UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark One)
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[X]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended March 1, 2008
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from __________ to __________
Commission
file no. 1-11107
FRANKLIN
COVEY CO.
(Exact
name of registrant as specified in its charter)
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Utah
(State
of incorporation)
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87-0401551
(I.R.S.
employer identification number)
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2200
West Parkway Boulevard
Salt
Lake City, Utah
(Address
of principal executive offices)
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84119-2099
(Zip
Code)
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Registrant’s
telephone number,
Including
area code
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(801)
817-1776
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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 T No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer
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£
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Accelerated
filer
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T
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||||
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Non-accelerated
filer
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£
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(Do
not check if a smaller reporting company)
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Smaller
reporting company
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£
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
Indicate
the number of shares outstanding of each of the issuer’s classes of Common Stock
as of the latest practicable date:
19,585,855
shares of Common Stock as of April 1, 2008
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PART
I.
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ITEM
1.
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ITEM
2.
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ITEM
3.
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ITEM
4.
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PART
II.
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ITEM
1A.
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ITEM
2.
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ITEM
4.
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ITEM
6.
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PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in
thousands, except per share amounts)
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March
1,
2008
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August
31,
2007
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|||||||
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(unaudited)
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||||||||
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ASSETS
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 5,334 | $ | 6,126 | ||||
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Accounts receivable, less
allowance for doubtful accounts of $899 and $821
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29,723 | 27,239 | ||||||
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Inventories
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21,190 | 24,033 | ||||||
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Deferred
income taxes
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3,706 | 3,635 | ||||||
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Prepaid
expenses and other assets
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7,748 | 9,070 | ||||||
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Total
current assets
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67,701 | 70,103 | ||||||
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Property
and equipment, net
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34,571 | 36,063 | ||||||
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Intangible
assets, net
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74,126 | 75,923 | ||||||
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Deferred
income taxes
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106 | 101 | ||||||
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Other
assets
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15,451 | 14,441 | ||||||
| $ | 191,955 | $ | 196,631 | |||||
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LIABILITIES AND SHAREHOLDERS’
EQUITY
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Current
liabilities:
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Current
portion of long-term debt and financing obligation
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$ | 657 | $ | 629 | ||||
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Line
of credit
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4,314 | 15,999 | ||||||
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Accounts
payable
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11,133 | 12,190 | ||||||
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Income
taxes payable
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1,101 | 2,244 | ||||||
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Accrued
liabilities
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29,180 | 30,101 | ||||||
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Total
current liabilities
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46,385 | 61,163 | ||||||
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Long-term
debt and financing obligation, less current portion
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32,681 | 32,965 | ||||||
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Deferred
income tax liabilities
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4,981 | 565 | ||||||
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Other
liabilities
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1,626 | 1,019 | ||||||
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Total
liabilities
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85,673 | 95,712 | ||||||
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Shareholders’
equity:
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Common stock – $0.05 par value;
40,000 shares authorized, 27,056 shares issued and
outstanding
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1,353 | 1,353 | ||||||
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Additional paid-in
capital
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185,003 | 185,890 | ||||||
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Common stock
warrants
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7,602 | 7,602 | ||||||
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Retained earnings
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24,630 | 19,489 | ||||||
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Accumulated other comprehensive
income
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1,510 | 970 | ||||||
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Treasury stock at cost, 7,249 and
7,296 shares
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(113,816 | ) | (114,385 | ) | ||||
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Total shareholders’
equity
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106,282 | 100,919 | ||||||
| $ | 191,955 | $ | 196,631 | |||||
See notes
to condensed consolidated financial statements.
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED INCOME
STATEMENTS
(in
thousands, except per share amounts)
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Quarter
Ended
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Two
Quarters Ended
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|||||||||||||||
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March
1,
2008
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March
3,
2007
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March
1,
2008
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March
3,
2007
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(unaudited)
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(unaudited)
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Net
sales:
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Products
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$ | 41,299 | $ | 45,283 | $ | 80,675 | $ | 87,391 | ||||||||
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Training
and consulting services
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33,828 | 31,593 | 68,027 | 65,014 | ||||||||||||
| 75,127 | 76,876 | 148,702 | 152,405 | |||||||||||||
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Cost
of sales:
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Products
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17,776 | 19,436 | 34,682 | 37,910 | ||||||||||||
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Training
and consulting services
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10,663 | 10,251 | 21,386 | 20,909 | ||||||||||||
| 28,439 | 29,687 | 56,068 | 58,819 | |||||||||||||
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Gross profit
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46,688 | 47,189 | 92,634 | 93,586 | ||||||||||||
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Selling,
general, and administrative
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37,652 | 36,666 | 76,424 | 77,514 | ||||||||||||
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Gain
on sale of manufacturing facility
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- | (1,227 | ) | - | (1,227 | ) | ||||||||||
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Depreciation
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1,350 | 1,366 | 2,547 | 2,403 | ||||||||||||
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Amortization
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901 | 900 | 1,800 | 1,802 | ||||||||||||
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Income
from operations
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6,785 | 9,484 | 11,863 | 13,094 | ||||||||||||
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Interest
income
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15 | 357 | 24 | 557 | ||||||||||||
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Interest
expense
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(761 | ) | (675 | ) | (1,672 | ) | (1,336 | ) | ||||||||
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Income
before provision for income taxes
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6,039 | 9,166 | 10,215 | 12,315 | ||||||||||||
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Provision
for income taxes
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2,957 | 4,452 | 5,074 | 6,186 | ||||||||||||
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Net
income
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3,082 | 4,714 | 5,141 | 6,129 | ||||||||||||
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Preferred
stock dividends
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- | (934 | ) | - | (1,867 | ) | ||||||||||
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Net
income available to common shareholders
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$ | 3,082 | $ | 3,780 | $ | 5,141 | $ | 4,262 | ||||||||
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Net
income available to common
shareholders per
share:
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Basic
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$ | .16 | $ | .19 | $ | .26 | $ | .22 | ||||||||
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Diluted
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$ | .16 | $ | .19 | $ | .26 | $ | .21 | ||||||||
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Weighted
average number of common shares:
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Basic
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19,510 | 19,589 | 19,495 | 19,750 | ||||||||||||
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Diluted
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19,805 | 19,870 | 19,782 | 20,031 | ||||||||||||
See notes
to condensed consolidated financial statements.
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in
thousands)
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Two
Quarters Ended
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||||||||
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March
1,
2008
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March
3,
2007
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(unaudited)
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Cash
flows from operating activities:
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Net
income
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$ | 5,141 | $ | 6,129 | ||||
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Adjustments to reconcile net
income to net cash provided by operating activities:
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Depreciation
and amortization
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4,907 | 4,977 | ||||||
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Deferred
income taxes
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3,656 | 4,218 | ||||||
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Loss
(gain) on disposals of property and equipment
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274 | (1,210 | ) | |||||
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Share-based
compensation expense
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(511 | ) | 622 | |||||
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Changes
in assets and liabilities:
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Increase
in accounts receivable, net
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(1,884 | ) | (433 | ) | ||||
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Decrease
(increase) in inventories
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3,270 | (1,616 | ) | |||||
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Decrease
in other assets
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1,132 | 728 | ||||||
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Decrease
in accounts payable and accrued liabilities
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(1,712 | ) | (5,196 | ) | ||||
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Decrease
in other long-term liabilities
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(116 | ) | (175 | ) | ||||
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Increase
in income taxes payable
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274 | 743 | ||||||
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Net
cash provided by operating activities
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14,431 | 8,787 | ||||||
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Cash
flows from investing activities:
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Proceeds
on notes receivable from disposals of subsidiaries
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1,046 | - | ||||||
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Purchases
of property and equipment
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(2,345 | ) | (5,377 | ) | ||||
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Curriculum
development costs
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(1,567 | ) | (3,163 | ) | ||||
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Proceeds
from sales of property and equipment
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60 | 2,258 | ||||||
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Net
cash used for investing activities
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(2,806 | ) | (6,282 | ) | ||||
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Cash
flows from financing activities:
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Proceeds
from line-of-credit borrowing
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40,029 | - | ||||||
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Payments
on line-of-credit borrowing
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(51,714 | ) | - | |||||
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Principal
payments on long-term debt and financing obligation
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(312 | ) | (297 | ) | ||||
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Proceeds
from sales of common stock from treasury
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193 | 137 | ||||||
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Purchases
of treasury shares
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- | (2,539 | ) | |||||
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Payment
of preferred stock dividends
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- | (1,867 | ) | |||||
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Net
cash used for financing activities
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(11,804 | ) | (4,566 | ) | ||||
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Effect
of foreign exchange rates on cash and cash equivalents
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(613 | ) | 94 | |||||
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Net
decrease in cash and cash equivalents
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(792 | ) | (1,967 | ) | ||||
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Cash
and cash equivalents at beginning of the period
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6,126 | 30,587 | ||||||
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Cash
and cash equivalents at end of the period
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$ | 5,334 | $ | 28,620 | ||||
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Supplemental
disclosure of cash flow information:
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Cash
paid for interest
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$ | 1,744 | $ | 1,324 | ||||
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Cash
paid for income taxes
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$ | 1,686 | $ | 1,270 | ||||
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Non-cash
investing and financing activities:
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Accrued
preferred stock dividends
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$ | - | $ | 934 | ||||
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Acquisition
of property and equipment through accounts payable
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252 | - | ||||||
See notes
to condensed consolidated financial statements.
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 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 following
popular workshops and curricula: FOCUS: Achieving Your Highest
Priorities™; Leadership: Great Leaders, Great
Teams, Great Results™; 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. During fiscal 2007 we also introduced
a new leadership program based upon principles found in The 7 Habits of Highly Effective
People.
The
accompanying unaudited condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations of the Company as of the dates and for the periods
indicated. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules
and regulations. The information included in this quarterly report on
Form 10-Q should be read in conjunction with the consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the
fiscal year ended August 31, 2007.
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 will end on December 1, 2007, March 1, 2008, and May 31,
2008 during fiscal 2008. Under the modified 52/53-week fiscal year,
the quarter ended March 1, 2008 had the same number of business days as the
quarter ended March 3, 2007 and the two quarters ended March 1, 2008 had one
less business day than the two quarters ended March 3, 2007.
The
results of operations for the quarter and two quarters ended March 1, 2008 are
not necessarily indicative of results expected for the entire fiscal year ending
August 31, 2008.
NOTE
2 – 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):
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March
1,
2008
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August
31,
2007
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|||||||
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Finished
goods
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$ | 17,615 | $ | 20,268 | ||||
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Work
in process
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583 | 743 | ||||||
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Raw
materials
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2,992 | 3,022 | ||||||
| $ | 21,190 | $ | 24,033 | |||||
NOTE
3 – SHARE-BASED COMPENSATION
We
utilize various share-based compensation plans as integral components of our
overall compensation and associate retention strategy. Our
shareholders have approved various stock incentive plans that permit us to grant
performance awards, unvested stock awards, employee stock purchase plan (ESPP)
shares, and stock options. In addition, our Board of Directors and
shareholders may, from time to time, approve fully vested stock
awards. The compensation cost of our share-based compensation plans
was included in selling, general, and administrative expenses in the
accompanying condensed consolidated income statements and no share-based
compensation was capitalized during the two quarters ended March 1,
2008. The Company generally issues shares of common stock for its
share-based compensation plans from shares held in treasury. The
following is a description of recent developments in our share-based
compensation plans.
