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 May 27, 2006
|
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
(Stae
of incorporation)
|
87-0401551
(I.R.S.
employer identification number)
|
|
|
2200
West Parkway Boulevard
Salt
Lake City, Utah
(Address
of principal exective offices)
|
84119-2099
(Zip Code)
|
|
|
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
|
o
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Yes
|
o
|
|
|
No
|
x
|
Indicate
the number of shares outstanding of each of the issuer’s classes of Common Stock
as of the latest practicable date:
19,887,747
shares of Common Stock as of July 5, 2006
|
Page
|
|
| Financial Statements | |
| Note 1 - Basis of Presentation | |
| Note 2 - Accounting for Stock-Based Compensation | |
| Note 3 - Inventories | |
| Note 4 - Intangible Assets | |
| Note 5 - Preferred Stock Redemptions and Purchases of Company Common Stock | |
| Note 6 - Income Tax Benefit | |
| Note 7 - Legal Settlement | |
| Note 8 - Comprehensive Income | |
| Note 9 - Earnings Per Share | |
| Note 10 - Segment Information | |
| Note 11 - Management Common Stock Loan Modifications | |
| Results of Operations | |
| Liquidity and Capital Resources | |
| Use of Estimates and Critical Accounting Policies | |
| New Accounting Pronouncements | |
| Market Risk of Financial Instruments | |
| Controls and Procedures | |
| Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 | |
| Other Information | |
| Exhibits | |
| Signatures |
2
PART
I.
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
FRANKLIN
COVEY CO.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except per share amounts)
|
May
27,
2006
|
August
31,
2005
|
||||||
|
(unaudited)
|
|||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
28,804
|
$
|
51,690
|
|||
|
Restricted
cash
|
-
|
699
|
|||||
|
Accounts
receivable, less allowance for doubtful accounts
of $1,155 and $1,425
|
26,684
|
22,399
|
|||||
|
Inventories
|
22,395
|
20,975
|
|||||
|
Other
current assets
|
9,106
|
9,419
|
|||||
|
Total
current assets
|
86,989
|
105,182
|
|||||
|
Property
and equipment, net
|
33,715
|
35,277
|
|||||
|
Intangible
assets, net
|
80,439
|
83,348
|
|||||
|
Other
long-term assets
|
10,714
|
9,426
|
|||||
|
$
|
211,857
|
$
|
233,233
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of long-term debt and financing obligation
|
$
|
576
|
$
|
1,088
|
|||
|
Accounts
payable
|
11,418
|
13,704
|
|||||
|
Income
taxes payable
|
1,490
|
3,996
|
|||||
|
Accrued
liabilities
|
33,660
|
36,536
|
|||||
|
Total
current liabilities
|
47,144
|
55,324
|
|||||
|
Long-term
debt and financing obligation, less current portion
|
33,707
|
34,086
|
|||||
|
Other
liabilities
|
1,186
|
1,282
|
|||||
|
Deferred
income tax liability
|
9,715
|
9,715
|
|||||
|
Total
liabilities
|
91,752
|
100,407
|
|||||
|
Shareholders’
equity:
|
|||||||
|
Preferred
stock - Series A, no par value; 4,000 shares authorized, 1,494
and 2,294 shares issued and outstanding; liquidation
preference totaling
$38,278 and $58,788
|
37,345
|
57,345
|
|||||
|
Common
stock - $0.05 par value; 40,000 shares authorized, 27,056
shares issued and outstanding
|
1,353
|
1,353
|
|||||
|
Additional
paid-in capital
|
186,272
|
190,760
|
|||||
|
Common
stock warrants
|
7,611
|
7,611
|
|||||
|
Accumulated
deficit
|
(1,033
|
)
|
(14,498
|
)
|
|||
|
Deferred
compensation on unvested stock grants
|
-
|
(1,055
|
)
|
||||
|
Accumulated
other comprehensive income
|
770
|
556
|
|||||
|
Treasury
stock at cost, 6,897 and 6,465 shares
|
(112,213
|
)
|
(109,246
|
)
|
|||
|
Total
shareholders’ equity
|
120,105
|
132,826
|
|||||
|
$
|
211,857
|
$
|
233,233
|
||||
See
notes
to condensed consolidated financial statements.
3
FRANKLIN
COVEY CO.
CONDENSED
CONSOLIDATED INCOME STATEMENTS
(in
thousands, except per share amounts)
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
27,
2006
|
May
28,
2005
|
May
27,
2006
|
May
28,
2005
|
||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||
|
Net
sales:
|
|||||||||||||
|
Products
|
$
|
32,184
|
$
|
35,217
|
$
|
126,428
|
$
|
134,443
|
|||||
|
Training
and consulting services
|
31,098
|
30,571
|
87,538
|
82,972
|
|||||||||
|
63,282
|
65,788
|
213,966
|
217,415
|
||||||||||
|
Cost
of sales:
|
|||||||||||||
|
Products
|
15,584
|
16,908
|
56,536
|
61,297
|
|||||||||
|
Training
and consulting services
|
11,406
|
10,612
|
28,558
|
26,198
|
|||||||||
|
26,990
|
27,520
|
85,094
|
87,495
|
||||||||||
|
Gross
profit
|
36,292
|
38,268
|
128,872
|
129,920
|
|||||||||
|
Selling,
general, and administrative
|
35,629
|
36,095
|
108,885
|
110,964
|
|||||||||
|
Depreciation
|
1,134
|
1,848
|
3,763
|
6,346
|
|||||||||
|
Amortization
|
908
|
1,043
|
2,911
|
3,130
|
|||||||||
|
Income
(loss) from operations
|
(1,379
|
)
|
(718
|
)
|
13,313
|
9,480
|
|||||||
|
Interest
income
|
307
|
310
|
953
|
592
|
|||||||||
|
Interest
expense
|
(663
|
)
|
(29
|
)
|
(1,966
|
)
|
(95
|
)
|
|||||
|
Gain
on disposal of investment in unconsolidated subsidiary
|
-
|
500
|
-
|
500
|
|||||||||
|
Legal
settlement
|
-
|
-
|
873
|
-
|
|||||||||
|
Income
(loss) before benefit for income taxes
|
(1,735
|
)
|
63
|
13,173
|
10,477
|
||||||||
|
Income
tax benefit
|
2,754
|
3,006
|
292
|
1,203
|
|||||||||
|
Net
income
|
1,019
|
3,069
|
13,465
|
11,680
|
|||||||||
|
Preferred
stock dividends
|
(934
|
)
|
(2,184
|
)
|
(3,452
|
)
|
(6,551
|
)
|
|||||
|
Loss
on recapitalization of preferred stock
|
-
|
(7,753
|
)
|
-
|
(7,753
|
)
|
|||||||
|
Net
income (loss) available to common shareholders
|
$
|
85
|
$
|
(6,868
|
)
|
$
|
10,013
|
$
|
(2,624
|
)
|
|||
|
Net
income (loss) available to common
shareholders
per share:
|
|||||||||||||
|
Basic
|
$
|
.00
|
$
|
(.34
|
)
|
$
|
.50
|
$
|
(.18
|
)
|
|||
|
Diluted
|
$
|
.00
|
$
|
(.34
|
)
|
$
|
.48
|
$
|
(.18
|
)
|
|||
|
Weighted
average number of common shares:
|
|||||||||||||
|
Basic
|
20,060
|
19,922
|
20,234
|
19,847
|
|||||||||
|
Diluted
|
20,734
|
19,922
|
20,670
|
19,847
|
|||||||||
See
notes
to condensed consolidated financial statements.
4
FRANKLIN
COVEY CO.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
Three
Quarters Ended
|
|||||||
|
May
27,
2006
|
May
28,
2005
|
||||||
|
(unaudited)
|
|||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
13,465
|
$
|
11,680
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|||||||
|
Depreciation
and amortization
|
8,046
|
11,082
|
|||||
|
Restructuring
cost reversal
|
-
|
(306
|
)
|
||||
|
Stock-based
compensation cost
|
567
|
729
|
|||||
|
Compensation
cost related to CEO common stock grant
|
-
|
404
|
|||||
|
Gain
on disposal of unconsolidated subsidiary
|
-
|
(500
|
)
|
||||
|
Changes
in assets and liabilities:
|
|||||||
|
Increase
in accounts receivable, net
|
(4,264
|
)
|
(6,095
|
)
|
|||
|
Decrease
(increase) in inventories
|
(1,388
|
)
|
2,253
|
||||
|
Decrease
in other assets
|
856
|
957
|
|||||
|
Decrease
in accounts payable and accrued liabilities
|
(4,628
|
)
|
(5,450
|
)
|
|||
|
Increase
(decrease) in other long-term liabilities
|
(192
|
)
|
470
|
||||
|
Increase
(decrease) in income taxes payable
|
(2,535
|
)
|
(1,547
|
)
|
|||
|
Net
cash provided by operating activities
|
9,927
|
13,677
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Purchases
of property and equipment
|
(3,318
|
)
|
(2,671
|
)
|
|||
|
Purchases
of short-term investments
|
-
|
(10,653
|
)
|
||||
|
Sales
of short-term investments
|
-
|
21,383
|
|||||
|
Proceeds
from sale of investment in unconsolidated subsidiary
|
-
|
500
|
|||||
|
Curriculum
development costs
|
(1,812
|
)
|
(1,699
|
)
|
|||
|
Net
cash provided by (used for) investing activities
|
(5,130
|
)
|
6,860
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Principal
payments on long-term debt and financing obligation
|
(965
|
)
|
(87
|
)
|
|||
|
Change
in restricted cash
|
699
|
-
|
|||||
|
Proceeds
from sales of common stock from treasury
|
333
|
35
|
|||||
|
Proceeds
from management stock loan payments
|
134
|
840
|
|||||
|
Redemption
of preferred stock
|
(20,000
|
)
|
-
|
||||
|
Purchase
of treasury shares
|
(3,982
|
)
|
(22
|
)
|
|||
|
Payment
of preferred stock dividends
|
(3,952
|
)
|
(6,551
|
)
|
|||
|
Net
cash used for financing activities
|
(27,733
|
)
|
(5,785
|
)
|
|||
|
Effect
of foreign exchange rates on cash and cash equivalents
|
50
|
(473
|
)
|
||||
|
Net
increase (decrease) in cash and cash equivalents
|
(22,886
|
)
|
14,279
|
||||
|
Cash
and cash equivalents at beginning of the period
|
51,690
|
31,174
|
|||||
|
Cash
and cash equivalents at end of the period
|
$
|
28,804
|
$
|
45,453
|
|||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Cash
paid for interest
|
$
|
2,001
|
$
|
79
|
|||
|
Cash
paid for income taxes
|
$
|
2,284
|
$
|
770
|
|||
|
Non-cash
investing and financing activities:
|
|||||||
|
Accrued
preferred stock dividends
|
$
|
934
|
$
|
2,184
|
|||
|
Issuance
of unvested common stock for compensation plans
|
212
|
720
|
|||||
|
Loss
on recapitalization of preferred stock
|
- |
(7,753
|
)
|
||||
|
Capital
lease financing of property and equipment purchases
|
109
|
-
|
|||||
See
notes
to condensed consolidated financial statements.
