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. (the “Company”) provides integrated training and performance enhancement solutions to organizations and individuals in productivity, leadership, sales, communication, and other areas. Each integrated solution may include components for training and consulting, assessment, and other application tools that are generally available in electronic or paper-based formats. The Company’s products and services are available through professional consulting services, public workshops, retail stores, catalogs, and the Internet atwww.franklincovey.com and through its online planning system atwww.franklinplanner.com. The Company’s best known products include the Franklin PlannerTM and the best-selling book,The7 Habits of Highly Effective People.
Fiscal Year
The Company utilizes a modified 52/53 week fiscal year that ends on August 31. Corresponding quarterly periods generally consist of 13-week periods that ended on November 25, 2000, February 24, 2001, and May 26, 2001 during fiscal 2001.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The results of Franklin Covey Coaching, LLC, a 50 percent owned joint venture (Note 18), are accounted for using the equity method in the accompanying consolidated financial statements.
Pervasiveness of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of August 31, 2001, the Company had demand deposits at various banks in excess of the $100,000 limit for insurance by the Federal Deposit Insurance Corporation.
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 manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation or amortization. Depreciation and amortization, which includes the amortization of assets recorded under capital lease obligations, are calculated using the straight-line method over the expected useful lives of the assets as follows:
Description Useful Lives
- ---------------------------------------------- -----------------
Buildings 15-39 years
Computer hardware and software 3 years
Machinery and equipment 3-7 years
Furniture, fixtures and leasehold
improvements 5-7 years
Leasehold improvements are amortized over the lesser of the useful economic life of the asset or the contracted lease period. Expenditures for maintenance and repairs are charged to expense as incurred. Gains and losses on the sale of property and equipment are recorded in current operations.
Restricted Investments
The Company’s restricted investments are comprised of investments in mutual funds that are held in a “rabbi trust” and are restricted for payment to the participants of the Company’s deferred compensation plan (Note 11). The Company accounts for its restricted investments using Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company determines the proper classification of investments at the time of purchase and reassesses such designations at each balance sheet date. At August 31, 2001, the Company’s restricted investments were classified as trading securities and recorded in other long-term assets in the accompanying consolidated balance sheets.
In accordance with SFAS No. 115, the unrealized losses, which were immaterial for fiscal years 2001 and 2000, were recognized in the accompanying consolidated statements of operations for fiscal years 2001 and 2000 as a component of selling, general, and administrative expense.
Other Long-Term Assets
The Company was recently involved in a business reengineering and information systems implementation project (the “Project”). Certain costs of the Project were capitalized in accordance with accounting standards generally accepted in the United States. At August 31, 2001 and 2000, the Company had $5.8 million and $8.5 million, of net capitalized Project costs classified as other long-term assets. Project costs are amortized over a five-year period following completion of associated Project phases. As of August 31, 2000, all phases of the Project were completed. Other long-term assets generally consist of capitalized development costs, restricted investments as described above, and notes receivable.
Long-Lived Assets
The Company reviews its long-lived assets for impairment at each balance sheet date for events or changes in circumstances that may indicate the book value of an asset may not be recoverable. The Company uses an estimate of future undiscounted net cash flows of the related asset or group of assets over the remaining life in measuring whether the assets are recoverable. The Company assesses the impairment of long-lived assets at the lowest level for which there are identifiable cash flows that are independent of other groups of assets.
During the fourth quarter of fiscal 1999, the Company initiated a plan to restructure its operations (Note 14). As part of the restructuring plan, all programs, products, and curricula were evaluated to determine their future value in the restructured Company. As a result of this evaluation, certain products, services, and curricula were discontinued which impacted the related long-lived assets and goodwill. Based upon the results of this review, the Company recognized a $16.6 million charge to earnings in the fourth quarter of fiscal 1999 for impaired assets related to the discontinued products and programs. The loss on impaired assets for the year ended August 31, 1999 was comprised of the following (in thousands):
Goodwill and other intangibles $ 8,234
Other long-term assets 6,772
Property and equipment 1,553
----------------
$ 16,559
================
The Company disposed of these assets, as the assets had no market value or alternative uses to the Company. Impaired goodwill and other intangible assets were primarily comprised of goodwill generated from previous acquisitions whose products or services were discontinued. Impaired other long-term assets primarily consisted of capitalized costs for Project modules that were determined to have no future value. Impaired property and equipment was comprised of purchased software that was written off because it was unusable and a printing press that was unable to meet printing quality standards.
Foreign Currency Translation and Transactions
The balance sheet accounts of the Company’s foreign subsidiaries are translated into U.S. dollars using the current exchange rate. Revenues and expenses are translated using an average exchange rate. The resulting translation gains or losses are recorded as a component of accumulated other comprehensive income or loss in shareholders’ equity. Transaction gains and losses are reported in current operations.
Revenue Recognition
Revenue is recognized upon delivery or shipment of product, presentation of training seminars, or delivery of consulting services.
Pre-Opening Costs
Pre-opening costs associated with new retail stores are charged to expense as incurred.
Advertising Costs
Costs for newspaper, television, radio, and other advertising are expensed as incurred. Direct response advertising costs consist primarily of printing and mailing costs for catalogs and seminar mailers that are charged to expense over the period of projected benefit, not to exceed 12 months. Total advertising costs were $32.7 million, $37.2 million, and $33.0 million for the years ended August 31, 2001, 2000, and 1999, respectively. Prepaid catalog and seminar mailer costs reported in other current assets were $5.2 million and $5.1 million at August 31, 2001 and 2000, respectively.
Research and Development Costs
The Company expenses research and development costs in accordance with generally accepted accounting principles in the United States. During fiscal 2001, 2000, and 1999, the Company expensed $3.7 million, $6.2 million, and $2.2 million, respectively, of research and development costs.
Stock Option Purchase and Relocation Costs
During fiscal 2000, the Company incurred expenses primarily comprised of charges related to a stock option tender offer and other purchases of outstanding stock options (Note 10), and to relocate certain sales associates to eight new regional sales offices. These costs were included as a separate component of operating expenses in the accompanying consolidated statement of operations for the fiscal year ended August 31, 2000.
Income Taxes
The provision for income taxes 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 provision for income taxes 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 the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.
Comprehensive Loss
Comprehensive loss includes charges and credits to equity accounts that are not the result of transactions with shareholders. Comprehensive loss is comprised of net loss and other comprehensive loss items. The Company’s comprehensive losses consist of the fair value of derivative instruments and changes in the cumulative foreign currency translation adjustment account. The changes in the cumulative foreign currency translation adjustment account are not adjusted for income taxes as they relate to specific indefinite investments in foreign subsidiaries.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management’s expectations.
Fair Value of Financial Instruments
The book value of the Company’s financial instruments approximates fair value. The estimated fair values have been determined using appropriate market information and valuation methodologies.
Recent Accounting Pronouncements
Effective September 1, 2000, the Company adopted the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138. The new standard requires that all derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value, and that changes in the derivative’s fair value be recognized as a component of earnings from current operations unless specific hedge criteria are met. The cumulative effect of adopting SFAS No. 133 was not material to the Company’s financial statements.
During September 2000, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) released Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs.” This standard requires that all amounts billed to a customer in a sale transaction related to shipping and handling be classified as sales. Previously, the Company recorded amounts billed to customers for shipping and handling as a component of cost of sales to offset the corresponding shipping and handling expense. Based upon the EITF release, amounts charged to customers for shipping and handling have been reclassified as sales in the accompanying consolidated statements of operations.
In July 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 eliminates amortization of goodwill and intangible assets with indefinite lives and requires such assets to be tested for impairment and written down to appropriate fair values. SFAS No. 142 is required for fiscal years beginning after December 15, 2001. Early adoption is permitted for companies with a fiscal year beginning after March 15, 2001, provided that the first quarter financial statements have not been previously issued. The Company will adopt these statements on September 1, 2001 and will not have goodwill amortization subsequent to fiscal 2001. In connection with the adoption of SFAS No. 142, the Company will assess its goodwill and intangibles for impairment based upon the new rules and, if necessary, will adjust the carrying value of its goodwill and other intangible assets. As of August 31, 2001, the Company had net goodwill and other intangible assets totaling $225.8 million. The Company is currently assessing its goodwill and intangible assets, and may be required to record a material charge in fiscal 2002 as a result of adopting the provisions of SFAS No. 142.
