification of the Chief Executive Officer | | éé |
| Rule 13a-14(a) Certification of the Chief Financial Officer | | éé |
| Section 1350 Certifications | | éé |
| Report of KPMG LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statement Schedule for the years ended August 31, 2007, 2006, and 2005 | | éé |
| Financial Statement Schedule II – Valuation and Qualifying Accounts and Reserves. | | éé |
| Exhibit No. | Exhibit | Incorporated By Reference | Filed Herewith |
| 2.1 | Master Asset Purchase Agreement between Franklin Covey Products, LLC and Franklin Covey Co. dated May 22, 2008 | (19) | |
| 2.2 | Amendment to Master Asset Purchase Agreement between Franklin Covey Products, LLC and Franklin Covey Co. dated May 22, 2008 | (20) | |
| 3.1 | Articles of Restatement dated March 4, 2005 amending and restating the Company’s Articles of Incorporation | (8) | |
| 3.2 | Amendment to Amended and Restated Articles of Incorporation of Franklin Covey (Appendix C) | (12) | |
| 3.3 | Amended and Restated Bylaws of the Registrant | (1) | |
| 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 | (8) | |
| 4.5 | Restated Registration Rights Agreement, dated as of March 8, 2005, between the Company and Knowledge Capital Investment Group | (8) | |
| 10.1* | Amended and Restated 1992 Employee Stock Purchase Plan | (3) | |
| 10.2* | Amended and Restated 2000 Employee Stock Purchase Plan | (6) | |
| 10.3* | Amended and Restated 2004 Employee Stock Purchase Plan | (15) | |
| 10.4* | Amended and Restated 1992 Stock Incentive Plan | (4) | |
| 10.5* | First Amendment to Amended and Restated 1992 Stock Incentive Plan | (16) | |
| 10.6* | Third Amendment to Amended and Restated 1992 Stock Incentive Plan | (17) | |
| 10.7* | Fifth Amendment to the Franklin Covey Co. Amended and Restated 1992 Stock Incentive Plan (Appendix A) | (12) | |
| 10.8* | Forms of Nonstatutory Stock Options | (1) | |
| 10.9* | Amended and Restated Option Agreement, dated December 8, 2004, by and between the Company and Robert A. Whitman | (7) | |
| 10.10* | Agreement for the Issuance of Restricted Shares, dated as of December 8, 2004, by and between Robert A. Whitman and the Company | (7) | |
| 10.11 | Restated Monitoring Agreement, dated as of March 8, 2005, between the Company and Hampstead Interests, LP | (8) | |
| 10.12 | Warrant, dated March 8, 2005, to purchase 5,913,402 shares of Common Stock issued by the Company to Knowledge Capital Investment Group | (8) | |
| 10.13 | 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 | (8) | |
| 10.14* | Franklin Covey Co. 2004 Non-Employee Directors’ Stock Incentive Plan | (9) | |
| 10.15* | The first amendment to the Franklin Covey Co. 2004 Non-Employee Director Stock Incentive Plan, (Appendix B) | (12) | |
| 10.16* | Form of Option Agreement for the 2004 Non-Employee Directors Stock Incentive Plan | (9) | |
| 10.17* | Form of Restricted Stock Agreement for the 2004 Non-Employees Directors Stock Incentive Plan | (9) | |
| 10.18 | Master Lease Agreement between Franklin SaltLake LLC (Landlord) Franklin Development Corporation (Tenant) | (10) | |
| 10.19 | Purchase and Sale Agreement and Escrow Instructions between Levy Affiliated Holdings, LLC (Buyer) and Franklin Development Corporation (Seller) and Amendments | (10) | |
| 10.20 | Redemption Extension Voting Agreement between Franklin Covey Co. and Knowledge Capital Investment Group, dated October 20, 2005 | (11) | |
| 10.21 | Agreement for Information Technology Services between each of Franklin Covey Co. Electronic Data Systems Corporation, and EDS Information Services LLC, dated April 1, 2001 | (13) | |
