form10q_071008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark One)
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended May 31, 2008
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition
period from __________ to __________
Commission
file no. 1-11107
FRANKLIN
COVEY CO.
(Exact
name of registrant as specified in its charter)
Utah
(State
of incorporation)
|
|
87-0401551
(I.R.S.
employer identification number)
|
2200
West Parkway Boulevard
Salt
Lake City, Utah
(Address
of principal executive offices)
|
|
84119-2099
(Zip
Code)
|
Registrant’s
telephone number,
Including
area code
|
|
(801)
817-1776
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such, shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes 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):
Large
accelerated filer
|
£
|
|
Accelerated
filer
|
T
|
|
|
|
Non-accelerated
filer
|
£
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
£
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
Indicate
the number of shares outstanding of each of the issuer’s classes of Common Stock
as of the latest practicable date:
19,615,444
shares of Common Stock as of July 1, 2008
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in
thousands, except per share amounts)
|
|
May
31,
2008
|
|
|
August
31,
2007
|
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
4,815 |
|
|
$ |
6,126 |
|
Accounts
receivable, less allowance for doubtful accounts of $777 and
$821
|
|
|
24,597 |
|
|
|
27,239 |
|
Inventories
|
|
|
7,034 |
|
|
|
24,033 |
|
Deferred
income taxes
|
|
|
3,697 |
|
|
|
3,635 |
|
Prepaid
expenses and other assets
|
|
|
4,837 |
|
|
|
9,070 |
|
Assets
of operations held for sale (Note 2)
|
|
|
30,754 |
|
|
|
- |
|
Total
current assets
|
|
|
75,734 |
|
|
|
70,103 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
25,807 |
|
|
|
36,063 |
|
Intangible
assets, net
|
|
|
73,223 |
|
|
|
75,923 |
|
Deferred
income taxes
|
|
|
105 |
|
|
|
101 |
|
Other
assets
|
|
|
16,934 |
|
|
|
14,441 |
|
|
|
$ |
191,803 |
|
|
$ |
196,631 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt and financing obligation
|
|
$ |
667 |
|
|
$ |
629 |
|
Line
of credit
|
|
|
8,223 |
|
|
|
15,999 |
|
Accounts
payable
|
|
|
8,341 |
|
|
|
12,190 |
|
Income
taxes payable
|
|
|
57 |
|
|
|
2,244 |
|
Accrued
liabilities
|
|
|
21,145 |
|
|
|
30,101 |
|
Liabilities
of operations held for sale (Note 2)
|
|
|
10,415 |
|
|
|
- |
|
Total
current liabilities
|
|
|
48,848 |
|
|
|
61,163 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt and financing obligation, less current portion
|
|
|
32,504 |
|
|
|
32,965 |
|
Deferred
income tax liabilities
|
|
|
4,455 |
|
|
|
565 |
|
Other
liabilities
|
|
|
1,652 |
|
|
|
1,019 |
|
Total
liabilities
|
|
|
87,459 |
|
|
|
95,712 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common stock – $0.05 par value;
40,000 shares authorized, 27,056 shares issued and
outstanding
|
|
|
1,353 |
|
|
|
1,353 |
|
Additional paid-in
capital
|
|
|
183,836 |
|
|
|
185,890 |
|
Common stock
warrants
|
|
|
7,602 |
|
|
|
7,602 |
|
Retained earnings
|
|
|
23,119 |
|
|
|
19,489 |
|
Accumulated other comprehensive
income
|
|
|
2,039 |
|
|
|
970 |
|
Treasury stock at cost, 7,249 and
7,296 shares
|
|
|
(112,956 |
) |
|
|
(114,385 |
) |
Other comprehensive loss held for
sale
|
|
|
(649 |
) |
|
|
- |
|
Total shareholders’
equity
|
|
|
104,344 |
|
|
|
100,919 |
|
|
|
$ |
191,803 |
|
|
$ |
196,631 |
|
|
|
|
|
|
|
|
|
|
See notes
to condensed consolidated financial statements.