Performance
Awards
The
Company has a performance based long-term incentive plan (the LTIP) that
provides for annual grants of share-based performance awards to certain
managerial personnel and executive management as directed by the Compensation
Committee of the Board of Directors. The LTIP performance awards
cliff vest at the completion of a three-year performance period that begins on
September 1 in the fiscal year of the grant. The number of common
shares that are finally awarded to LTIP participants is variable and is based
entirely upon the achievement of a combination of performance objectives related
to sales growth and cumulative operating income during the three-year
performance period. Due to the variable number of common shares that
may be issued under the LTIP, we reevaluate our LTIP grants on a quarterly basis
and adjust the number of shares expected to be awarded based upon actual and
estimated financial results of the Company 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
adjustment date based upon the revised estimate of common shares that are
expected to be awarded. The Company granted performance awards under
provisions of the LTIP in fiscal 2006, which vest on August 31, 2008, and in
fiscal 2007, which vest on August 31, 2009.
Based
upon actual financial performance through December 1, 2007 and estimated
performance through the remaining service period of the fiscal 2006 LTIP grant,
the Company determined that no shares of common stock would be awarded to
participants under the terms of the fiscal 2006 LTIP grant. Although
we expect sufficient levels of cumulative operating income to be recognized for
the fiscal 2006 award, anticipated sales growth is below the minimum threshold
for shares to be awarded under the plan. We expect that our
anticipated sales growth in training and consulting sales will be insufficient
to offset forecasted product sales declines, which were revised using actual
product sales levels late in our first fiscal quarter and early second fiscal
quarter, and the impact of eliminated sales resulting from the sales of our
subsidiary in Brazil and our training operations in Mexico. As a
result of this determination, we recorded a cumulative adjustment in the quarter
ended December 1, 2007 that reduced our selling, general, and administrative
expenses by $0.7 million and did not record any compensation expense for the
fiscal 2006 LTIP award during the quarter ended March 1, 2008. We
also recorded cumulative
adjustments
totaling $0.1 million in the two quarters ended March 3, 2007 that reduced the
compensation expense recognized for the fiscal 2006 LTIP award.
We also
reevaluated the fiscal 2007 LTIP award based upon revised estimated sales growth
and cumulative operating income. As a result of this reevaluation, we
reduced the expected number of shares to be awarded under the fiscal 2007 LTIP
to 227,535 shares, or 53 percent of the original target award of 429,312
shares. We recorded cumulative adjustments totaling $0.3 million to
reduce selling, general, and administrative expenses during the two quarters
ending March 1, 2008 to reflect the new estimated shares to be
awarded. At March 1, 2008, there was $0.7 million of estimated
unrecognized compensation expense remaining on the fiscal 2007 LTIP
award. However, the number of shares to be issued is based on
estimates and may vary during periods prior to the vesting date.
Unvested
Stock Awards
The fair
value of our unvested stock awards is calculated based on the number of shares
issued and the closing market price of our common stock on the date of the
grant. The corresponding compensation cost of unvested stock awards
is amortized to selling, general, and administrative expense on a straight-line
basis over the vesting period of the award, which generally ranges from three to
five years. The following information applies to our unvested stock
awards granted to members of the Board of Directors under the Directors’ Plan
and to employees through the two quarters ended March 1, 2008:
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Number
of Shares
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|||||||
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Unvested
stock awards at
August 31, 2007
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410,670 | $ | 3.80 | |||||
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Granted
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- | - | ||||||
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Forfeited
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- | - | ||||||
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Vested
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- | - | ||||||
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Unvested
stock awards at
March 1, 2008
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410,670 | $ | 3.80 | |||||
Employee
Stock Purchase Plan
We have
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. During the quarter and
two quarters ended March 1, 2008, a total of 18,128 and 34,027 shares were
issued to participants in the ESPP.
Stock
Options
The
Company has an incentive stock option plan whereby options to purchase shares of
our common stock are issued to key employees at an exercise price not less than
the fair market value of the Company’s common stock on the date of
grant. The term, not to exceed ten years, and exercise period of each
incentive stock option awarded under the plan are determined by the Compensation
Committee of our Board of Directors.
Information
related to stock option activity during the two quarters ended March 1, 2008 is
presented below:
|
Number
of Stock Options
|
Weighted
Avg. Exercise Price Per Share
|
|||||||
|
Outstanding
at
August 31, 2007
|
2,058,300 | $ | 12.72 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
(12,500 | ) | 1.70 | |||||
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Forfeited
|
(8,000 | ) | 9.69 | |||||
|
Outstanding
at
March 1, 2008
|
2,037,800 | $ | 12.80 | |||||
|
Options
vested and exercisable at
March 1, 2008
|
2,037,800 | $ | 12.80 | |||||
NOTE
4 – INCOME TAXES
Income
Tax Provision
In order
to determine our quarterly provision for income taxes, we use an estimated
annual effective tax rate, which is based on expected annual income and
statutory tax rates in the various jurisdictions in which we
operate. Certain significant or unusual items are separately
recognized in the quarter during which they occur and can be a source of
variability in our effective tax rates from quarter to quarter.
Our
effective tax rate for the two quarters ended March 1, 2008 of approximately 50
percent was higher than statutory combined rates primarily due to the accrual of
taxable interest income on the management stock loan program and withholding
taxes on royalty income from foreign licensees.
Adoption
of FIN 48
In July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.
48, Accounting for Uncertainty
in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN
48). This interpretation addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in
the financial statements. Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement. Interpretation No. 48 also
provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting for income taxes in interim periods, and requires
increased disclosure of various income tax items.
We
adopted the provisions of FIN 48 on September 1, 2007. The amount of
gross unrecognized tax benefits at September 1, 2007 totaled $4.3 million, of
which $3.1 million would affect our effective tax rate, if
recognized. The gross unrecognized tax benefit includes $2.9 million
related to individual states’ net operating loss carryforwards. The
Company has determined that all material temporary differences, except for
certain states’ net operating loss carryforwards, can be fully recognized for
FIN 48 purposes. At the date of adoption, we had approximately $0.2
million of accrued interest and penalties related to uncertain tax
positions. Based upon guidance in FIN 48, interest and penalties
related to uncertain tax positions are now recognized as components of income
tax expense. The amount of our unrecognized tax benefits did not
change significantly during the two quarters ended March 1, 2008.
Prior to
the adoption of FIN 48, the reserve for uncertain tax positions was classified
as a component of income taxes payable in our consolidated balance
sheets. Consistent with the guidance found in FIN 48, our
unrecognized income tax benefits related to net operating loss carryforwards now
reduce the related
deferred
income tax asset and have the effect of increasing our net deferred income tax
liability. All other unrecognized income tax benefits, which totaled
$0.7 million, were reclassified as other long-term liabilities in our
consolidated balance sheets.
The
Company anticipates that it is reasonably possible that unrecognized tax
benefits, including interest and penalties, of up to $0.3 million could be
recognized within the next twelve months due to the lapse of applicable statutes
of limitation, of which $0.2 million would affect our effective tax rate in
those periods.
We file
United States federal income tax returns as well as income tax returns in
various states and foreign jurisdictions. The tax years that remain subject to
examinations for the Company’s major tax jurisdictions are shown
below. Additionally, any net operating losses that were generated in
prior years and utilized in these years may be subject to
examination.
|
2000-2007
|
Canada
|
|
2002-2007
|
Japan,
Mexico, United Kingdom
|
|
2003-2007
|
United
States – state and local income taxes
|
|
2004-2007
|
United
States – federal income tax
|
NOTE
5 – COMPREHENSIVE INCOME
Comprehensive
income is based on net income and includes charges and credits to equity
accounts that were not the result of transactions with
shareholders. Comprehensive income for the Company was calculated as
follows (in thousands):
|
Quarter
Ended
|
Two
Quarters Ended
|
|||||||||||||||
|
March
1,
2008
|
March
3,
2007
|
March
1,
2008
|
March
3,
2007
|
|||||||||||||
|
Net
income
|
$ | 3,082 | $ | 4,714 | $ | 5,141 | $ | 6,129 | ||||||||
|
Other
comprehensive income
(loss) items, net of tax:
|
||||||||||||||||
|
Foreign
currency translation adjustments
|
291 | (80 | ) | 540 | 16 | |||||||||||
|
Comprehensive
income
|
$ | 3,373 | $ | 4,634 | $ | 5,681 | $ | 6,145 | ||||||||
NOTE
6 – 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. Due to modifications to our management stock loan
program, we determined that the shares of management stock loan participants
that were placed in the escrow account are participating securities as defined
by Emerging Issues Task Force (EITF) Issue No. 03-6, Participating Securities and the
Two-Class Method under FASB Statement No. 128, because they continue to
have equivalent common stock dividend rights. Accordingly, these
management stock loan shares are included in our basic EPS calculation during
periods of net income and excluded from the basic EPS calculation in periods of
net loss.
The
following table presents the computation of our EPS for the periods indicated
(in thousands, except per share amounts):
|
Quarter
Ended
|
Two
Quarters Ended
|
|||||||||||||||
|
March
1,
2008
|
March
3,
2007
|
March
1,
2008
|
March
3,
2007
|
|||||||||||||
|
Numerator
for basic and diluted earnings per share:
|
||||||||||||||||
|
Net
income
|
$ | 3,082 | $ | 4,714 | $ | 5,141 | $ | 6,129 | ||||||||
|
Preferred
stock dividends
|
- | (934 | ) | - | (1,867 | ) | ||||||||||
|
Net
income available to common shareholders
|
$ | 3,082 | $ | 3,780 | $ | 5,141 | $ | 4,262 | ||||||||
|
Denominator
for basic and diluted earnings per share:
|
||||||||||||||||
|
Basic
weighted average shares outstanding(1)
|
19,510 | 19,589 | 19,495 | 19,750 | ||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||
|
Stock
options
|
6 | 24 | 8 | 29 | ||||||||||||
|
Unvested
stock awards
|
289 | 257 | 279 | 252 | ||||||||||||
|
Common
stock warrants(2)
|
- | - | - | - | ||||||||||||
|
Diluted
weighted average shares outstanding
|
19,805 | 19,870 | 19,782 | 20,031 | ||||||||||||
|
Basic
and diluted EPS:
|
||||||||||||||||
|
Basic
EPS
|
$ | .16 | $ | .19 | $ | .26 | $ | .22 | ||||||||
|
Diluted
EPS
|
$ | .16 | $ | .19 | $ | .26 | $ | .21 | ||||||||
|
(1)
|
Since
the Company recognized net income for the quarter and two quarters ended
March 1, 2008, basic weighted average shares for those periods include 3.5
million shares of common stock held by management stock loan participants
that were placed in escrow.
|
|
(2)
|
For
the periods presented, the conversion of 6.2 million common stock warrants
is not assumed because such conversion would be
anti-dilutive.
|
At March
1, 2008 and March 3, 2007, we had approximately 1.9 million and 2.0 million
stock options outstanding which were not included in the computation of diluted
EPS because the options’ exercise prices were greater than the average market
price of the Company’s common shares for the respective
periods. Although these shares were not included in our calculation
of diluted EPS, these stock options, and other dilutive securities, may have a
dilutive effect on the Company’s EPS calculation in future periods if the price
of our common stock increases.