| 10.22 | Additional Services Addendum No. 1 to Agreement for Information Technology Services between each of Franklin Covey Co. Electronic Data Systems Corporation, and EDS Information Services LLC, dated June 30, 2001 | (13) | |
| 10.23 | Amendment No. 2 to Agreement for Information Technology Services between each of Franklin Covey Co. Electronic Data Systems Corporation, and EDS Information Services LLC, dated June 30, 2001 | (13) | |
| 10.24 | Amendment No. 6 to the Agreement for Information Technology Services between each of Franklin Covey Co., Electronic Data Systems Corporation, and EDS Information Services L.L.C. dated April 1, 2006 | (14) | |
| 10.25 | Revolving Line of Credit Agreement ($18,000,000) by and between JPMorgan Chase Bank, N.A. and Franklin Covey Co. dated March 14, 2007 | (18) | |
| 10.26 | Secured Promissory Note between JPMorgan Chase Bank, N.A. and Franklin Covey Co. dated March 14, 2007 | (18) | |
| 10.27 | Security Agreement between Franklin Covey Co., Franklin Covey Printing, Inc., Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey Marketing, LTD., and JPMorgan Chase Bank, N.A. and Zions First National Bank, dated March 14, 2007 | (18) | |
| 10.28 | Repayment Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc., Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey Marketing, LTD., and JPMorgan Chase Bank N.A., dated March 14, 2007 | (18) | |
| 10.29 | Pledge and Security Agreement between Franklin Covey Co. and JPMorgan Chase Bank, N.A. and Zions First National Bank, dated March 14, 2007 | (18) | |
| 10.30 | Revolving Line of Credit Agreement ($7,000,000) by and between Zions First National Bank and Franklin Covey Co. dated March 14, 2007 | (18) | |
| 10.31 | Secured Promissory Note between Zions First National Bank and Franklin Covey Co. dated March 14, 2007 | (18) | |
| 10.32 | Repayment Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc., Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey Marketing, LTD., and Zions First National Bank, dated March 14, 2007 | (18) | |
| 10.33 | Credit Agreement between Franklin Covey Canada, Ltd. and Toronto-Dominion Bank dated February 19, 2007 | (18) | |
| 10.34 | Master License Agreement between Franklin Covey Co. and Franklin Covey Products, LLC | (21) | |
| 10.35 | Supply Agreement between Franklin Covey Products, LLC and Franklin Covey Product Sales, Inc. | (21) | |
| 10.36 | Master Shared Services Agreement between The Franklin Covey Products Companies and the Shared Services Companies | (21) | |
| 10.37 | Amended and Restated Operating Agreement of Franklin Covey Products, LLC | (21) | |
| 10.38 | Sublease Agreement between Franklin Development Corporation and Franklin Covey Products, LLC | (21) | |
| 10.39 | Sub-Sublease Agreement between Franklin Covey Co. and Franklin Covey Products, LLC | (21) | |
| 10.40 | Loan Modification Agreement between Franklin Covey Co. and JPMorgan Chase Bank, N.A. dated July 8, 2008 | (21) | |
| General Services Agreement between Franklin Covey Co. and Electronic Data Systems (EDS) dated October 27, 2008 | | éé |
| Subsidiaries of the Registrant | | éé |
| Consent of Independent Registered Public Accounting Firm | | éé |
| Rule 13a-14(a) Certification of the Chief Executive Officer | | éé |
| Rule 13a-14(a) Certification of the Chief Financial Officer | | éé |
| Section 1350 Certifications | | éé |
| Report of KPMG LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statement Schedule for the years ended August 31, 2008, 2007, and 2006 | | éé |
| Financial Statement Schedule II – Valuation and Qualifying Accounts and Reserves. | | éé |