5
FRANKLIN
COVEY CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1 - BASIS OF PRESENTATION
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 seminars, retail stores,
catalogs, and the Internet at www.franklincovey.com.
Historically, the Company’s 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, except as discussed below) 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 consolidated financial statements and
related notes included in our Annual Report on Form 10-K for the fiscal year
ended August 31, 2005.
During
the quarter ended May 27, 2006, we determined that our Mexico subsidiary
had
misstated its financial results in prior periods by recording improper sales
transactions and not recording all operating expenses in proper periods.
We
determined that the misstatements occurred during fiscal 2002 through fiscal
2006 in various amounts. The Audit Committee engaged an independent legal
firm
to investigate the misstatements and they concluded that such misstatements
were
intentional. The Company determined that the impact of these misstatements
was
immaterial to previously issued financial statements and we recorded a
$0.5
million
decrease to international sales and a $0.5
million
increase in selling, general, and administrative expenses during the quarter
ended May 27, 2006 to correct these misstatements. We are currently in the
process of taking actions as recommended by the investigators, which include
enhancements to internal control over foreign operations.
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 ended on November 26, 2005, February 25, 2006, and May 27, 2006 during
fiscal 2006. Under the modified 52/53-week fiscal year, the quarter and three
quarters ended May 27, 2006 had the same number of business days as the
corresponding periods of the prior fiscal year.
The
results of operations for the quarter and three quarters ended May 27, 2006
are
not necessarily 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.
6
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.
We
previously accounted for our stock-based compensation using the intrinsic method
as defined in APB Opinion No. 25 and accordingly, prior to September 1, 2005
we
did not recognize 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 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 reclassified our unamortized deferred
compensation related to the issuance of unvested common stock awards that was
reported in the equity section of our balance sheet to additional paid-in
capital. The following table presents the stock-based compensation expense
included in our selling, general, and administrative expenses for the quarter
and three quarters ended May 27, 2006 and the pro forma stock-based compensation
amounts that would have been included in our income statements for the
comparable periods of the prior year had stock-based compensation expense been
determined in accordance with the fair value method prescribed by SFAS No.
123
and SFAS No. 148, Accounting
for Stock-Based Compensation: An Amendment of FASB Statement No.
123
(in
thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
27,
2006
|
May
28,
2005
|
May
27,
2006
|
May
28,
2005
|
||||||||||
|
Compensation
cost of stock options
|
$
|
2
|
$
|
4(1)
|
|
$
|
6
|
$
|
2,103(1)
|
|
|||
|
Discount
on employee stock purchase plan
|
9
|
-
|
24
|
4(1)
|
|
||||||||
|
Compensation
cost of unvested stock awards
|
321
|
344
|
537
|
722
|
|||||||||
|
Compensation
cost of stock option agreement modifications
|
-
|
108(1)
|
|
-
|
108(1)
|
|
|||||||
|
Compensation
cost of fully vested stock award
|
-
|
-
|
-
|
404
|
|||||||||
|
Total
stock-based compensation
|
$
|
332
|
$
|
456
|
$
|
567
|
$
|
3,341
|
|||||
|
Net
loss attributable to common shareholders, as reported
|
$
|
(6,868
|
)
|
$
|
(2,624
|
)
|
|||||||
|
Fair
value of stock-based compensation excluded from net loss, net of
tax
|
(112
|
)
|
(2,215
|
)
|
|||||||||
|
Net
income available to common shareholders, pro forma
|
$
|
(6,980
|
)
|
$
|
(4,839
|
)
|
|||||||
|
Basic
and diluted earnings per share, as reported
|
$
|
(.34
|
)
|
$
|
(.18
|
)
|
|||||||
|
Basic
and diluted earnings per share, pro forma
|
$
|
(.35
|
)
|
$
|
(.29
|
)
|
|||||||
|
(1)
|
Based
upon the intrinsic method as defined in APB Opinion No. 25, this
amount
was excluded from operating expenses and net income prior to the
adoption
of SFAS No. 123(R) on September 1,
2005.
|
7
The
following is a description of activity in our stock-based compensation plans
for
the quarter and three quarters ended May 27, 2006.
Stock
Options
The
Company has an incentive stock option plan whereby options to purchase shares
of
our common stock are issued to key employees at an exercise price not less
than
the fair market value of the Company’s common stock on the date of grant. The
term, not to exceed ten years, and exercise period of each incentive stock
option awarded under the plan are determined by a committee appointed by our
Board of Directors. During the three quarters ended May 27, 2006 we did not
grant any new stock options and the remaining unamortized service cost on
previously granted stock options is insignificant in aggregate. The intrinsic
value of stock options exercised during the three quarters ended May 27, 2006
was less than $0.1
million.
The fair market value of options that vested during the quarter was zero and
for
the three quarters ended May 27, 2006 was approximately $6,000.
The
Company generally issues shares of common stock for the exercise of stock
options from shares held in treasury.
A
summary
of our stock option activity for the three quarters ended May 27, 2006 is as
follows (in thousands, except share amounts):
|
Number
of Stock Options
|
Weighted
Avg. Exercise Price
|
||||||
|
Outstanding
at August 31, 2005
|
2,285,884
|
12.40
|
|||||
|
Granted
|
-
|
-
|
|||||
|
Exercised
|
(35,537
|
)
|
5.50
|
||||
|
Forfeited
|
(90,375
|
)
|
15.84
|
||||
|
Outstanding
at May 27, 2006
|
2,159,972
|
12.37
|
|||||
The
following additional information applies to our stock options outstanding at
May
27, 2006:
|
Range
of
Exercise
Prices
|
Number
Outstanding at May 27, 2006
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Options
Exercisable at May 27, 2006
|
Weighted
Average Exercise Price
|
|||||||||||
|
$1.70
- $7.00
|
232,912
|
3.8
|
$
|
5.30
|
207,912
|
$
|
5.73
|
|||||||||
|
$7.75
- $9.69
|
316,500
|
3.3
|
9.19
|
316,500
|
9.19
|
|||||||||||
|
$14.00
- $14.00
|
1,602,000
|
4.3
|
14.00
|
1,602,000
|
14.00
|
|||||||||||
|
$17.69
- $21.50
|
8,560
|
1.6
|
17.82
|
8,560
|
17.82
|
|||||||||||
The
intrinsic value of our outstanding in-the-money options was $0.7
million
and the intrinsic value of our exercisable in-the-money options was $0.5
million
at May 27, 2006.
The
Company did not issue any stock options to vendors or other non-employees during
the three quarters ended May 27, 2006.
Employee
Stock Purchase Plan
The
Company has an employee stock purchase plan that offers qualified employees
the
opportunity to purchase shares of our common stock at a price equal to 85
percent of the average fair market value of the Company’s common stock on the
last trading day of the calendar month in each fiscal quarter. Based upon SFAS
No. 123R, we determined that the discount offered to employees is compensatory
and the amount is therefore expensed each quarter. A total of 7,546
and
21,920
shares
were issued under this plan in the quarter and three quarters ended May 27,
2006, respectively.
8
Unvested
Stock Awards
Employee
Awards
- During
fiscal 2006 and in prior periods, we have granted unvested stock awards to
certain employees as long-term incentives. The following is a brief description
of these unvested stock awards that have been granted to employees.
Awards
Granted in Fiscal 2005 and Prior Periods - These
awards cliff vest five years from the grant date or on an accelerated basis
if
we achieve specified earnings levels. The compensation cost of these unvested
stock awards was based on the fair value of the shares on the grant date and
is
expensed on a straight-line basis over the vesting (service) period of the
awards. The recognition of compensation cost will be accelerated when we believe
that it is probable that we will achieve the specified earnings thresholds
and
the shares will vest. We did not accelerate the vesting of any of these awards
during the three quarters ended May 27, 2006.
Fiscal
2006 Long-Term Incentive Plan - On
January 20, 2006, the Company’s shareholders approved a stock-based long-term
incentive plan (the LTIP) that permits the grant of unvested share awards of
common stock to certain employees as directed by the Compensation Committee
of
the Board of Directors. The LTIP share awards granted during fiscal 2006 cliff
vest on August
31, 2008,
which
is the completion of a three-year performance period. The number of shares
that
are finally awarded to LTIP participants is variable and is based entirely
upon
the achievement of a combination of performance objectives related to sales
growth and operating income during the three-year performance period. The
Compensation Committee initially granted awards for 377,665
shares
(target award) of common stock; the number of shares finally awarded will range
from zero shares, if a minimum level of performance is not achieved, to 200
percent of the target award, if specifically defined performance criteria is
achieved during the three-year performance period.
The
LTIP
shares were valued at $6.60
per
share, which was the closing price of our common stock on the grant date. The
corresponding compensation cost of the award, based upon the target award number
of shares, totaled $2.5
million,
which is being expensed over the service period of the award. Due to the
variable number of shares that may be issued under the LTIP, we reevaluate
the
LTIP on a quarterly basis and adjust the number of shares expected to be awarded
based upon financial results of the Company as compared to the performance
goals
set for the award. Adjustments to the number of shares awarded, and to the
corresponding compensation expense, are made on a cumulative basis at the date
of adjustment based upon the probable number of shares to be awarded. There
was
no adjustment to the number of shares expected to be issued under the LTIP
during the three quarters ended May 27, 2006. The total compensation cost of
the
LTIP is equal to the number of shares finally issued multiplied by $6.60 per
share, the fair value of the common shares determined at the grant
date.
Board
of Director Awards
- During
January 2006, the Company’s shareholders also approved changes to our
non-employee directors’ stock incentive plan (the Directors’ Plan). The
Directors’ plan was designed to provide non-employee directors of the Company,
who are ineligible to participate in our employee stock incentive plan, an
opportunity to acquire an interest in the Company through the acquisition of
shares of common stock. Under the previous provisions of the Directors’ Plan,
each non-employee director received an annual unvested stock award with a value
(based on the trading price of the Company’s common stock on the date of the
award) equal to $27,500. The primary modification to the Directors’ plan
approved by the shareholders changes the annual unvested stock grant to 4,500
shares of common stock rather than the dollar value previously defined in the
plan. The amendment also eliminates the limitation on the maximum dollar value
of all awards made under the Directors’ Plan in any given year.