NOTE
7 – SEGMENT INFORMATION
The
Company has two segments: the Consumer Solutions 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
Solutions Business Unit – This business unit is primarily focused on
product sales to individual customers and small business organizations and
includes the results of our domestic retail stores, consumer direct operations
(primarily eCommerce and call center), wholesale operations, international
product channels in certain countries, and other related distribution channels,
including government product sales and domestic printing and publishing
sales. The CSBU results of operations also include the financial
results of our paper planner manufacturing operations. Although CSBU
sales primarily consist of products such as planners, binders, software, totes,
books, and various accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may be purchased through our CSBU
channels.
Organizational
Solutions Business Unit – The OSBU is primarily responsible for the
development, marketing, sale, and delivery of strategic execution, productivity,
leadership, sales
force
performance, and communication training and consulting solutions directly to
organizational clients, including other companies, the government, and
educational institutions. The OSBU includes the financial results of
our domestic sales force, public programs, and certain international
operations. The domestic sales force is responsible for the sale and
delivery of our training and consulting 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 Chief Executive Officer (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, our consolidated
EBITDA can be calculated as our 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 fiscal 2008, we transferred our
public programs operations from CSBU to OSBU and made other less significant
organizational changes. All prior period segment information has been
revised to conform to the most recent classifications and organizational
changes. The Company accounts for its segment information on the same
basis as the accompanying condensed consolidated financial
statements.
SEGMENT
INFORMATION
|
(in
thousands)
|
||||||||||||||||||||
|
Quarter
Ended
March
1, 2008
|
Sales
to External Customers
|
Gross
Profit
|
EBITDA
|
Depreciation
|
Amortization
|
|||||||||||||||
|
Consumer
Solutions
Business Unit:
|
||||||||||||||||||||
|
Retail
|
$ | 17,628 | $ | 11,072 | $ | 3,815 | $ | 265 | $ | - | ||||||||||
|
Consumer
direct
|
13,574 | 7,700 | 5,776 | 67 | - | |||||||||||||||
|
Wholesale
|
2,921 | 1,554 | 1,419 | - | - | |||||||||||||||
|
CSBU
International
|
2,902 | 1,514 | 625 | 8 | - | |||||||||||||||
|
Other
CSBU
|
1,276 | 239 | (6,586 | ) | 101 | - | ||||||||||||||
|
Total CSBU
|
38,301 | 22,079 | 5,049 | 441 | - | |||||||||||||||
|
Organizational
Solutions
Business Unit:
|
||||||||||||||||||||
|
Domestic
|
21,662 | 13,743 | 1,107 | 586 | 899 | |||||||||||||||
|
International
|
15,164 | 10,866 | 4,646 | 40 | 2 | |||||||||||||||
|
Total
OSBU
|
36,826 | 24,609 | 5,753 | 626 | 901 | |||||||||||||||
|
Total
operating segments
|
75,127 | 46,688 | 10,802 | 1,067 | 901 | |||||||||||||||
|
Corporate
and eliminations
|
- | - | (1,766 | ) | 283 | - | ||||||||||||||
|
Consolidated
|
$ | 75,127 | $ | 46,688 | $ | 9,036 | $ | 1,350 | $ | 901 | ||||||||||
|
Quarter
Ended
March
3, 2007
|
||||||||||||||||||||
|
Consumer
Solutions
Business Unit:
|
||||||||||||||||||||
|
Retail
|
$ | 19,265 | $ | 11,861 | $ | 4,673 | $ | 186 | $ | - | ||||||||||
|
Consumer
direct
|
14,574 | 8,381 | 6,252 | 50 | - | |||||||||||||||
|
Wholesale
|
3,581 | 1,932 | 1,747 | - | - | |||||||||||||||
|
CSBU
International
|
2,643 | 1,608 | 709 | - | - | |||||||||||||||
|
Other
CSBU
|
1,565 | 393 | (5,421 | ) | 533 | - | ||||||||||||||
|
Total CSBU
|
41,628 | 24,175 | 7,960 | 769 | - | |||||||||||||||
|
Organizational
Solutions
Business Unit:
|
||||||||||||||||||||
|
Domestic
|
21,819 | 13,896 | 2,059 | 155 | 900 | |||||||||||||||
|
International
|
13,429 | 9,118 | 3,030 | 204 | - | |||||||||||||||
|
Total
OSBU
|
35,248 | 23,014 | 5,089 | 359 | 900 | |||||||||||||||
|
Total
operating segments
|
76,876 | 47,189 | 13,049 | 1,128 | 900 | |||||||||||||||
|
Corporate
and eliminations
|
- | - | (2,526 | ) | 238 | - | ||||||||||||||
|
Consolidated
|
$ | 76,876 | $ | 47,189 | $ | 10,523 | $ | 1,366 | $ | 900 | ||||||||||
|
Two
Quarters Ended
March
1, 2008
|
||||||||||||||||||||
|
Consumer
Solutions
Business Unit:
|
||||||||||||||||||||
|
Retail
|
$ | 30,762 | $ | 18,790 | $ | 4,667 | $ | 480 | $ | - | ||||||||||
|
Consumer
direct
|
28,386 | 16,709 | 12,715 | 122 | - | |||||||||||||||
|
Wholesale
|
7,181 | 4,009 | 3,714 | - | - | |||||||||||||||
|
CSBU
International
|
5,574 | 3,071 | 1,285 | 33 | - | |||||||||||||||
|
Other
CSBU
|
2,441 | 429 | (13,546 | ) | 390 | - | ||||||||||||||
|
Total CSBU
|
74,344 | 43,008 | 8,835 | 1,025 | - | |||||||||||||||
|
Organizational
Solutions
Business Unit:
|
||||||||||||||||||||
|
Domestic
|
43,325 | 27,454 | 1,362 | 819 | 1,798 | |||||||||||||||
|
International
|
31,033 | 22,172 | 9,371 | 227 | 2 | |||||||||||||||
|
Total
OSBU
|
74,358 | 49,626 | 10,733 | 1,046 | 1,800 | |||||||||||||||
|
Total
operating segments
|
148,702 | 92,634 | 19,568 | 2,071 | 1,800 | |||||||||||||||
|
Corporate
and eliminations
|
- | - | (3,358 | ) | 476 | - | ||||||||||||||
|
Consolidated
|
$ | 148,702 | $ | 92,634 | $ | 16,210 | $ | 2,547 | $ | 1,800 | ||||||||||
|
Two
Quarters Ended
March
3, 2007
|
||||||||||||||||||||
|
Consumer
Solutions
Business Unit:
|
||||||||||||||||||||
|
Retail
|
$ | 33,392 | $ | 20,260 | $ | 5,909 | $ | 377 | $ | - | ||||||||||
|
Consumer
direct
|
30,784 | 18,231 | 13,980 | 70 | - | |||||||||||||||
|
Wholesale
|
8,158 | 4,710 | 4,409 | - | - | |||||||||||||||
|
CSBU
International
|
5,029 | 3,093 | 1,195 | - | - | |||||||||||||||
|
Other
CSBU
|
2,837 | 112 | (13,531 | ) | 792 | - | ||||||||||||||
|
Total CSBU
|
80,200 | 46,406 | 11,962 | 1,239 | - | |||||||||||||||
|
Organizational
Solutions
Business Unit:
|
||||||||||||||||||||
|
Domestic
|
43,288 | 27,770 | 3,295 | 269 | 1,802 | |||||||||||||||
|
International
|
28,917 | 19,410 | 6,217 | 409 | - | |||||||||||||||
|
Total
OSBU
|
72,205 | 47,180 | 9,512 | 678 | 1,802 | |||||||||||||||
|
Total
operating segments
|
152,405 | 93,586 | 21,474 | 1,917 | 1,802 | |||||||||||||||
|
Corporate
and eliminations
|
- | - | (5,402 | ) | 486 | - | ||||||||||||||
|
Consolidated
|
$ | 152,405 | $ | 93,586 | $ | 16,072 | $ | 2,403 | $ | 1,802 | ||||||||||
A
reconciliation of operating segment EBITDA to consolidated income before taxes
is provided below (in thousands):
|
Quarter
Ended
|
Two
Quarters Ended
|
|||||||||||||||
|
March
1,
2008
|
March
3,
2007
|
March
1,
2008
|
March
3,
2007
|
|||||||||||||
|
Reportable
segment EBITDA
|
$ | 10,802 | $ | 13,049 | $ | 19,568 | $ | 21,474 | ||||||||
|
Corporate
expenses
|
(1,766 | ) | (2,526 | ) | (3,358 | ) | (5,402 | ) | ||||||||
|
Consolidated
EBITDA
|
9,036 | 10,523 | 16,210 | 16,072 | ||||||||||||
|
Gain
on sale of manufacturing facility
|
- | 1,227 | - | 1,227 | ||||||||||||
|
Depreciation
|
(1,350 | ) | (1,366 | ) | (2,547 | ) | (2,403 | ) | ||||||||
|
Amortization
|
(901 | ) | (900 | ) | (1,800 | ) | (1,802 | ) | ||||||||
|
Income
from operations
|
6,785 | 9,484 | 11,863 | 13,094 | ||||||||||||
|
Interest
income
|
15 | 357 | 24 | 557 | ||||||||||||
|
Interest
expense
|
(761 | ) | (675 | ) | (1,672 | ) | (1,336 | ) | ||||||||
|
Income
before provision for income taxes
|
$ | 6,039 | $ | 9,166 | $ | 10,215 | $ | 12,315 | ||||||||
|
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,
2007.
RESULTS
OF OPERATIONS
Overview
Our
second fiscal quarter, which includes the months of December, January, and
February, has historically reflected strong product sales, primarily from
seasonal holiday shopping, and generally good training and consulting service
sales. For the quarter ended March 1, 2008, our income from
operations decreased to $6.8 million compared to $9.5 million for the same
quarter of fiscal 2007, which includes a $1.2 million gain from the sale of a
manufacturing facility. Our income before provision for income taxes
also declined to $6.0 million compared to $9.2 million in the prior year and net
income available to common shareholders decreased to $3.1 million compared to
$3.8 million in fiscal 2007.
The
primary factors that influenced our operating results during the quarter ended
March 1, 2008 were as follows:
|
·
|
Sales – Our consolidated
sales declined $1.7 million, which was the result of a $4.0 million
decrease in product sales that was partially offset by increased training
and consulting services sales. Product sales declined primarily
due to reduced retail sales, consumer direct sales, and wholesale sales
compared to the prior year. Training and consulting services
sales increased primarily due to increased sales from our international
operations.
|
|
·
|
Gross
Profit – Our consolidated gross profit totaled $46.7 million for
the quarter ended March 1, 2008 compared to $47.2 million for the same
quarter in fiscal 2007. The decrease was primarily due to
decreased product sales during fiscal 2008 compared to the prior
year. Our consolidated gross margin, which is gross profit
stated in terms of a percentage of sales, increased to 62.1 percent of
sales compared to 61.4 percent in fiscal 2007. The increase in
gross margin percentage was primarily attributable to the continuing shift
toward increased training and consulting sales, which generally have
higher margins than our product sales. Training and consulting
service sales increased to 45 percent of total sales in the quarter ended
March 1, 2008 compared to 41 percent in the same quarter of the prior
year.
|
|
·
|
Operating
Costs – Our operating costs increased by $1.0 million compared to
the prior year (not including the impact of a gain on the sale of our
printing facility in fiscal 2007), which was primarily the result of
increased selling, general, and administrative expenses as depreciation
expense and amortization expense from our definite-lived intangible assets
did not differ appreciably from the prior
year.
|
Further
details regarding these factors and their impact on our operating results and
liquidity are provided throughout the following management’s discussion and
analysis.