In June 2001, the FASB released SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses the accounting treatment for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of the statement apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, or normal operation of a long-lived asset. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not completed its analysis of the impact of adopting SFAS No. 143, but does not expect this statement to have a material impact on its operations or financial position.
During August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and various provisions of APB Opinion No. 30. This statement establishes new guidelines, in connection with SFAS No. 142, for recognizing losses on certain long-lived assets when the carrying amount of the asset is not recoverable. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. As of August 31, 2001, the Company has not completed its analysis of the impact of adopting the provisions of SFAS No. 144 and its effect upon the Company’s operations and financial position.
Reclassifications
Certain reclassifications have been made in the prior years’ consolidated financial statements to conform with the current year presentation.
2. INVENTORIES
Inventories were comprised of the following (in thousands):
AUGUST 31, 2001 2000
- ------------------------ -------- ---------
Finished goods ......... $31,616 $38,363
Work-in-process ........ 2,408 2,803
Raw materials .......... 11,149 12,433
------- -------
$45,173 $53,599
======= =======
Certain inventories represent collateral for debt obligations (Note 5).
3. PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following (in thousands):
AUGUST 31, 2001 2000
- ---------------------------------- ------------- -------------
Land and improvements ............ $ 4,982 $ 7,634
Buildings ........................ 34,238 49,623
Computer hardware and software ... 71,599 69,261
Machinery and equipment .......... 41,702 42,554
Furniture, fixtures and
leasehold improvements ........ 60,216 50,994
--------- ---------
212,737 220,066
Less accumulated depreciation and
amortization .................. (107,861) (98,510)
--------- ---------
$ 104,876 $ 121,556
========= =========
During fiscal 2001, the Company entered into an outsourcing agreement with Electronic Data Systems (“EDS”) to provide warehousing, distribution, information systems, and call center operations (Note 8). In connection with the outsourcing agreement, the Company sold its warehouse and distribution facilities located in Salt Lake City, Utah for $15.3 million in cash. The Company generated a $0.4 million gain from the sale of the warehouse and distribution facility.
Certain land and buildings represent collateral for debt obligations (Note 5).
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following (in thousands):
AUGUST 31, 2001 2000
- -------------------------------- ------------- -------------
Goodwill ....................... $ 120,274 $ 142,755
License rights ................. 27,000 27,000
Curriculum rights .............. 62,431 61,778
Trade names and other .......... 94,838 92,517
--------- ---------
304,543 324,050
Less accumulated amortization .. (78,738) (65,575)
--------- ---------
$ 225,805 $ 258,475
========= =========
Goodwill, representing the excess of cost over the net tangible and identifiable intangible assets of acquired businesses, and other intangible assets were amortized on a straight-line basis over the following estimated useful lives:
Useful Lives
-----------------
Goodwill 5-30 years
License rights 40 years
Curriculum rights 14-30 years
Trade names and other 4-40 years
As discussed in Note 1, effective September 1, 2001, the Company will no longer amortize goodwill and certain intangible assets with indefinite lives.
5. DEBT
Lines of Credit
During fiscal 2001, the Company entered into a new credit agreement with its lenders. The new credit agreement is comprised of a $69.0 million term loan and a $45.6 million revolving credit facility, which expires in May 2004. Combined with an existing $17.0 million line of credit facility that expires in December 2001, the Company had lines of credit available for working capital needs totaling $62.6 million, of which $17.3 million was available at August 31, 2001. The amounts outstanding under the Company’s lines of credit consisted of the following as of August 31, 2001 (in thousands):
$17.0 million current line of credit with
interest at LIBOR plus 1.5%, secured by
inventories and receivables $ 9,750
$45.6 million long-term credit facility
with interest at LIBOR plus 2.5%,
secured by real estate, inventory, 35,576
and receivables
-------------
Total borrowings under lines of credit $ 45,326
=============
The weighted average interest rate on outstanding current line of credit debt was 5.1 percent and 8.6 percent at August 31, 2001 and 2000, respectively. The weighted average interest rate on the Company’s long-term credit facilities was 6.4 percent and 8.7 percent as of August 31, 2001 and 2000, respectively. Commitment fees associated with the lines of credit were $0.2 million during fiscal 2001.
The line of credit agreements require the Company to maintain certain financial ratios and working capital levels. At August 31, 2001, the Company was in compliance with the terms of the line of credit agreements. In addition, the long-term credit facility is subject to a borrowing base calculation that determines the available borrowing amount. The borrowing base calculation did not limit the amount available to the Company at August 31, 2001. However, based upon operating results recorded during the first two months of the first quarter of fiscal 2002, the Company expects to be out of compliance with the terms of its long-term line of credit agreement at the end of the first quarter of fiscal 2002. The Company anticipates utilizing a portion of the proceeds from the sale of Premier Agendas (Note 20) to pay the term loan and revolving credit line in full during the second quarter of fiscal 2002. Although a definitive agreement has been signed for the sale of Premier Agendas (“Premier”), there can be no assurance that the sale will be completed for the disclosed price and during the expected timeframe.
Long-Term Debt
Long-term debt was comprised of the following (in thousands):
AUGUST 31, 2001 2000
- ------------------------------------ ------------ ------------
Term note payable to bank, payable
as described below with interest
at LIBOR plus 2.5%, secured by
real estate, inventories, and
receivables ........................ $ 56,211 $
Note payable in annual
installments of $3,000 plus
interest at 8% through December
2001, unsecured .................... 3,000 6,000
Note payable on demand, plus
interest at 8.0%, unsecured,
payable to related parties ......... 1,481 1,396
Mortgage payable in monthly
installments of $14 CDN, including
interest at 7.2% through January
2015, secured by real estate ....... 907 997
Note payable to bank, payable in
monthly installments of $20,
including interest at 7.8% through
August 2004, secured by equipment... 615 802
Mortgage payable in monthly
installments of $8 including
interest at 9.9% through October
2014, secured by real estate ....... 665 688
Note payable to bank, payable in
monthly installments of $23, plus
interest at prime plus .5% payable
through September 2002, secured by
real estate ........................ 305 587
Note payable in quarterly
installments of $574 including
interest at 5.0% through April
2001, paid in full ................. 1,679
Mortgage payable in monthly
installments of $18 including
interest at 8.5% through August
2016, paid in full due to sale of
property in fiscal 2001 ............ 1,619
Other mortgages and notes, payable
in monthly installments, interest
ranging from 2.0% to 8.8%, due at
various dates through 2002,
secured by equipment ............... 50 230
-------- --------
63,234 13,998
Less current portion ............... (13,294) (6,873)
-------- --------
Long-term debt, less current
portion ............................ $ 49,940 $ 7,125
======== ========
A significant component of the Company’s new credit facility is a $69.0 million term loan. As of August 31, 2001, the Company had outstanding borrowings under the term loan of approximately $56.2 million. Included in the term loan amount was $33.6 million related to the purchase of stock under the management common stock loan program (Note 17), which was previously guaranteed by the Company. The terms of the $69.0 million loan require an installment payment of $15.0 million on November 30, 2001 and quarterly payments of $2.0 million through May 31, 2004. The remaining repayment schedule requires one installment on June 30, 2004 equal to $36.0 million less the aggregate dollar amount of principal payments made prior to that date and one final payment for remaining principal and interest due on March 31, 2005. The weighted average interest rate on the $69.0 million term loan was 6.3 percent at August 31, 2001. The term loan requires the Company to maintain the same financial ratios and working capital levels as described above for the long-term line of credit agreement.
During fiscal 2001, the Company sold its warehouse and distribution facility in Salt Lake City, Utah and applied the net cash proceeds of the sale to the term loan. As a result, the Company paid $12.8 million on the $15.0 million term note payment due on November 30, 2001. The corresponding mortgages on the warehouse and distribution facilities were paid in full from the proceeds of the sale.
Future maturities of long-term debt at August 31, 2001 were as follows (in thousands):
YEAR ENDING
AUGUST 31,
- ------------------------------------ --------------
2002 $ 13,294
2003 8,316
2004 7,274
2005 33,090
2006 94
Thereafter 1,166
--------------
$ 63,234
==============
6. LEASE OBLIGATIONS
Capital Leases
Future minimum lease payments for equipment held under capital lease arrangements as of August 31, 2001 were as follows (in thousands):
YEAR ENDING
AUGUST 31,
- ----------------------------------------------------------
2002 $ 392
Less amount representing interest (12)
------------
Present value of future minimum lease
payments 380
Less current portion (380)
------------
$
============
Total assets held by the Company under capital lease arrangements were $4.0 million with accumulated amortization of $2.6 million as of August 31, 2001. Amortization of capital lease assets is included in depreciation expense in the accompanying consolidated statements of operations.