During
the three quarters ended May 27, 2006, we granted 27,000
shares
of unvested stock to members of our Board of Directors under the Directors’
Plan. The compensation cost of the Board of Director award was $0.2
million
and was calculated at $7.84
per
share, which was the fair value of the Company’s common stock on the grant date.
The common stock issued to the Board of Directors was previously recorded as
treasury stock and had a cost basis of $0.5
million.
The difference between the compensation cost of the award and the cost of the
shares issued was recorded to additional paid-in capital.
A
summary
of our unvested stock award activity for the three quarters ended May 27, 2006
is as follows (in thousands, except share amounts):
|
Number
of Unvested Shares
|
Compensation
Cost
|
||||||
|
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
|
|||||
|
Granted
|
377,665
|
2,493
|
|||||
|
Vested
|
-
|
-
|
|||||
|
Amortization
of compensation
|
n/a
|
(148
|
)
|
||||
|
Outstanding
shares and unamortized compensation cost at February 25,
2006
|
786,960
|
$
|
3,332
|
||||
|
Granted
|
27,000
|
211
|
|||||
|
Vested
|
-
|
-
|
|||||
|
Amortization
of compensation
|
n/a
|
(321
|
)
|
||||
|
Outstanding
shares and unamortized compensation cost at May 27, 2006
|
813,960
|
$
|
3,222
|
||||
The
intrinsic value of our unvested stock awards (both employee and Board of
Director awards) was $6.5
million,
which was based upon our closing stock price of $7.99
per
share on May 27, 2006.
9
NOTE
3 - INVENTORIES
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):
|
May
27,
2006
|
August
31,
2005
|
||||||
|
Finished
goods
|
$
|
19,408
|
$
|
18,161
|
|||
|
Work
in process
|
299
|
825
|
|||||
|
Raw
materials
|
2,688
|
1,989
|
|||||
|
$
|
22,395
|
$
|
20,975
|
||||
NOTE
4 - INTANGIBLE ASSETS
The
Company’s intangible assets were comprised of the following (in
thousands):
|
May
27, 2006
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||
|
Definite-lived
intangible assets:
|
||||||||||
|
License
rights
|
$
|
27,000
|
$
|
(7,183
|
)
|
$
|
19,817
|
|||
|
Curriculum
|
58,233
|
(26,442
|
)
|
31,791
|
||||||
|
Customer
lists
|
18,774
|
(12,943
|
)
|
5,831
|
||||||
|
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
|
105,284
|
(47,845
|
)
|
57,439
|
|||||||
|
Indefinite-lived
intangible asset:
|
||||||||||
|
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
|
Balance
at May 27, 2006
|
$
|
128,284
|
$
|
(47,845
|
)
|
$
|
80,439
|
|||
|
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 $0.9
million
for the quarter ended May 27, 2006 and $1.0
million
during the quarter ended May 28, 2005. For the three quarters ended May 27,
2006
our total amortization expense was $2.9
million
compared to $3.1
million
for the three quarters ended May 28, 2005.
Preferred
Stock Redemptions
During
the three quarters ended May 27, 2006 we have redeemed $20.0
million,
or approximately 800,000
shares
of preferred stock. Since the recapitalization of our preferred stock in March
2005, we have redeemed a total of $50.0
million,
or approximately 2.0
million
shares, of our outstanding Series A preferred stock. These preferred stock
redemptions have reduced the Company’s preferred dividend obligation by
$5.0
million
per year.
At
our
Annual Meeting of Shareholders held in January 2006, we obtained shareholder
approval of an amendment to our articles of incorporation that extends the
period during which we have the right to redeem outstanding shares of preferred
stock at 100 percent of its liquidation preference. The amendment extends the
current redemption deadline from March 8, 2006 to December 31, 2006 and also
provides 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. During February 2006 we redeemed the preferred stock
necessary to satisfy the additional extension provision and the Company can
redeem preferred stock at the liquidation preference through December 31,
2007.
Common
Stock Purchases
During
January 2006, our Board of Directors authorized the purchase of up to
$10.0
million
of our currently outstanding common stock. The purchases will be made at the
Company’s discretion at prevailing market prices and will be subject to
customary regulatory requirements and considerations. The Company does not
have
a timetable for the purchase of these common shares and the authorization by
the
Board of Directors does not have an expiration date. During the quarter ended
May 27, 2006, we purchased 275,300
shares
of our common stock for $2.4
million.
Through the three quarters ended May 27, 2006 we have purchased 485,500
shares
of our common stock under the terms of this newly authorized plan for
$3.9
million.
10
NOTE
6 - INCOME TAX BENEFIT
The
Company recorded income tax benefits totaling $2.8
million
during the quarter ended May 27, 2006 and $3.0
million
during the quarter ended May 28, 2005. We regularly evaluate our United States
federal and various state and foreign jurisdiction income tax exposures and
record reserves against tax exposures based upon the probability that the tax
exposure would be sustained by various tax jurisdictions. We recognize the
benefits of the tax exposure items in the financial statements, that is, the
reserve is reversed when it becomes probable that the tax position will be
sustained. To assess the probability of sustaining a tax position, the Company
considers all available positive evidence. In many instances, sufficient
positive evidence may not be available until the expiration of the statute
of
limitations for assessment by tax authorities, at which time the entire benefit
will be recognized as a discrete item in the applicable period. The income
tax
benefits recorded during the quarters ended May 27, 2006 and May 28, 2005
resulted primarily from the expiration of the statute of
limitations for various tax exposures, which was partially offset by income
taxes incurred by our profitable foreign subsidiaries and foreign income taxes
on payments received from foreign licensees.
During
the periods ended May 27, 2006 and May 28, 2005, 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.
However, as operating results continue to improve and taxable income continues
to increase, we are accumulating positive evidence which may allow us to reverse
these valuation allowances on the deferred income tax assets in a future
period.
NOTE
7 - LEGAL SETTLEMENT
In
fiscal
2002, we filed legal action against World Marketing Alliance, Inc., a Georgia
corporation (WMA), and World Financial Group, Inc., a Delaware corporation
and
purchaser of substantially all assets of WMA, for breach of contract. The case
proceeded to trial and the jury rendered a verdict in our favor and against
WMA
on November 1, 2004 for the entire unpaid contract amount of approximately
$1.1
million.
In addition to the verdict, we recovered legal fees totaling $0.3
million
and pre- and post-judgment interest of $0.3 million from WMA. During our fiscal
quarter ended May 28, 2005, we received payment in cash from WMA for the total
verdict amount, including legal fees and interest. However, shortly after paying
the verdict amount, WMA appealed the jury decision to the 10th Circuit Court
of
Appeals and we recorded receipt of the verdict amount plus legal fees and
interest with a corresponding increase to accrued liabilities and deferred
the
gain until the case was finally resolved. On December 30, 2005, the Company
entered into a settlement agreement with WMA. Under the terms of the settlement
agreement, WMA agreed to dismiss its appeal. As a result of this settlement
agreement and dismissal of WMA’s appeal, we recorded a $0.9
million
gain from the legal settlement and a $0.3
million
reduction in selling, general, and administrative expenses during the second
quarter of fiscal 2006.
NOTE
8 - COMPREHENSIVE INCOME
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
|
Three
Quarters Ended
|
||||||||||||
|
May
27,
2006
|
May
28,
2005
|
May
27,
2006
|
May
28,
2005
|
||||||||||
|
Net
income
|
$
|
1,019
|
$
|
3,069
|
$
|
13,465
|
$
|
11,680
|
|||||
|
Other
comprehensive income (loss) items:
|
|||||||||||||
|
Adjustment
for fair value of foreign currency hedge derivatives
|
-
|
-
|
-
|
(318
|
)
|
||||||||
|
Foreign
currency translation adjustments
|
434
|
(455
|
)
|
214
|
(52
|
)
|
|||||||
|
Comprehensive
income
|
$
|
1,453
|
$
|
2,614
|
$
|
13,679
|
$
|
11,310
|
|||||
11
NOTE
9 - EARNINGS PER SHARE
Basic
earnings per common share (EPS) is calculated by dividing net income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is calculated by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding plus the assumed exercise of all dilutive securities using the
treasury stock method or the “as converted” method, as appropriate. Following
the preferred stock recapitalization that was completed in March 2005, 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
|
Three
Quarters Ended
|
||||||||||||
|
May
27,
2006
|
May
28,
2005
|
May
27,
2006
|
May
28,
2005
|
||||||||||
|
Net
income
|
$
|
1,019
|
$
|
3,069
|
$
|
13,465
|
$
|
11,680
|
|||||
|
Non-convertible
preferred stock dividends
|
(934
|
)
|
(2,184
|
)
|
(3,452
|
)
|
(2,184
|
)
|
|||||
|
Convertible
preferred stock dividends
|
-
|
-
|
-
|
(4,367
|
)
|
||||||||
|
Loss
on recapitalization of preferred stock
|
-
|
(7,753
|
)
|
-
|
(7,753
|
)
|
|||||||
|
Net
income (loss) available to common shareholders
|
$
|
85
|
$
|
(6,868
|
)
|
$
|
10,013
|
$
|
(2,624
|
)
|
|||
|
Convertible
preferred stock dividends
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
4,367
|
|||||
|
Weighted
average preferred shares on an as converted basis
|
-
|
-
|
-
|
6,239
|
|||||||||
|
Distributed
EPS - preferred
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
.70
|
|||||
|
Undistributed
income (loss) through February 26, 2005
|
$
|
-
|
$
|
(6,868
|
)
|
$
|
-
|
$
|
4,244
|
||||
|
Preferred
ownership on an as converted basis
|
-
|
-
|
-
|
24
|
%
|
||||||||
|
Preferred
shareholders interest in undistributed income
|
-
|
-
|
-
|
1,019
|
|||||||||
|
Weighted
average preferred shares on an as converted basis
|
-
|
-
|
6,239
|
||||||||||
|
Undistributed
EPS - preferred
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
.16
|
|||||
|
Undistributed
income (loss)
|
$
|
85
|
$
|
(6,868
|
)
|
$
|
10,013
|
$
|
4,244
|
||||
|
Common
stock ownership
|
100
|
%
|
100
|
%
|
100
|
%
|
76
|
%
|
|||||
|
Common
shareholder interest in undistributed income (loss)
|
85
|
-
|
10,013
|
3,225
|
|||||||||
|
Undistributed
loss for the quarter ended May 28, 2005
|
-
|
(6,868
|
)
|
-
|
(6,868
|
)
|
|||||||
|
Common
shareholder interest in undistributed loss
|
$
|
85
|
$
|
(6,868
|
)
|
$
|
10,013
|
$
|
(3,643
|
)
|
|||
|
Weighted
average common shares outstanding - Basic
|
20,060
|
19,922
|
20,234
|
19,847
|
|||||||||
|
Effect
of dilutive securities(1):
|
|||||||||||||
|
Stock
options
|
75
|
-
|
55
|
-
|
|||||||||
|
Unvested
stock awards
|
403
|
-
|
315
|
-
|
|||||||||
|
Common
stock warrants
|
196
|
-
|
66
|
-
|
|||||||||
|
Weighted
average common shares outstanding - Diluted
|
20,734
|
19,922
|
20,670
|
19,847
|
|||||||||
|
Basic
EPS - Common
|
$
|
.00
|
$
|
(.34
|
)
|
$
|
.50
|
$
|
(.18
|
)
|
|||
|
Diluted
EPS - Common
|
$
|
.00
|
$
|
(.34
|
)
|
$
|
.48
|
$
|
(.18
|
)
|
|||
(1)For
the
quarter and three quarters ended May 28, 2005, conversion of common share
equivalents is not assumed because such conversion would be
anti-dilutive.