Quarter Ended March 1, 2008
Compared to the Quarter Ended March 3, 2007
Sales
The
following table sets forth sales data by category and for our operating segments
(in thousands):
|
Quarter
Ended
|
Two
Quarters Ended
|
|||||||||||||||||||||||
|
March
1, 2008
|
March
3, 2007
|
Percent
Change
|
March
1, 2008
|
March
3, 2007
|
Percent
Change
|
|||||||||||||||||||
|
Sales
by Category:
|
||||||||||||||||||||||||
|
Products
|
$ | 41,299 | $ | 45,283 | (9 | ) | $ | 80,675 | $ | 87,391 | (8 | ) | ||||||||||||
|
Training
and consulting services
|
33,828 | 31,593 | 7 | 68,027 | 65,014 | 5 | ||||||||||||||||||
| $ | 75,127 | $ | 76,876 | (2 | ) | $ | 148,702 | $ | 152,405 | (2 | ) | |||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||
|
Retail Stores
|
$ | 17,628 | $ | 19,265 | (8 | ) | $ | 30,762 | $ | 33,392 | (8 | ) | ||||||||||||
|
Consumer Direct
|
13,574 | 14,574 | (7 | ) | 28,386 | 30,784 | (8 | ) | ||||||||||||||||
|
Wholesale
|
2,921 | 3,581 | (18 | ) | 7,181 | 8,158 | (12 | ) | ||||||||||||||||
|
CSBU
International
|
2,902 | 2,643 | 10 | 5,574 | 5,029 | 11 | ||||||||||||||||||
|
Other CSBU
|
1,276 | 1,565 | (18 | ) | 2,441 | 2,837 | (14 | ) | ||||||||||||||||
| 38,301 | 41,628 | (8 | ) | 74,344 | 80,200 | (7 | ) | |||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||
|
Domestic
|
21,662 | 21,819 | (1 | ) | 43,325 | 43,288 | - | |||||||||||||||||
|
International
|
15,164 | 13,429 | 13 | 31,033 | 28,917 | 7 | ||||||||||||||||||
| 36,826 | 35,248 | 4 | 74,358 | 72,205 | 3 | |||||||||||||||||||
|
Total
Sales
|
$ | 75,127 | $ | 76,876 | (2 | ) | $ | 148,702 | $ | 152,405 | (2 | ) | ||||||||||||
Product
Sales –
Consolidated product sales, which primarily consists of planners,
binders, totes, software and related accessories that are primarily sold through
our Consumer Solutions Business Unit (CSBU) channels, declined $4.0 million
compared to the prior year. Our product sales, primarily in retail
stores and through our consumer direct channels, have declined in recent periods
and this trend may continue in future periods. We also believe that
the product sales declines in the quarter March 1, 2008 were worsened by
deteriorating economic conditions in the United States, which generally reduced
consumer spending during the 2007 holiday season. The decline in
overall product sales during the quarter ended March 1, 2008 was primarily due
to the following performance in our CSBU channels:
|
·
|
Retail Stores – The
decline in retail sales was primarily due to reduced traffic in our retail
locations, a significant increase in the number of wholesale outlets that
sell our products and compete directly against Company-owned retail
stores, reduced demand for technology and related products, and fewer
store locations, which had a $0.3 million impact on retail
sales. Our retail store traffic, or the number of consumers
entering our retail locations, declined by approximately 18 percent
compared to the second quarter of fiscal 2007 and resulted in decreased
sales of “core” products (e.g. planners, binders, totes, and accessories)
compared to the prior year. Due to declining demand for
electronic handheld planning products, during late fiscal 2007 we decided
to exit the low-margin handheld device and related electronics accessories
business, which reduced retail sales by $0.4 million compared to the prior
year. These factors combined to produce a 6 percent decline in
year-over-year comparable store (stores which were open during the
comparable periods) sales versus the second quarter of fiscal
2007. We closed nine retail locations late in the quarter ended
March 1, 2008 and were operating 78 domestic retail locations at March 1,
2008 compared to 87 locations at March 3, 2007. Based upon our
continuing analyses of retail store performance we may close additional
retail stores and continue to recognize decreased sales in future periods
as a result of closing store
locations.
|
|
·
|
Consumer Direct – Sales
through our consumer direct channels (primarily eCommerce and call center)
decreased $1.0 million, primarily due to a decline in the number of
customers visiting our website and a decline in the number of orders that
are being processed through the call center. Visits to our
website decreased from the prior year by approximately 13
percent. Declining consumer orders through the call center
continues a long-term trend and decreased by approximately 11 percent
compared to the prior year, which we believe is partially the result of a
transition of customers to our other product
channels.
|
|
·
|
Wholesale – Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, decreased $0.7 million primarily due to the
transition of a portion of our wholesale business to a new distributor and
the timing of sales as the new distributor builds
inventories. We anticipate an increase in our wholesale sales
during the last two quarters of fiscal 2008 compared to the prior year as
the transition to the new wholesale partner is
completed.
|
|
·
|
CSBU International –
This channel includes the product sales of our directly owned
international offices in Canada, the United Kingdom, Mexico, and
Australia. Sales increased $0.3 million primarily due to
increased demand for our products in these countries during the quarter
ended March 1, 2008.
|
|
·
|
Other CSBU – Other CSBU
sales consist primarily of domestic printing and publishing sales and
building sublease revenues. The decrease in other CSBU sales
was primarily due to a $0.4 million decrease in external printing sales
compared to the prior year. The decrease in external printing
sales was primarily due to reduced demand for these
products.
|
Training and
Consulting Services –
We offer a variety of training courses, training related products, and
consulting services focused on leadership, productivity, strategy execution,
sales force performance, and effective communications that are provided both
domestically and internationally through the Organizational Solutions Business
Unit (OSBU). Our consolidated training and consulting service sales
increased $2.2 million compared to the prior year and maintained the favorable
momentum in training and consulting sales that began in prior
periods. Training and consulting service sales performance during the
quarter ended March 1, 2008 was primarily influenced by the following factors in
our OSBU divisions:
|
·
|
Domestic –
Our domestic division includes sales from our five geographic and
two vertical direct sales offices, public programs, the sales performance
group, book and audio channels, and various other
sources. Domestic division sales decreased by $0.2 million,
primarily due to decreased sales performance group revenues and lower book
royalty income. The domestic sales performance during the
quarter was also reflective of the successful launch of the Company's new
leadership offering during the second quarter of fiscal 2007, which had a
favorable impact on domestic training and consulting sales. Book
royalties decreased due to a reduction in the number of new publications
that were launched in fiscal 2008. We launched several new
publications during fiscal 2007, including the best-selling The 6 Most Important Decisions
You’ll Ever Make. Partially offsetting these declines
were increased sales at our domestic direct sales offices.
Sales
in our direct sales offices continue to improve as a result of continued
acceptance of our core product offerings, which includes The Seven Habits of Highly
Effective People, Leadership: Great Leaders, Great Teams, Great Results,
and The 4
Disciplines of Execution programs. As a result, sales
from our direct sales offices increased four percent over the prior
year. Sales performance from our consultant-lead programs
increased 12 percent, reflecting an increase in both the number of days
given and the average revenue per day. Facilitated training
sales were flat compared to the prior year as the prior year sales were
favorably impacted by the release of our new leadership
program. Our outlook for the remainder of fiscal 2008 continues
to be strong as we continue to hire and train new sales
people. The current number of training days we
have
|
scheduled
to be delivered in the third and fourth quarters have increased 15 percent
compared to the number of days we had scheduled at this time in the prior
year. We believe that the introduction of new programs and refreshed
existing programs will continue to have a favorable impact on training and
consulting service sales in future periods, including the release of our Leadership Modular series and
Leading at the Speed of
Trust program, which are scheduled to launch in the third quarter of
fiscal 2008.
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·
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International –
International sales increased $1.7 million compared to the same quarter of
fiscal 2007. Sales increased over the prior year at our
directly owned foreign offices located in Japan, United Kingdom, Canada,
and Australia, as well as from licensee royalty
revenues. Partially offsetting these increases was the
elimination of sales from our wholly owned subsidiary in Brazil and our
training operations located in Mexico. We sold these operations
to external licensees during fiscal 2007 and we now receive royalty
revenue from their operations based upon gross sales. The
conversion of these operations to licensees had a $1.0 million unfavorable
impact on our international sales, but the conversion of these entities
improved our income from their operations during the
quarter. The translation of foreign sales to United States
dollars resulted in a $1.0 million favorable impact to our consolidated
sales as foreign currencies strengthened against the United States dollar
during the quarter ended March 1,
2008.
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Gross
Profit
Gross
profit consists of net sales less the cost of goods sold or the cost of services
provided. Our consolidated gross profit totaled $46.7 million for the
quarter ended March 1, 2008 compared to $47.2 million in fiscal
2007. The decrease was primarily due to decreased product sales
during fiscal 2008 compared to the prior year. Our consolidated gross
margin, which is gross profit stated in terms of a percentage of sales,
increased to 62.1 percent of sales compared to 61.4 percent in fiscal
2007. The slight increase in gross margin percentage was primarily
attributable to the continuing shift toward increased training and consulting
sales, which generally have higher margins than our product
sales. Training and consulting service sales increased to 45 percent
of total sales in the quarter ended March 1, 2008 compared to 41 percent in the
same quarter of the prior year.
Our gross
margin on product sales remained relatively consistent at 57.0 percent of sales
compared to 57.1 percent in fiscal 2007.
For the
quarter ended March 1, 2008, our training and consulting services gross margin
was 68.5 percent compared to 67.6 percent in the prior year. The
improvement was primarily attributable to continued improvements in gross margin
percentage at our international offices and increasing licensee royalty
revenues, which have virtually no corresponding cost of sales.
Operating
Expenses
Selling, General
and Administrative –
Our selling, general, and administrative (SG&A) expenses increased
$1.0 million, or three percent, compared to the prior year (excluding the gain
on the sale of a manufacturing facility in the second quarter of fiscal
2007). The increase in SG&A expenses was primarily due to 1)
increased compensation costs totaling $0.8 million that were primarily
generated by additional OSBU sales personnel; 2) increased promotional costs
totaling $0.7 million resulting from a change in the timing of catalog mailings
and our overall catalog strategy, which concentrated a greater amount of catalog
costs in the second quarter of fiscal 2008; 3) increased bad debt expense of
$0.4 million resulting primarily from the prior year adjustment of our bad debt
reserve, which produced a benefit in fiscal 2007 that did not occur in fiscal
2008; and 4) increased legal fees totaling $0.3 million incurred primarily for
ongoing litigation. These increased SG&A costs were partially
offset by the sale of our subsidiary in Brazil and the training and consulting
operations of our subsidiary in Mexico and by reduced SG&A costs in various
other areas of the Company’s operations. During the fourth quarter of
fiscal 2007, we
completed
the sales and conversions of our subsidiary in Brazil and our training
operations in Mexico to licensee operations. The conversion of these
operations to licensees reduced our SG&A expenses by $0.8 million compared
to the prior year.
