UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended November 26, 2005
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from __________ to __________
Commission
file no. 1-11107
FRANKLIN
COVEY CO.
(Exact
name of registrant as specified in its charter)
|
Utah
|
87-0401551
|
|
(State
of incorporation)
|
(I.R.S.
employer identification number)
|
|
2200
West Parkway Boulevard
|
84119-2099
|
|
Salt
Lake City, Utah
|
(Zip
Code)
|
|
(Address
of principal executive offices)
|
|
|
Registrant’s
telephone number,
|
|
|
Including
area code
|
(801)
817-1776
|
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
|
X
|
|
|
No
|
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
|
Yes
|
||
|
No
|
X
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Yes
|
||
|
No
|
X
|
Indicate
the number of shares outstanding of each of the issuer’s classes of Common Stock
as of the latest practicable date:
20,311,785 shares
of Common Stock as of January 6, 2006
PART
I.
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
FRANKLIN
COVEY CO.
(in
thousands, except per share amounts)
|
November
26,
2005
|
August
31,
2005
|
||||||
|
(unaudited)
|
|||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
32,828
|
$
|
51,690
|
|||
|
Restricted
cash
|
-
|
699
|
|||||
|
Accounts
receivable, less allowance for doubtful accounts
of $1,708 and $1,425
|
27,531
|
22,399
|
|||||
|
Inventories
|
24,740
|
20,975
|
|||||
|
Other
current assets
|
8,040
|
9,419
|
|||||
|
Total
current assets
|
93,139
|
105,182
|
|||||
|
Property
and equipment, net
|
33,989
|
35,277
|
|||||
|
Intangible
assets, net
|
82,249
|
83,348
|
|||||
|
Other
long-term assets
|
9,951
|
9,426
|
|||||
|
$
|
219,328
|
$
|
233,233
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of long-term debt and financing obligation
|
$
|
553
|
$
|
1,088
|
|||
|
Accounts
payable
|
12,794
|
13,704
|
|||||
|
Income
taxes payable
|
4,012
|
3,996
|
|||||
|
Accrued
liabilities
|
32,354
|
36,536
|
|||||
|
Total
current liabilities
|
49,713
|
55,324
|
|||||
|
Long-term
debt and financing obligation, less current portion
|
33,956
|
34,086
|
|||||
|
Other
liabilities
|
1,292
|
1,282
|
|||||
|
Deferred
income tax liability
|
9,715
|
9,715
|
|||||
|
Total
liabilities
|
94,676
|
100,407
|
|||||
|
Shareholders’
equity:
|
|||||||
|
Preferred
stock-Series A, no par value; 4,000 shares authorized, 1,894 and
2,294
shares issued; liquidation preference totaling $48,528 and
$58,788
|
47,345
|
57,345
|
|||||
|
Common
stock - $0.05 par value; 40,000 shares authorized, 27,056
shares issued
|
1,353
|
1,353
|
|||||
|
Additional
paid-in capital
|
188,415
|
190,760
|
|||||
|
Common
stock warrants
|
7,611
|
7,611
|
|||||
|
Accumulated
deficit
|
(11,265
|
)
|
(14,498
|
)
|
|||
|
Deferred
compensation on unvested stock grants
|
-
|
(1,055
|
)
|
||||
|
Accumulated
other comprehensive income
|
191
|
556
|
|||||
|
Treasury
stock at cost, 6,457 and 6,465 shares
|
(108,998
|
)
|
(109,246
|
)
|
|||
|
Total
shareholders’ equity
|
124,652
|
132,826
|
|||||
|
$
|
219,328
|
$
|
233,233
|
||||
See
notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
(in
thousands, except per share amounts)
|
Quarter
Ended
|
|||||||
|
November
26, 2005
|
November
27, 2004
|
||||||
|
|
|
(unaudited)
|
|||||
|
Net
sales:
|
|||||||
|
Products
|
$
|
43,403
|
$
|
44,051
|
|||
|
Training
and consulting services
|
28,948
|
25,053
|
|||||
|
72,351
|
69,104
|
||||||
|
Cost
of sales:
|
|||||||
|
Products
|
18,664
|
19,808
|
|||||
|
Training
and consulting services
|
9,281
|
7,861
|
|||||
|
27,945
|
27,669
|
||||||
|
Gross
margin
|
44,406
|
41,435
|
|||||
|
Selling,
general, and administrative
|
37,767
|
35,930
|
|||||
|
Depreciation
|
1,408
|
2,178
|
|||||
|
Amortization
|
1,095
|
1,043
|
|||||
|
Income
from operations
|
4,136
|
2,284
|
|||||
|
Interest
income
|
330
|
118
|
|||||
|
Interest
expense
|
(643
|
)
|
(38
|
)
|
|||
|
Income
before provision for income taxes
|
3,823
|
2,364
|
|||||
|
Provision
for income taxes
|
(590
|
)
|
(838
|
)
|
|||
|
Net
income
|
3,233
|
1,526
|
|||||
|
Preferred
stock dividends
|
(1,379
|
)
|
(2,184
|
)
|
|||
|
Net
income (loss) available to common shareholders
|
$
|
1,854
|
$
|
(658
|
)
|
||
|
Net
income (loss) available to common shareholders per
share:
|
|||||||
|
Basic
|
$
|
.09
|
$
|
(.03
|
)
|
||
|
Diluted
|
$
|
.09
|
$
|
(.03
|
)
|
||
|
Weighted
average number of common shares:
|
|||||||
|
Basic
|
20,331
|
19,729
|
|||||
|
Diluted
|
20,642
|
19,729
|
|||||
See
notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
(in
thousands)
|
Quarter
Ended
|
|||||||
|
November
26,
2005
|
November
27,
2004
|
||||||
|
(unaudited)
|
|||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
3,233
|
$
|
1,526
|
|||
|
Adjustments
to reconcile net income to net cash used for operating activities:
|
|||||||
|
Depreciation
and amortization
|
3,037
|
3,736
|
|||||
|
Restructuring
cost reversal
|
-
|
(306
|
)
|
||||
|
Stock-based
compensation cost
|
77
|
41
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Increase
in accounts receivable, net
|
(5,424
|
)
|
(4,404
|
)
|
|||
|
Increase
in inventories
|
(3,865
|
)
|
(5,245
|
)
|
|||
|
Decrease
(increase) in other assets
|
1,423
|
(95
|
)
|
||||
|
Decrease
in accounts payable and accrued liabilities
|
(4,597
|
)
|
(1,545
|
)
|
|||
|
Increase
(decrease) in other long-term liabilities
|
(89
|
)
|
128
|
||||
|
Increase
in income taxes payable
|
39
|
715
|
|||||
|
Net
cash used for operating activities
|
(6,166
|
)
|
(5,449
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Purchases
of property and equipment
|
(599
|
)
|
(621
|
)
|
|||
|
Purchases
of short-term investments
|
-
|
(3,603
|
)
|
||||
|
Sales
of short-term investments
|
-
|
4,583
|
|||||
|
Curriculum
development costs
|
(702
|
)
|
(558
|
)
|
|||
|
Net
cash used for investing activities
|
(1,301
|
)
|
(199
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Principal
payments on long-term debt and financing obligation
|
(681
|
)
|
(31
|
)
|
|||
|
Change
in restricted cash
|
699
|
-
|
|||||
|
Proceeds
from sales of common stock from treasury
|
126
|
25
|
|||||
|
Proceeds
from management stock loan payments
|
134
|
-
|
|||||
|
Redemption
of preferred stock
|
(10,000
|
)
|
-
|
||||
|
Purchase
of treasury shares
|
-
|
(22
|
)
|
||||
|
Payment
of preferred stock dividends
|
(1,629
|
)
|
(2,184
|
)
|
|||
|
Net
cash used for financing activities
|
(11,351
|
)
|
(2,212
|
)
|
|||
|
Effect
of foreign exchange rates on cash and cash equivalents
|
(44
|
)
|
(74
|
)
|
|||
|
Net
decrease in cash and cash equivalents
|
(18,862
|
)
|
(7,934
|
)
|
|||
|
Cash
and cash equivalents at beginning of the period
|
51,690
|
31,174
|
|||||
|
Cash
and cash equivalents at end of the period
|
$
|
32,828
|
$
|
23,240
|
|||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Cash
paid for interest
|
$
|
673
|
$
|
27
|
|||
|
Cash
paid for income taxes
|
$
|
599
|
$
|
395
|
|||
|
Non-cash
investing and financing activities:
|
|||||||
|
Accrued
preferred stock dividends
|
$
|
1,184
|
$
|
2,184
|
|||
|
Capital
lease financing of property and equipment purchases
|
109
|
||||||
See
notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Franklin
Covey Co. (hereafter referred to as us, we, our, or the Company) provides
integrated consulting, training, and performance enhancement solutions to
organizations and individuals in strategy execution, productivity, leadership,
sales force effectiveness, effective communications, and other areas. Each
integrated solution may include components of training and consulting,
assessment, and other application tools that are generally available in
electronic or paper-based formats. Our products and services are available
through professional consulting services, public workshops, retail stores,
catalogs, and the Internet at www.franklincovey.com.