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED
INCOME STATEMENTS
(in
thousands, except per share amounts)
|
|
Quarter
Ended
|
|
|
Three
Quarters Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
25,197 |
|
|
$ |
30,857 |
|
|
$ |
105,872 |
|
|
$ |
118,248 |
|
Training
and consulting services
|
|
|
33,864 |
|
|
|
33,652 |
|
|
|
101,891 |
|
|
|
98,666 |
|
|
|
|
59,061 |
|
|
|
64,509 |
|
|
|
207,763 |
|
|
|
216,914 |
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
11,883 |
|
|
|
14,619 |
|
|
|
46,565 |
|
|
|
52,528 |
|
Training
and consulting services
|
|
|
11,421 |
|
|
|
10,254 |
|
|
|
32,807 |
|
|
|
31,163 |
|
|
|
|
23,304 |
|
|
|
24,873 |
|
|
|
79,372 |
|
|
|
83,691 |
|
Gross profit
|
|
|
35,757 |
|
|
|
39,636 |
|
|
|
128,391 |
|
|
|
133,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
|
|
|
34,210 |
|
|
|
35,287 |
|
|
|
110,634 |
|
|
|
112,803 |
|
Gain
on sale of manufacturing facility
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,227 |
) |
Depreciation
|
|
|
1,497 |
|
|
|
1,060 |
|
|
|
4,044 |
|
|
|
3,463 |
|
Amortization
|
|
|
902 |
|
|
|
906 |
|
|
|
2,702 |
|
|
|
2,708 |
|
Income
(loss) from operations
|
|
|
(852 |
) |
|
|
2,383 |
|
|
|
11,011 |
|
|
|
15,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
55 |
|
|
|
124 |
|
|
|
78 |
|
|
|
682 |
|
Interest
expense
|
|
|
(725 |
) |
|
|
(867 |
) |
|
|
(2,396 |
) |
|
|
(2,203 |
) |
Income
(loss) before provision for income taxes
|
|
|
(1,522 |
) |
|
|
1,640 |
|
|
|
8,693 |
|
|
|
13,955 |
|
Benefit
(provision) for income taxes
|
|
|
11 |
|
|
|
(753 |
) |
|
|
(5,063 |
) |
|
|
(6,939 |
) |
Net
income (loss)
|
|
|
(1,511 |
) |
|
|
887 |
|
|
|
3,630 |
|
|
|
7,016 |
|
Preferred
stock dividends
|
|
|
- |
|
|
|
(348 |
) |
|
|
- |
|
|
|
(2,215 |
) |
Net
income (loss) available to common shareholders
|
|
$ |
(1,511 |
) |
|
$ |
539 |
|
|
$ |
3,630 |
|
|
$ |
4,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common
shareholders per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(.09 |
) |
|
$ |
.03 |
|
|
$ |
.19 |
|
|
$ |
.24 |
|
Diluted
|
|
$ |
(.09 |
) |
|
$ |
.03 |
|
|
$ |
.18 |
|
|
$ |
.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,132 |
|
|
|
19,412 |
|
|
|
19,542 |
|
|
|
19,637 |
|
Diluted
|
|
|
16,132 |
|
|
|
19,738 |
|
|
|
19,815 |
|
|
|
19,933 |
|
See notes
to condensed consolidated financial statements.
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Three
Quarters Ended
|
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
|
(unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,630 |
|
|
$ |
7,016 |
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,699 |
|
|
|
7,503 |
|
Deferred
income taxes
|
|
|
3,130 |
|
|
|
4,824 |
|
Loss
(gain) on disposals of property and equipment
|
|
|
274 |
|
|
|
(1,283 |
) |
Share-based
compensation expense (benefit)
|
|
|
(936 |
) |
|
|
894 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in accounts receivable, net
|
|
|
(2,031 |
) |
|
|
(4,408 |
) |
Decrease
(increase) in inventories
|
|
|
3,033 |
|
|
|
(2,951 |
) |
Decrease
in other assets
|
|
|
747 |
|
|
|
1,236 |
|
Decrease
in accounts payable and accrued liabilities
|
|
|
(2,884 |
) |
|
|
(4,357 |
) |
Decrease
in other long-term liabilities
|
|
|
(81 |
) |
|
|
(188 |
) |
Increase
(decrease) in income taxes payable
|
|
|
(775 |
) |
|
|
411 |
|
Net
cash provided by operating activities
|
|
|
11,806 |
|
|
|
8,697 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
on notes receivable from disposals of subsidiaries
|
|
|
1,110 |
|
|
|
- |
|
Purchases
of property and equipment
|
|
|
(2,784 |
) |
|
|
(7,855 |
) |
Curriculum
development costs
|
|
|
(2,860 |
) |
|
|
(4,234 |
) |
Proceeds
from sales of property and equipment
|
|
|
60 |
|
|
|
2,596 |
|
Net
cash used for investing activities
|
|
|
(4,474 |
) |
|
|
(9,493 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from line-of-credit borrowing
|
|
|
61,689 |
|
|
|
30,429 |
|
Payments
on line-of-credit borrowing
|
|
|
(69,465 |
) |
|
|
(12,585 |
) |
Redemption
of preferred stock
|
|
|
- |
|
|
|
(37,345 |
) |
Principal
payments on long-term debt and financing obligation
|
|
|
(478 |
) |
|
|
(402 |
) |
Proceeds
from sales of common stock from treasury
|
|
|
311 |
|
|
|
206 |
|
Proceeds
from management stock loan payments
|
|
|
- |
|
|
|
27 |
|
Purchases
of treasury shares
|
|
|
- |
|
|
|
(2,561 |
) |
Payment
of preferred stock dividends
|
|
|
- |
|
|
|
(2,215 |
) |
Net
cash used for financing activities
|
|
|
(7,943 |