Gain on Sale of
Manufacturing Facility – In August 2006, we initiated a project to
reconfigure our printing operations to improve our printing services’
efficiency, reduce operating costs, and improve our printing services’
flexibility to potentially increase external printing service
sales. Our reconfiguration plan included moving our printing
operations a short distance from its existing location to our corporate
headquarters campus and the sale of the manufacturing facility and certain
printing presses. During the quarter ended March 3, 2007, we
completed the sale of the manufacturing facility. The sale price was
$2.5 million and, after deducting customary closing costs, the net proceeds to
the Company from the sale totaled $2.3 million in cash. The carrying
value of the manufacturing facility at the date of sale was approximately $1.1
million and we recognized a $1.2 million gain on the sale of the manufacturing
facility during the quarter ended March 3, 2007.
Depreciation – Depreciation expense
remained consistent with the prior year at $1.4 million. Our
depreciation expense for the quarter ended March 1, 2008 included an impairment
charge totaling $0.3 million for software that did not function as anticipated
and was written off during the quarter. Depreciation expense in the
prior year included an impairment charge totaling $0.3 million that we recorded
to reduce the carrying value of one of our printing presses to be sold to its
anticipated sale price. Based upon anticipated capital spending in
fiscal 2008 and purchases in prior years, we anticipate that total depreciation
expense in fiscal 2008 will approximate fiscal 2007 expense.
Income
Taxes
Our
income tax provision for the quarter ended March 1, 2008 decreased to $3.0
million, compared to $4.5 million in the same quarter of the prior
year. The decrease in our income tax provision was primarily due to
reduced pre-tax income. Our effective tax rate for the quarter ended
March 1, 2008 of approximately 49 percent was higher than statutory combined
rates primarily due to the accrual of taxable interest income on the management
stock loan program and withholding taxes on royalty income from foreign
licensees.
Preferred
Dividends
Due to
the redemption of all remaining shares of Series A preferred stock in the third
quarter of fiscal 2007, our preferred dividend obligation decreased $0.9 million
compared to the prior year.
Two Quarters Ended March 1,
2008 Compared to the Two Quarters Ended March 3, 2007
Sales
Product
Sales – Our
consolidated product sales, which are primarily generated by our CSBU channels,
declined $6.7 million compared to the prior year. Our product sales
have declined in recent periods, primarily through our retail store and consumer
direct channels, and this trend may continue in future periods. We
also believe that the product sales declines during the first two quarters of
fiscal 2008 were worsened by deteriorating economic conditions in the United
States, which generally reduced consumer spending during the 2007 holiday
season. The following is a description of sales performance in our CSBU
channels for the two quarters ended March 1, 2008:
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·
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Retail Stores – The
decline in retail sales was primarily due to reduced traffic in our retail
locations, a significant increase in the number of wholesale outlets that
sell our products and compete directly against Company-owned retail
stores, reduced demand for technology and related products, and fewer
store locations, which had a $0.5 million impact on retail
sales. Our retail store traffic declined by approximately 19
percent compared to the first two quarters of fiscal 2007 and resulted in
decreased sales of “core” products compared to the prior
year. Due to declining demand for electronic handheld planning
products, during late fiscal 2007 we decided to exit
the
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low-margin
handheld device and related electronics accessories business, which reduced
retail sales by $0.6 million compared to the prior year. These
factors combined to produce a 7 percent decline in year-over-year comparable
store sales versus the prior year.
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·
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Consumer Direct – Sales
through our consumer direct channels decreased $2.4 million, primarily due
to a decline in the number of customers visiting our website and a decline
in the number of orders that are being processed through our call
center. Website visits decreased by 10 percent compared to the
prior year and declining customer orders through the call center continues
a long-term trend and decreased by 11 percent, which we believe is
partially due to consumers transitioning to our other product
channels.
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·
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Wholesale – Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, decreased $1.0 million primarily due to the
transition of a portion of our wholesale business to a new wholesale
distribution partner. We anticipate an increase in our
wholesale sales during the last two quarters of fiscal 2008 compared to
the prior year as the transition to the new wholesale partner is
completed.
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CSBU International –
This channel includes the product sales of our directly owned
international offices in Canada, the United Kingdom, Mexico, and
Australia. Sales performance through these channels increased
$0.5 million compared with the prior year primarily due to increased
demand for products in certain
countries.
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|
·
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Other CSBU – The $0.4
million decrease in other CSBU sales was primarily due to decreased
external printing sales that occurred during the second quarter of fiscal
2008.
|
Training and
Consulting Services –
Our consolidated training and consulting service sales increased $3.0
million compared to the prior year. Training and consulting service
sales performance during the first two quarters of fiscal 2007 was influenced by
the following performance and trends in the OSBU divisions:
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·
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Domestic –
Our domestic training sales were flat compared to the two quarters
ended March 3, 2007. Sales performance through our direct sales
offices continue to improve as a result of continued acceptance of our
core product offerings, which includes The Seven Habits of Highly
Effective People, Leadership: Great Leaders, Great Teams, Great Results,
and The 4
Disciplines of Execution. However, these increases were
offset by decreased sales performance group revenues and decreased book
royalties. Our current outlook for the remainder of fiscal 2008
continues to be strong and current training days booked has increased
compared to the prior year.
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·
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International –
International sales increased $2.1 million compared to the first two
quarters of fiscal 2007. Sales increased over the prior year at
all of our directly owned foreign offices as well as from licensee royalty
revenues. Partially offsetting these increases was the
elimination of sales from our wholly owned subsidiary in Brazil and our
training operations located in Mexico. We sold these operations
to external licensees during fiscal 2007 and we now receive royalty
revenue from their operations based upon gross sales. The
conversion of these operations to licensees had a $2.3 million unfavorable
impact on our international sales but improved our income from these
operations compared to the prior year. The translation of
foreign sales to United States dollars had a $1.9 million favorable impact
on our consolidated sales as foreign currencies strengthened against the
United States dollar during the two quarters ended March 1,
2008.
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Gross
Profit
For the
two quarters ended March 1, 2008, our consolidated gross profit decreased to
$92.6 million compared to $93.6 million in fiscal 2007. The decrease
was primarily attributable to decreased product sales during fiscal 2008
compared to the prior year. Our consolidated gross margin, which is
gross profit stated in terms of a percentage of sales, increased to 62.3 percent
of sales compared to 61.4 percent in the first two quarters of fiscal
2007. The slight increase in gross margin percentage was primarily
attributable to the continuing shift toward increased training and consulting
sales, which generally have higher margins than our product
sales. Training and consulting service sales increased to 46 percent
of total sales for the two quarters ended March 1, 2008 compared to 43 percent
in the prior year.
Our gross
margin on product sales remained relatively consistent at 57.0 percent of sales
compared to 56.6 percent in the prior year.
During
the first two quarters of fiscal 2008, our training and consulting services
gross margin was 68.6 percent compared to 67.8 percent in the prior
year. The improvement was primarily attributable to improved gross
margins at our international offices and increasing licensee royalty revenues,
which have virtually no corresponding cost of sales.
Operating
Expenses
Selling, General
and Administrative –
Consolidated SG&A expenses decreased $1.1 million, or 1 percent,
compared to the prior year (excluding the gain on the sale of a manufacturing
facility in the second quarter of fiscal 2007). The decrease in
SG&A expenses was primarily due to 1) the fiscal 2007 sale of our subsidiary
in Brazil and the training and consulting operations of our subsidiary in
Mexico, which reduced SG&A expenses by $1.9 million; 2) a $1.1 million
decrease in share-based compensation primarily due to the determination that no
shares will be awarded under our fiscal 2006 long-term incentive plan and the
corresponding reversal of share-based compensation expense during the quarter
ended December 1, 2007; and 3) a $0.5 million decrease in audit and related
consulting costs primarily resulting from improved processes and procedures
combined with revised internal control testing standards. These
decreases were partially offset by increased compensation expenses for
additional OSBU sales personnel, which totaled $1.2 million, increased legal
expenses for ongoing litigation, and increases in various other areas of the
Company.
Gain on Sale of
Manufacturing Facility –
In August 2006, we initiated a project to reconfigure our printing
operations to improve our printing services’ efficiency, reduce operating costs,
and improve our printing services’ flexibility to potentially increase external
printing service sales. Our reconfiguration plan included the sale of
our manufacturing facility and certain printing presses. During the
quarter ended March 3, 2007, we completed the sale of the manufacturing facility
and recorded a gain on the sale for $1.2 million. For further
information on the sale of the manufacturing facility, refer to the discussion
regarding this transaction in the comparison of the quarter ended March 1, 2008
to the quarter ended March 3, 2007.
Depreciation and
Amortization –
Depreciation expense increased to $2.5 million compared to $2.4 million
in fiscal 2007. Our depreciation expense for the two quarters ended
March 1, 2008 included an impairment charge totaling $0.3 million for software
that did not function as anticipated and was written
off. Depreciation expense in the prior year also included an
impairment charge totaling $0.3 million that we recorded to reduce the carrying
value of one of our printing presses to be sold to its anticipated sale
price. Based upon anticipated capital spending in fiscal 2008 and
purchases in prior years, we anticipate that total depreciation expense in
fiscal 2008 will approximate fiscal 2007 depreciation expense.
Amortization
expense from definite-lived intangible assets totaled $1.8 million for the two
quarters ended March 1, 2008 and March 3, 2007. We currently expect
that intangible asset amortization expense will total $3.6 million in fiscal
2008.
Income
Taxes
Our
income tax provision for the two quarters ended March 1, 2008 totaled $5.1
million compared to $6.2 million for the first two quarters of fiscal
2007. The decrease in our income tax provision was primarily due to
reduced pre-tax income. Our effective tax rate for the two quarters
ended March 1, 2008 of approximately 50 percent was higher than statutory
combined rates primarily due to the accrual of taxable interest income on the
management stock loan program and withholding taxes on royalty income from
foreign licensees.
The
adoption of FIN 48 during our first quarter of fiscal 2008 did not have a
material impact on our income tax provision.
Preferred
Stock Dividends
Due to
the redemption of all remaining shares of Series A preferred stock in the third
quarter of fiscal 2007, our preferred dividend obligation decreased $1.9 million
compared to the prior year.
LIQUIDITY
AND CAPITAL RESOURCES
At March
1, 2008 we had $5.3 million of cash and cash equivalents compared to $6.1
million at August 31, 2007 and our net working capital (current assets less
current liabilities) increased to $21.3 million at March 1, 2008 compared to
$8.9 million at August 31, 2007. The increase in working capital was
primarily due to reduced line of credit borrowing at March 1,
2008. During fiscal 2007, we used substantially all of our cash on
hand combined with proceeds from a line of credit to redeem all of our remaining
preferred stock at its liquidation preference of $25 per share plus accrued
dividends. Although we have incurred additional interest expense from
line of credit borrowings, we believe that the redemption of our remaining
preferred stock and elimination of the corresponding 10.0 percent dividend
obligation will continue to improve our cash flows and reported results of
operations in future periods.