The
Company’s historically best-known offerings include the FranklinCovey Planner™,
and a suite of new and updated individual-effectiveness and
leadership-development training products based on the best-selling book
The
7
Habits of Highly Effective People.
We also
offer a range of training and assessment products to help organizations achieve
superior results by focusing and executing on top priorities, building the
capability of knowledge workers, and aligning business processes. These
offerings include the popular workshop FOCUS:
Achieving Your Highest Priorities™,
The
4
Disciplines of Execution™,
The
4
Roles of Leadership™,
Building
Business Acumen: What the CEO Wants You to Know™,
the
Advantage Series communication workshops, and the Execution
Quotient
(xQ™)
organizational assessment tool.
The
accompanying unaudited condensed consolidated financial statements reflect,
in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results
of
operations of the Company as of the dates and for the periods indicated. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to Securities
and Exchange Commission (SEC) rules and regulations. The information included
in
this quarterly report on Form 10-Q should be read in conjunction with the
financial statements and related notes included in our Annual Report on Form
10-K for the fiscal year ended August 31, 2005.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management 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.
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 end on November 26, 2005, February 25, 2006, and May 27, 2006 during fiscal
2006. Under the modified 52/53-week fiscal year, the quarter ended November
26,
2005 had one less business day than the quarter ended November 27,
2004.
The
results of operations for the quarter ended November 26, 2005 are not indicative
of results expected for the entire fiscal year ending August 31,
2006.
Certain
reclassifications have been made to the fiscal 2005 financial statements to
conform with the current period presentation.
On
September 1, 2005, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based
Payment (SFAS
No.
123R), which is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation.
Statement 123R supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
amends SFAS No. 95, Statement
of Cash Flows.
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.
Pro forma disclosure is no longer an alternative.
We
previously accounted for our stock-based compensation using the intrinsic method
as defined in APB Opinion No. 25 and accordingly, we have not previously
recognized any expense for our employee stock purchase plan or incentive stock
option plan in our consolidated financial statements. We used the modified
prospective transition method during the quarter ended November 26, 2005 to
adopt the provisions of SFAS No. 123R. Under this method, unvested awards at
the
date of adoption as well as awards that are granted, modified, or settled after
the date of adoption will be measured and accounted for in accordance with
Statement 123R. Based upon our analysis of the requirements of SFAS No. 123R,
we
determined that our employee stock purchase plan is a compensatory plan and
we
will be required to expense the discount on the shares purchased by the plan
participants. In addition, SFAS No. 123R required us to reclassify our
unamortized deferred compensation related to the issuance of unvested common
stock awards reported in the equity section of our balance sheet to additional
paid-in capital. Overall, the impact of adopting SFAS No. 123R had an immaterial
effect upon our consolidated financial statements for the quarter ended November
26, 2005 and we recorded approximately $9,000 in stock-based compensation
expense related to stock options and shares issued under our employee stock
purchase plan.
The
following is a summary of our stock-based compensation plans at November 26,
2005.
Stock
Options
Our
Board
of Directors have approved an incentive stock option plan whereby options to
purchase shares of our common stock are issued to key employees at an exercise
price not less than the fair market value of the Company’s common stock on the
date of grant. The term, not to exceed ten years, and exercise period of each
incentive stock option awarded under the plan are determined by a committee
appointed by our Board of Directors. In addition to stock options granted from
the incentive stock option plan in prior years, we granted a fully vested stock
award and other unvested stock awards during fiscal 2005 (refer to discussion
below) from the incentive stock option plan, which also reduced the number
of
shares available for granting under the incentive option plan. At November
26,
2005, we had approximately 836,000 shares available to grant under this
incentive stock option plan. A summary of our stock option activity is presented
below:
|
Number
of Stock Options
|
Weighted
Avg. Exercise Price
|
||||||
|
Outstanding
at August 31, 2004
|
2,505,659
|
$
|
12.37
|
||||
|
Granted
|
-
|
-
|
|||||
|
Exercised
|
(15,000
|
)
|
1.73
|
||||
|
Forfeited
|
(204,775
|
)
|
12.58
|
||||
|
Outstanding
at August 31, 2005
|
2,285,884
|
12.40
|
|||||
|
Granted
|
-
|
-
|
|||||
|
Exercised
|
(20,000
|
)
|
4.49
|
||||
|
Forfeited
|
(65,600
|
)
|
18.10
|
||||
|
Outstanding
at November 26, 2005
|
2,200,284
|
12.30
|
|||||
Compensation
expense associated with the remaining portion of requisite service under
previously issued unvested stock options was immaterial during the quarter
ended
November 26, 2005 and the remaining unamortized service cost on previously
issued stock options is immaterial in aggregate. The intrinsic value of stock
options exercised during the quarter ended November 26, 2005 and for the fiscal
year ended August 31, 2005 was less than $0.1 million in each period. The
fair market value of options that vested during the quarter was approximately
$6,000.
The
following table summarizes exercisable stock option information for the periods
indicated:
|
November
26, 2005
|
August
31,
2005
|
||||||
|
Exercisable
stock options
|
2,175,284
|
2,248,384
|
|||||
|
Weighted
average exercise price per share
|
$
|
12.43
|
$
|
12.58
|
|||
The
following additional information applies to our stock options outstanding at
November 26, 2005:
|
·
|
A
total of 241,474 options outstanding have exercise prices between
$1.70
per share and $7.00 per share, with a weighted average exercise price
of
$5.33 per share and a weighted average remaining contractual life
of 4.2
years. At November 26, 2005, 216,474 of these options were exercisable
and
had a weighted average exercise price of $5.75 per share. The
aggregate intrinsic value of these stock options outstanding was
$0.4
million and for exercisable stock options in this price range was
$0.3
million. The aggregate intrinsic value represents the total pre-tax
intrinsic value, based on our closing stock price of $7.00 per share
as of
November 26, 2005, which would have been received by option holders
had
all option holders exercised their options as of that date. As all
other stock options have an exercise price higher than the closing
stock
price at the end of our first quarter of fiscal 2006, the intrinsic
value
of these options is zero.
|
|
·
|
We
have 344,500 options outstanding that have exercise prices ranging
from
$7.19 per share to $9.69 per share, with a weighted average exercise
price
of $9.08 per share and a weighted average remaining contractual life
of
3.8 years. At November 26, 2005, all of these options were
exercisable.
|
|
·
|
We
granted 1,602,000 options to our CEO under terms of a Board and
shareholder approved employment agreement. These options have an
exercise
price of $14.00 per share, with a weighted average remaining contractual
life of 4.8 years. As a result of changes to the CEO’s compensation
arrangement in fiscal 2005, all of these options were vested in fiscal
2005 and were exercisable at November 26, 2005.
|
|
·
|
The
remaining 12,310 stock options outstanding have exercise prices between
$17.69 per share and $21.50 per share, with a weighted average exercise
price of $18.94 per share and a weighted average remaining contractual
life of 1.5 years. At November 26, 2005, all of these options were
exercisable.
|
The
Company did not issue any stock options to vendors or other non-employees for
inventory or services provided during the quarter ended November 26,
2005.
Unvested
Stock Awards
During
fiscal 2005, the Company granted shares of our common stock to certain employees
and non-employee members of our Board of Directors in the form of unvested
stock
awards. At November 26, 2005, the weighted average vesting period of our
unvested stock awards was 3.6 years, assuming no acceleration. The intrinsic
value of our unvested stock awards was $2.9 million, which was based upon our
closing stock price of $7.00 per share as of November 26, 2005. A summary
of our unvested stock award activity is presented below (in thousands, except
share amounts):
|
Number
of Unvested Shares
|
Compensation
Cost
|
||||||
|
Outstanding
shares and unamortized compensation cost at August 31,
2004
|
303,660
|
732
|
|||||
|
Granted
|
376,090
|
1,147
|
|||||
|
Vested
|
(258,205
|
)
|
-
|
||||
|
Forfeited
|
(12,250
|
)
|
(33
|
)
|
|||
|
Amortization
of compensation
|
n/a
|
(791
|
)
|
||||
|
Outstanding
shares and unamortized compensation cost at August 31,
2005
|
409,295
|
$
|
1,055
|
||||
|
Granted
|
-
|
-
|
|||||
|
Vested
|
-
|
-
|
|||||
|
Amortization
of compensation
|
n/a
|
(68
|
)
|
||||
|
Outstanding
shares and unamortized compensation cost at November 26,
2005
|
409,295
|
987
|
|||||
Employee
Awards
- Unvested
stock awards granted to employees vest five years from the grant date or on
an
accelerated basis if we achieve specified earnings levels. The compensation
cost
of the unvested stock awards was based on the fair value of the shares on the
grant date. The compensation cost related to these unvested stock awards is
expensed on a straight-line basis over the vesting (service) period of the
awards and will be accelerated when we believe that it is probable that we
will
achieve the specified earnings thresholds and the shares will vest. In
connection with these unvested stock awards, 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 million for awards granted
in
fiscal 2005, which was expensed as the bonuses were paid to the participants
on
or around the grant date.