) |
|
|
(24,446 |
) |
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rates on cash and cash equivalents
|
|
|
(662 |
) |
|
|
(175 |
) |
Net
decrease in cash and cash equivalents
|
|
|
(1,273 |
) |
|
|
(25,417 |
) |
Cash
and cash equivalents at beginning of the period
|
|
|
6,126 |
|
|
|
30,587 |
|
Cash
and cash equivalents at end of the period
|
|
$ |
4,853 |
|
|
$ |
5,170 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
2,475 |
|
|
$ |
2,048 |
|
Cash
paid for income taxes
|
|
$ |
3,117 |
|
|
$ |
1,804 |
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment through accounts payable
|
|
$ |
1,060 |
|
|
|
- |
|
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, except as discussed in Note 2) 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 ended 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 May 31, 2008 had the same number of business days as the quarter
ended June 2, 2007 and the three quarters ended May 31, 2008 had one less
business day than the three quarters ended June 2, 2007.
The
results of operations for the quarter and three quarters ended May 31, 2008 are
not necessarily indicative of results expected for the entire fiscal year ending
August 31, 2008.
NOTE
2 – SALE OF CONSUMER SOLUTIONS BUSINESS UNIT ASSETS
On May
22, 2008, we signed a definitive agreement with Peterson Partners to create a
new company, Franklin Covey Products, LLC (Franklin Covey
Products). This new company will purchase substantially all of the
assets of our Consumer Solutions Business Unit (CSBU) and will focus on
expanding sales of Franklin Covey products pursuant to a comprehensive license
agreement. The CSBU is primarily responsible for sales of our
products to both domestic and international consumers through a variety of
channels (Note 8). Subsequent to May 31, 2008, we completed the sale
of substantially all of the CSBU assets to Franklin Covey Products, which
becomes effective during the quarter ended August 31, 2008. Franklin
Covey Products, which is controlled by Peterson Partners, purchased the CSBU
assets for $32.0 million in cash, subject to adjustments for working capital on
the closing date of the sale. On the date of the sale closing, the
Company invested approximately $1.8 million to purchase a 19.5 percent voting
interest in Franklin Covey Products, made a $1.0 million preferred capital
contribution with a 10 percent priority return, and will have the opportunity to
earn contingent license fees if Franklin Covey Products achieves specified
performance objectives.
Based
upon the guidance found in Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we determined that the
assets and liabilities of the CSBU, which constitutes an entire operating
segment of the Company, should be classified as held for sale at May 31,
2008. The sale transaction was completed during our fourth fiscal
quarter ended August 31, 2008 and we expect to recognize a gain on the sale of
the CSBU assets. The carrying amounts of the assets and liabilities
of our CSBU, which were classified as held for sale in our May 31, 2008
condensed consolidated balance sheet were as follows (in
thousands):
Description
|
|
|
|
Cash
and cash equivalents
|
|
$ |
38 |
|
Accounts
receivable, net
|
|
|
5,266 |
|
Inventories
|
|
|
14,340 |
|
Other
current assets
|
|
|
2,852 |
|
Property
and equipment, net
|
|
|
8,100 |
|
Other
assets
|
|
|
158 |
|
Total
assets held for sale
|
|
$ |
30,754 |
|
|
|
|
|
|
Accounts
payable
|
|
$ |
4,284 |
|
Accrued
liabilities
|
|
|
6,131 |
|
Total
liabilities held for sale
|
|
$ |
10,415 |
|
As a
result of Franklin Covey Products’ structure as a limited liability company with
separate owner capital accounts and the guidance found in Emerging Issues Task
Force (EITF) Issue No. 03-16, Accounting for Investments in
Limited Liability Companies, we determined that the Company’s investment
in Franklin Covey Products is more than minor and the Company will therefore be
able to exercise significant influence over the operations of Franklin Covey
Products. Combined with the possibility of receiving future cash
distributions from Franklin Covey Products for returns of capital and dividends,
plus possible participation in Franklin Covey Products’ cash flows through the
license agreement, we determined that the financial results of the CSBU should
not be reported as discontinued operations in the accompanying condensed
consolidated income statements or in future periods.