Our debt
structure consists of a $25.0 million line of credit that may be used for
working capital and other general needs, a long-term variable rate mortgage on
our Canadian building, and a long-term lease on our corporate campus that is
accounted for as a financing obligation. The $25.0 million line of
credit carries an interest rate equal to LIBOR plus 1.10 percent and expires on
March 14, 2010. We may draw on the line of credit facility, repay,
and draw again, on a revolving basis, up to the maximum loan amount of $25.0
million so long as no event of default has occurred and is
continuing. The working capital line of credit also contains
customary representations and guarantees as well as provisions for repayment and
liens.
In
addition to customary non-financial terms and conditions, our line of credit
requires us to be in compliance with specified financial covenants, including:
(i) a funded debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a
limitation on annual capital expenditures; and (iv) a defined amount of minimum
net worth. In the event of noncompliance with these financial
covenants and other defined events of default, the lenders are entitled to
certain remedies, including acceleration of the repayment of amounts outstanding
on the line of credit. During the quarter ended March 1, 2008, we
believe that we were in compliance with the terms and financial covenants of our
credit facilities. At March 1, 2008, we had $4.3 million outstanding
on the line of credit, which was classified as a current liability on our
condensed consolidated balance sheets.
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 two
quarters ended March 1, 2008.
Cash
Flows From Operating Activities
Our cash
provided by operating activities totaled $14.4 million for the two quarters
ended March 1, 2008 compared to $8.8 million during 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 provided by or used for changes in
working capital during the two quarters ended March 1, 2008 was primarily
related to 1) decreased inventory balances resulting from the sale of goods
during our seasonally busy months of December and January; 2) increased accounts
receivable balances resulting from improved OSBU sales; and 3) payments to
reduce accounts payable and accrued liabilities from seasonally high balances at
August 31. We believe that our continued efforts to optimize working
capital balances, combined with existing and planned sales growth programs and
cost-reduction 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 $2.8 million for the two quarters ended
March 1, 2008. Our primary uses of cash for investing activities were
the purchase of property and equipment and additional spending on curriculum
development. Our purchases of property and equipment, which totaled
$2.3 million, consisted primarily of computer hardware, computer software, and
leasehold improvements. During the first two quarters of fiscal 2008,
we spent $1.6 million for further investment in the development of various
programs and curriculum. Partially offsetting these uses of cash was
the receipt of $1.0 million on notes receivable from the sales of our subsidiary
in Brazil and our training operations in Mexico, which were completed at August
31, 2007 through the use of notes receivable financing.
Cash
Flows From Financing Activities
Net cash
used for financing activities during the two quarters ended March 1, 2008
totaled $11.8 million, which primarily consisted of payments on our line of
credit and other debt obligations. During the two quarters ended
March 1, 2008 we used substantially all of our available cash to reduce our line
of credit borrowings from $16.0 million at August 31, 2007 to $4.3 million at
March 1, 2008. For a period during the quarter ended March 1, 2008,
we had repaid all amounts outstanding on our line of credit
facility.
Sources
of Liquidity
Going
forward, we will continue to incur costs necessary for the operation and
potential growth of the business. We anticipate using cash on hand,
cash provided by the sale of goods and services to our clients on the condition
that we can continue to generate positive cash flows from operating activities,
proceeds from our line of credit, and other financing alternatives, if
necessary, for these expenditures. We anticipate that our existing
capital resources should be adequate to enable us to maintain our operations for
at least the upcoming twelve months. However, our ability to maintain
adequate capital for our operations in the future is dependent upon a number of
factors, including sales trends, our ability to contain costs, purchases of our
common stock, levels of capital expenditures, collection of accounts receivable,
and other factors. Some of the factors that influence our operations
are not within our control, such as economic conditions and the introduction of
new technology and products by our competitors. We will continue to
monitor our liquidity position and may pursue additional financing alternatives,
if required, to maintain sufficient resources for future growth and capital
requirements. However, there can be no assurance that such financing
alternatives will be available to us on acceptable terms.
Contractual
Obligations
The
Company has not structured any special purpose or variable interest entities, or
participated in any commodity trading activities, which would expose us to
potential undisclosed liabilities or create adverse consequences to our
liquidity. Required contractual payments primarily consist of 1)
payments to EDS for outsourcing services related to information systems,
warehousing and distribution, and call center operations; 2) payments on a
financing obligation resulting from the sale of our corporate campus; 3) minimum
rent payments for retail store and sales office space; 4) mortgage payments on
certain buildings and property; and 5) short-term purchase obligations for
inventory and other products or services to be delivered in fiscal
2008. There have been no significant changes to our expected required
contractual obligations from those disclosed at August 31, 2007.
Our
contractual obligations as disclosed in our Form 10-K for the year ended August
31, 2007 exclude unrecognized tax benefits under FIN 48 of $4.3 million for
which we cannot make a reasonably reliable estimate of the amount and period of
payment. For further information regarding the adoption of FIN 48,
refer to Note 4 of the notes to the condensed consolidated financial statements
contained in this Form 10-Q.
Other
Items
The
Company is the creditor for a loan program that provided the capital to allow
certain management personnel the opportunity to purchase shares of our common
stock. For further information regarding our management common stock
loan program, refer to Note 10 to our consolidated financial statements on Form
10-K for the fiscal year ended August 31, 2007. The inability of the
Company to collect all, or a portion, of these receivables could have an adverse
impact upon our financial position and future cash flows compared to full
collection of the loans.
USE
OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America. The
significant accounting polices that we used to prepare our consolidated
financial statements are outlined in Note 1 to the consolidated financial
statements, which are presented in Part II, Item 8 of our Annual Report on Form
10-K for the fiscal year ended August 31, 2007. 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:
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Products – We sell
planners, binders, planner accessories, handheld electronic devices, and
other related products that are mainly sold through our CSBU
channels.
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Training and Consulting
Services – We provide training and consulting services to both
organizations and individuals in leadership, productivity, strategic
execution, goal alignment,
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sales
force performance, and communication effectiveness skills. These
training programs and services are principally sold through our OSBU
channels.
The
Company recognizes revenue when: 1) persuasive evidence of an agreement exists,
2) delivery of product has occurred or services have been rendered, 3) the price
to the customer is fixed and determinable, and 4) collectibility is reasonably
assured. For product sales, these conditions are generally met upon
shipment of the product to the customer or by completion of the sale transaction
in a retail store. For training and service sales, these conditions
are generally met upon presentation of the training seminar or delivery of the
consulting services.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. In
accordance with Emerging Issues Task Force (EITF) Issue 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. Statement 97-2, as
amended, generally requires revenue earned on software arrangements involving
multiple elements such as software products and support to be allocated to each
element based on the relative fair value of the elements based on vendor
specific objective evidence (VSOE). The majority of the Company’s
software sales have 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 wholly-owned operation. Licensee companies are unrelated
entities that have been granted a license to translate our content and
curriculum, adapt the content and curriculum to the local culture, and sell our
training seminars and products in a specific country or
region. Licensees are required to pay us royalties based upon a
percentage of the licensee’s sales. The Company recognizes royalty
income each period based upon the sales information reported to us from the
licensees.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Share-Based
Compensation
During
fiscal 2006, we granted performance based compensation awards to certain
employees in a Board of Director approved long-term incentive plan (the
LTIP). These performance-based share awards allow each participant
the right to receive a certain number of shares of common stock based upon the
achievement of specified financial goals at the end of a predetermined
performance period. The LTIP awards vest on August 31 of the third
fiscal year from the grant date, which corresponds to the completion of a
three-year performance cycle. For example, the LTIP awards granted in
fiscal 2006 vest
on August
31, 2008. The number of shares that are finally awarded to LTIP
participants is variable and is based entirely upon the achievement of a
combination of performance objectives related to sales growth and cumulative
operating income during the performance period. Due to the variable
number of shares that may be issued under the LTIP, we reevaluate the LTIP
grants on a quarterly basis and adjust the number of shares expected to be
awarded for each grant based upon financial results of the Company as compared
to the performance goals set for the award. Adjustments to the number
of shares awarded, and to the corresponding compensation expense, are based upon
estimated future performance and are made on a cumulative basis at the date of
adjustment based upon the probable number of shares to be awarded.
The
Compensation Committee initially granted awards for 378,665 shares (the Target
Award) of common stock under the LTIP during fiscal 2006. However,
based upon actual financial performance through December 1, 2007 and estimated
performance through the remaining service period of the fiscal 2006 LTIP grant,
the Company determined that no shares of common stock would be awarded under the
terms of the fiscal 2006 LTIP grant. We expect that our anticipated
sales growth in training and consulting sales will be insufficient to offset
forecast product sales declines, which were revised using actual product sales
levels late in our first fiscal quarter and early second fiscal quarter, and the
impact of eliminated sales resulting from the disposal and conversion of our
subsidiary in Brazil and our training operations in Mexico to
licensees. Although we expect sufficient levels of cumulative
operating income to be recognized for the fiscal 2006 award, anticipated sales
growth was below the minimum 7.5 percent threshold for shares to be awarded
under the plan (refer to the table below). As a result of this
determination, we recorded a cumulative adjustment in the quarter ended December
1, 2007 that reduced our selling, general, and administrative expenses by $0.7
million and no compensation expense was recognized from the fiscal 2006 LTIP
award during the quarter ended March 1, 2008.
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Sales
Growth
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Percent
of Target Shares Awarded
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30.0%
|
115%
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135%
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150%
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175%
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200%
|
|
22.5%
|
90%
|
110%
|
125%
|
150%
|
175%
|
|
15.0%
|
65%
|
85%
|
100%
|
125%
|
150%
|
|
11.8
%
|
50%
|
70%
|
85%
|
110%
|
135%
|
|
7.5%
|
30%
|
50%
|
65%
|
90%
|
115%
|
|
$36.20
|
$56.80
|
$72.30
|
$108.50
|
$144.60
|
|
|
Cumulative
Operating Income (millions)
|
|||||
During
fiscal 2007, the Compensation Committee granted performance awards for 429,312
shares of common stock under the terms of the LTIP. Consistent with
the fiscal 2006 LTIP grant, the Company must achieve minimum levels of sales
growth and cumulative operating income in order for participants to receive any
shares under the LTIP grant. As shown in the table below, the minimum
sales growth for the fiscal 2007 LTIP is 10.0 percent (fiscal 2009 compared to
fiscal 2007) and the minimum cumulative operating income total during the
service period is $41.3 million. We record compensation expense on
the fiscal 2007 LTIP using a 5 percent estimated forfeiture rate during the
vesting period. However, the total amount of compensation expense
recorded for the fiscal 2007 LTIP will equal the number of shares awarded
multiplied by $5.78 per share.