During
our third quarter of fiscal 2005, we achieved the specified earnings thresholds
required to accelerate the vesting for one-half of the unvested stock awards
granted in fiscal 2004 and to our CEO in December 2004. Accordingly, we expensed
an additional $0.5 million of deferred compensation for the accelerated vesting
of these unvested stock awards during fiscal 2005.
The
unvested award shares were issued from common stock held in treasury and had
a
cost basis of $5.2 million for awards granted in fiscal 2005. 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.
During
the quarter ended November 26, 2005, our Board of Directors approved a long-term
incentive plan in which certain employees of the Company may be granted unvested
share awards. This proposed long-term incentive plan is subject to shareholder
approval at our Annual Shareholders’ Meeting scheduled to be held on January 20,
2006 and no shares have been granted under this plan.
Board
of Director Awards
- During
fiscal 2005, we awarded 76,090 shares of common stock as unvested stock awards
to non-employee members of the Board of Directors as part of a shareholder
approved long-term incentive plan. The fair value of these shares was calculated
on the grant date and the corresponding compensation cost will be recognized
over the vesting period of the awards, which is three years. These awards were
valued at the closing market price of our common stock on the measurement date
and will result in $0.2 million of compensation cost over the vesting period
of
the awards. The cost of the common stock issued from treasury was $1.3 million
and the difference between the cost of the treasury stock and fair value of
the
award, which totaled $1.1 million, was recorded as a reduction of additional
paid-in capital.
Pro
Forma Disclosure of Stock-Based Compensation Cost
Had
compensation expense for our stock option plans and employee stock purchase
plan
been determined in accordance with the fair value method prescribed by SFAS
No.
123, Accounting
for Stock-Based Compensation,
and
SFAS No. 148, Accounting
for Stock-Based Compensation: An Amendment of FASB Statement No.
123,
our
net loss attributable to common shareholders and corresponding basic and diluted
loss per share would have been the following for the first quarter of fiscal
2005 (in thousands, except for per share amounts):
|
November
27,
2004
|
||||
|
Net
loss attributable to common shareholders, as reported
|
$
|
(658
|
)
|
|
|
Fair
value of stock-based compensation, net of tax
|
(187
|
)
|
||
|
Net
loss attributable to common shareholders, pro forma
|
$
|
(845
|
)
|
|
|
Basic
and diluted loss per share, as reported
|
$
|
(.03
|
)
|
|
|
Basic
and diluted loss per share, pro forma
|
$
|
(.04
|
)
|
|
Restricted
cash at August 31, 2005 represents 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,
including a prepayment penalty of $0.1 million, was repaid in full during
September 2005.
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method, and were comprised of the following (in
thousands):
|
November
26,
2005
|
August
31,
2005
|
||||||
|
Finished
goods
|
$
|
21,447
|
$
|
18,161
|
|||
|
Work
in process
|
368
|
825
|
|||||
|
Raw
materials
|
2,925
|
1,989
|
|||||
|
$
|
24,740
|
$
|
20,975
|
||||
The
Company’s intangible assets were comprised of the following (in
thousands):
|
November
26, 2005
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||
|
Definite-lived
intangible assets:
|
||||||||||
|
License
rights
|
$
|
27,000
|
$
|
(6,715
|
)
|
$
|
20,285
|
|||
|
Curriculum
|
58,227
|
(25,663
|
)
|
32,564
|
||||||
|
Customer
lists
|
18,774
|
(12,374
|
)
|
6,400
|
||||||
|
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
|
105,278
|
(46,029
|
)
|
59,249
|
|||||||
|
Indefinite-lived
intangible asset:
|
||||||||||
|
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
|
Balance
at November 26, 2005
|
$
|
128,278
|
$
|
(46,029
|
)
|
$
|
82,249
|
|||
|
August
31, 2005
|
||||||||||
|
Definite-lived
intangible assets:
|
||||||||||
|
License
rights
|
$
|
27,000
|
$
|
(6,480
|
)
|
$
|
20,520
|
|||
|
Curriculum
|
58,232
|
(25,146
|
)
|
33,086
|
||||||
|
Customer
lists
|
18,774
|
(12,032
|
)
|
6,742
|
||||||
|
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
|
105,283
|
(44,935
|
)
|
60,348
|
|||||||
|
Indefinite-lived
intangible asset:
|
||||||||||
|
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
|
Balance
at August 31, 2005
|
$
|
128,283
|
$
|
(44,935
|
)
|
$
|
83,348
|
|||
The
Company’s aggregate amortization expense totaled $1.1 million for the quarter
ended November 26, 2005 and $1.0 million during the quarter ended November
27,
2004.
On
November 11, 2005, we redeemed $10.0 million, or approximately 400,000 shares,
of our currently outstanding Series A Preferred Stock at its liquidation
preference ($25 per share plus accrued dividends). During the quarter ended
November 26, 2005, we also announced that we intend to seek shareholder approval
to amend our articles of incorporation to extend the period during which we
have
the right to redeem the outstanding preferred stock at 100 percent of the
liquidation preference. The amendment would extend the current redemption
deadline from March 8, 2006 to December 31, 2006. The extension agreement would
also provide the right to extend the redemption period for an additional year
to
December 31, 2007, if another $10.0 million of preferred stock is redeemed
before December 31, 2006. Knowledge Capital, an entity which holds nearly all
of
our outstanding preferred stock, has signed an agreement to vote in favor of
the
proposal to extend the redemption period.
Comprehensive
income is based on net income and includes charges and credits to equity
accounts that are not the result of transactions with shareholders.
Comprehensive income for the Company was calculated as follows (in
thousands):
|
Quarter
Ended
|
|||||||
|
November
26,
2005
|
November
27,
2004
|
||||||
|
Net
income
|
$
|
3,233
|
$
|
1,526
|
|||
|
Other
comprehensive income (loss) items:
|
|||||||
|
Adjustment
for fair value of hedge derivatives
|
-
|
(292
|
)
|
||||
|
Foreign
currency translation adjustments
|
(365
|
)
|
635
|
||||
|
Comprehensive
income
|
$
|
2,868
|
$
|
1,869
|
|||
Basic
earnings (loss) per common share (EPS) is calculated by dividing net income
or
loss available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is calculated by dividing net
income or loss available to common shareholders by the weighted-average number
of common shares outstanding plus the assumed exercise of all dilutive
securities using the treasury stock method or the “as converted” method, as
appropriate. Following the fiscal 2005 preferred stock recapitalization, our
preferred stock is no longer convertible into common stock or entitled to
participate in dividends payable to holders of common stock. Accordingly, we
no
longer use the two-class method of calculating EPS as defined in SFAS No. 128,
Earnings
Per Share,
and
EITF Issue 03-6, Participating
Securities and the Two-Class Method under FASB Statement No.
128,
for
periods after February 26, 2005.
The
following table sets forth the computation of basic and diluted EPS for the
periods indicated (in thousands, except per share amounts):
|
Quarter
Ended
|
|||||||
|
November
26,
2005
|
November
27,
2004
|
||||||
|
Numerator
for basic and diluted earnings per share:
|
|||||||
|
Net
income
|
$
|
3,233
|
$
|
1,526
|
|||
|
Preferred
stock dividends
|
(1,379
|
)
|
(2,184
|
)
|
|||
|
Net
income available to common shareholders(1)
|
$
|
1,854
|
$
|
(658
|
)
|
||
|
Denominator
for basic and diluted earnings per share:
|
|||||||
|
Basic
weighted average shares outstanding
|
20,331
|
19,729
|
|||||
|
Effect
of dilutive securities(2):
|
|||||||
|
Stock
options
|
46
|
-
|
|||||
|
Unvested
stock awards
|
265
|
-
|
|||||
|
Diluted
weighted average shares outstanding
|
20,642
|
19,729
|
|||||
|
Basic
and diluted EPS:
|
|||||||
|
Basic
EPS
|
$
|
.09
|
$
|
(.03
|
)
|
||
|
Diluted
EPS
|
$
|
.09
|
$
|
(.03
|
)
|
||
| (1) |
Preferred
shareholders do not participate in any undistributed losses with
common
shareholders; therefore, the two-class method had no impact on the
November 27, 2004 EPS computation.
|
| (2) | For the quarter ended November 27, 2004, conversion of common share equivalents is not assumed because such conversion would be anti-dilutive. A total of 6.2 million shares of Series A preferred stock on an "as converted" basis and options to purchase approximately 12,000 shares of common stock were excluded from the EPS calculation because of their anti-dilutive effect. |
At
November 26, 2005, we had approximately 2.0 million stock options outstanding
which were not included in the computation of diluted EPS because the options’
exercise prices were greater than the average market price of the Company’s
common shares. We also had 6.2 million common stock warrants with an exercise
price of $8.00 per share that were not included in the Company’s EPS calculation
because their exercise price was higher than the average market price of our
common stock during the quarter. At November 27, 2004, the Company had
approximately 2.5 million stock options outstanding and 0.3 million shares
of
non-vested restricted common stock that were not considered in the Company’s
calculation of diluted EPS that may have a dilutive effect on the Company’s EPS
calculation in future periods.