Operating Leases
The Company leases certain retail store and office locations under noncancelable operating lease agreements with remaining terms of one to 15 years. The following table summarizes future minimum lease payments under operating leases at August 31, 2001 (in thousands):
YEAR ENDING
AUGUST 31,
- ----------------------------------------------------------
2002 $ 15,329
2003 14,489
2004 13,021
2005 9,939
2006 6,732
Thereafter 22,951
------------
$ 82,461
============
Total rental expense for leases under operating lease agreements was $19.5 million, $17.4 million, and $17.6 million, for the years ended August 31, 2001, 2000, and 1999, respectively.
As part of its restructuring plan (Note 14), the Company exited certain leased office space in Provo, Utah during fiscal 2000. In connection with leaving the office space, the Company obtained a noncancelable sublease agreement for the majority of the Company's remaining lease term on the buildings. Future minimum lease payments due to the Company from the subleasee as of August 31, 2001 were as follows:
YEAR ENDING
AUGUST 31,
- -----------------------------------------------------------
2002 $ 1,845
2003 1,901
2004 1,958
2005 2,017
2006 2,077
Thereafter 1,232
------------
$ 11,030
============
Total sublease payments to the Company totaled $2.2 million and $0.6 million in fiscal 2001 and 2000, respectively.
7. DERIVATIVE INSTRUMENTS
During the normal course of business, the Company is exposed to interest rate and foreign currency exchange risks. To manage risks associated with interest rates and foreign currencies, the Company makes limited utilization of derivative financial instruments. Derivatives are financial instruments that derive their value from one or more underlying financial instruments. As a matter of policy, the Company's derivative instruments are entered into for periods consistent with related underlying exposures and do not constitute positions that are independent of those exposures. In addition, the Company does not enter into derivative contracts for trading or speculative purposes, nor is the Company 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 the exposure to the Company through its use of derivatives. The Company enters into derivative agreements with highly rated counterparties and the Company does not expect to incur any losses resulting from non-performance by other parties.
Interest Rate Risk Management
Generally, under interest rate swaps, the Company agrees with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts calculated by reference to a contracted notional amount. The Company designates interest rate swap agreements as hedges of risks associated with specific assets, liabilities, or future commitments, and these contracts are monitored to determine whether the underlying agreements remain effective hedges. The interest rate differential on interest rate swaps is recognized as a component of interest expense or income over the term of the agreement.
In connection with the management loan program (Note 17), the Company entered into an interest rate swap agreement to lock an interest rate for loan participants. As a result of the credit agreement obtained in fiscal 2001 (Note 5), the notes receivable from loan participants, corresponding debt, and interest rate swap agreement were recorded on the Company's consolidated balance sheet. The interest rate swap agreement allows the Company to pay a fixed rate and receive a floating rate from the counterparty through the term of agreement, which expires in March 2005. At August 31, 2001, the fair value of this agreement was a $4.6 million liability, which was recorded as a component of other long-term liabilities and accumulated comprehensive loss on the accompanying consolidated balance sheet for fiscal 2001. The interest rate differential totaled $0.1 million for fiscal 2001, which will be recovered by the Company from the loan participants upon repayment of the loans.
Subsequent to August 31, 2001, the Company signed a definitive agreement to sell Premier Agendas, a wholly owned subsidiary (Note 20). The Company anticipates utilizing a portion of the proceeds to pay the term loan and revolving line of credit (Note 5). In connection with the payment of these debt balances, the Company anticipates that a portion of the proceeds from the sale of Premier will be used to settle the $4.6 million liability related to the interest rate swap agreement.
Foreign Currency Exposure
The Company has international operations and during the normal course of business is exposed to foreign currency exchange risks as a result of transactions that are denominated in currencies other than the United States dollar. At August 31, 2001, the Company utilized a foreign currency forward contract to manage the volatility of certain intercompany financing transactions that are denominated in Japanese Yen. This contract did not meet specific hedge accounting requirements and corresponding gains and losses have been recorded as a component of current operations, which offset the gains and losses on the underlying transaction, in the accompanying consolidated statement of operations for fiscal 2001 and 2000. The notional amount of the Company's foreign currency forward contract was $6.0 million at August 31, 2001.
8. COMMITMENTS AND CONTINGENCIES
EDS Contract
During fiscal 2001, the Company entered into a long-term outsourcing agreement with Electronic Data Systems ("EDS") to provide warehousing, distribution, information systems, and call center operations. Under terms of the outsourcing contract, EDS will operate the Company's primary call center, provide warehousing and distribution services, and support the Company's information systems. The contract expires in 2016 and has required minimum payments totaling approximately $389.9 million, which are payable over the term of the contract. Beginning in fiscal 2003, the warehouse, distribution, and call center components of the contract will be a variable charge, which will be based upon the number of actual transactions processed, such as boxes shipped and calls answered. Minimum payments for these services have been estimated using expected activity levels for future periods. The outsourcing contract also contains early termination provisions that the Company may exercise under certain conditions. In order to exercise the early termination provisions, the Company would have to pay specified penalties to EDS. The Company believes that the outsourcing agreement with EDS will reduce operating costs and improve asset utilization.
Purchase Commitments
The Company has various purchase commitments for materials, supplies, and other items incident to the ordinary conduct of business. In aggregate, such commitments are immaterial to the Company's operations.
Legal Matters
The Company is the subject of certain legal actions, which it considers routine to its business activities. As of August 31, 2001, management believes that, after consultation with legal counsel, any potential liability to the Company under such actions will not materially affect the Company's financial position or results of operations.
9. RELATED PARTY TRANSACTIONS
The Company pays a Vice-Chairman of the Board of Directors a percentage of the proceeds received for seminars that are presented by him. During the fiscal years ended August 31, 2001, 2000, and 1999, the Company paid $3.5 million, $3.3 million, and $3.0 million, respectively, to the Vice-Chairman for such seminars.
The Company, under a long-term agreement, leases buildings from a partnership that is partially owned by a Vice-Chairman of the Board of Directors and certain officers of the Company. Rent expense paid to the partnership totaled $2.1 million per year for the fiscal years ended August 31, 2001, 2000, and 1999.
Premier Agendas, a subsidiary of the Company, had trade accounts payable to various companies that are partially owned by certain former owners of Premier totaling $0.5 million and $2.1 million at August 31, 2001 and 2000, respectively. In addition, Premier had notes payable to key employees and former key employees totaling $1.5 million and $1.4 million as of August 31, 2001 and 2000, respectively (Note 5). The notes payable were used for working capital, are due upon demand, and have interest rates that approximate prevailing market rates.
During the fiscal year ended August 31, 2000, the Company sold 121,250 shares of its common stock to a former CEO of the Company for $0.9 million. In consideration for the common stock, the Company received a non-recourse promissory note, due September 2003, bearing interest at 10.0 percent. Additionally, all of the former CEO's stock options were canceled and the issuance of common stock is being accounted for as a variable security, due to its stock option characteristics. The note receivable from the sale of this stock has been recorded as a component of notes and interest receivable from sales of common stock to related parties in the shareholders' equity section of the accompanying consolidated balance sheets.
During fiscal 2000, the Company actively sought to reacquire outstanding options to purchase the Company's common stock (Note 10). Included in the total number of option shares reacquired, the Company purchased 150,000 option shares from a Vice-Chairman of the Board of Directors for $0.4 million. In addition, 358,000 option shares were purchased from two officers and one former officer of the Company for a total of $0.8 million. These options were reacquired using the same valuation methodology as other stock options purchased by the Company.
During the fiscal year ended August 31, 2000, the Company purchased 9,000 shares of its common stock for $0.1 million in cash, from a Vice-Chairman of the Board of Directors. All shares were purchased at the existing fair market value on the dates of the transactions.
As part of the preferred stock offering completed during fiscal 1999, an affiliate of the investor was named Chairman of the Board of Directors and Chief Executive Officer (“CEO”). The Chairman and CEO was previously a member of the Company's Board. In addition, two affiliates of the investor were appointed to the Board of Directors. In connection with the preferred stock offering, the Company pays an affiliate of the investor a monitoring fee of $100,000 per quarter.