At
May
27, 2006, we had approximately 1.8
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. At May 28, 2005, we had approximately
2.3
million
stock options that were not considered in our calculation of diluted EPS that
may have a dilutive effect on the Company’s EPS calculation in future
periods.
12
NOTE
10 - SEGMENT INFORMATION
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 our CSBU channels.
Organizational
Solutions Business Unit - The
OSBU
is primarily responsible for the development, marketing, sale, and delivery
of
strategic execution, productivity, leadership, sales force performance, and
communication training and consulting solutions directly to organizational
clients, including other companies, the government, and educational
institutions. The OSBU includes the financial results of our domestic sales
force and 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 first quarter of fiscal 2006, 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.
13
|
(in
thousands)
|
||||||||||||||||
|
Quarter
Ended
May
27, 2006
|
Sales
to External Customers
|
Gross
Profit
|
EBITDA
|
Depreciation
|
Amortization
|
|||||||||||
|
Consumer
and Small Business Unit:
|
||||||||||||||||
|
Retail
|
$
|
11,493
|
$
|
6,347
|
$
|
(1,018
|
)
|
$
|
274
|
$
|
-
|
|||||
|
Consumer
direct
|
12,504
|
7,479
|
5,509
|
16
|
-
|
|||||||||||
|
Wholesale
|
6,920
|
3,632
|
3,447
|
-
|
-
|
|||||||||||
|
Other
CSBU
|
1,168
|
119
|
(6,870
|
)
|
300
|
-
|
||||||||||
|
Total
CSBU
|
32,085
|
17,577
|
1,068
|
590
|
-
|
|||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||
|
Domestic
|
17,807
|
10,879
|
639
|
85
|
902
|
|||||||||||
|
International
|
13,390
|
7,836
|
415
|
289
|
6
|
|||||||||||
|
Total
OSBU
|
31,197
|
18,715
|
1,054
|
374
|
908
|
|||||||||||
|
Total
operating segments
|
63,282
|
36,292
|
2,122
|
964
|
908
|
|||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(1,459
|
)
|
170
|
-
|
||||||||||
|
Consolidated
|
$
|
63,282
|
$
|
36,292
|
$
|
663
|
$
|
1,134
|
$
|
908
|
||||||
|
Quarter
Ended
May
28, 2005
|
||||||||||||||||
|
Consumer
and Small Business Unit:
|
||||||||||||||||
|
Retail
|
$
|
13,443
|
$
|
7,392
|
$
|
(1,083
|
)
|
$
|
614
|
$
|
-
|
|||||
|
Consumer
direct
|
12,144
|
7,153
|
3,876
|
23
|
-
|
|||||||||||
|
Wholesale
|
7,627
|
3,459
|
3,292
|
-
|
-
|
|||||||||||
|
Other
CSBU
|
792
|
(39
|
)
|
(5,925
|
)
|
650
|
86
|
|||||||||
|
Total
CSBU
|
34,006
|
17,965
|
160
|
1,287
|
86
|
|||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||
|
Domestic
|
18,736
|
11,629
|
2,313
|
74
|
954
|
|||||||||||
|
International
|
13,046
|
8,674
|
2,744
|
331
|
2
|
|||||||||||
|
Total
OSBU
|
31,782
|
20,303
|
5,057
|
405
|
956
|
|||||||||||
|
Total
operating segments
|
65,788
|
38,268
|
5,217
|
1,692
|
1,042
|
|||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(3,044
|
)
|
156
|
1
|
||||||||||
|
Consolidated
|
$
|
65,788
|
$
|
38,268
|
$
|
2,173
|
$
|
1,848
|
$
|
1,043
|
||||||
|
Three
Quarters Ended
May
27, 2006
|
||||||||||||||||
|
Consumer
and Small Business Unit:
|
||||||||||||||||
|
Retail
|
$
|
50,001
|
$
|
29,359
|
$
|
4,404
|
$
|
1,056
|
$
|
-
|
||||||
|
Consumer
direct
|
50,291
|
30,311
|
23,992
|
43
|
-
|
|||||||||||
|
Wholesale
|
17,148
|
8,680
|
8,142
|
-
|
-
|
|||||||||||
|
Other
CSBU
|
3,622
|
630
|
(22,525
|
)
|
957
|
57
|
||||||||||
|
Total
CSBU
|
121,062
|
68,980
|
14,013
|
2,056
|
57
|
|||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||
|
Domestic
|
49,423
|
31,677
|
2,985
|
249
|
2,845
|
|||||||||||
|
International
|
43,481
|
28,215
|
8,320
|
940
|
9
|
|||||||||||
|
Total
OSBU
|
92,904
|
59,892
|
11,305
|
1,189
|
2,854
|
|||||||||||
|
Total
operating segments
|
213,966
|
128,872
|
25,318
|
3,245
|
2,911
|
|||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(5,331
|
)
|
518
|
-
|
||||||||||
|
Consolidated
|
$
|
213,966
|
$
|
128,872
|
$
|
19,987
|
$
|
3,763
|
$
|
2,911
|
||||||
|
Three
Quarters Ended
May
28, 2005
|
||||||||||||||||
|
Consumer
and Small Business Unit:
|
||||||||||||||||
|
Retail
|
$
|
59,886
|
$
|
34,369
|
$
|
5,453
|
$
|
2,136
|
$
|
-
|
||||||
|
Consumer
direct
|
49,390
|
29,455
|
19,274
|
517
|
-
|
|||||||||||
|
Wholesale
|
16,107
|
7,536
|
6,995
|
-
|
-
|
|||||||||||
|
Other
CSBU
|
2,542
|
(1,289
|
)
|
(20,416
|
)
|
2,016
|
258
|
|||||||||
|
Total
CSBU
|
127,925
|
70,071
|
11,306
|
4,669
|
258
|
|||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||
|
Domestic
|
48,303
|
31,756
|
5,293
|
228
|
2,862
|
|||||||||||
|
International
|
41,187
|
28,093
|
9,903
|
994
|
5
|
|||||||||||
|
Total
OSBU
|
89,490
|
59,849
|
15,196
|
1,222
|
2,867
|
|||||||||||
|
Total
operating segments
|
217,415
|
129,920
|
26,502
|
5,891
|
3,125
|
|||||||||||
|
Corporate
and eliminations
|
-
|
-
|
(7,546
|
)
|
455
|
5
|
||||||||||
|
Consolidated
|
$
|
217,415
|
$
|
129,920
|
$
|
18,956
|
$
|
6,346
|
$
|
3,130
|
||||||
14
A
reconciliation of operating segment EBITDA to consolidated income before taxes
is provided below (in thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
27,
2006
|
May
28,
2005
|
May
27,
2006
|
May
28,
2005
|
||||||||||
|
Reportable
segment EBITDA
|
$
|
2,122
|
$
|
5,217
|
$
|
25,318
|
$
|
26,502
|
|||||
|
Restructuring
cost reversal
|
-
|
-
|
-
|
306
|
|||||||||
|
Corporate
expenses
|
(1,459
|
)
|
(3,044
|
)
|
(5,331
|
)
|
(7,852
|
)
|
|||||
|
Consolidated
EBITDA
|
663
|
2,173
|
19,987
|
18,956
|
|||||||||
|
Depreciation
|
(1,134
|
)
|
(1,848
|
)
|
(3,763
|
)
|
(6,346
|
)
|
|||||
|
Amortization
|
(908
|
)
|
(1,043
|
)
|
(2,911
|
)
|
(3,130
|
)
|
|||||
|
Income
(loss) from operations
|
(1,379
|
)
|
(718
|
)
|
13,313
|
9,480
|
|||||||
|
Interest
income
|
307
|
310
|
953
|
592
|
|||||||||
|
Interest
expense
|
(663
|
)
|
(29
|
)
|
(1,966
|
)
|
(95
|
)
|
|||||
|
Recovery
of investment in unconsolidated subsidiary
|
-
|
500
|
-
|
500
|
|||||||||
|
Legal
settlement
|
-
|
-
|
873
|
-
|
|||||||||
|
Income
(loss) before income tax benefit
|
$
|
(1,735
|
)
|
$
|
63
|
$
|
13,173
|
$
|
10,477
|
||||
During
the quarter ended May 27, 2006, the Company offered participants in its
management common stock loan program the opportunity to formally modify the
terms of their loans in exchange for placing their shares of common stock
obtained through the loan program in an escrow account that allows the Company
to have a security interest in the loan program shares. The key modifications
to
the management common stock loans for the participants accepting the offer
are
as follows:
|
·
|
Modification
of Promissory Note - The
management stock loan due date will be changed to be the earlier
of (a)
March 30, 2013, or (b) the date on which the Company’s stock closes, as
reported by the exchange or market that is the principal market for
our
common stock, at or above the price per share such that the value
of the
shares acquired by the participants under the program is equal to
the
principal and accrued interest on the participants’ promissory notes
(Breakeven Date). The interest rate on the loans will increase from
3.16
percent compounded annually to 4.72 percent compounded
annually.
|
|
·
|
Redemption
of Management Loan Program Shares - The
Company will have the right to redeem the shares on the due date
in
satisfaction of the promissory notes as
follows:
|
|
(a)
|
On
the Breakeven Date, the Company has the right to purchase and redeem
from
the loan participants the number of loan program shares necessary
to
satisfy the participant’s obligation under the promissory note. The
redemption price for each such loan program share will be equal to
the
closing price of our common stock on the Breakeven
Date.
|
| (b) | If the Company’s stock has not closed at or above the breakeven price on or before March 30, 2013, the Company has the right to purchase and redeem from the participants all of their loan program shares at the closing price on that date as partial payment on the participant’s obligation. |
Loan
program participants may choose whether or not to place their loan program
shares in the escrow account and accept the modification agreement. If a loan
participant declines the offer to modify their management stock loan, their
loan
will continue to have the same terms and conditions that were previously
approved in May 2004 by the Company’s Board of Directors and their loans will be
due at the earlier of March 30, 2008 or the Breakeven Date. The Company believes
that the new modifications improve its ability to collect the shares purchased
by participants through establishing a security interest in the shares and
facilitates redemption of the loan program shares from participants on the
due
date. Consistent with the May 2004 modifications, participants will be unable
to
realize a gain on the loan program shares unless they pay cash to satisfy the
promissory note obligation prior to the due date.