The
Company has two segments: the Consumer and Small Business Unit (CSBU) and the
Organizational Solutions Business Unit (OSBU). The following is a description
of
our segments, their primary operating components, and their significant business
activities:
|
Consumer
and Small Business Unit - This
business unit is primarily focused on sales to individual customers
and
small business organizations and includes the results of our domestic
retail stores, consumer direct operations (catalog, eCommerce, and
public
seminars programs), wholesale operations, and other related distribution
channels, including government product sales and domestic printing
and
publishing sales. The CSBU results of operations also include the
financial results of our paper planner manufacturing operations.
Although
CSBU sales primarily consist of products such as planners, binders,
software, and handheld electronic planning devices, virtually any
component of our leadership, productivity, and strategy execution
solutions may be purchased through CSBU channels.
|
|
Organizational
Solutions Business Unit - The
OSBU is primarily responsible for the development, marketing, sale,
and
delivery of strategic execution, productivity, leadership, sales
force
performance, and communication training and consulting solutions
directly
to organizational clients, including other companies, the government,
and
educational institutions. The OSBU includes the financial results
of our
domestic sales force and our international operations. The domestic
sales
force is responsible for the sale and delivery of our training and
consulting services in the United States. Our international sales
group
includes the financial results of our directly owned foreign offices
and
royalty revenues from licensees.
|
The
Company’s chief operating decision maker is the CEO, and each of the segments
has a president who reports directly to the CEO. The primary measurement tool
used in business unit performance analysis is earnings before interest, taxes,
depreciation, and amortization (EBITDA), which may not be calculated as
similarly titled amounts calculated by other companies. For segment reporting
purposes, the Company’s consolidated EBITDA can be calculated as its
income from operations excluding depreciation and amortization
charges.
In
the
normal course of business, the Company may make structural and cost allocation
revisions to its segment information to reflect new reporting responsibilities
within the organization. During the quarter ended November 26, 2005, we
transferred our public seminar programs from the domestic unit of OSBU to the
consumer direct channel in CSBU. We also transferred the operations of certain
corporate departments, such as Franklin Covey travel and accounts payable,
to
the operating segments. All prior period segment information has been revised
to
conform to the most recent classifications and organizational changes. The
Company accounts for its segment information on the same basis as the
accompanying condensed consolidated financial statements.
SEGMENT
INFORMATION
|
(in
thousands)
|
||||||||||||||||
|
Quarter
Ended
November
26, 2005
|
Sales
to External Customers
|
Gross
Margin
|
EBITDA
|
Depreciation
|
Amortization
|
|||||||||||
|
Consumer
and Small Business Unit:
|
||||||||||||||||
|
Retail
|
$
|
14,670
|
$
|
8,687
|
$
|
101
|
$
|
441
|
$
|
-
|
||||||
|
Consumer
direct
|
18,588
|
11,405
|
9,303
|
12
|
-
|
|||||||||||
|
Wholesale
|
6,609
|
3,131
|
2,961
|
-
|
-
|
|||||||||||
|
Other
CSBU
|
1,163
|
378
|
(8,388
|
)
|
348
|
57
|
||||||||||
|
Total
CSBU
|
41,030
|
23,601
|
3,977
|
801
|
57
|
|||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||
|
Domestic
|
16,393
|
10,503
|
640
|
80
|
1,036
|
|||||||||||
|
International
|
14,928
|
10,302
|
3,948
|
331
|
2
|
|||||||||||
|
Total
OSBU
|
31,321
|
20,805
|
4,588
|
411
|
1,038
|
|||||||||||
|
Total
operating segments
|
72,351
|
44,406
|
8,565
|
1,212
|
1,095
|
|||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(1,926
|
)
|
196
|
-
|
||||||||||
|
Consolidated
|
$
|
72,351
|
$
|
44,406
|
$
|
6,639
|
$
|
1,408
|
$
|
1,095
|
||||||
|
Quarter
Ended
November
27, 2004
|
||||||||||||||||
|
Consumer
and Small Business Unit:
|
||||||||||||||||
|
Retail
|
$
|
18,387
|
$
|
10,378
|
$
|
353
|
$
|
678
|
$
|
-
|
||||||
|
Consumer
direct
|
18,859
|
11,388
|
7,872
|
245
|
-
|
|||||||||||
|
Wholesale
|
3,583
|
1,759
|
1,545
|
-
|
-
|
|||||||||||
|
Other
CSBU
|
985
|
(350
|
)
|
(7,306
|
)
|
686
|
86
|
|||||||||
|
Total
CSBU
|
41,814
|
23,175
|
2,464
|
1,609
|
86
|
|||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||
|
Domestic
|
13,406
|
8,786
|
653
|
76
|
953
|
|||||||||||
|
International
|
13,884
|
9,474
|
3,592
|
326
|
2
|
|||||||||||
|
Total
OSBU
|
27,290
|
18,260
|
4,245
|
402
|
955
|
|||||||||||
|
Total
operating segments
|
69,104
|
41,435
|
6,709
|
2,011
|
1,041
|
|||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(1,204
|
)
|
167
|
2
|
||||||||||
|
Consolidated
|
$
|
69,104
|
$
|
41,435
|
$
|
5,505
|
$
|
2,178
|
$
|
1,043
|
||||||
A
reconciliation of operating segment EBITDA to consolidated income before taxes
is provided below (in thousands):
|
Quarter
Ended
|
|||||||
|
November
26,
2005
|
November
27,
2004
|
||||||
|
Reportable
segment EBITDA
|
$
|
8,565
|
$
|
6,709
|
|||
|
Restructuring
cost reversal
|
306
|
||||||
|
Corporate
expenses
|
(1,926
|
)
|
(1,510
|
)
|
|||
|
Consolidated
EBITDA
|
6,639
|
5,505
|
|||||
|
Depreciation
|
(1,408
|
)
|
(2,178
|
)
|
|||
|
Amortization
|
(1,095
|
)
|
(1,043
|
)
|
|||
|
Income
from operations
|
4,136
|
2,284
|
|||||
|
Interest
income
|
330
|
118
|
|||||
|
Interest
expense
|
(643
|
)
|
(38
|
)
|
|||
|
Income
before provision for income taxes
|
$
|
3,823
|
$
|
2,364
|
|||
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 will record the gain
from the legal settlement, net of legal fees and related costs, in our
financial statements for the quarter ended February 25, 2006.
|
ITEM
2.
|
MANAGEMENT’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 Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended August 31,
2005.
Overview
Our
financial results for the quarter ended November 26, 2005 represented another
quarter of year-over-year improvement and maintained the favorable momentum
that
was achieved in fiscal 2005. Our income from operations improved to $4.1
million,
compared to $2.3
million
in the prior year and we were able to increase our net income to $3.2
million
from $1.5
million
in the comparable quarter of fiscal 2005. Due to improved operating results
and
reduced preferred dividends resulting from preferred stock redemptions, we
recognized $1.9
million
of net income available to common shareholders compared to a $0.7
million
net loss attributable to common shareholders in the corresponding quarter of
fiscal 2005.
The
primary factors that influenced our operating results for the quarter ended
November 26, 2005 were as follows:
|
·
|
Improved
Sales Performance
- Training
and consulting services sales increased $3.9
million, which reflected increased training sales in both domestic
and
international delivery channels. Product sales declined by $0.7
million, more than 100 percent of which was attributable to the
impact of closed retail stores, reduced technology and specialty
product
sales, and one less business day than the prior year. Partially offsetting
these product sales trends were increased wholesale sales. Total
sales
increased by $3.2
million, or 5
percent, compared to the corresponding quarter of the prior
year.
|
|
·
|
Gross
Margin Improvement
-
Our gross margin improved compared to the prior year due to increased
training sales as a percent of total sales and favorable product
mix
changes.
|
|
·
|
Increased
Operating Costs
-
For the quarter ended November 26, 2005, our selling, general, and
administrative expense increased by $1.8
million,
which was partially offset by a $0.8
million decrease in depreciation expense. Total operating expenses
increased by $1.1
million over the first quarter of fiscal 2005, primarily as a result
of
growth initiatives.
|
|
·
|
Reduced
Preferred Stock Dividends -
Due to preferred stock redemptions in the fourth quarter of fiscal
2005
and the first quarter of fiscal 2006 totaling $40.0
million, our preferred stock dividend cost decreased by $0.8
million compared to the corresponding quarter of fiscal
2005.
|
Further
details regarding these factors and their impact on our operating results and
liquidity are provided throughout the following management’s discussion and
analysis.