In January 1999, the Company issued 1,450 shares of its common stock to each member of the Board of Directors for $17.25 per share. The purchase price was to be paid in the form of secured promissory notes that were payable in three annual installments. During fiscal 2000, the promissory notes were canceled and the Company retained the shares of stock.
During the fiscal year ended August 31, 1999, the Company purchased 130,000 shares of its common stock for $2.3 million in cash, from an officer of the Company. Also during fiscal 1999, the Company purchased 92,000 shares of its common stock for $1.2 million in cash from a former officer and director of the Company. The shares in each of these transactions were purchased at the existing fair market value on the dates of the transactions.
10. CAPITAL TRANSACTIONS
Preferred Stock
Preferred stock dividends accrue at an annual rate of 10.0 percent and are payable quarterly in cash or additional shares of preferred stock until July 1, 2002. Subsequent to that date, all preferred dividends must be paid in cash. During fiscal 2001, the Company issued 20,277 shares of preferred stock to existing preferred shareholders as payment for third quarter accrued preferred dividends. All other preferred dividend payments made during fiscal 2001 were paid with cash. At August 31, 2001 and 2000, the Company had accrued $2.1 million and $2.0 million of preferred dividends, respectively. Subsequent to August 31, 2001, the Company paid the accrued preferred dividend with additional shares of preferred stock. The preferred stock is convertible at any time into the Company's common stock at a conversion price of $14.00 per share and ranks senior to the Company's common stock. Preferred stock shareholders generally have the same voting rights as common stock holders on an "as-converted" basis.
Treasury Stock
The Company sold 164,496, 153,614, and 263,100 shares of its common stock held in treasury as a result of the exercise of incentive stock options and the purchase of shares under the Company's employee stock purchase plan for the fiscal years ended August 31, 2001, 2000, and 1999, respectively. These shares were sold for a total of $1.0 million, $1.0 million, and $1.4 million, and had a cost of approximately $2.7 million, $2.9 million, and $5.6 million for the fiscal years ended August 31, 2001, 2000, and 1999. Additionally, during fiscal 2000, the Company sold 650,000 shares of treasury stock to its management stock loan program (Note 17) for $5.1 million, which was the fair market value of the shares sold.
Through August 31, 2000, the Company's Board of Directors had approved various plans for the purchase of up to 8,000,000 shares of the Company's common stock. Through November 25, 2000, the Company had purchased 7,705,000 shares under these board-authorized plans. On December 1, 2000, the Company's Board of Directors approved an additional plan to purchase up to $10.0 million of the Company's common stock. Through August 31, 2001, the Company had purchased 888,000 shares for $7.1 million under the terms of this plan. In connection with Board authorized purchase plans, the Company purchased 900,000 shares for $7.2 million, 688,000 shares for $5.5 million, and 2,126,000 shares for $32.7 million during the fiscal years ended August 31, 2001, 2000, and 1999, respectively. In addition, the Company purchased 41,000 shares of its common stock with a cost of $0.3 million during fiscal 2001 for exclusive distribution to participants enrolled in the employee stock purchase plan.
Tax Benefit from Exercise of Affiliate Stock Options
During the fiscal years ended August 31, 2001, 2000, and 1999, certain employees exercised affiliate stock options (nonqualified stock options received from principal shareholders of the Company), which resulted in tax benefits to the Company of $25,000, $0.6 million, and $1.3 million, which were recorded as increases to additional paid-in capital.
Restricted Stock Deferred Compensation
Restricted stock deferred compensation represents restricted stock granted to key executives. The restricted stock is fully vested four years from the date of grant and was recorded at the fair market value at the date of grant. Compensation expense was recognized ratably over the corresponding four-year vesting period. All restricted stock deferred compensation programs were fully vested at August 31, 2001. Restricted stock deferred compensation was included as a reduction to shareholders' equity in the accompanying consolidated balance sheets.
Stock Options
The Company's Board of Directors has approved an incentive stock option plan whereby options to purchase shares of common stock are issued to key employees at an exercise price not less than the fair market value of the Company's common stock at 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 the Company's Board of Directors. At August 31, 2001, approximately 460,000 shares were available for grant under the current incentive stock option plan.
A summary of nonqualified and incentive stock option activity is set forth below:
Number of Weighted Avg.
Options Exercise Price
- --------------------------------------------------
Outstanding at
August 31, 1998 .. 3,669,730 $ 21.89
Granted ............. 2,058,825 12.02
Exercised ........... (231,931) 3.59
Forfeited ........... (212,459) 18.89
---------
Outstanding at
August 31, 1999 .. 5,284,165 19.05
Granted ............. 354,685 7.59
Exercised ........... (22,334) 4.38
Repurchased ......... (3,294,476) 22.54
Forfeited ........... (574,033) 15.69
---------
Outstanding at
August 31, 2000 .. 1,748,007 11.59
Granted:
At market value... 203,000 7.44
To the CEO ....... 1,602,000 14.00
Exercised ........... (19,861) 5.97
Forfeited ........... (93,117) 9.31
---------
Outstanding at
August 31, 2001 .. 3,440,029 $ 12.56
=========
During fiscal 2001, the Company’s shareholders ratified a Board approved employment agreement for the Company’s CEO. In connection with the employment agreement, the CEO was granted 1.6 million options to purchase shares of the Company’s common stock. The options will be fully exercisable on August 31, 2007, and will be exercisable prior to August 31, 2007 only upon the achievement of specified common stock prices ranging from $20.00 per share to $50.00 per share. The options can only be exercised while the executive is employed as the CEO or as the Company’s Chairman of the Board of Directors.
The following table summarizes exerciseable option information for the periods indicated:
AUGUST 31, 2001 2000 1999
- ------------------------ ----------- ------------ -----------
Exercisable options ... 1,039,672 757,656 2,683,966
Weighted average
exercise price per
share .............. $ 13.27 $ 14.83 $ 23.87
In an effort to reduce the potentially dilutive effect of outstanding options on the Company's capital structure, the Company actively sought to reacquire outstanding stock options from both current and former employees during fiscal 2000. The majority of option purchase costs were incurred in connection with a tender offer made by the Company during the third quarter of fiscal 2000 to purchase all outstanding options with an exercise price of $12.25 or higher. The tender offer expired on May 3, 2000 with a total of 2,319,000 options tendered. Under terms of the offer, the Company paid cash for the outstanding options, which were priced using a market valuation methodology. The total cost of the tender offer was $6.9 million. As a result of the tender offer and previously purchased option shares, the Company purchased 3,294,476 option shares for a total cost of $8.7 million in cash.
The Company applies Accounting Principles Board ("APB") Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option plans or employee stock purchase plan. Had compensation cost for the Company's stock option plans and employee stock purchase plan been determined in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and corresponding loss per share would have been the pro forma amounts indicated below (in thousands, except per share data):
YEAR ENDED
AUGUST 31, 2001 2000 1999
- ---------------------------- ----------- ----------- ------------
Net loss attributable to
common shareholders
as reported ........... $ (19,236) $ (12,414) $ (10,647)
Net loss attributable to
common shareholders
pro forma ............. (21,302) (11,404) (16,181)
Diluted loss per share as
reported .............. (.95) (.61) (.51)
Diluted loss per share
pro forma ............. (1.10) (.57) (.80)
The following information applies to options outstanding at August 31, 2001:
| | o | A total of 1,395,824 options outstanding have exercise prices between $2.78 and $12.25 per share, with a weighted average exercise price of $7.99 and a weighted average remaining contractual life of 7.6 years. At August 31, 2001, 642,050 options were exercisable. |
| | o | The 1,602,000 outstanding options granted to the Company’s CEO in connection with a Board approved employment agreement have an exercise price of $14.00 per share, with a weighted average remaining contractual life of 9.0 years. At August 31, 2001, none of the options were exercisable. |
| | o | The remaining 442,205 options outstanding have exercise prices between $14.69 and $34.50 per share, with a weighted average exercise price of $21.78 per share and a weighted average remaining contractual life of 3.8 years. At August 31, 2001, 397,622 options were exercisable. |
The weighted average fair value of option shares granted under the Company’s stock option plans during the fiscal year ended August 31, 2001 was $3.07 for shares granted at the market price and $3.05 for options granted to the CEO. The weighted average fair value of option shares granted during fiscal 2000 and fiscal 1999 was $3.03 and $4.79, respectively.