Based
upon evaluations of the fiscal 2007 LTIP through March 1, 2008, we currently
estimate that 227,535 shares, or 53 percent of the original target award, will
be awarded under the terms of the fiscal 2007 LTIP grant. We have
recorded cumulative adjustments to reduce operating expenses by $0.3 million
during the two quarters ended March 1, 2008 to reflect the revision to the
estimated shares to be awarded. At March 1, 2008, there was $0.7
million of estimated unrecognized compensation expense remaining on the fiscal
2007 LTIP award.
The
number of shares finally awarded to LTIP participants under the fiscal 2007 LTIP
grant is based upon the combination of factors as shown below:
|
Sales
Growth
|
Percent
of Target Shares Awarded
|
||||
|
40.0%
|
115%
|
135%
|
150%
|
175%
|
200%
|
|
30.0%
|
90%
|
110%
|
125%
|
150%
|
175%
|
|
20.0%
|
65%
|
85%
|
100%
|
125%
|
150%
|
|
15.7%
|
50%
|
70%
|
85%
|
110%
|
135%
|
|
10.0%
|
30%
|
50%
|
65%
|
90%
|
115%
|
|
$41.30
|
$64.90
|
$82.60
|
$123.90
|
$165.20
|
|
|
Cumulative
Operating Income (millions)
|
|||||
The
analysis of our LTIP plans contains uncertainties because we are required to
make assumptions and judgments about the eventual number of shares that will
vest in each LTIP grant. The assumptions and judgments that are
essential to the analysis include forecasted sales and operating income levels
during the LTIP service periods. The evaluation of LTIP performance
awards and corresponding use of estimated amounts may produce additional
volatility in our consolidated financial statements as we record cumulative
adjustments to the estimated number of common shares to be awarded under the
LTIP grants. Actual results could differ, and differ materially, from
estimates made during the service, or vesting, period.
We
estimate the value of our stock option awards on the date of grant using the
Black-Scholes option pricing model. However, the Company did not
grant any stock options during the quarter or two quarters ended March 1, 2008
or the fiscal years ended August 31, 2007 and 2006, and we did not have any
remaining unrecognized compensation expense associated with unvested stock
options at March 1, 2008.
Accounts
Receivable Valuation
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best
estimate of the amount of probable credit losses in the existing accounts
receivable balance. We determine the allowance for doubtful accounts
based upon historical write-off experience and current economic conditions and
we review the adequacy of our allowance for doubtful accounts on a regular
basis. Receivable balances over 90 days past due, which exceed a
specified dollar amount, are reviewed individually for
collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the probability
for recovery is considered remote. We do not have any off-balance
sheet credit exposure related to our customers.
Our
allowance for doubtful accounts calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding the
collectibility of customer accounts, which may be influenced by a number of
factors that are not within our control, such as the financial health of each
customer. We regularly review the collectibility assumptions of our
allowance for doubtful accounts calculation and compare them against historical
collections. Adjustments to the assumptions are then based upon the
comparison, which may either increase or decrease our total allowance for
doubtful accounts. For example, a 10 percent increase to our
allowance for doubtful accounts at March 1, 2008 would reduce our reported
income from operations by approximately $0.1 million.
Inventory
Valuation
Our
inventories are comprised primarily of dated calendar products and other
non-dated products such as binders, stationery, training products, and other
accessories. Inventories are stated at the lower of cost or market
with cost determined using the first-in, first-out
method. Inventories are reduced to their fair market value through
the use of inventory loss reserves, which are recorded during the normal course
of business.
Our
inventory loss reserve calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding a number of
factors, including future inventory demand requirements and pricing
strategies. During the evaluation process we consider historical
sales patterns
and
current sales trends, but these may not be indicative of future inventory
losses. While we have not made material changes to our inventory
reserves methodology during the past three years, our inventory requirements may
change based on projected customer demand, technological and product life cycle
changes, longer or shorter than expected usage periods, and other factors that
could affect the valuation of our inventories. If our estimates
regarding consumer demand and other factors are inaccurate, we may be exposed to
losses that may have a materially adverse impact upon our financial position and
results of operations. For instance, a 10 percent increase in our
inventory loss reserves at March 1, 2008 would reduce our income from operations
by approximately $0.4 million.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized, but rather
are tested for impairment on an annual basis, or more often if events or
circumstances indicate that a potential impairment exists. The Covey
trade name intangible asset has been deemed to have an indefinite
life. This intangible asset is assigned to the OSBU and is tested for
impairment using the present value of estimated royalties on trade name related
revenues, which consist primarily of training seminars, international licensee
royalties, and related products. If the carrying value of the Covey
trade name exceeds the fair value of its discounted estimated royalties on trade
name related revenues, an impairment loss is recognized for the
difference. The adjusted basis becomes the carrying value until a
future impairment assessment determines that additional impairment charges are
necessary.
Our
impairment evaluation calculation for the Covey trade name contains
uncertainties because it requires us to make assumptions and apply judgment in
order to estimate future cash flows, to estimate an appropriate royalty rate,
and to select a discount rate that reflects the inherent risk of future cash
flows. Our valuation methodology for the Covey trade name was
developed by an independent valuation firm and has remained materially unchanged
during the past three years. However, if forecasts and assumptions
used to support the carrying value of our indefinite-lived intangible asset
change in future periods, significant impairment charges could result that would
have an adverse effect upon our results of operations and financial
condition. Based upon the fiscal 2007 evaluation of the Covey trade
name, our trade-name related revenues and licensee royalties would have to
suffer significant reductions before we would be required to impair the Covey
trade name.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an
estimate of undiscounted future net cash flows of the assets over their
remaining useful lives in determining whether the carrying value of the assets
is recoverable. If the carrying values of the assets exceed the
anticipated future cash flows of the assets, we calculate an impairment
loss. The impairment loss calculation compares the carrying value of
the asset to the asset’s estimated fair value, which may be based upon
discounted cash flows over the estimated remaining useful life of the
asset. If we recognize an impairment loss, the adjusted carrying
amount of the asset becomes its new cost basis, which is then depreciated or
amortized over the remaining useful life of the asset. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent from other groups of
assets.
Our
impairment evaluation calculations contain uncertainties because they require us
to make assumptions and apply judgment in order to estimate future cash flows,
forecast the useful lives of the assets, and select a discount rate that
reflects the risk inherent in future cash flows. Although we have not
made any material changes to our long-lived assets impairment assessment
methodology during the past three years, if forecasts and assumptions used to
support the carrying value of our long-lived tangible and definite-lived
intangible assets change in the future, significant impairment charges could
result that would adversely affect our results of operations and financial
condition. During the quarter and two
quarters
ended March 1, 2008, there were no events or circumstances that we believe
indicated a possible material impairment of our long-lived assets.
Income
Taxes
We
regularly evaluate our United States federal and various state and foreign
jurisdiction income tax exposures. On September 1, 2007, the Company
adopted FIN 48, which addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under the provisions of FIN 48, we may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained upon examination by the
taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than 50 percent likelihood of being realized upon final
settlement. The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest, and penalties on income taxes,
accounting for income taxes in interim periods, and requires increased
disclosure of various income tax items. Taxes and penalties are
components of our overall income tax provision. Prior to the adoption
of FIN 48, interest on income tax items was recorded as a component of
consolidated interest expense. Beginning on September 1, 2007, in
conjunction with the adoption of FIN 48, interest on income taxes is included as
a component of overall income tax expense.
The
Company records previously unrecognized tax benefits in the financial statements
when it becomes more likely than not (greater than a 50 percent likelihood) that
the tax position will be sustained. To assess the probability of
sustaining a tax position, the Company considers all available
evidence. In many instances, sufficient positive evidence may not be
available until the expiration of the statute of limitations for audits by
taxing jurisdictions, at which time the entire benefit will be recognized as a
discrete item in the applicable period.
Our
unrecognized tax benefits result from uncertain tax positions about which we are
required to make assumptions and apply judgment to estimate the exposures
associated with our various tax filing positions. The calculation of
our income tax provision or benefit, as applicable, requires estimates of future
taxable income or losses. During the course of the fiscal year, these
estimates are compared to actual financial results and adjustments may be made
to our tax provision or benefit to reflect these revised
estimates. Our effective income tax rate is also affected by changes
in tax law and the results of tax audits by various
jurisdictions. Although we believe that our judgments and estimates
discussed herein are reasonable, actual results could differ, and we could be
exposed to losses or gains that could be material.
NEW
ACCOUNTING PRONOUNCEMENTS
Fair Value
Measures – In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measures. This statement establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value, and
requires additional disclosures about fair-value
measurements. Statement No. 157 only applies to fair-value
measurements that are already required or permitted by other accounting
standards except for measurements of share-based payments and measurements that
are similar to, but not intended to be, fair value. This statement is
effective for the specified fair value measures for financial statements issued
for fiscal years beginning after November 15, 2007, and will thus be effective
for the Company in fiscal 2009. Subsequent to the issuance of SFAS
No. 157, the FASB provided for a one-year deferral of certain provisions related
to non-financial assets and liabilities that are recognized or disclosed on a
non-recurring basis. We have not yet completed our analysis of the
impact of SFAS No. 157 on our financial statements.
Fair Value Option
for Financial Assets and Financial Liabilities – In February 2007, the
FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities including an
Amendment of FASB Statement No. 115. Statement No.159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. The provisions of SFAS No. 159 are effective for our
fiscal year beginning September 1, 2008 (fiscal 2009). We have not
yet completed our analysis of the impact of SFAS No. 159 on our financial
statements.
Business
Combinations – In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. These standards aim to
improve, simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The provisions of SFAS No. 141R and SFAS No.
160 are effective for our fiscal year beginning September 1,
2009. Although we have not yet completed our analysis of the impact
of these provisions, we do not currently anticipate that they will have a
material impact upon our financial condition or results of
operations.
Derivatives
Disclosures – In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. Statement No. 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. The provisions of SFAS No. 161 are
effective for our third quarter of fiscal 2009. The Company is
currently evaluating the impact of the provisions of SFAS No. 161, but due to
our limited use of derivative instruments we do not currently anticipate that
the provisions of SFAS No. 161 will have a material impact on our financial
statements.
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain
written and oral statements made by the Company or our representatives in this
report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, internet web casts, or otherwise, are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934 as amended (the Exchange Act). Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate,
or imply future results, performance, or achievements, and may contain words
such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or
phrases of similar meaning. In our reports and filings we may make
forward-looking statements regarding future product and training sales activity,
anticipated expenses, projected cost reduction and strategic initiatives,
expected levels of depreciation and amortization expense, expectations regarding
tangible and intangible asset valuation expenses, expected improvement in our
cash flows and reported results of operations as a result of the redemption of
our preferred stock, expected improvements in cash flows from operating
activities, the adequacy of our existing capital resources, future compliance
with the terms and conditions of our line of credit, expected timing of the
repayment of our line of credit, estimated capital expenditures, and cash flow
estimates used to determine the fair value of long-lived
assets. These, and other forward-looking statements, are subject to
certain risks and uncertainties that may cause actual results to differ
materially from the forward-looking statements. These risks and
uncertainties are disclosed from time to time in reports filed by us with the
SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and
uncertainties include, but are not limited to, the matters discussed in Item 1A
of our report on Form 10-K for the fiscal year ended August 31, 2007, entitled
“Risk Factors.” In addition, such risks and uncertainties may include
unanticipated developments in any one or more of the following
areas: unanticipated costs or capital expenditures; difficulties
encountered by EDS in operating and maintaining our information systems and
controls, including without limitation, the systems related to demand and supply
planning, inventory control, and order fulfillment; delays or unanticipated
outcomes relating to our strategic plans; dependence on existing products or
services; the rate and consumer acceptance of new
product
introductions; competition; the number and nature of customers and their product
orders, including changes in the timing or mix of product or training orders;
pricing of our products and services and those of competitors; adverse
publicity; and other factors which may adversely affect our
business.