Due
to
the loan program modifications that were approved in May 2004, we currently
account for the management common stock loans as stock option arrangements.
Under the provisions of SFAS No. 123R, which we adopted on September 1, 2005,
additional compensation expense will be recognized only if the Company takes
action that constitutes a modification that increases the fair value of the
arrangements. Since these new modifications do not increase the fair value
of
the arrangements, no compensation expense was recognized.
15
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
third
fiscal quarter, which includes the months of March, April, and May, has
historically reflected seasonally lower product sales, but generally stronger
training and consulting service sales compared to our first two fiscal quarters.
As a result of these seasonal product sales factors, our third fiscal quarter
has typically not been as profitable as other quarters of our fiscal year.
For
the quarter ended May 27, 2006, our loss from operations increased to
$1.4
million
compared to $0.7
million
in the prior year and our after-tax net income declined to $1.0
million
compared to $3.1
million
in the comparable quarter of the prior year. However, due to significantly
reduced preferred dividends resulting from preferred stock redemptions, and
a
$7.8 million loss recognized on the recapitalization of our preferred stock
in
fiscal 2005, our income available to common shareholders improved to
$0.1
million
compared to a $6.9
million
loss recognized in the corresponding quarter of fiscal 2005.
The
primary factors that influenced our operating results for the quarter ended
May
27, 2006 were as follows:
|
·
|
Sales
- Product
sales declined $3.0
million due to fewer retail stores being open during the quarter,
reduced
wholesale sales, and reduced technology and specialty product sales.
Partially offsetting these declines were improved “core” product sales
performance, including planners, binders, totes, and other planning
tools
and accessories. Training and consulting services sales increased
$0.5
million primarily due to increased international sales and improved
The
7 Habits of Highly Effective People training
program sales, which were partially offset by decreased sales
effectiveness training sales. As a result of these factors, our total
sales decreased by $2.5
million, or 4
percent, compared to the corresponding quarter of the prior
year.
|
|
·
|
Gross
Profit
-
When compared to the prior year, our gross profit declined due to
decreased sales. Our gross margin, which is gross profit in terms
of a
percentage of sales, declined to 57.3
percent compared to 58.2
percent in the prior year. The decrease was primarily due to increased
costs for our annual Symposium conference events that were held during
the
quarter.
|
|
·
|
Operating
Costs
-
Our operating costs declined by $1.3
million compared to the prior year, which was the result of selling,
general, and administrative expense decreases totaling $0.5
million, a $0.7
million decrease in depreciation expense, and a $0.1
million decrease in amortization
expense.
|
|
·
|
Income
Tax Benefit
-
During the quarter ended May 27, 2006, we recognized income tax benefits
totaling $2.8
million compared to income tax benefits of $3.0
million in fiscal 2005. The tax benefits recorded during these quarters
were primarily the result of the expiration of the statute of limitations
for various tax exposures, which were partially offset by income
taxes
incurred by our profitable foreign subsidiaries and foreign income
taxes
on payments received from foreign
licensees.
|
|
·
|
Preferred
Stock Dividends -
Due to preferred stock redemptions in fiscal 2005 and the first two
quarters of fiscal 2006 totaling $50.0
million, our preferred stock dividends decreased by $1.3
million compared to the corresponding quarter of fiscal
2005.
|
|
·
|
Correction
of Foreign Subsidiary Misstatements -
During the quarter ended May 27, 2006, we determined that our Mexico
subsidiary had misstated its financial results in prior periods by
recording improper sales transactions and not recording all operating
expenses in proper periods. We determined that the misstatements
occurred
during fiscal 2002 through fiscal 2006 in various amounts. The Audit
Committee engaged an independent legal firm to investigate the
misstatements and they concluded that such misstatements were intentional.
We are in the process of taking actions as recommended by the
investigators, which include enhancements to internal control over
foreign
operations. The Company determined that the impact of these misstatements
was immaterial to previously issued financial statements and we recorded
a
$0.5
million decrease to international sales and a $0.5
million increase in selling, general, and administrative expenses
during
the quarter ended May 27, 2006 to correct these
misstatements.
|
Further
details regarding these factors and their impact on our operating results and
liquidity are provided throughout the following management’s discussion and
analysis.
16
Quarter
Ended May 27, 2006 Compared to the Quarter Ended May 28, 2005
Sales
The
following table sets forth sales data by category and for our operating segments
(in thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||||||||
|
May
27,
2006
|
May
28,
2005
|
Percent
Change
|
May
27,
2006
|
May
28,
2005
|
Percent
Change
|
||||||||||||||
|
Sales
by Category:
|
|||||||||||||||||||
|
Products
|
$
|
32,184
|
$
|
35,217
|
(9)
|
|
$
|
126,428
|
$
|
134,443
|
(6)
|
|
|||||||
|
Training
and consulting services
|
31,098
|
30,571
|
2
|
87,538
|
82,972
|
6
|
|||||||||||||
|
$
|
63,282
|
$
|
65,788
|
(4)
|
|
$
|
213,966
|
$
|
217,415
|
(2)
|
|
||||||||
|
Consumer
and Small Business Unit:
|
|||||||||||||||||||
|
Retail
Stores
|
$
|
11,493
|
$
|
13,443
|
(15)
|
|
$
|
50,001
|
$
|
59,886
|
(17)
|
|
|||||||
|
Consumer
Direct
|
12,504
|
12,144
|
3
|
50,291
|
49,390
|
2
|
|||||||||||||
|
Wholesale
|
6,920
|
7,627
|
(9)
|
|
17,148
|
16,107
|
6
|
||||||||||||
|
Other
CSBU
|
1,168
|
792
|
47
|
3,622
|
2,542
|
42
|
|||||||||||||
|
32,085
|
34,006
|
(6)
|
|
121,062
|
127,925
|
(5)
|
|
||||||||||||
|
Organizational
Solutions Business Unit:
|
|||||||||||||||||||
|
Domestic
|
17,807
|
18,736
|
(5)
|
|
49,423
|
48,303
|
2
|
||||||||||||
|
International
|
13,390
|
13,046
|
3
|
43,481
|
41,187
|
6
|
|||||||||||||
|
31,197
|
31,782
|
(2)
|
|
92,904
|
89,490
|
4
|
|||||||||||||
|
Total
Sales
|
$
|
63,282
|
$
|
65,788
|
(4)
|
|
$
|
213,966
|
$
|
217,415
|
(2)
|
|
|||||||
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 $3.0
million,
or 9
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 $2.0
million decline in retail sales was due to fewer stores, which had
a
$2.0
million impact on sales, and reduced demand for technology and specialty
products, which totaled $0.3
million. Partially offsetting these declines were increased “core” product
(e.g. planners, binders, and totes) sales, which improved $0.3
million, compared to the prior year. At May 27, 2006, we were operating
93
retail stores compared to 112
stores at May 28, 2005. Comparable store (stores which were open
during
the comparable periods) sales were flat
compared
to the same quarter of the prior
year.
|
|
·
|
Consumer
Direct
-
Sales through our consumer direct channels (catalog, eCommerce, and
public
seminars) increased primarily due to increased public seminar sales
and
the transition of clients from closed retail stores to consumer direct
channels.
|
|
·
|
Wholesale
-
Sales through our wholesale channel, which includes sales to office
superstores and other retail chains, decreased $0.7
million primarily due to reduced demand for our products through
these
channels during the quarter.
|
|
·
|
Other
CSBU
-
Other CSBU sales consist primarily of domestic printing and publishing
sales and building sublease revenues. The increase in other CSBU
sales was
primarily due to increased sublease revenue. During fiscal 2005,
we began
subleasing a substantial portion of our corporate
headquarters.
|
17
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 $0.5
million,
or 2
percent,
compared to the same quarter of the prior year. Training and consulting service
sales performance during the quarter was primarily attributable to the following
factors in our OSBU divisions:
|
·
|
Domestic
- Our
domestic training sales declined by $0.9
million, or 5
percent, primarily due to a $0.6
million decrease in our sales effectiveness training sales and a
$0.5
million decrease in seminar presentations by Dr. Stephen R. Covey.
Decreased sales effectiveness training was primarily due to reduced
demand
for this curriculum during the quarter. Training seminars presented
by Dr.
Covey were favorably influenced in the prior year by the release
of
The
8th
Habit book
and the demand for these presentations did not continue at the same
level
in fiscal 2006. These declines were partially offset by increased
sales of
other training courses, especially those related to our The
7 Habits of Highly Effective People
training courses. In addition, training manual sales increased by
$0.5
million and the number of training and consulting days delivered
increased
by 12
percent
over the prior year.
|
|
·
|
International
-
International sales increased $0.3
million, or 3
percent, compared to the prior year. The increase was the result
of
increased licensee royalty revenues and increased sales at our directly
owned offices in Canada, Australia, and Brazil. Partially offsetting
these
sales increases were the correction of misstatements at our Mexico
subsidiary and the translation of foreign sales to United States
dollars.
During the quarter ended May 27, 2006, we determined that our Mexico
subsidiary misstated its financial results in prior periods by recording
improper sales transactions and not recording all operating expenses
in
proper periods. We determined that the misstatements occurred during
fiscal 2002 through fiscal 2006 in various amounts. The correction
of
these misstatements, which primarily occurred in prior fiscal years,
resulted in a $0.5
million decrease in international sales. The translation of foreign
sales
to United States dollars resulted in a $0.3
million unfavorable impact to our consolidated sales as certain foreign
currencies, particularly the Japanese Yen, weakened against the United
States dollar during much of the quarter ended May 27,
2006.
|
Gross
Profit
Gross
profit consists of net sales less the cost of goods sold or the cost of services
provided. Our overall gross margin, which is gross profit stated in terms of
a
percentage of sales, declined to 57.3
percent,
compared to 58.2
percent
in the comparable quarter of fiscal 2005. The decline was primarily attributable
to increased training and consulting services costs from our Symposium
conference events held during the quarter. Our gross margin on product sales
decreased slightly to 51.6
percent
compared to 52.0
percent
in fiscal 2005.
For
the
quarter ended May 27, 2006, our training and consulting services gross margin
declined to 63.3
percent
compared to 65.3
percent
in the prior year. The decrease in gross margin during the quarter was primarily
attributable to increased direct costs associated with our annual Symposium
conferences that were held at various locations in the United States and in
the
United Kingdom, and increased cost of sales at certain international locations.
These decreases were partially offset by increased sales of certain higher
margin training and consulting sales.