The Black-Scholes option-pricing model was used to calculate the weighted average fair value of options granted using the following assumptions for grants for fiscal years 2001, 2000, and 1999:
YEAR ENDED AUGUST 31, 2001 2000 1999
- --------------------------- ---- ---- -----
Dividend yield ............ None None None
Volatility ................ 55.3% 55.3% 55.8%
Expected life (years)...... 6.9 4.4 4.3
Risk free rate of return .. 5.7% 5.3% 5.3%
The estimated fair value of options granted is subject to the assumptions made and if the assumptions were to change, the estimated fair value amounts could be significantly different. The weighted average fair value of options exercised during fiscal years 2001, 2000, and 1999, was $8.58, $8.40, and $7.04, respectively.
11. EMPLOYEE BENEFIT PLANS
Profit Sharing Plans
The Company has defined contribution profit sharing plans that qualify under Section 401(k) of the Internal Revenue Code. The plans provide retirement benefits for employees meeting minimum age and service requirements. Participants may contribute up to 15 percent of their gross wages, subject to certain limitations. The plans provide for matching contributions by the Company. The matching contributions expensed in the years ended August 31, 2001, 2000, and 1999, were $1.8 million, $1.8 million, and $1.7 million, respectively.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan whereby shares of common stock can be purchased by qualified employees at a price equal to 85 percent of the fair market value of common stock at the time of purchase. A total of 144,035, 142,327, and 66,019 shares were issued under this plan for the fiscal years ended August 31, 2001, 2000, and 1999, respectively. Shares available for issuance under this plan at August 31, 2001 were 730,403. The Company accounts for its employee stock purchase plan under the provisions of APB Opinion 25 and related interpretations.
Deferred Compensation Plan
During fiscal 2000, the Company established a deferred compensation plan for certain key officers and employees that provides the opportunity for these employees to defer a portion of their compensation until a later date. The Company’s expenses under the deferred compensation plan were $0.2 million during fiscal 2001 and $0.1 million during fiscal 2000. Deferred compensation amounts used to pay benefits are held in a “rabbi trust”, which invests in various mutual funds and/or the Company’s common stock as directed by the participants. The trust assets are recorded in the accompanying consolidated balance sheets because such amounts are subject to the claims of the Company’s creditors. The corresponding deferred compensation liability represents the amounts deferred by participants plus any earnings on the trust assets. The plan’s assets and liabilities, which were approximately $3.1 million and $3.3 million at August 31, 2001 and 2000, respectively, were recorded as components of other long-term assets and other long-term liabilities in the accompanying consolidated balance sheets.
12. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED AUGUST 31, 2001 2000 1999
- ------------------------- ----------- ------------ -----------
Current:
Federal ............ $ (3,259) $ 7,131 $ 12,545
State .............. 207 1,698 2,046
Foreign ........... 2,753 2,907 2,077
Deferred:
Federal ............ 460 (1,440) (10,422)
State .............. 106 (334) (1,700)
-------- -------- --------
$ 267 $ 9,962 $ 4,546
======== ======== ========
The differences between income taxes at the statutory federal income tax rate and income taxes reported in the consolidated statements of operations are as follows:
YEAR ENDED AUGUST 31, 2001 2000 1999
- --------------------------- -------- ------- --------
Federal statutory
tax rate ................ (35.0)% 35.0% (35.0)%
State income taxes, net
of federal effect ....... 0.9 4.9 (3.5)
Goodwill amortization ...... 21.0 56.4 44.6
Effect of foreign losses
and tax rate differential 6.0 53.3 63.9
Other ...................... 9.6 29.8 37.6
----- ----- -----
2.5% 179.4% 107.6%
===== ===== =====
Goodwill amortization consists of non-deductible goodwill generated by the merger with Covey Leadership Center and certain other acquisitions. During the fiscal years ended August 31, 2000 and 1999, the effect of foreign losses is primarily comprised of losses sustained in Japan, Australia, and New Zealand for which no offsetting tax benefit could be recognized due to uncertainties related to future taxable income to offset such losses. Other items are comprised of various non-deductible expenses that occur in the normal course of business, but which had a magnified effect on the tax rate due to decreased taxable income in fiscal years 2001, 2000, and 1999.
Significant components of the Company’s deferred tax assets and liabilities are comprised of the following (in thousands):
AUGUST 31, 2001 2000
- --------------------------------- ------------ ------------
Deferred income tax assets:
Inventory and bad debt
reserves .................. $ 4,767 $ 4,700
Sales returns and
contingencies ............. 2,732 3,648
Restructuring cost accruals ... 975 2,058
Vacation and other accruals ... 1,637 2,495
Deferred compensation ......... 1,340 1,310
Interest and other
capitalization ............ 463 362
Other ......................... 864 141
-------- --------
Total deferred income tax assets.. 12,778 14,714
-------- --------
Deferred income tax liabilities:
Intangibles and fixed
asset step-up .............. (27,833) (29,342)
Depreciation and
amortization ............... (2,412) (1,455)
Other ......................... (3,193) (3,940)
-------- --------
Total deferred income tax
liabilities ................... (33,438) (34,737)
-------- --------
Net deferred income tax
liabilities ................... $(20,660) $(20,023)
======== ========
13. NET LOSS PER COMMON SHARE
Basic earnings (loss) per share (“EPS”) is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net loss by the weighted average number of common shares outstanding, plus the assumed exercise of all dilutive securities using the treasury stock or "as converted" method, as appropriate. During periods of net loss, all common stock equivalents, including the effect of common shares from the issuance of preferred stock on an "as converted" basis, are excluded from the diluted EPS calculation. Significant components of the numerator and denominator used for basic and diluted EPS were as follows (in thousands, except per share amounts):
YEAR ENDED
AUGUST 31, 2001 2000 1999
- ----------------------------- ----------- ----------- -----------
Net loss .................... $(11,083) $ (4,409) $ (8,772)
Preferred stock dividends ... 8,153 8,005 1,875
-------- -------- --------
Net loss attributable to
common shareholders ...... $(19,236) $(12,414) $(10,647)
======== ======== ========
Basic and diluted weighted-
average shares outstanding 20,199 20,437 20,881
======== ======== ========
Basic and diluted net loss
per share ................ $ (.95) $ (.61) $ (.51)
======== ======== ========
Due to their antidilutive effect, the following incremental shares from the effect of the preferred stock on an “as converted basis” and options to purchase common stock have been excluded from the diluted EPS calculation:
YEAR ENDED
AUGUST 31, 2001 2000 1999
- -------------------------------- ----------- ----------- -----------
Number of preferred shares
on an "as converted" basis .. 5,829,689 5,793,529 1,339,286
Common stock equivalents
from the assumed exercise
of stock options ............ 55,692 82,144 171,929
--------- --------- ---------
Total antidilutive shares
excluded from the EPS
calculation ................. 5,885,381 5,875,673 1,511,215
========= ========= =========
14. RESTRUCTURING COSTS
During the fourth quarter of fiscal 1999, the Company's Board of Directors approved a plan to restructure the Company's operations, reduce its workforce, and formally exit the majority of its leased office space located in Provo, Utah. These changes were intended to align the Company's products, services, and distribution channels in a manner that focuses Company resources on providing integrated training and performance solutions to organizations and individuals. In connection with the restructuring plan, the Company recorded a fourth quarter restructuring charge of $16.3 million, which is included in the accompanying consolidated statement of operations for the fiscal year ended August 31, 1999. Included in the restructuring charge were costs to provide severance and related benefits, as well as costs to formally exit the leased office space. The Company's restructuring plan was substantially completed during fiscal 2000. The components of the accrued restructuring charge and the remaining accrual balances at August 31, 2001 were as follows (in thousands):
Leased
Office
Severance Space Exit
Costs Costs Total
----------- ------------ -----------
Accrued restructuring
costs at August 31, 2000 ... $ 2,415 $ 2,745 $ 5,160
Restructuring costs paid ...... (2,114) (534) (2,648)
-------- -------- --------
Accrued restructuring
costs at August 31, 2001 ... $ 301 $ 2,211 $ 2,512
======== ======== ========
As of August 31, 2001, accrued severance costs consisted of expected remaining severance and benefit payments for terminated employees. Remaining accrued leased office space exit costs represent the difference between base rental charges and the offsetting expected sublease revenue receipts. The Company expects that the remaining restructuring accrual will be sufficient to complete its restructuring plan.