The risks
included here are not exhaustive. Other sections of this report may
include additional factors that could adversely affect our business and
financial performance, including the risk factors noted in Item 1A of our report
on Form 10-K for the year ended August 31, 2007. Moreover, we operate
in a very competitive and rapidly changing environment. New risk
factors may emerge and it is not possible for our management to predict all such
risk factors, nor can we assess the impact of all such risk factors on our
business or the extent to which any single factor, or combination of factors,
may cause actual results to differ materially from those contained in
forward-looking statements. Given these risks and uncertainties,
investors should not rely on forward-looking statements as a prediction of
actual results.
The
market price of our common stock has been and may remain volatile. In
addition, the stock markets in general have experienced increased
volatility. Factors such as quarter-to-quarter variations in revenues
and earnings or losses and our failure to meet expectations could have a
significant impact on the market price of our common stock. In
addition, the price of our common stock can change for reasons unrelated to our
performance. Due to our low market capitalization, the price of our
common stock may also be affected by conditions such as a lack of analyst
coverage and fewer potential investors.
Forward-looking
statements are based on management’s expectations as of the date made, and the
Company does not undertake any responsibility to update any of these statements
in the future except as required by law. Actual future performance
and results will differ and may differ materially from that contained in or
suggested by forward-looking statements as a result of the factors set forth in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in our filings with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
Risk of Financial Instruments
The
Company is exposed to financial instrument market risk primarily through
fluctuations in foreign currency exchange rates and interest
rates. To manage risks associated with foreign currency exchange and
interest rates, we make limited use of derivative financial
instruments. Derivatives are financial instruments that derive their
value from one or more underlying financial instruments. As a matter
of policy, our derivative instruments are entered into for periods consistent
with the related underlying exposures and do not constitute positions that are
independent of those exposures. In addition, we do not enter into
derivative contracts for trading or speculative purposes, nor are we party to
any leveraged derivative instrument. The notional amounts of
derivatives do not represent actual amounts exchanged by the parties to the
instrument, and, thus, are not a measure of exposure to us through our use of
derivatives. Additionally, we enter into derivative agreements only
with highly rated counterparties and we do not expect to incur any losses
resulting from non-performance by other parties.
Foreign
Currency Sensitivity
Due to
the global nature of our operations, we are subject to risks associated with
transactions that are denominated in currencies other than the United States
dollar, as well as the effects of translating amounts denominated in foreign
currencies to United States dollars as a normal part of the reporting
process. The objective of our foreign currency risk management
activities is to reduce foreign currency risk in the consolidated financial
statements. In order to manage foreign currency risks, we make
limited use of foreign currency forward contracts and other foreign currency
related derivative instruments. Although we cannot eliminate all
aspects of our foreign currency risk, we believe that our strategy, which
includes the use of derivative instruments, can reduce the impacts of foreign
currency related issues on our
consolidated
financial statements. The following is a description of our use of
foreign currency derivative instruments.
During
the quarter and two quarters ended March 1, 2008 we utilized foreign currency
forward contracts to manage the volatility of certain intercompany financing
transactions and other transactions that are denominated in foreign
currencies. Because these contracts do not meet specific hedge
accounting requirements, gains and losses on these contracts, which expire on a
quarterly basis, are recognized currently and are used to offset a portion of
the gains or losses of the related accounts. The gains and losses on
these contracts were recorded as a component of SG&A expense in our
consolidated income statements and had the following net impact on the periods
indicated (in thousands):
|
Quarter
Ended
|
Two
Quarters Ended
|
|||||||||||||||
|
March
1,
2008
|
March
3,
2007
|
March
1,
2008
|
March
3,
2007
|
|||||||||||||
|
Losses
on foreign exchange contracts
|
$ | (199 | ) | $ | (64 | ) | $ | (328 | ) | $ | (73 | ) | ||||
|
Gains
on foreign exchange contracts
|
- | 15 | - | 33 | ||||||||||||
|
Net
gain (loss) on foreign exchange contracts
|
$ | (199 | ) | $ | (49 | ) | $ | (328 | ) | $ | (40 | ) | ||||
On March
1, 2008, all of our foreign currency forward contracts were
settled. However, subsequent to March 1, 2008, we entered into new
foreign currency forward contracts that will settle near the end of our third
fiscal quarter ending May 31, 2008. The notional amounts of these
foreign currency sell contracts that did not qualify for hedge accounting were
as follows (in thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
||||||
|
Japanese
Yen
|
81,000 | $ | 786 | |||||
|
Mexican
Pesos
|
7,630 | 696 | ||||||
|
Great
Britain Pounds
|
320 | 652 | ||||||
|
Australian
Dollars
|
155 | 141 | ||||||
During
the quarter and two quarters ended March 1, 2008, we did not utilize any
derivative contracts that qualified for hedge accounting. However,
the Company may utilize net investment hedge contracts or other foreign currency
derivatives in future periods as a component of our overall foreign currency
risk strategy.
Interest
Rate Sensitivity
The
Company is exposed to fluctuations in United States interest rates primarily as
a result of our line of credit borrowings. At March 1, 2008, our debt
balances consisted primarily of a fixed-rate financing obligation associated
with the sale of our corporate headquarters facility, a variable-rate line of
credit arrangement, and a variable rate long-term mortgage on certain of our
buildings and property. The addition of the variable-rate line of
credit in fiscal 2007 increased our interest rate sensitivity and in the future
our overall interest rate sensitivity will be influenced by the amounts borrowed
on the line of credit and the prevailing interest rates, which may create
additional expense if interest rates increase in future
periods. Accordingly, at March 1, 2008 borrowing levels, a 1 percent
increase on our variable rate debt would increase our interest expense over the
next year by approximately $0.1 million.
During
the quarter ended March 1, 2008 we were not party to any interest rate swap or
other interest related derivative instruments that would increase our interest
rate sensitivity.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and the Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
We
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act, as of the end of the period covered by this
report. Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on
Form 10-Q.
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f)) during the most recently completed fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item
1A. RISK
FACTORS
For
information regarding Risk Factors, please refer to Item 1A in the Company’s
Annual Report on Form 10-K for the fiscal year ended August 31,
2007.
Item
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
Company acquired the following shares of its outstanding securities during the
fiscal quarter ended March 1, 2008:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares That May Yet Be Purchased Under the Plans or
Programs
(in
thousands)
|
|||||||||
|
Common
Shares:
|
|||||||||||||
|
December
2, 2007 to
January 5, 2008
|
- | $ | - |
none
|
$ | 2,413 | |||||||
|
January
6, 2008 to
February 2, 2008
|
1,549 | (2) | 7.64 |
none
|
2,413 | ||||||||
|
February
3, 2008 to
March 1, 2008
|
- | - |
none
|
2,413 | (1) | ||||||||
|
Total
Common Shares
|
1,549 | $ | 7.64 |
none
|
|||||||||
|
|
(1)
|
In
January 2006, our Board of Directors approved the purchase of up to $10.0
million of our outstanding common stock. All previous
authorized common stock purchase plans were canceled. Following
the approval of this common stock purchase plan, we have purchased a total
of 1,009,300 shares of our common stock for $7.6 million through March 1,
2008.
|
|
|
(2)
|
Amount
represents shares withheld for statutory taxes from a distribution of
common shares from our non-qualified deferred compensation
plan.
|
Item 4. SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS
We held
our Annual Meeting of Shareholders on Friday, January 18, 2008. The
following represents a summary of each matter voted upon and the corresponding
voting results for each item considered by shareholders at the Annual
Meeting.
Further
information regarding each item can be found in the Company’s definitive Proxy
Statement which was filed with the Securities and Exchange Commission on
December 14, 2007.
|
1.
|
Election of Directors –
Three directors were elected for three-year terms that expire at
the Annual Meeting of Shareholders to be held following the end of fiscal
2010 or until their successors are elected and qualified. The
number of votes for each nominee for director was as
follows:
|
|
Name
|
Votes
For
|
Votes
Withheld
|
||
|
Clayton
M. Christensen
|
14,645,105
|
625,644
|
||
|
E.J.
“Jake” Garn
|
14,606,389
|
664,360
|
||
|
Donald
J. McNamara
|
14,472,050
|
798,699
|
|
|
2.
|
Appointment of Independent
Auditors – The shareholders ratified the appointment of KPMG LLP as
the Company’s independent auditors for the fiscal year ending August 31,
2008. A total of 14,784,667 shares voted in favor of this
appointment, 483,384 shares voted against, and 2,698 shares abstained from
voting.
|
Item
6.
EXHIBITS
|
(A)
|
Exhibits:
|
|
31.1
|
Rule
13a-14(a) Certifications of the Chief Executive
Officer
|
|
31.2
|
Rule
13a-14(a) Certifications of the Chief Financial
Officer
|
|
32
|
Section
1350 Certifications
|
SIGNATURES
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.
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FRANKLIN
COVEY CO.
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Date:
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April
10, 2008
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By:
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/s/
Robert A. Whitman
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Robert
A. Whitman
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Chief
Executive Officer
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Date:
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April
10, 2008
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By:
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/s/
Stephen D. Young
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Stephen
D. Young
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Chief
Financial Officer
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35
Exhibit
31.1
SECTION
302 CERTIFICATION
I, Robert
A. Whitman, certify that:
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1.
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I
have reviewed this quarterly report on Form 10-Q of Franklin Covey
Co.;
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2.
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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;
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3.
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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;
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4.
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The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
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a)
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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;
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b)
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Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
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c)
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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
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d)
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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
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5.
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The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
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a)
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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
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b)
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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.
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Date: April
10, 2008
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||
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/s/
Robert A. Whitman
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Robert
A. Whitman
Chief
Executive Officer
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Exhibit
31.2
SECTION
302 CERTIFICATION
I,
Stephen D. Young, certify that:
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1.
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I
have reviewed this quarterly report on Form 10-Q of Franklin Covey
Co.;
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2.
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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;
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3.
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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;
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4.
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The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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)
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Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
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c)
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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
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d)
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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
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5.
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The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
|
a)
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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
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|
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b)
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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.
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Date: April
10, 2008
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||
| /s/ Stephen D. Young | ||
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Stephen
D. Young
Chief
Financial Officer
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||
Exhibit 32
CERTIFICATION
In
connection with the quarterly report of Franklin Covey Co. (the “Company”) on
Form 10-Q for the quarterly period ended March 1, 2008, as filed with the
Securities and Exchange Commission (the “Report”), we, Robert A. Whitman,
President and Chief Executive Officer of the Company, and Stephen D. Young,
Chief Financial Officer of the Company, hereby certify as of the date hereof,
solely for purposes of Title 18, Chapter 63, Section 1350 of the United States
Code, that to the best of our knowledge:
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1.
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The
Report fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934, and
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2.
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The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
at the dates and for the periods
indicated.
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This
Certification has not been, and shall not be deemed, “filed” with the Securities
and Exchange Commission.
| /s/ Robert A. Whitman | /s/ Stephen D. Young | ||
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Robert
A. Whitman
Chief
Executive Officer
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Stephen
D. Young
Chief
Financial Officer
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||
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Date:
April 10, 2008
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Date:
April 10, 2008
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