Quarter
Ended November 26, 2005 Compared to the Quarter Ended November 27,
2004
Sales
The
following table sets forth sales data for our operating segments (in
thousands):
|
Quarter
Ended
|
||||||||||
|
November
26,
2005
|
November
27,
2004
|
Percent
Change
|
||||||||
|
Consumer
and Small Business Unit:
|
||||||||||
|
Retail
Stores
|
$
|
14,670
|
$
|
18,387
|
(20
|
)
|
||||
|
Consumer
Direct
|
18,588
|
18,859
|
(1
|
)
|
||||||
|
Wholesale
|
6,609
|
3,583
|
84
|
|||||||
|
Other
CSBU
|
1,163
|
985
|
18
|
|||||||
|
41,030
|
41,814
|
(2
|
)
|
|||||||
|
Organizational
Solutions Business
Unit:
|
||||||||||
|
Domestic
|
16,393
|
13,406
|
22
|
|||||||
|
International
|
14,928
|
13,884
|
8
|
|||||||
|
31,321
|
27,290
|
15
|
||||||||
|
Total
Sales
|
$
|
72,351
|
$
|
69,104
|
5
|
|||||
Product
Sales - Overall
product sales, which primarily consist of planners, binders, software, and
handheld electronic planning devices that are primarily sold through our
Consumer and Small Business Unit (CSBU) channels, declined $0.6
million,
or 1
percent,
compared to the prior year. The decline in product sales was primarily due
to
the following performance in our CSBU channels:
|
·
|
Retail
Stores
-
The $3.7
million decline in retail sales was primarily due to fewer stores,
which
had a $3.3
million impact on sales, and reduced technology and specialty product
sales, which totaled $0.7
million. Partially offsetting these declines were increased “core” product
(e.g. planners, binders, and totes) sales during the quarter. At
November
26, 2005, we were operating 105 retail stores compared to 135 stores
at
November 27, 2004. Product sales trends were reflected by a two
percent decline in comparable store (stores which were open during
the
comparable periods) sales compared to the prior year.
|
|
·
|
Consumer
Direct
-
Sales through our consumer direct channels (catalog, eCommerce, and
public
seminars) remained relatively consistent with the prior year.
|
|
·
|
Wholesale -
Sales through our wholesale channel, which includes sales to office
superstores and other retail chains, increased due to the timing
of
product sales to these entities and increased demand from wholesale
channel customers.
|
|
·
|
Other
CSBU
-
Other CSBU sales consist primarily of domestic printing and publishing
sales and building sublease revenues. The increase in other CSBU
revenues
was due to increased sublease revenue. During fiscal 2005 we subleased
a
substantial portion of our corporate headquarters and recognized
increased
lease revenue, which is classified as other CSBU
sales.
|
Training
and Consulting Services - We
offer
a variety of training courses, training related products, and consulting
services focused on productivity, leadership, strategy execution, sales force
performance, and effective communications training programs that are provided
both domestically and internationally through the Organizational Solutions
Business Unit (OSBU). Our overall training and consulting service sales
increased by $3.9
million,
or 16
percent,
compared to the same period of the prior year. The improvement in training
sales
was reflected in both domestic and international training program and consulting
sales and was primarily attributable to the following sales performance in
our
OSBU divisions:
|
·
|
Domestic
- Our
domestic sales performance improved by $3.0
million over the prior year and was primarily attributable to increased
sales of our The
7 Habits of Highly Effective People
training courses and increased sales of our execution and business
results
programs. Sales of our productivity and sales performance programs
remained relatively flat compared to the prior year.
|
|
·
|
International
-
International sales increased $1.0
million compared to the prior year primarily due to increased sales
in
Japan, Canada, and Brazil, as well as increased licensee royalty
revenues.
The translation of foreign sales resulted in a $0.1
million unfavorable impact to our consolidated sales as certain foreign
currencies, particularly in Japan, weakened against the United States
dollar during much of the quarter ended November 26,
2005.
|
Gross
Margin
Gross
margin consists of net sales less the cost of goods sold or services provided.
Our overall gross margin improved to 61.4
percent
of sales for the quarter, compared to 60.0
percent
in the comparable quarter of fiscal 2005. The improvement in our overall gross
margin was primarily due to increased training sales as a percent of total
sales
and favorable product mix changes. Training and consulting service sales, which
typically have higher gross margins than our product sales, increased to
40
percent
of total sales during the quarter ended November 26, 2005 compared to
36
percent
in the prior year.
Our
gross
margin on product sales improved to 57.0
percent
compared to 55.0
percent
in fiscal 2005 and was primarily due to a favorable shift in our product mix
as
sales of higher-margin paper products and binders increased as a percent of
total sales, while sales of lower-margin technology and specialty products
continue to decline.
Training
solution and related services gross margin, as a percent of sales, declined
slightly to 67.9
percent
compared to 68.6
percent
in the first quarter of fiscal 2005.
Operating
Expenses
Selling,
General and Administrative
- Our
selling, general, and administrative (“SG&A”) expenses increased
$1.8
million,
or 5
percent,
compared to the prior year. Increased SG&A expenses were primarily due to
investment in initiatives intended to grow our business in future periods,
increased commissions and bonuses resulting from increased training and
consulting sales, and increases in other SG&A expenses such as accounting
fees. During late fiscal 2005 and the quarter ended November 26, 2005, we began
specific initiatives designed to grow our business in future periods. These
initiatives included hiring additional sales people in the OSBU and the CSBU,
increased advertising and marketing programs, additional curriculum and product
development, and increased spending on sales effectiveness training. Due to
the
time necessary to implement these growth strategies, including training new
sales personnel and effectively rolling out new training offerings and products,
these growth initiatives may not add material benefits to our fiscal 2006
operating results. However, we believe that these investments in additional
sales personnel, increased marketing, and new consulting, training and product
offerings will allow us to increase our sales and improve our operating
performance in future periods. Although we have incurred additional costs
related to these investments in future growth, we continue to implement
strategies designed to reduce our overall operating costs. Our cost-reduction
efforts have included retail store closures, headcount reductions, consolidation
of corporate office space, and other measures designed to focus our resources
on
critical activities and projects related to growth opportunities. The favorable
impact of these efforts, including reduced associate costs and rent expense
related to closed stores, partially offset the increase in other SG&A
spending during the quarter ended November 26, 2005.
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
may close additional stores during fiscal 2006 if further analysis indicates
that we can improve our operating results through additional store closures
due
to the higher costs associated with our retail store channel. No retail store
locations were closed during the quarter ended November 26, 2005 and expenses
incurred for previously closed stores were approximately $39,000
compared
to $0.3
million
for store closure costs in the prior year. 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, which are included as a component of
SG&A expenses. We may continue to incur store closing expenses in future
periods if the Company determines to close additional retail
locations.
On
September 1, 2005, we adopted the provisions of Statement of Financial
Accounting Standards 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 the quarter ended November 26, 2005, our operating
expenses may be unfavorably affected in future periods if we grant additional
stock options or participation in the Company’s employee stock purchase program
increases.
Depreciation
and Amortization
- Depreciation
expense decreased $0.8
million,
or 35
percent,
compared to the first quarter of fiscal 2005 primarily due to the full
depreciation or disposal of certain property and equipment balances, primarily
computer software and hardware, and the effects of significantly reduced capital
expenditures during preceding fiscal years. Based upon these events and current
capital spending trends, we expect that depreciation expense will continue
to
decline compared to prior periods during fiscal 2006.
Amortization
expense on definite-lived intangible assets totaled $1.1
million
for the quarter ended November 26, 2005 compared to $1.0
million
in the prior year. We expect intangible asset amortization expense to total
$3.8
million
in fiscal 2006 as certain intangible assets become fully amortized during the
fiscal year.
Interest
Income and Interest Expense
Interest
Income
-
Our
interest income increased $0.2
million
primarily due to higher average cash balances and higher interest rates on
our
interest-bearing cash accounts.
Interest
Expense
-
Our
interest expense increased $0.6
million
primarily due to the sale of our corporate headquarters facility and the
resulting interest component of our lease payments to the landlord. We are
accounting for the lease on the corporate facility as a financing obligation,
which is accounted for similar to long-term debt.
Income
Taxes
The
provision for income taxes decreased to $0.6
million
for the quarter ended November 26, 2005 compared to $0.8
million
in fiscal 2005. The decrease in our income tax provision was primarily due
to
fluctuations in our income taxes related to foreign tax jurisdictions. We were
unable to offset our tax liabilities in foreign jurisdictions with our domestic
operating loss carryforwards. In addition, a history of significant operating
losses has precluded us from demonstrating 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. Accordingly,
we
have recorded valuation allowances on the majority of our domestic deferred
income tax assets.