The severance cost accrual was established based upon estimates of factors such as expected time to find other employment, expected benefit payments, and severance payment type. However, primarily due to favorable economic conditions that decreased the average time necessary for terminated employees to find new employment, the Company reassessed its potential liability for remaining severance costs. Accordingly, the Company reduced the severance accrual during fiscal 2000 by $4.9 million to reflect the estimated remaining liability.
15. STATEMENTS OF CASH FLOWS
The following supplemental disclosures are provided for the consolidated statements of cash flows (in thousands):
YEAR ENDED AUGUST 31, 2001 2000 1999
- --------------------- -------- -------- --------
Cash paid for:
Income taxes .... $ 1,140 $ (250) $ 22,701
Interest ........ 5,927 7,353 9,219
-------- -------- --------
Fair value of
assets acquired $ 4,432 $ 21,444 $ 19,025
Cash paid for
net assets ...... (4,432) (21,444) (19,025)
-------- -------- --------
Liabilities
assumed from
acquisitions .... $ -- $ -- $ --
-------- -------- --------
Tax effect of
exercise of affiliate
stock options ....... $ 25 $ 557 $ 1,320
-------- -------- --------
Non-Cash Investing and Financing Activities
On September 1, 2000, the Company contributed substantially all of the assets of its Personal Coaching division to Franklin Covey Coaching, LLC (Note 18), a joint venture formed to provide coaching services. The total value of the assets contributed to form Franklin Covey Coaching, LLC was $18.2 million, net of cash contributed to the joint venture.
In connection with the credit agreement obtained during fiscal 2001 (Note 5), the Company acquired $33.6 million of notes receivable from the participants of the management common stock loan program, which was previously guaranteed by the Company. The corresponding liability was recorded as a component of long-term debt in the accompanying consolidated balance sheet at August 31, 2001. In addition, due to current economic and entity specific factors, the Company recorded a $1.1 million non-cash reserve against the notes receivable from the participants of the loan program.
As of August 31, 2001 and 2000, the Company had accrued preferred dividends totaling $2.1 million and $2.0 million, respectively. Subsequent to August 31, 2001, the Company paid the $2.1 million accrued dividend with additional shares of preferred stock. The accrued dividend at August 31, 2000 was paid during fiscal 2001 with cash.
In connection with the acquisition of DayTracker.com in December 1999 (Note 18), the Company issued $6.0 million of notes payable. The notes payable are due and payable in annual installments through December 2001 (Note 5).
During fiscal 2000, the Company sold 121,250 shares of its common stock to a former CEO of the Company in consideration for a $0.9 million promissory note.
At August 31, 2000 and 1999, the Company had accrued $0.7 million and $15.9 million, respectively, for earnout payments in connection with the acquisition of certain entities.
During fiscal 1999, the Company financed the acquisition of certain software licenses with a note payable to the software vendor for $5.9 million.
16. SEGMENT INFORMATION
Reportable Segments
As part of its restructuring initiatives during fiscal 2000, the Company adopted a channel-based view of its operations and has aligned its business operations into the following business segments:
| | Retail Stores – Includes the sales and operational results of the Company’s 164 domestic retail stores. Although retail store sales primarily consist of products such as planners and handheld electronic devices, virtually any component of the Company’s leadership and productivity solutions can be purchased through the retail store channel. |
| | Catalog/eCommerce – This operating segment includes the sales and operating results of the Company’s catalog operation and its Internet web site atwww.franklincovey.com. Nearly all of the Company’s products and services can be purchased through these channels. |
| | Organizational Sales Group (OSG) – The organizational sales group is primarily responsible for the sale and delivery of leadership, productivity, sales performance, and communication training seminars to corporations and certain other organizational clients. |
| | Educational – The educational channel includes the sales and operating results of Premier, a subsidiary that focuses on productivity and effectiveness tools for students and teachers, and includes sales of both products and training to educational institutions from elementary schools to colleges and universities. Operating results of this channel are primarily dependent upon the seasonal sales pattern of Premier, which recognizes the majority of its sales during the Company’s fourth fiscal quarter. |
| | Other –The “other” channel consists primarily of wholesale, government, personal coaching, and commercial printing operations. Financial results from the “other” channel group were affected by the contribution of personal coaching assets to form Franklin Covey Coaching LLC, effective September 1, 2000, and the sale of commercial printing operations at Franklin Covey Printing, which occurred during fiscal 2000. |
The Company’s chief operating decision maker is the CEO. Each of the reportable segments and corporate support departments has an executive vice-president who reports directly to the CEO. The primary measurement tool in segment performance analysis is earnings before interest, taxes, depreciation, and amortization (“EBITDA”), which also approximates cash flows from the operating segments and may not be calculated as similarly titled amounts presented by other companies. The calculation of EBITDA includes the impact of stock option purchase and relocation costs in fiscal 2000 and the equity in earnings of Franklin Covey Coaching, LLC, a newly formed joint venture that began operations on September 1, 2000. Restructuring costs recorded in fiscal 1999 and fiscal 2000 were excluded in the calculation of EBITDA for those respective periods.
The Company accounts for its segment information on the same basis as the accompanying consolidated financial statements. Prior year information has been restated in order to conform to current year classifications.
SEGMENT INFORMATION
(in thousands)
Reportable Segments
---------------------------------------------------------------------------
Corporate,
Adjustments
Year ended Retail Catalog/ and
August 31, 2001 Stores eCommerce OSG Educational International Other Eliminations Consolidated
- ----------------------------- ----------- ------------- ----------- ------------ ----------- ------------ ------------ ------------
Sales to external customers $ 151,943 $ 90,450 $ 84,723 $ 91,037 $ 51,851 $ 55,329 $ 525,333
Intersegment sales ........ 16,957 $ (16,957)
Gross margin .............. 77,027 50,922 58,690 51,842 34,484 28,438 (2,830) 298,573
EBITDA .................... 22,093 26,233 16,742 17,743 6,164 (5,952) (42,349) 40,674
Depreciation .............. 8,283 513 1,297 1,432 1,044 2,685 10,927 26,181
Amortization .............. 114 2,524 4,301 536 3,710 8,513 19,698
Capital expenditures ...... 16,305 575 1,402 2,162 1,318 3,334 1,931 27,027
Segment assets ............ 30,807 347 14,949 114,316 24,137 62,224 288,289 535,069
Year ended
August 31, 2000
- --------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Sales to external customers $ 163,305 $ 110,543 $ 85,977 $ 85,348 $ 50,870 $ 106,942 $ 602,985
Intersegment sales ........ 25,718 $ (25,718)
Gross margin .............. 86,021 54,248 58,205 48,146 32,729 45,484 3,025 327,858
Stock option purchase and
relocation costs ....... 11,227 11,227
EBITDA .................... 39,840 25,049 16,352 16,777 2,080 (3,388) (46,249) 50,461
Depreciation .............. 6,304 293 780 1,102 890 2,601 12,220 24,190
Amortization .............. 607 324 2,600 4,188 686 4,467 8,105 20,977
Significant non-cash items:
Restructuring charge
reversals .............. (4,946) (4,946)
Capital expenditures ...... 5,505 365 1,373 2,262 2,488 2,578 9,952 24,523
Segment assets ............ 24,189 414 14,895 113,771 24,245 75,584 339,381 592,479
Year ended
August 31, 1999
- --------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Sales to external customers $ 140,850 $ 102,335 $ 77,496 $ 70,798 $ 50,611 $ 129,506 $ 571,596
Intersegment sales ........ 33,669 $ (33,669)
Gross margin .............. 77,374 57,530 52,894 41,042 30,922 49,694 (500) 308,956
EBITDA .................... 35,879 36,617 15,586 17,568 3,233 6,651 (38,746) 76,788
Depreciation .............. 5,688 328 483 736 744 2,459 10,361 20,799
Amortization .............. 1,412 2,431 3,221 1,318 3,503 6,855 18,740
Significant non-cash items:
Restructuring charge ... 16,282 16,282
Loss on impaired assets 1,555 2,180 6,172 6,652 16,559
Capital expenditures ...... 4,178 29 671 1,596 2,647 895 12,980 22,996
Segment assets ............ 20,373 361 15,173 96,080 22,249 73,472 395,595 623,303
The primary measurement tool in segment performance analysis is EBITDA. Interest expense is primarily generated at the corporate level and is not allocated to the reporting segments. Income taxes are likewise calculated and paid on a corporate level (except for entities that operate within foreign jurisdictions) and are not allocated to reportable segments. Due to the nature of stock option purchase and relocation costs, they were not charged to reportable segments during fiscal 2000. Likewise, the restructuring charges recorded in fiscal 1999 and fiscal 2000 were not allocated to the reporting segments in order to enhance comparability between periods. A reconciliation of reportable segment EBITDA to consolidated EBITDA is presented below (in thousands):
YEAR ENDED AUGUST 31, 2001 2000 1999
- ---------------------- ----------- ------------ -----------
Reportable segment
EBITDA .............. $ 83,023 $ 96,710 $ 115,534
Corporate expenses ..... (42,349) (35,408) (37,701)
Reserve on management
common stock loan
program ............. 1,052
Stock option purchase
and relocation costs (11,227)
Intercompany rent
charges ............. 5,712 6,652 6,844
Other ............... (6,764) (6,266) (7,889)
--------- --------- ---------
Consolidated EBITDA .... $ 40,674 $ 50,461 $ 76,788
========= ========= =========
The majority of the increase in corporate expenses was due to a change in allocation of certain manufacturing costs that was initiated during fiscal 2001. Due to the nature of the allocation change, it was impractical to restate prior periods in the foregoing table.