Operating
Expenses
Selling,
General and Administrative
- Our
selling, general, and administrative (“SG&A”) expenses decreased
$0.5
million,
or 1
percent,
compared to the prior year. The decline in SG&A expenses was primarily due
to reduced retail store costs resulting from fewer stores and the favorable
results of initiatives to reduce overall operating costs. Our retail store
costs
decreased $1.1
million
due to store closures that occurred in prior periods. In addition to these
decreases, we continue to implement strategies designed to reduce our overall
operating costs. Our cost-reduction efforts have included retail store closures,
headcount reductions, and other measures designed to focus our resources on
critical activities and projects related to growth opportunities. The favorable
impact of these efforts resulted in reduced SG&A expenses in many areas of
the Company during the quarter ended May 27, 2006.
Partially
offsetting these expense reductions were costs related to our investment in
various growth initiatives, the correction of misstatements in a foreign
subsidiary, and increased accounting and consulting fees primarily associated
with compliance with Section 404 of the Sarbanes-Oxley Act of 2002. During
fiscal 2005 and 2006 we began numerous initiatives designed to produce business
growth in future periods. These initiatives included hiring additional sales
people in both OSBU and 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. During the quarter
ended May 27, 2006, we determined that our subsidiary in Mexico misstated its
financial results in prior periods by recording improper sales transactions
and
not recording all operating expenses in proper periods. We determined that
the
misstatements occurred during fiscal 2002 through fiscal 2006 in various
amounts. We corrected these misstatements during the quarter ended May 27,
2006
and recorded a $0.5
million
charge to SG&A expenses. We are currently in the process of becoming
compliant with the internal control requirements found in Section 404 of the
Sarbanes-Oxley Act of 2002. During the quarter ended May 27, 2006, we recorded
$0.3
million
of additional accounting and consulting fees related to our compliance
efforts.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future profitability. During
this assessment process, judgments are made as to whether under-performing
or
unprofitable stores should be closed. As a result of this evaluation process,
we
closed 6
retail
store locations during the quarter ended May 27, 2006 and have closed
2
additional retail locations subsequent to the end of the quarter. We incurred
and expensed $0.1
million
of costs related to closed stores during each of the quarters ended May 27,
2006
and May 28, 2005. The costs associated with closing retail stores are typically
comprised of charges related to vacating the premises, which may include a
provision for the remaining term on the lease, and severance and other personnel
costs, which are included as a component of SG&A expenses. We may continue
to incur store closing expenses in future periods if we determine to close
additional retail locations.
18
Depreciation
and Amortization
- Depreciation
expense decreased $0.7
million,
or 39
percent,
compared to the third quarter of fiscal 2005 primarily due to the full
depreciation or disposal of certain property and equipment (including retail
stores) 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 during
the
remainder of fiscal 2006 as compared to prior periods.
Amortization
expense from definite-lived intangible assets totaled $0.9
million
for the quarter ended May 27, 2006 compared to $1.0
million
in the prior year. We expect intangible asset amortization expense to decline
compared to the prior year since certain intangible assets became fully
amortized during fiscal 2006.
Other
Income and Expense Items
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
During
the quarter ended May 27, 2006, we recognized income tax benefits totaling
$2.8
million
compared to $3.0
million
in fiscal 2005. The income tax benefits reported in these periods primarily
resulted from the expiration of the statute of limitations for various
tax exposures, which were partially offset by income taxes incurred by our
profitable foreign subsidiaries and foreign income taxes on payments received
from foreign licensees.
We
were
unable to offset our tax liabilities in foreign jurisdictions with our domestic
operating loss carryforwards. In addition, our 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 at May 27, 2006. As our operating results continue to improve
and our taxable income continues to increase, we are accumulating positive
evidence which may allow the Company to reverse these valuation allowances
on
our deferred income tax assets in a future period.
Loss
on Recapitalization of Preferred Stock
We
completed our preferred stock recapitalization during the quarter ended May
28,
2005. Due to the significant modifications to our preferred stock, we believe
that previously outstanding preferred stock was replaced with new classes of
preferred stock and common stock warrants. As a result, the new preferred stock
was recorded at its fair value on the date of modification, which was determined
to be equal to the liquidation preference of $25 per share. The difference
between the aggregate fair value of the consideration given (the new Series
A
preferred stock and the common stock warrants) and the carrying value of the
previously existing Series A preferred stock, which totaled $7.8 million, was
reported as a loss on recapitalization of preferred stock, which decreased
net
income attributable to common shareholders in the quarter ended May 28,
2005.
Three
Quarters Ended May 27, 2006 Compared to the Three Quarters Ended May 28,
2005
Sales
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 $8.0
million,
or 6
percent,
compared to the prior year. The decline in product sales was primarily due
to
the following performance in our CSBU channels:
|
·
|
Retail
Stores
-
Retail sales declined $9.9
million compared to the prior year. The decrease was due to fewer
stores,
which had a $10.3
million impact on sales, and reduced demand for technology and specialty
products, which totaled $1.4
million. Partially offsetting these declines were increased “core” product
sales. Improved core product sales trends were reflected in a 1
percent increase in comparable store sales compared to the prior
year.
|
|
·
|
Consumer
Direct
-
Year-to-date sales through our consumer direct channels (catalog,
eCommerce, and public seminars) remained relatively consistent with
the
prior year and increased slightly due to increased public seminar
sales
and the transition of clients from closed retail stores to consumer
direct
channels.
|
|
·
|
Wholesale
-
Sales through our wholesale channel increased $1.0
million primarily 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 primarily due to increased sublease revenue compared to the prior
year.
|
19
Training
and Consulting Services
- Our
overall training and consulting service sales increased by $4.6
million,
or 6
percent,
compared to the same period of the prior year. The improvement in training
and
consulting service sales was primarily attributable to the following sales
performance during the first three quarters of fiscal 2006 in our OSBU
divisions:
|
·
|
Domestic
- Our
domestic training sales increased by $1.1
million, or 2
percent, compared to fiscal 2005. The increase was primarily due
to
improved sales of training courses related to our refreshed The
7 Habits of Highly Effective People
curriculum. Increased sales of these programs were partially offset
by
decreased sales effectiveness training sales. Training manual sales
increased by $2.6
million and the number of training and consulting days delivered
increased
by 8
percent over the prior year.
|
|
·
|
International
-
International sales increased $2.3
million, or 6
percent, compared to the prior year. The increase was the result
of
improved sales performance at our directly owned offices in Canada
and
Japan, and increased licensee royalty revenues. These increases were
partially offset by the translation of foreign sales, which resulted
in a
$1.1
million unfavorable impact to our consolidated sales as certain foreign
currencies, particularly in Japan, weakened against the United States
dollar during the three quarters ended May 27,
2006.
|
Gross
Profit
Gross
profit consists of net sales less the cost of goods sold or the cost of services
provided. Our overall gross margin, which is gross profit stated in terms of
a
percentage of sales, improved slightly for the three quarters ended May 27,
2006
to 60.2
percent
of sales, compared to 59.8
percent
in the comparable period 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 sales mix changes. Training and consulting service sales,
which typically have higher gross margins than our product sales, increased
to
41
percent
of total sales in fiscal 2006 compared to 38
percent
in the prior year.
Our
gross
margin on product sales improved to 55.3
percent
compared to 54.4
percent
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, and to better inventory management practices during fiscal
2006.
Training
and consulting services gross margin, as a percent of sales, declined slightly
to 67.4
percent
compared to 68.4
percent
in fiscal 2005 primarily due to higher costs associated with our Symposium
conferences which were held during the quarter ended May 27, 2006 and increased
cost of sales in certain international locations.
Operating
Expenses
Selling,
General and Administrative
- Our
SG&A expenses decreased $2.1
million,
or 2
percent,
compared to the prior year. The decrease in SG&A expenses was primarily due
to reduced retail store costs resulting from fewer stores and the favorable
results of initiatives to reduce overall operating costs. Our retail store
costs
decreased $3.6
million
primarily due to store closures that occurred in prior periods. We also
recovered $0.3
million
of legal costs from the WMA settlement during the quarter ended February 25,
2006. In addition to these decreases, we continue to implement strategies
designed to reduce our overall operating costs. The favorable impact of these
efforts has resulted in reduced SG&A expenses in many areas of the Company
during the three quarters ended May 27, 2006. These cost reductions were
partially offset by increased spending on growth initiatives (refer to
discussion below), $0.7
million
of increased travel expenses resulting from additional employee training and
sales leadership events, $0.4
million
of increased accounting fees primarily related to compliance with section 404
of
the Sarbanes-Oxley Act of 2002, and the correction of misstated operating
expenses at our Mexico subsidiary totaling $0.5
million.
During
fiscal 2006, we have invested in various initiatives intended to grow our
business in future periods. These initiatives included hiring additional sales
people in both OSBU and 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.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future profitability. As
a
result of this evaluation process, we closed 14
retail
stores during the three quarters ended May 27, 2006 and have closed 2
additional retail locations subsequent to May 27, 2006. We incurred and expensed
$0.4
million
of costs related to store closure activities compared to $0.8
million
for store closure costs in the same period of the prior year. We may continue
to
incur store closing expenses in future periods if we determine to close
additional retail locations.
During
the second quarter of fiscal 2006 our shareholders approved a long-term
incentive plan (LTIP) that permits the grant of unvested share awards of common
stock to certain employees. These LTIP share awards granted during fiscal 2006
cliff vest on August 31, 2008, which is the completion of a three-year
performance period. The number of shares that are finally awarded to
participants is variable and is based entirely upon the achievement of a
combination of performance objectives related to sales growth and operating
income during the three-year performance period. The award was initially for
377,665
shares
(target award) of common stock. The award shares were valued at $6.60
per
share, and the corresponding initial compensation cost totaled $2.5
million.
However, the number of shares that will ultimately vest under the LTIP will
vary
depending on whether the performance criteria are met or exceeded. The award
will be reviewed quarterly and the value may be adjusted, depending on the
performance of the Company compared to the award criteria. The compensation
cost
of the award is being expensed over the three-year service period of the award.
As a result, the award will increase our SG&A expense during the vesting
period.
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 three quarters ended May 27, 2006, our operating
expenses may be unfavorably affected in future periods if we grant additional
stock options or participation in our employee stock purchase program
increases.
20
Depreciation
and Amortization
- Depreciation
expense decreased $2.6
million,
or 41
percent,
compared to the first three quarters of fiscal 2005 primarily due to the full
depreciation or disposal of certain property and equipment and the effects
of
significantly reduced capital expenditures during preceding fiscal years. Based
upon these events and current capital spending trends, we expect that
depreciation expense will continue to decline during the remainder of fiscal
2006 as compared to prior periods.