Historically,
our primary sources of capital have been net cash provided by operating
activities, line-of-credit financing, long-term borrowings, asset sales, and
the
issuance of preferred and common stock. We currently rely primarily upon cash
flows from operating activities and cash on hand to maintain adequate liquidity
and working capital levels. At November 26, 2005 we had $32.8
million
of cash and cash equivalents compared to $51.7
million
at August 31, 2005. Our net working capital (current assets less current
liabilities) decreased to $43.4
million
at November 26, 2005 compared to $49.9
million
at August 31, 2005.
During
fiscal 2005, we completed the sale of our corporate headquarters facility
located in Salt Lake City, Utah and received net proceeds totaling $32.4
million.
However, in connection with the sale of our corporate campus we incurred a
long-term financing obligation for the purchase price. The annual payments
on
the financing obligation are approximately $3.0
million
per year for the first five years with two percent annual increases thereafter.
We used a portion of the proceeds from the sale of the campus to redeem
$30.0
million
of preferred stock during the fourth quarter of fiscal 2005 and we redeemed
an
additional $10.0
million
of preferred stock during the quarter ended November 26, 2005. We currently
anticipate that additional preferred stock redemptions will occur in future
periods if our cash flows from operating activities continue to
improve.
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
quarter ended November 26, 2005.
Cash
Flows From Operating Activities
During
the quarter ended November 26, 2005, our net cash used for operating activities
totaled $6.2
million
compared to $5.4
million
for the same quarter of the prior year. 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
are
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. Cash used for operating activities during the
quarter was primarily related to 1) payments made to reduce accrued liabilities
and accounts payable from seasonally high August 31 balances; 2) inventory
purchases for our seasonally busy months of November, December, and January;
and
3) to finance growth in our accounts receivable that arose primarily in
connection with improved OSBU and wholesale sales during the quarter. Although
we used significant cash for these operating activities, due in part to the
seasonality of our business, we expect to improve our cash flows from operating
activities in future periods.
We
believe that continued efforts to optimize working capital balances combined
with existing and planned sales growth efforts and cost-cutting initiatives,
will improve our cash flows from operating activities in future periods.
However, the success of these efforts is dependent upon numerous factors, many
of which are not within our control.
Cash Flows From Investing Activities and Capital Expenditures
Net
cash
used for investing activities totaled $1.3
million
for the quarter ended November 26, 2005. Our primary uses of cash for investing
activities were the purchase of property and equipment, which consisted
primarily of computer hardware and software, and totaled $0.6
million,
and further investment in curriculum development, primarily related to new
and
refreshed training courses based on The
7
Habits of Highly Effective People,
which
totaled $0.7
million.
Cash
Flows From Financing Activities
Net
cash
used for financing activities during the quarter ended November 26, 2005 totaled
$11.4
million.
Our primary uses of cash for financing activities were the redemption of
$10.0
million,
or approximately 400,000 shares, of Series A preferred stock and the payment
of
preferred stock dividends, which totaled $1.6
million
(which included accrued dividends through the date of redemption) during the
quarter. We also used restricted cash, generated from a portion of the proceeds
of the corporate headquarters sale, totaling $0.7
million
to repay the mortgage, including a $0.1
million
prepayment penalty, on one of the buildings that was sold in the campus sale
transaction that was completed in fiscal 2005.
Contractual
Obligations
The
Company has not structured any special purpose or variable interest entities,
or
participated in any commodity trading activities, which would expose us to
potential undisclosed liabilities or create adverse consequences to our
liquidity. Required contractual payments primarily consist of payments to EDS
for outsourcing services related to information systems, warehousing and
distribution, and call center operations; payments on the financing obligation
resulting from the sale of our corporate campus; minimum rent payments for
retail store and sales office space; cash payments for Series A preferred stock
dividends; mortgage payments on certain buildings and property; required
computer hardware and software purchases required by our outsourcing contracts;
and monitoring fees paid to a Series A preferred stock investor. There have
been
no significant changes to our expected required contractual obligations from
those disclosed at August 31, 2005.
Other
Items
Management
Common Stock Loan Program
- 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. In May 2004, our Board of Directors approved modifications to the terms
of the management stock loans. While these changes have significant implications
for most management stock loan program participants, the Company did not
formally amend or modify the stock loan program notes. Rather, the Company
is
foregoing certain of its rights under the terms of the loans in order to
potentially improve the participant’s ability to pay, and the Company’s ability
to collect, the outstanding balances of the loans. Based upon guidance found
in
EITF Issue 00-23, Issues
Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44,
and
EITF Issue 95-16, Accounting
for Stock Compensation Agreements with Employer Loan Features under APB Opinion
No. 25,
we
determined that the management common stock loans should be accounted for as
non-recourse stock compensation instruments due to the modifications approved
in
May 2004 and their effects to the Company and the loan participants. While
this
accounting treatment does not alter the legal rights associated with the loans
to the employees, the modifications to the terms of the loans were deemed
significant enough to adopt the non-recourse accounting model as described
in
EITF 00-23. As a result of this accounting treatment, the remaining carrying
value of the notes and interest receivable related to financing common stock
purchases by related parties, which totaled $7.6 million prior to the loan
term
modifications, was reduced to zero with a corresponding reduction in additional
paid-in capital.
We
currently account for the management common stock loans as variable stock option
arrangements. Under the provisions of SFAS No. 123R, which we adopted on
September 1, 2005, additional compensation expense will only be recognized
on
the loans if the Company takes action on the loans that in effect constitutes
a
modification that increases the fair value of an option. This accounting
treatment also precludes us from reversing the amounts expensed as additions
to
the loan loss reserve, totaling $29.7 million, which were recognized in prior
periods. As a result of these loan program modifications, the Company hopes
to
increase the total value received from loan participants; however, the inability
of the Company to collect all, or a portion, of these receivables could have
an
adverse impact upon our financial position and future cash flows compared to
full collection of the loans.
Availability
of Future Capital Resources
- Going
forward, we will continue to incur costs necessary for the operation of the
business. We anticipate using cash on hand, cash provided by operating
activities, on the condition that we can return to generating positive cash
flows from operations, and other financing alternatives, if necessary, for
these
expenditures. We anticipate that our existing capital resources should be
adequate to enable us to maintain our operations for at least the upcoming
twelve months. However, our ability to maintain adequate capital for our
operations in the future is dependent upon a number of factors, including sales
trends, our ability to contain costs, levels of capital expenditures, collection
of accounts receivable, and other factors. Some of the factors that influence
our operations are not within our control, such as economic conditions and
the
introduction of new technology and products by our competitors. We will continue
to monitor our liquidity position and may pursue additional financing
alternatives, if required, to maintain sufficient resources for future operating
and capital requirements. However, there can be no assurance such financing
alternatives will be available to us on acceptable terms.
Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America. The significant
accounting polices that we used to prepare our consolidated financial statements
are outlined in Note 1 to the consolidated financial statements, which are
presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
year ended August 31, 2005. Some of those accounting policies require us to
make
estimates and assumptions that affect the amounts reported in our consolidated
financial statements. Management regularly evaluates its estimates and
assumptions and bases those estimates and assumptions on historical experience,
factors that are believed to be reasonable under the circumstances, and
requirements under accounting principles generally accepted in the United States
of America. Actual results may differ from these estimates under different
assumptions or conditions, including changes in economic conditions and other
circumstances that are not in our control, but which may have an impact on
these
estimates and our actual financial results.
The
following items require 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 strategic execution, leadership, productivity, goal
alignment, sales force performance, and communication effectiveness
skills. These training programs and services are primarily sold through
our OSBU channels.
|
The
Company recognizes revenue when: 1) persuasive evidence of an agreement exists,
2) delivery of product has occurred or services have been rendered, 3) the
price
to the customer is fixed and determinable, and 4) collectibility is reasonably
assured. For product sales, these conditions are generally met upon shipment
of
the product to the customer or by completion of the sale transaction in a retail
store. For training and consulting service sales, these conditions are generally
met upon presentation of the training seminar or delivery of the consulting
services.
Some
of
our training and consulting contracts contain multiple deliverable elements
that
include training along with other products and services. In accordance with
Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables,
sales
arrangements with multiple deliverables are divided into separate units of
accounting if the deliverables in the sales contract meet the following
criteria: 1) the delivered training or product has value to the client on a
standalone basis; 2) there is objective and reliable evidence of the fair value
of undelivered items; and 3) delivery of any undelivered item is probable.
The
overall contract consideration is allocated among the separate units of
accounting based upon their fair values, with the amount allocated to the
delivered item being limited to the amount that is not contingent upon the
delivery of additional items or meeting other specified performance conditions.
If the fair value of all undelivered elements exits, but fair value does not
exist for one or more delivered elements, the residual method is used. Under
the
residual method, the amount of consideration allocated to the delivered items
equals the total contract consideration less the aggregate fair value of the
undelivered items. Fair value of the undelivered items is based upon the normal
pricing practices for the Company’s existing training programs, consulting
services, and other products, which are generally the prices of the items when
sold separately.