Corporate assets such as cash, accounts receivable, and other assets are not generally allocated to reportable segments for business analysis purposes. However, inventories, goodwill, and identifiable fixed assets are classified by segment. A reconciliation of segment assets to consolidated assets is as follows (in thousands):
YEAR ENDED AUGUST 31, 2001 2000 1999
- ------------------------- ----------- ------------ -----------
Reportable segment
assets .............. $246,780 $253,098 $227,708
Corporate assets ....... 321,359 350,475 444,296
Intercompany
accounts receivable.. (33,070) (11,094) (48,702)
----------- ------------ -----------
Consolidated assets .... $535,069 $592,479 $623,302
=========== =========== ===========
Enterprise-Wide Information
The Company’s revenues are derived primarily from the United States. However, the Company operates direct offices or contracts with licensees to provide products and services to various countries throughout the world. The Company’s consolidated revenues and long-lived assets by geographic region are as follows (in thousands):
YEAR ENDED
AUGUST 31, 2001 2000 1999
- ----------------------- ---------- ----------- ----------
Sales:
United States ..... $462,943 $541,250 $511,484
Americas .......... 30,799 29,153 24,804
Japan/Greater China 16,567 14,585 16,692
Europe/Middle East 8,704 8,446 8,515
Australia ......... 3,108 7,032 6,737
Others ............ 3,212 2,519 3,364
-------- -------- --------
$525,333 $602,985 $571,596
======== ======== ========
Long-Lived Assets:
United States ..... $347,895 $379,323 $393,354
Americas .......... 14,033 11,434 9,722
Japan/Greater China 6,142 7,038 6,346
Europe/Middle East 396 503 558
Australia ......... 926 1,146 1,677
-------- -------- --------
$369,392 $399,444 $411,657
======== ======== ========
Amounts reported under the “Americas” caption include North and South America except the United States. The Australia caption includes information from Australia, New Zealand, and neighboring countries such as Indonesia and Malaysia. Intersegment sales are immaterial and eliminated upon consolidation.
17. MANAGEMENT COMMON STOCK LOAN PROGRAM
During fiscal 2000, the Company implemented an incentive-based compensation program that included a loan program from external lenders to certain management personnel for the purpose of purchasing shares of the Company’s common stock. The program gave management of the Company the opportunity to purchase shares of the Company’s common stock on the open market, and from shares purchased by and from the Company, by borrowing on a full-recourse basis from the external lenders. The loan program closed during fiscal 2001 with 3,825,000 shares purchased for a total cost of $33.6 million. Although interest accrues over the life of the loans, no interest payments are due from participants until the loans mature in March 2005. As part of the credit agreement obtained in fiscal 2001 (Note 5), the Company recorded the notes receivable from participants of the program as a component of shareholders’ equity in the accompanying fiscal 2001 consolidated balance sheet. Under terms of the new credit agreement, the Company will now be the lender on these full-recourse notes from the participants of the loan program. The corresponding liability was included as a component of long-term debt in the accompanying fiscal 2001 consolidated balance sheet. At August 31, 2001, the participant loans exceeded the value of the common stock held by the participants by $18.9 million. All participants have agreed to repay the Company for any loss incurred on their loans. The Company regularly evaluates the creditworthiness of participants and their ability to repay the loans. In fiscal 2001, due to economic and entity specific factors, the Company established a loan loss reserve by recording a non-cash charge of $1.1 million, which was included in the operating results of the Company for fiscal 2001.
In addition, the Company paid $2.2 million to the previous lender for interest on behalf of the loan participants. The participants will repay this amount to the Company when the loans, including all accrued interest, mature in March 2005. Accordingly, this transaction was recorded as a component of notes and interest receivable from sales of common stock to related parties in the accompanying consolidated balance sheet for fiscal 2001.
18. ACQUISITION AND DIVESTING ACTIVITIES
Fiscal 2001
Effective September 1, 2000, the Company entered into a joint venture agreement with American Marketing Systems, Inc. (“AMS”), a significant customer of the Company’s Personal Coaching division. The new company, Franklin Covey Coaching, LLC, will continue to provide personal coaching services for the Company’s customers. Under terms of the joint venture agreement, the Company and AMS each own 50 percent of Franklin Covey Coaching, LLC and are equally represented in the management of the new company. The terms of the joint venture agreement also require coaching earnings on the Company’s programs to achieve specified thresholds over the next four years, or the agreement could be subject to termination at the option of AMS. The Company contributed substantially all of the net assets of the Personal Coaching division to form the new entity, which resulted in a contribution basis difference of approximately $9.0 million. The basis difference will be amortized over a 20-year period and will offset a portion of the Company’s share of Franklin Covey Coaching’s earnings. The Company expects that the new venture will broaden the curricula and services currently offered in order to grow the personal coaching business over the long term, while maintaining a substantial portion of the Company’s current earnings from coaching services. The Company’s share of the joint venture’s earnings was reported as “equity in earnings of unconsolidated subsidiary” in the accompanying consolidated statement of operations for fiscal 2001.
During April 2001, the Company purchased the Project Consulting Group for $1.5 million in cash. The Project Consulting Group provides project consulting, project management, and project methodology training services. The purchase was accounted for using the purchase method of accounting and resulted in $1.5 million of goodwill and related intangible assets.
Fiscal 2000
As of February 28, 2000, the Company sold the assets and substantially all of the business of its commercial printing division of Publishers Press. The Company has retained printing operations necessary for the production of its planners and other related products (now “Franklin Covey Printing”). The final sales price, after adjustments under terms of the purchase agreement, was $13.4 million and consisted of $11.0 million in cash and a $2.4 million note payable to the Company over five years. Net cash proceeds to the Company from the sale totaled $6.4 million. The note payable is secured by property and other assets specified in the purchase agreement. The Company also recognized a $0.3 million gain from the sale of these assets, which is included as a component of net other expense in the accompanying consolidated statement of operations for the fiscal year ended August 31, 2000.
In December 1999, the Company purchased a majority interest in DayTracker.com, an on-line provider of scheduling and calendar services. The total purchase price was $11.0 million in cash and notes payable. The acquisition was accounted for using the purchase method of accounting and resulted in $9.0 million of goodwill and intangible assets that are being amortized on a straight-line basis over five years. The acquired web site and its on-line scheduling and organizational services can be accessed on the Internet atwww.franklinplanner.com.
During September 1999, the Company acquired the assets of the Professional Resources Organization (the Jack Phillips Group) for $1.5 million in cash. The Professional Resources Organization is a leading measurement assessment firm specializing in measuring the impact and return on investment of training and consulting programs. The acquisition was accounted for using the purchase method of accounting and resulted in $1.5 million of goodwill and intangible assets.
Fiscal 1999
In January 1999, the Company acquired the assets of Khalsa Associates for $2.7 million in cash. Khalsa Associates is a leading sales training company. The acquisition was accounted for using the purchase method of accounting and resulted in $2.7 million of goodwill and intangible assets.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information included in Item 7 of Part II of this Form 10-K is an integral part of the consolidated financial statements.