| (1) | Incorporated by reference to Registration Statement on Form S-1 filed with the Commission on April 17, 1992, Registration 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. 33-4728333-47283. |
| (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 14, 1999). Registration No. 005-43123. |
| (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)(8) | Incorporated by reference to Report on Form 8-K filed with the Commission on March 10, 2005.** |
(10)(9) | 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)(10) | Incorporated by reference to Report on Form 8-K filed with the Commission on June 27, 2005.** |
(13)(11) | Incorporated by reference to Report on Form 8-K filed with the Commission on October 24, 2005.** |
(14)(12) | Incorporated by reference to Definitive Proxy Statement on Form DEF 14A filed with the Commission on December 12, 2005.** |
(15)(13) | Incorporated by reference to Report on Form 10-Q filed July 10, 2001, for the quarter ended May 26, 2001.** |
(16)(14) | Incorporated by reference to Report on Form 8-K filed with the Commission on April 5, 2006.** |
(17)(15) | Incorporated by reference to Definitive Proxy Statement on Form DEF 14A filed with the Commission on February 1, 2005.** |
(18)(16) | Incorporated by reference to Definitive Proxy Statement on Form DEF 14A dated November 5, 1993.** |
(19)(17) | Incorporated by reference to Definitive Proxy Statement on Form DEF 14A filed with the Commission on December 3, 1999.** |
(20)(18) | Incorporated by reference to Report on Form 8-K filed with the Commission on March 19, 2007.** |
éé
(19) | Filed herewith and attachedIncorporated by reference to this report. |
* | Indicates a management contract or compensatory plan or agreement. |
| Report on Form 8-K/A filed with the Commission on May 29, 2008.** | Registration No. 001-11107 |
| (20) | Incorporated by reference to Report on Form 10-Q filed July 10, 2008, for the Quarter ended May 31, 2008.** |
| (21) | Incorporated by reference to Report on Form 8-K filed with the Commission on July 11, 2008.** |
éé Filed herewith and attached to this report.
* Indicates a management contract or compensatory plan or agreement.
** Registration No. 001-11107.
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 14, 2007.2008.
FRANKLIN COVEY CO.
| By: | /s/ ROBERTRobert A. WHITMANWhitman |
| | | 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 | TitleDate
| Date
|
/s/ ROBERT /s/ Robert A. WHITMAN
Whitman | Chairman of the Board and Chief Executive Officer | November 14, 20072008 |
Robert A. Whitman | | |
/s/ STEPHEN /s/ Stephen R. COVEY
Covey | Vice-Chairman of the Board | November 14, 2008 |
Stephen R. Covey November 14, 2007
|
Stephen R. Covey | | |
| /s/Clayton M. Christensen | Director | November 14, 2008 |
Clayton M. Christensen /s/ CLAYTON M. CHRISTENSEN
| Director
| November 14, 2007
|
Clayton M. Christensen | | |
| /s/ Robert H. Daines | Director | November 14, 2008 |
Robert H. Daines /s/ ROBERT H. DAINES
| Director
| November 14, 2007
|
Robert H. Daines | | |
| /s/ E.J. “Jake” Garn | Director | November 14, 2008 |
E.J. “Jake” Garn /s/ E.J. "JAKE" GARN
| Director
| November 14, 2007
|
E.J. “Jake” Garn | | |
| /s/ Dennis G. Heiner | Director | November 14, 2008 |
Dennis G. Heiner /s/ DENNIS G. HEINER
| Director
| November 14, 2007
|
Dennis G. Heiner | | |
| /s/ Donald J. McNamara | Director | November 14, 2008 |
Donald J. McNamara /s/ DONALD J. MCNAMARA
| Director
| November 14, 2007
|
Donald J. McNamara | | |
| /s/ Joel C. Peterson | Director | November 14, 2008 |
Joel C. Peterson /s/ JOEL C. PETERSON
| Director
| November 14, 2007
|
Joel C. Peterson | | |
/s/ E. KAY STEPP
| Director
| November 14, 2007
|
| /s/ E. Kay Stepp | Director | November 14, 2008 |
E. Kay Stepp | | |