Amortization
expense on definite-lived intangible assets totaled $2.9
million
for the three quarters ended May 27, 2006 compared to $3.1
million
in the prior year. We expect intangible asset amortization expense to total
$3.8
million in fiscal 2006.
Other
Income and Expense Items
Interest
Income
-
Our
interest income increased $0.4
million
primarily due to increased interest rates and higher average cash balances
in
our interest-bearing cash accounts.
Interest
Expense
-
Our
interest expense increased $1.9
million
primarily due to the sale of our corporate headquarters facility and the
resulting interest component of our lease payments to the landlord.
Legal
Settlement
- In
fiscal
2002, we filed legal action against World Marketing Alliance, Inc., a Georgia
corporation (WMA), and World Financial Group, Inc., a Delaware corporation
and
purchaser of substantially all assets of WMA, for breach of contract. The case
proceeded to trial and the jury rendered a verdict in our favor and against
WMA
for the entire unpaid contract amount of approximately $1.1
million.
In addition to the verdict, we recovered legal fees totaling $0.3
million
and pre- and post-judgment interest of $0.3
million
from WMA. We received payment in cash from WMA for the total verdict amount,
including legal fees and interest. However, shortly after paying the verdict
amount, WMA appealed the jury decision to the 10th Circuit Court of Appeals
and
we recorded receipt of the verdict amount plus legal fees and interest with
a
corresponding increase to accrued liabilities and deferred the gain until the
case was finally resolved. On December 30, 2005, we entered into a settlement
agreement with WMA. Under the terms of the settlement agreement, WMA agreed
to
dismiss its appeal. As a result of this settlement agreement and dismissal
of
WMA’s appeal, we recorded a $0.9
million
gain from the legal settlement.
Income
Taxes
For
the
three quarters ended May 27, 2006 we recorded an income tax benefit of
$0.3
million,
compared to a benefit of $1.2
million
for the same period of the prior year. These tax benefits resulted primarily
from the expiration of the statute of limitations for various tax
exposures, which were partially offset by income taxes incurred by our
profitable foreign subsidiaries and foreign income taxes on payments received
from foreign licensees. During the second quarter of fiscal 2006 we also
received a $0.6
million
tax assessment from a foreign jurisdiction, further offsetting the tax benefits
for the period.
We
were
unable to offset our tax liabilities in foreign jurisdictions with our domestic
operating loss carryforwards. In addition, our 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 at May 27, 2006. As our operating results continue to improve
and our taxable income continues to increase, we are accumulating positive
evidence which may allow the Company to reverse these valuation allowances
on
our deferred income tax assets in a future period.
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. Our third fiscal quarter, which includes our
seasonally low-product sales months, has historically produced near break-even
operating results and does not generally produce significant cash flows from
operating activities. At May 27, 2006, we had $28.8
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 $39.8
million
at May 27, 2006 compared to $49.9
million
at August 31, 2005.
During
the first three quarters of fiscal 2006, one of our primary uses of cash has
been the redemption of Series A preferred stock. During this period, we have
redeemed a total of $20.0
million,
or approximately 800,000 shares, of our outstanding preferred stock. Since
the
fiscal 2005 sale of our corporate headquarters facility, we have redeemed
$50.0
million
of preferred stock which has reduced our preferred stock dividend obligation
by
$5.0
million
per year. However, in connection with the sale of our corporate campus, which
provided proceeds of $32.4
million,
we incurred a long-term financing obligation for the purchase price. The annual
payments on the financing obligation are approximately $3.0
million
per year for the first five years with two percent annual increases thereafter.
The Company believes that its strategy related to the sale of the corporate
campus and subsequent redemptions of preferred stock will improve overall cash
flows in future periods. In addition to preferred stock redemptions, we also
obtained authorization from the Board of Directors to purchase up to
$10.0
million
of our common stock. During the three quarters ended May 27, 2006, we have
purchased 485,500
shares
of common stock for $3.9
million
under the terms of this recently approved program to purchase common shares.
We
currently anticipate that additional preferred stock redemptions and common
stock purchases 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
three quarters ended May 27, 2006.
21
Cash
Flows From Operating Activities
During
the three quarters ended May 27, 2006, our net cash provided by operating
activities totaled $9.9
million
compared to $13.7
million
for the same period 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 were
payments to suppliers for materials used in products sold, payments for direct
costs necessary to conduct training programs, and payments for selling, general,
and administrative expenses. Cash used for changes in working capital during
the
first three quarters of fiscal 2006 was primarily related to 1) payments made
to
reduce accrued liabilities and accounts payable from seasonally high August
31
balances; 2) increased accounts receivable balances; and 3) purchases of
additional inventories. We believe that our continued efforts to optimize
working capital balances, combined with existing and planned sales growth
programs and cost-cutting initiatives, will improve our cash flows from
operating activities in future periods. However, the success of these efforts,
and their eventual contribution to our cash flows, 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 $5.1
million
for the three quarters ended May 27, 2006. 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 $3.3
million,
and further investment in curriculum development, primarily related to new
and
refreshed training courses based primarily on The
7
Habits of Highly Effective People,
which
totaled $1.8
million.
Cash
Flows From Financing Activities
Net
cash
used for financing activities during the three quarters ended May 27, 2006
totaled $27.7
million.
Our primary uses of cash for financing activities during this period were the
redemption of $20.0
million,
or approximately 800,000 shares, of Series A preferred stock, payment of
preferred stock dividends totaling $4.0
million
(which included accrued dividends on redeemed shares through the date of
redemption), and purchases of our common stock totaling $4.0
million.
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 liabilities or create adverse consequences to our liquidity. During
the quarter ended May 27, 2006 we amended our outsourcing agreement with
Electronic Data Systems Corporation (EDS). One of the key provisions of this
amendment is reduced required minimum annual payments for information systems
support. Although we may pay more than the minimum required payments due to
actual usage and other factors, the contractually required minimum annual
payments were reduced by a total of $84.2
million
over the life of the outsourcing agreement, which extends through June 30,
2016.
The following table has been revised to reflect the decreased minimum required
annual payments to EDS for outsourcing services as well as the impact of fiscal
2006 preferred stock redemptions, totaling $20.0
million,
on projected dividend payments and monitoring fees paid to a preferred stock
investor. Contractual obligations in other captions presented have not changed
materially from those disclosed in our fiscal 2005 report on Form 10-K and
were
not revised (in thousands).
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||||
|
Contractual
Obligations
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
Total
|
|||||||||||||||
|
Minimum
required payments to EDS for outsourcing services
|
$
|
19,825
|
$
|
17,217
|
$
|
15,901
|
$
|
15,927
|
$
|
15,577
|
$
|
88,531
|
$
|
172,978
|
||||||||
|
Required
payments on corporate campus financing obligation
|
3,045
|
3,045
|
3,045
|
3,045
|
3,055
|
53,072
|
68,307
|
|||||||||||||||
|
Minimum
operating lease payments
|
8,509
|
6,204
|
5,346
|
4,225
|
3,148
|
7,718
|
35,150
|
|||||||||||||||
|
Preferred
stock dividend payments
|
4,385
|
3,735
|
3,735
|
3,735
|
3,735
|
-
|
19,325
|
|||||||||||||||
|
Debt
payments
|
866
|
160
|
155
|
148
|
143
|
554
|
2,026
|
|||||||||||||||
|
Contractual
computer hardware and software purchases
|
1,334
|
680
|
797
|
1,072
|
1,334
|
6,059
|
11,276
|
|||||||||||||||
|
Monitoring
fees paid to a preferred stock investor
|
195
|
166
|
166
|
166
|
166
|
-
|
859
|
|||||||||||||||
|
Total
expected contractual
obligation
payments
|
$
|
38,159
|
$
|
31,207
|
$
|
29,145
|
$
|
28,318
|
$
|
27,158
|
$
|
155,934
|
$
|
309,921
|
||||||||
22
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 had significant implications
for most management stock loan program participants, the Company did not
formally amend or modify the stock loan program notes. Rather, the Company
chose
to forego certain of its rights under the terms of the loans 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 the May 2004 modifications and this accounting
treatment, the remaining carrying value of the notes and interest receivable
related to the notes, which totaled $7.6
million,
was reduced to zero with a corresponding reduction in additional paid-in
capital.
We
currently account for the management common stock loans as equity-classified
stock option arrangements. Under the provisions of SFAS No. 123R, which we
adopted on September 1, 2005, additional compensation expense will be recognized
only if the Company takes action that constitutes a modification which increases
the fair value of the arrangements. During the quarter ended May 27, 2006,
the
Company offered management stock loan participants the opportunity to formally
modify the terms of their stock loans in exchange for placing stock loan shares
in an escrow account controlled by the Company. Under terms of the new
modifications, the management stock loan due date will be changed to be the
earlier of (a) March 30, 2013, or (b) the date on which the Company’s stock
closes, as reported by the exchange or market that is the principal market
for
our common stock, at or above the price per share such that the value of the
shares acquired by the participant equals the principal and accrued interest
on
the participant’s promissory note (the Breakeven Price). The modifications give
the Company the right to redeem the stock on the due date of the promissory
note. In addition, the interest rate on the loans will increase from 3.16
percent compounded annually to 4.72 percent compounded annually. Since these
new
modifications do not increase the fair value of the arrangements, we did not
recognize any additional compensation expense.
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 continue 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.
23
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
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.
Our
international strategy includes the use of licensees in countries where we
do
not have a directly-owned operation. Licensee companies are unrelated entities
that have been granted a license to translate the Company’s content and
curriculum, adapt the content and curriculum to the local culture, and sell
the
Company’s training seminars and products in a specific country or region.
Licensees are required to pay us royalties based upon a percentage of the
licensee’s sales. The Company recognizes royalty income each period based upon
the sales information reported to the Company from the licensee.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Stock-Based
Compensation
Effective
September 1, 2005, we adopted the fair value recognition provisions of SFAS
No.
123R, using the modified prospective transition method, and therefore have
not
restated prior periods’ financial results. Under this method, we recognize
compensation expense for all share-based payments granted after September
1,
2006 and prior to but not yet vested as of September 1, 2006, in accordance
with
SFAS No. 123R. Prior to the adoption of SFAS No. 123R, we accounted for
share-based payments under APB No. 25, and therefore we generally recognized
compensation expense from stock options only when we granted options with
an
exercise price below the market price on the date of grant or made modifications
to stock option terms which increased the fair value of the award.
During
fiscal 2006, we granted unvested stock-based compensation awards to certain
employees in a Board of Director approved long-term incentive plan (LTIP).