20. SUBSEQUENT EVENTS
Sale of Premier Agendas
On November 13, 2001, the Company signed a definitive agreement to sell Premier Agendas, a wholly owned subsidiary that provides productivity and learning solutions to the educational industry. The sales price is $152.5 million in cash. In addition, the Company will retain approximately $13.0 million of Premier’s working capital. The transaction is subject to regulatory approval and other customary closing conditions. The Company expects to recognize a significant gain from the sale of Premier and anticipates that the sale will be completed during the second quarter of fiscal 2002. The Company anticipates utilizing the majority of the proceeds of the sale to pay the term loan and revolving line of credit in full (Note 5), settle the $4.6 million interest rate swap liability (Note 7), and to fund a tender offer for shares of the Company's common stock (see below). Although a definitive agreement has been signed for the sale of Premier, there can be no assurance that the sale will be completed for the disclosed price and during the expected timeframe.
Tender Offer
On November 26, 2001, the Company filed a tender offer statement with the Securities and Exchange Commission to purchase up to 7,333,333 shares of its common stock at a purchase price of $6.00 per share. The tender offer is subject to the completion of the sale of Premier and subsequent retirement of the Company’s existing credit facilities, as well as other customary conditions set forth in the tender offer statement.
Effects of September 11, 2001 Terrorist Attacks
On September 11, 2001, major terrorist attacks occurred in New York City and Washington, D.C. Although the economy in the United States was already slowing prior to September 11, 2001, the magnitude of these attacks was unprecedented in their effects upon the United States and its economy. Immediately following the attacks, a series of events occurred, including the closure of airports and shopping malls, which had a material impact upon the Company’s operations during the first quarter of fiscal 2002. The Company was not aware of any significant instances of destruction or impairment of its assets, but the inability of sales and training personnel to travel and stores to open in certain mall locations, had adverse financial consequences to the Company during the first quarter of fiscal 2002.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to the sections titled “Election of Directors,” “Executive Officers” and “Executive Compensation” in the Company’s definitive Proxy Statement for the annual meeting of shareholders which is scheduled to be held on January 11, 2002. 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.
Item 11. Executive Compensation
The information required by the Item is incorporated by reference to the sections titled “Election of Directors - Director Compensation” and “Executive Compensation” in the Company’s definitive Proxy Statement for the annual meeting of shareholders which is scheduled to be held on January 11, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the section titled “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 11, 2002.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the section titled “Certain Relationships and Related Transactions” in the Company’s definitive Proxy Statement for the annual meeting of shareholders which is scheduled to be held on January 11, 2002.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed
1. Financial Statements. The following Consolidated Financial Statements of the Company and Report of Independent Public Accountants or the year ended August 31, 2001, are included herewith:
- Report of Independent Public Accountants
- Consolidated Balance Sheets at August 31, 2001 and 2000
- Consolidated Statements of Operations and Comprehensive Loss for the years ended August 31, 2001, 2000, and 1999
- Consolidated Statements of Shareholders' Equity for the years ended August 31, 2001, 2000 and 1999
- Consolidated Statements of Cash Flows for the years ended August 31, 2001, 2000 and 1999
- Notes to Consolidated Financial Statements
2. Exhibit List.
Exhibit No. | Exhibit | Incorporated by Reference | Filed Herewith |
| | 3.1 | Revised Articles of Incorporation of the Registrant | | (1) |
| | 3.2 | Amended and Restated Bylaws of the Registrant | | (1) |
| | 3.3 | Articles of Amendment to Revised Articles of Incorporation of the Registrant (filed as Exhibit 2 to Schedule 13D) | | (5) |
| | 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 (filed as Exhibits 1 and 3 to Schedule 13D) | | (5) |
| | 4.3 | Registration Rights Agreement, dated June 2, 1999 (filed as Exhibit 4 to Schedule 13D) | | (5) |
| | 10.1 | Amended and Restated 1992 Employee Stock Purchase Plan | | (3) |
| | 10.2 | First Amendment to Amended and Restated 1992 Stock Incentive Plan | | (4) |
| | 10.4 | Forms of Nonstatutory Stock Options | | (1) |
| | 10.5 | Amended and Restated 2000 Employee Stock Purchase Plan | | (6) |
| | 10.6 | Limited Liability Company Agreement of Franklin Covey Coaching LLC, dated September 1, 2000 | | (7) |
| | 10.7 | Employment Agreement between Franklin Covey Co. and Robert A. Whitman | | (8) |
| | 10.8 | Waiver of Breach of Covenant, between Franklin Covey Co. and Bank One, NA and Zions First National Bank, dated April 1, 2001 | | (9) |
| | 10.9 | Agreement for Information Technology Services between each of Franklin Covey Co., Electronic Data Systems Corporation and EDS Information Services LLC, dated April 1, 2001 | | (10) |
| | 10.10 | Additional Services Addendum #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 | | (10) |
| | 10.11 | Amendment #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 | | (10) |
| | 10.12 | Interest Transfer Agreement between Bank One, NA and Franklin Covey Co., dated May 3, 2001 | | (10) |
| | 10.13 | Fourth Amendment to Facility and Guaranty Agreement among Franklin Covey Co., Bank One, NA as Agent, and the Financial Institutions Signatory Hereto | | (10) |
| | 10.14 | Credit Agreement among Franklin Covey Co., and Bank One, NA, Zions First National Bank, and Banc One Capital Markets,Inc., dated July 10, 2001 | | ** |
| | 10.15 | Purchase Agreement By and Among Franklin Covey Co., Franklin Covey Canada Ltd., School Specialty, Inc., and 3956831 Canada, Inc., dated November 13, 2001 | | ** |
| | 21 | Subsidiaries of the Registrant | | ** |
| | 23 | Consent of Independent Public Accountants | | ** |
| | (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. 33-47283. |
| | (3) | Incorporated by reference to Report on Form 10-K filed November 27, 1992, for the year ended August 31,1992. |
| | (4) | Incorporated by reference to Registration Statement on Form S-1 filed with the Commission on January 3, 1994, Registration No. 33-73728. |
| | (5) | Incorporated by reference to Schedule 13D(CUSIP No. 534691090 as filed with the Commission on June 2, 1999) |
| | (6) | Incorporated by reference to Report on Form S-8 filed with the Commission on May 31, 2000, Registration No. 333-38172. |
| | (7) | Incorporated by reference to Report on Form 10-K filed November 29, 2000, for the year ended August 31, 2000. |
| | (8) | Incorporated by reference to Report on Form 10K/A filed January 11, 2001, for the year ended August 31, 2000. |
| | (9) | Incorporated by reference to Report on Form 10-Q filed April 10, 2001, for the quarter ended February 24, 2001. |
| | (10) | Incorporated by reference to Report on Form 10-Q filed July 10, 2001, for the quarter ended May 26, 2001. |
| | ** | Filed herewith and attached to this report. |
(b) Reports on Form 8-K
None.
(c) Exhibits
Exhibits to this Report are attached following hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 29, 2001.
FRANKLIN COVEY CO.
| | By: /s/ ROBERT A. WHITMAN
|
| | Robert A. Whitman, Chief Executive Officer and Chairman |
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.
/s/ ROBERT A. WHITMAN
| | Chairman of the Board and Chief Executive Officer | | November 29, 2001 |
/s/ HYRUM W. SMITH
| | Vice-Chairman of the Board | | November 29, 2001 |
/s/ STEPHEN R. COVEY
| | Vice-Chairman of the Board | | November 29, 2001 |
/s/ STEPHEN M. R. COVEY
| | Executive Vice President and Director | | November 29, 2001 |
/s/ STEPHEN D. YOUNG
| | Senior Vice President, Controller and Chief Accounting Officer | | November 29, 2001 |
/s/ ROBERT H. DAINES
| | Director | | November 29, 2001 |
/s/ E. J. "JAKE" GARN
| | Director | | November 29, 2001 |
/s/ DENNIS G. HEINER
| | Director | | November 29, 2001 |
/s/ BRIAN A. KRISAK
| | Director | | November 29, 2001 |
/s/ DONALD J. MCNAMARA
| | Director | | November 29, 2001 |
/s/ JOEL C. PETERSON
| | Director | | November 29, 2001 |
/s/ E. KAY STEPP
| | Director | | November 29, 2001 |