Revenue
is recognized on software sales in accordance with Statement of Position (SOP)
97-2, Software
Revenue Recognition
as
amended by SOP 98-09. SOP 97-2, as amended, generally requires revenue earned
on
software arrangements involving multiple elements such as software products
and
support to be allocated to each element based on the relative fair value of
the
elements based on vendor specific objective evidence (VSOE). The majority of
the
Company’s software sales have elements, including a license and post contract
customer support (PCS). Currently the Company does not have VSOE for either
the
license or support elements of its software sales. Accordingly, revenue is
deferred until the only undelivered element is PCS and the total arrangement
fee
is recognized ratably over the support period.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Accounts
Receivable Valuation
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best estimate
of
the amount of probable credit losses in the existing accounts receivable
balance. We determine the allowance for doubtful accounts based upon historical
write-off experience and current economic conditions and we review the adequacy
of our allowance for doubtful accounts on a regular basis. Receivable balances
past due over 90 days, which exceed a specified dollar amount, are reviewed
individually for collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the probability
for recovery is considered remote. We do not have any off-balance sheet credit
exposure related to our customers.
Inventory
Valuation
Inventories
are stated at the lower of cost or market with cost determined using the
first-in, first-out method. Our inventories are comprised primarily of dated
calendar products and other non-dated products such as binders, handheld
electronic devices, stationery, training products, and other accessories.
Provision is made to reduce excess and obsolete inventories to their estimated
net realizable value. In assessing the realization of inventories, we make
judgments regarding future demand requirements and compare these assessments
with current and committed inventory levels. Inventory requirements may change
based on projected customer demand, technological and product life cycle
changes, longer or shorter than expected usage periods, and other factors that
could affect the valuation of our inventories.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized, but rather
are tested for impairment on an annual basis, or more often if events or
circumstances indicate that a potential impairment exists. The Covey trade
name
intangible asset has been deemed to have an indefinite life. This intangible
asset is assigned to the OSBU and is tested for impairment using the present
value of estimated royalties on trade name related revenues, which consist
primarily of training seminars, international licensee royalties, and related
products. If forecasts and assumptions used to support the realizability of
our
indefinite-lived intangible asset change in the future, significant impairment
charges could result that would adversely affect our results of operations
and
financial condition.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an estimate of
undiscounted future net cash flows of the assets over the remaining useful
lives
in determining whether the carrying value of the assets is recoverable. If
the
carrying values of the assets exceed the anticipated future cash flows of the
assets, we recognize an impairment loss equal to the difference between the
carrying values of the assets and their estimated fair values. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent from other groups of assets. The
evaluation of long-lived assets requires us to use estimates of future cash
flows. If forecasts and assumptions used to support the realizability of our
long-lived tangible and definite-lived intangible assets change in the future,
significant impairment charges could result that would adversely affect our
results of operations and financial condition.
Income
Taxes
The
calculation of our income tax provision or benefit, as applicable, requires
estimates of future taxable income or losses. During the course of the fiscal
year, these estimates are compared to actual financial results and adjustments
may be made to our tax provision or benefit to reflect these revised
estimates.
Our
history of significant operating losses precludes us from demonstrating that
it
is more likely than not that the related benefits from deferred income tax
deductions and foreign tax carryforwards will be realized. Accordingly, we
recorded valuation allowances on the majority of our deferred income tax assets.
These valuation allowances are based on estimates of future taxable income
or
losses that may or may not be realized.
In
March
2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 47, Accounting
For Conditional Asset Retirement Obligations - an Interpretation of FASB
Statement No. 143.
This
interpretation clarifies that the term conditional
asset retirement obligation
as used
in SFAS No. 143, Accounting
for Asset Retirement Obligations,
refers
to a legal obligation to perform an asset retirement activity in which the
timing and (or) method of settlement are conditional on a future event that
may
or may not be within the control of the Company. Thus, the timing and (or)
method of settlement may be conditional on a future event. Accordingly, we
will
be required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. The fair value of a liability for the conditional asset retirement
obligation should be recognized when incurred - generally upon acquisition,
construction, development, and (or) through the normal operation of the asset.
The effective date for FIN No. 47 is no later than the end of fiscal years
ending after December 15, 2005, which is August 31, 2006 for the Company. As
of
November 26, 2005, we have not completed our analysis of the impact of FIN
No.
47 on our consolidated financial statements.
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB
Statement No. 3.
Statement No. 154 changes the requirements for the accounting for and reporting
of a change in accounting principle and applies to all voluntary changes in
accounting principle. This statement requires retrospective application to
prior
periods’ financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of an accounting change. Further, SFAS No. 154 requires that the new
accounting principle be applied to the balances of assets and liabilities as
of
the beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance
of retained earnings (or other appropriate components of shareholders’ equity)
for that period that is being reported in an income statement. This statement
also carries forward, without change, the guidance in APB Opinion No. 20 for
reporting the correction of an error in previously issued financial statements
and a change in accounting estimate. Statement No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 and will thus be effective for our fiscal year beginning
September 1, 2006.
ITEM
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
primary financial instrument risks to which the Company is exposed are
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
Currency Sensitivity
Due
to
the global nature of the Company’s operations, we are subject to risks
associated with transactions that are denominated in currencies other than
the
United States dollar, which creates exposure to foreign currency exchange risk.
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.
During
the quarter ended November 26, 2005, 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 the Company’s consolidated statements of
operations and resulted in the following net gains or losses for the periods
indicated (in thousands):
|
Quarter
Ended
|
|||||||
|
November
26,
2005
|
November
27, 2004
|
||||||
|
Losses
on foreign exchange contracts
|
$
|
(46
|
)
|
$
|
(294
|
)
|
|
|
Gains
on foreign exchange contracts
|
217
|
-
|
|||||
|
Net
gain (loss) on foreign exchange contracts
|
$
|
171
|
$
|
(294
|
)
|
||
At
November 26, 2005, the fair value of these contracts, which was determined
using
the estimated amount at which contracts could be settled based upon forward
market exchange rates, was insignificant. The notional amounts of our foreign
currency sell contracts that did not qualify for hedge accounting were as
follows at November 26, 2005 (in thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
|||||
|
Japanese
Yen
|
315,000
|
$
|
2,645
|
||||
|
Australian
Dollars
|
1,535
|
1,122
|
|||||
|
Mexican
Pesos
|
5,100
|
480
|
|||||
During
the quarter ended November 27, 2004, we also entered into foreign currency
forward contracts that were designed to manage foreign currency risks related
to
the value of our net investment in foreign operations located in Canada, Japan,
and the United Kingdom. These foreign currency forward instruments, which
expired on a monthly basis, qualified for hedge accounting and corresponding
gains and losses were recorded as a component of other comprehensive income
in
the Company’s consolidated balance sheet. During the quarter ended November 27,
2004, we recorded losses totaling $0.3 million from these
contracts.
During
the quarter ended November 26, 2005, we did not utilize net investment contracts
or other derivative contracts that qualified for hedge accounting. However,
the
Company may utilize net investment hedge contracts in future periods as a
component of its overall foreign currency risk strategy.
Interest
Rate Sensitivity
The
Company is exposed to fluctuations in U.S. interest rates primarily as a result
of the cash and cash equivalents that we hold. Our debt balances consist
primarily of a financing obligation associated with the sale of our corporate
headquarters facility and a long-term mortgage on certain of our buildings
and
property. As such, the Company does not have significant exposure or additional
liability due to interest rate sensitivity and we were not party to any interest
rate swap or other interest related derivative instrument during the quarter
ended November 26, 2005.
ITEM
4.
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and the Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As
required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report, and included
consideration of the material weakness disclosed in our Form 10-K for the fiscal
year ended August 31, 2005. Based on this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that because of this
material weakness in our accounting for income taxes, our disclosure
controls and procedures were ineffective as of the end of the period covered
by
this Quarterly Report on Form 10-Q. Specifically,
our accounting personnel lacked sufficient technical expertise to properly
account for income taxes in accordance with generally accepted accounting
principles and our monitoring and review controls were inadequate.
Changes
in Internal Control Over Financial Reporting
In
order
to remediate the aforementioned material weakness, management is in the process
of implementing internal controls over financial reporting regarding income
taxes through additional training on accounting for income taxes and
establishing additional monitoring and review controls. Additional work is
needed to fully remedy this material weakness and we intend to continue our
efforts to improve and strengthen our control processes and procedures related
to income taxes.
Other
than as described above, there has been no change in the Company’s internal
controls over financial reporting during the fiscal quarter ended November
26,
2005 that has materially affected, or is reasonable likely to materially affect,
our internal controls over financial reporting.
Certain
written and oral statements made by the Company or our representatives in this
report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, Internet webcasts, or otherwise, are
“forward-looking statements” within the meaning of the Private Securities
Litigation reform Act of 1995 and Section 21E of the Securities Exchange Act
of
1934. Forward-looking statements include, without limitation, any statement
that
may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain words such as “believe,” “anticipate,” “expect,”
“estimate,” “project,” or words or phrases of similar meaning. Forward-looking
statements are subject to certain risks and uncertainties that may cause actual
results to differ materially from the forward-looking statements. These risks
and uncertainties are disclosed from time to time in reports filed by us with
the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and
uncertainties include, but are not limited to, the matters discussed under
Business Environment and Risk in our annual report on Form 10-K for the fiscal
year ended August 31, 2005, which are incorporated herein by this reference.