The
LTIP share awards granted during fiscal 2006 cliff vest on August 31, 2008,
which is the completion of a three-year performance period. The number of
shares
that are finally awarded to LTIP participants is variable and is based entirely
upon the achievement of a combination of performance objectives related to
sales
growth and operating income during the three-year performance period. Due
to the
variable number of shares that may be issued under the LTIP, we reevaluate
the
LTIP on a quarterly basis and adjust the number of shares expected to be
awarded
based upon financial results of the Company as compared to the performance
goals
set for the award. Adjustments to the number of shares awarded, and to the
corresponding compensation expense, are based upon estimated future performance
and are made on a cumulative basis at the date of adjustment based upon the
probable number of shares to be awarded. Actual results could differ from
estimates made during the service, or vesting, period. The total compensation
cost of the 2006 LTIP grant will be equal to the number of shares finally
issued
multiplied by $6.60 per share, the fair value of the common shares determined
at
the grant date.
We
estimate the value of our stock option awards on the date of grant using
the
Black-Scholes option pricing model. However, at May 27, 2006 the remaining
cost
associated with our unvested stock options was insignificant.
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.
24
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 has historically precluded 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. As our operating results continue to improve and our taxable
income continues to increase, we are accumulating positive evidence which may
allow the Company to reverse all, or a portion of, our valuation allowances.
We
will continue to evaluate both positive and negative evidence and when it
becomes more likely than not that all or a portion of our deferred tax assets
will be realizable, we will reduce our valuation allowance. The decision to
increase or decrease our valuation allowances requires significant judgment,
including estimates of future income 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
May 27, 2006, we do not believe that the adoption of FIN No. 47 will have a
material impact 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.
25
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 and three quarters ended May 27, 2006, we utilized foreign currency
forward contracts to manage the volatility of certain intercompany financing
transactions and other transactions that are denominated in foreign currencies.
Because these contracts do not meet specific hedge accounting requirements,
gains and losses on these contracts, which expire on a quarterly basis, are
recognized currently and are used to offset a portion of the gains or losses
of
the related accounts. The gains and losses on these contracts were recorded
as a
component of SG&A expense in the Company’s consolidated statements of
operations and resulted in the following net gains or losses for the periods
indicated (in thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
27,
2006
|
May
28,
2005
|
May
27,
2006
|
May
28,
2005
|
||||||||||
|
Losses
on foreign exchange contracts
|
$
|
(208
|
)
|
$
|
(31
|
)
|
$
|
(276
|
)
|
$
|
(384
|
)
|
|
|
Gains
on foreign exchange contracts
|
33
|
53
|
256
|
56
|
|||||||||
|
Net
gain (loss) on foreign exchange contracts
|
$
|
(175
|
)
|
$
|
22
|
$
|
(20
|
)
|
$
|
(328
|
)
|
||
At
May
27, 2006, 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
May
27, 2006 (in thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
|||||
|
Japanese
Yen
|
322,000
|
$
|
2,901
|
||||
|
Australian
Dollars
|
1,536
|
1,159
|
|||||
|
Mexican
Pesos
|
10,900
|
951
|
|||||
During
the three quarters ended May 28, 2005, 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
our consolidated balance sheet. During the three quarters ended May 28, 2005,
we
recorded losses totaling $0.3
million
from these contracts.
During
the quarter ended May 27, 2006, 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, we do 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 instruments during the quarter ended May
27, 2006.
26
During
the quarter ended May 27, 2006, we determined that our Mexico subsidiary had
misstated its financial results in prior periods by recording improper sales
transactions and not recording all operating expenses in proper periods. We
determined that the misstatements occurred during fiscal 2002 through fiscal
2006 in various amounts. The Audit Committee engaged an independent legal firm
to investigate the misstatements and they concluded that such misstatements
were
intentional. The Company determined that the impact of these misstatements
was
immaterial to previously issued financial statements and we recorded a
$0.5
million
decrease to international sales and a $0.5
million
increase in selling, general, and administrative expenses during the quarter
ended May 27, 2006 to correct these misstatements. In light of these
misstatements at our Mexico subsidiary, management has concluded that, as of
May
27, 2006, a material weakness in the Company’s internal control over financial
reporting existed related to international operations. Specifically,
we determined that we did not have adequate oversight of the accounting policies
and procedures of our international locations.
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 related to income taxes disclosed in
our
Form 10-K for the fiscal year ended August 31, 2005. Based on this evaluation,
and as a result of the material weakness in our internal control over financial
reporting related to our international operations, the Chief Executive Officer
and the Chief Financial Officer have concluded that our disclosure controls
and
procedures were not effective as of May 27, 2006.
Changes
in Internal Control Over Financial Reporting
In
order
to remediate the aforementioned material weakness, certain personnel at our
Mexico subsidiary have been terminated, and management is in the process of
implementing new processes and internal controls over financial reporting
including by aligning international accounting oversight with qualified
personnel in the United States, expanding the contents of our monthly
international reporting package, conducting more in-depth financial reviews
for
each country, increasing the frequency of on-site reviews and testing of
internal controls, implementing of a training program for foreign accounting
personnel, and changing the reporting structure so that international financial
professionals report directly to a financial professional in the United States.
We are also in the process of documenting processes and controls in the foreign
locations to improve the quality of international financial accounting and
reporting at all of our foreign subsidiary locations.
Other
than as described above, there has been no change in the Company’s internal
control over financial reporting during the fiscal quarter ended May 27, 2006
that has materially affected, or is reasonably likely to materially affect,
our
internal control 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. 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.
27
Item
1A. Risk
Factors
The
Company is providing the following information regarding changes that have
occurred to previously disclosed risk factors from our Form 10-K for the fiscal
year ended August 31, 2005:
Our
strategy of outsourcing certain functions and operations may fail to reduce
our
costs for these services
-
We
have
an outsourcing contract with Electronic Data Systems (EDS) to provide
warehousing, distribution, information systems, and call center operations.
Under terms of the outsourcing contract and its addendums, EDS operates the
Company’s primary call center, provides warehousing and distribution services,
and supports our various information services. Certain components of the
outsourcing agreement contain minimum activity levels that we must meet or
we
will be required to pay penalty charges. During the quarter ended May 27, 2006,
we amended our outsourcing agreement with EDS. One of the key provisions of
this
amendment is reduced required minimum annual payments for information systems
support. Although we may pay more than the minimum required payments due to
actual usage and other factors, the contractually required minimum annual
payments were reduced by a total of $84.2
million
over the life of the outsourcing agreement, which extends through June 30,
2016.
The Company believes that the reduced minimum charges will reduce our risk
of
penalty charges and that we will be able to realize benefits from the
outsourcing agreement.
We
may elect to use our cash to redeem shares of preferred stock, which may
decrease our ability to respond to adverse changes
- Our
outstanding preferred stock bears a cumulative dividend equal to 10 percent
per
annum. During fiscal 2005, we utilized a portion of the proceeds from the sale
of our corporate headquarters to redeem $30.0 million of our preferred stock.
Subsequent to August 31, 2005, we redeemed an additional $10.0 million of
preferred stock and we proposed an amendment to the terms of our preferred
stock
recapitalization that was completed in fiscal 2005 to extend the period during
which we can redeem preferred stock at an amount equal to the liquidation
preference. We obtained shareholder approval of the amendment during the second
quarter of fiscal 2006 and redeemed an additional $10.0 million of preferred
stock in connection with this amendment to extend the redemption period to
December 31, 2007. We anticipate that we may redeem additional shares of
preferred stock in the future to the extent that we believe sufficient cash
is
available to do so. Additional preferred stock redemptions will reduce our
cash
on hand and may reduce our ability to adequately respond to any future adverse
changes in our business and operations, whether anticipated or
unanticipated.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
The
Company acquired the following securities during the quarter ended May 27,
2006:
|
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:
|
|||||||||||||
|
February
26, 2006 to April 1, 2006
|
-
|
$
|
-
|
none
|
n/a
|
||||||||
|
April
2, 2006 to April 29, 2006
|
144,200
|
8.97
|
144,200
|
n/a
|
|||||||||
|
April
30, 2006 to May 27, 2006
|
131,100
|
8.17
|
131,100
|
n/a
|
|||||||||
|
Total
Common Shares
|
275,300
|
$
|
8.59
|
760,057(1)
|
|
||||||||
|
Total
Preferred Shares
|
none
|
none
|
|||||||||||
(1) In
January 2006, the Company’s Board of Directors approved the purchase of up to
$10.0
million
of our outstanding common stock. All previous authorized common stock purchase
plans were canceled. Since the approval of this stock purchase plan, we have
purchased 485,500
shares
of common stock for $3.9
million.
The maximum number of shares that may yet be purchased under this plan was
calculated by dividing the remaining approved dollars by $7.99,
which
was the closing price of the Company’s common stock on May 26, 2006 (the last
trading day of the fiscal quarter).
Item
6. Exhibits
|
(A)
|
Exhibits:
|
|
10.1
|
Amendment
No. 6 to the Agreement for Information Technology Services between
each of
Franklin Covey Co., Electronic Data Systems Corporation, and EDS
Information Services L.L.C. dated April 1, 2006 and incorporated
herein by
reference to Exhibit 99.1 to the Current Report on Form 8-K filed
with the
Commission on April 5, 2006.
|
|
Rule
13a-14(a) Certifications of the CEO and
CFO.
|
|
Section
1350 Certifications of the CEO and
CFO.
|
28
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:
|
July
11, 2006
|
By:
|
/s/
ROBERT A. WHITMAN
|
|
|
Robert
A. Whitman
|
||||
|
Chief
Executive Officer
|
||||
|
Date:
|
July
11, 2006
|
By:
|
/s/
STEPHEN D. YOUNG
|
|
|
Stephen
D. Young
|
||||
|
Chief
Financial Officer
|
||||
29
Exhibit
31
CERTIFICATION
OF THE CHIEF EXECUTIVE OFFICER
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(s) 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 most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) 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(s) 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: July 11, 2006 | /s/ ROBERT A. WHITMAN | |
|
Robert A. Whitman |
||
| Chief Executive Officer | ||
CERTIFICATION
OF THE CHIEF FINANCIAL OFFICER
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(s) 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 most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) 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(s) 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: July 11, 2006 | /s/ STEPHEN D. YOUNG | |
|
Stephen D. Young |
||
| Chief Financial Officer | ||
Exhibit
32
The
following certifications are being furnished solely to accompany the Report
pursuant to 18 U.S.C. § 1350 and in accordance with SEC Release No. 33-8238.
These certifications shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, whether made before or after
the date hereof, regardless of any general incorporation language in such
filing.
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 May 27, 2006 (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.
|
| |
|
|
| Date: July 11, 2006 | /s/ ROBERT A. WHITMAN | |
|
Robert A. Whitman |
||
| Chief Executive Officer | ||
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 May 27, 2006 (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.
|
| |
|
|
| Date: July 11, 2006 | /s/ STEPHEN D. YOUNG | |
|
Stephen D. Young |
||
| Chief Executive Officer | ||