In
addition, such risks and uncertainties may include unanticipated developments
in
any one or more of the following areas: demand for our products and services,
which depends to some extent on general economic conditions, so that we can
avoid future declines in revenues; the ability of our products and services
to
successfully compete with alternative solutions and the products and services
offered by others; unanticipated costs or capital expenditures; cost savings
from the outsourcing of 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
the
Company’s strategic plans; dependence on existing products or services; the rate
and consumer acceptance of new product introductions; the number and nature
of
customers and their product orders, including changes in the timing or mix
of
product or training orders; pricing of our products and services and those
of
competitors; adverse publicity; and other factors which may adversely affect
our
business.
The
risks
included here are not exhaustive. Other sections of this report may include
additional factors that could adversely affect our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors may emerge and it is not possible for our
management to predict all such risk factors, nor can we assess the impact of
all
such risk factors on our business or the extent to which any single factor,
or
combination of factors, may cause actual results to differ materially from
those
contained in forward-looking statements. Given these risks and uncertainties,
investors should not rely on forward-looking statements as a prediction of
actual results.
The
market price of our common stock has been and may remain volatile. Factors
such
as quarter-to-quarter variations in revenues and earnings or losses or 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
and
share price, the price of our common stock may also be affected by conditions
such as a lack of analyst coverage and fewer potential investors.
Forward-looking
statements are based on management’s expectations as of the date made, and the
Company does not undertake any responsibility to update any of these statements
in the future. Actual future performance and results will differ and may differ
materially from that contained in or suggested by forward-looking statements
as
a result of the factors set forth in this Management’s Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in our filings
with the SEC.
Item
1. Legal
Proceedings:
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 will record the gain from
the legal settlement, net of legal fees and related costs, in our financial
statements for the quarter ended February 25, 2006.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
The
Company acquired the following securities during the quarter ended November
26,
2005 (in thousands except for per share amounts):
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plans or
Programs
|
|||||||||
|
Common
Shares:
|
|||||||||||||
|
September
1, 2005 to October 1, 2005
|
-
|
$
|
-
|
none
|
n/a
|
||||||||
|
October
2, 2005 to October 29, 2005
|
-
|
-
|
none
|
n/a
|
|||||||||
|
October
30, 2005 to November 26, 2005
|
18(1)
|
|
7.00
|
none
|
n/a
|
||||||||
|
Total
Common Shares
|
18
|
$
|
7.00
|
426(3)
|
|
||||||||
|
Total
Preferred Shares
|
400(2)
|
|
$
|
25.00
|
|||||||||
|
(1)
|
Amount
represents shares received from a management stock loan program
participant for payment on their loan.
|
|
(2)
|
Amount
represents the redemption of $10.0 million of Series A preferred
stock
during the period from October 30, 2005 to November 26, 2005.
|
|
(3)
|
In
previous fiscal years, the Company’s Board of Directors had approved
various plans for the purchase of up to 8,000,000 shares of our common
stock. As of November 25, 2000, the Company had purchased 7,705,000
shares
of common stock under these board-authorized purchase plans. On December
1, 2000, the Board of Directors approved an additional plan to acquire
up
to $8.0 million of our common stock. To date, we have purchased $7.1
million of our common stock under the terms of the December 2000
Board
approved purchase plan. The maximum number of shares that may yet
be
purchased under the plans was calculated for the December 2000 plan
by
dividing the remaining approved dollars by $7.00, which was the closing
price of the Company’s common stock on November 25, 2005 (last trading day
of fiscal quarter). These shares were added to the remaining shares
from
the Company’s other Board-approved plans to arrive at the maximum amount
that may be purchased as of November 26, 2005. No shares of the Company’s
common stock were purchased during the fiscal quarter ended November
26,
2005 under terms of any Board authorized purchase
plan.
|
Item
6. Exhibits
|
(A)
|
Exhibits:
|
|
31
|
Rule
13a-14(a) Certifications of the CEO and CFO.
|
||
|
32
|
Section
1350 Certifications of the CEO and
CFO.
|
Pursuant
to the requirements 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.
|
FRANKLIN
COVEY CO.
|
||||
|
Date:
|
January
10, 2006
|
By:
|
/s/
ROBERT A. WHITMAN
|
|
|
Robert
A. Whitman
|
||||
|
Chief
Executive Officer
|
||||
|
Date:
|
January
10, 2006
|
By:
|
/s/
STEPHEN D. YOUNG
|
|
|
Stephen
D. Young
|
||||
|
Chief
Financial Officer
|
||||
CERTIFICATION
OF THE CHIEF EXECUTIVE OFFICER
Pursuant
to Rule 13a-14(a) of the Securities Exchange Act adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert
A. Whitman, certify that:
| 1. |
I
have reviewed this quarterly report on Form 10-Q of
Franklin Covey Co.;
|
| 2. |
Based
on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under
which such statements were made, not misleading with respect to the
period
covered by this report;
|
| 3. |
Based
on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all
material respects the financial condition, results of operations
and cash
flows of the registrant as of, and for, the periods presented in
this
report;
|
| 4. |
The
registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and
procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e))
for
the registrant and have:
|
| a) |
Designed
such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
| b) |
Evaluated
the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about
the
effectiveness of the disclosure controls and procedures, as of the
end of
the period covered by this report based on such evaluation; and
|
| c) |
Disclosed
in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
|
| 5. |
The
registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
|
| a) |
All
significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
| b) |
Any
fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal
control over financial reporting.
|
Date:
January 10, 2006
| /s/ ROBERT A. WHITMAN |
| Robert
A. Whitman Chief Executive Officer |
CERTIFICATION
OF THE CHIEF FINANCIAL OFFICER
Pursuant
to Rule 13a-14(a) of the Securities Exchange Act adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Stephen
D. Young, certify that:
| 1. |
I
have reviewed this quarterly report on Form 10-Q of
Franklin Covey Co.;
|
| 2. |
Based
on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under
which such statements were made, not misleading with respect to the
period
covered by this report;
|
| 3. |
Based
on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all
material respects the financial condition, results of operations
and cash
flows of the registrant as of, and for, the periods presented in
this
report;
|
| 4. |
The
registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and
procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e))
for
the registrant and have:
|
| a) |
Designed
such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
| b) |
Evaluated
the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about
the
effectiveness of the disclosure controls and procedures, as of the
end of
the period covered by this report based on such evaluation; and
|
| c) |
Disclosed
in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
|
| 5. |
The
registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
|
| a) |
All
significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
| b) |
Any
fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal
control over financial reporting.
|
Date:
January 10, 2006
| /s/ STEPHEN D. YOUNG |
| Stephen
D. Young Chief Financial Officer |
The
following certifications are being furnished solely to accompany the Report
pursuant to 18 U.S.C. § 1350 and in accordance with SEC Release No. 33-8238.
These certifications shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, whether made before or after
the date hereof, regardless of any general incorporation language in such
filing.
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
OF FRANKLIN COVEY
PURSUANT TO 18 U.S.C. § 1350
CHIEF EXECUTIVE OFFICER
OF FRANKLIN COVEY
PURSUANT TO 18 U.S.C. § 1350
Pursuant
to
18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002,
the undersigned officer of Franklin Covey Co. (the “Company”), hereby certifies,
to his knowledge, that:
| 1. |
the
accompanying quarterly report on Form 10-Q of the Company
for the period ended November 26, 2005 (the “Report”) fully complies with
the requirements of Section 13 (a) or Section 15 (d), as applicable,
of
the Securities Exchange Act of 1934, as amended; and
|
| 2. |
the
information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of
the Company.
|
Dated:
January 10, 2006
| /s/ ROBERT A. WHITMAN |
| Robert
A. Whitman Chief Executive Officer |
CERTIFICATION
OF
CHIEF FINANCIAL OFFICER
OF FRANKLIN COVEY
PURSUANT TO 18 U.S.C. § 1350
CHIEF FINANCIAL OFFICER
OF FRANKLIN COVEY
PURSUANT TO 18 U.S.C. § 1350
Pursuant
to
18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002,
the undersigned officer of Franklin Covey Co. (the “Company”), hereby certifies,
to his knowledge, that:
| 1. |
the
accompanying quarterly report on Form 10-Q of the
Company for the period ended November 26, 2005 (the “Report”) fully
complies with the requirements of Section 13 (a) or Section 15 (d),
as
applicable, of the Securities Exchange Act of 1934, as amended; and
|
| 2. |
the
information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of
the Company.
|
Dated:
January 10, 2006
| /s/ STEPHEN D. YOUNG |
| Stephen
D. Young Chief Financial Officer |