NOTE
3 – INVENTORIES
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method, and were comprised of the following (in
thousands):
|
|
May
31,
2008
|
|
|
August
31,
2007
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
6,670 |
|
|
$ |
20,268 |
|
Work
in process
|
|
|
- |
|
|
|
743 |
|
Raw
materials
|
|
|
364 |
|
|
|
3,022 |
|
|
|
$ |
7,034 |
|
|
$ |
24,033 |
|
NOTE
4 – 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 share 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 three quarters ended May 31,
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. The following is a description of the accounting for the fiscal
2006 and fiscal 2007 LTIP awards as of May 31, 2008.
Fiscal 2006 LTIP
Award – 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. Our anticipated sales growth in training and consulting sales
is expected to 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, which occurred during the fourth quarter of fiscal
2007. 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 we did not record any
compensation expense for the fiscal 2006 LTIP award during the quarters ended
March 1, 2008 or May 31, 2008.
Fiscal 2007 LTIP
Award – Consistent with our policy as stated above, we reevaluated the
fiscal 2007 LTIP award at May 31, 2008 based upon revised estimates for sales
growth and cumulative operating income. As a result of this
reevaluation, we determined that no shares of common stock would be awarded to
participants under the terms of the fiscal 2007 LTIP
grant. Consistent with the analysis of the fiscal 2006 LTIP grant, we
expect sufficient levels of operating income to be recognized for the fiscal
2007 award, but sales growth is expected to be insufficient for any shares to be
awarded under this plan. The revised sales projections included
actual performance through May 31, 2008 and estimated sales performance through
fiscal 2009 based upon revised assumptions, which were adversely affected by
slowing economic conditions in the United States and other countries in which
the Company has operations. Although training and consulting sales
are expected to increase in fiscal 2009, the growth rate was insufficient to
offset expected declines in product sales and the impact of transitioning our
Mexico and Brazil offices to licensees. As a result of this
determination, we recorded cumulative adjustments totaling $1.0 million to
reduce selling, general, and administrative expenses during the three quarters
ended May 31, 2008.
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 awards, which generally range 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 three quarters ended May 31, 2008:
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|
Unvested
stock awards at August 31, 2007
|
|
|
410,670 |
|
|
$ |
3.80 |
|
Granted(1)
|
|
|
36,000 |
|
|
|
7.50 |
|
Vested(2)
|
|
|
(87,590 |
) |
|
|
3.01 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Unvested
stock awards at May 31, 2008
|
|
|
359,080 |
|
|
$ |
4.62 |
|
(1)
|
Shares
granted during the three quarters ended May 31, 2008 consisted of shares
awarded to our Board of Directors under the provisions of the Directors’
Plan.
|
(2)
|
Share
awards that vested during the three quarters ended May 31, 2008 consisted
of 76,090 shares that were awarded to members of our Board of Directors in
fiscal 2005 under the Directors’ Plan and 11,500 shares that were granted
to certain employees and were vested on an accelerated basis because the
employees’ area of responsibility met specified financial performance
criteria. The compensation expense from the accelerated vesting
of these shares totaled approximately
$37,000.
|
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
three quarters ended May 31, 2008, a total of 18,089 and 52,116 shares were
issued to participants in the ESPP and the corresponding share-based
compensation expense from the discount totaled approximately $22,000 and
$61,000, respectively.
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 market price 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 three quarters ended May 31, 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 |
|
Forfeited
|
|
|
(18,000 |
) |
|
|
9.69 |
|
Outstanding
at May
31, 2008
|
|
|
2,027,800 |
|
|
$ |
12.82 |
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at May 31, 2008
|
|
|
2,027,800 |
|
|
$ |
12.82 |
|
NOTE
5 – 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 three quarters ended May 31, 2008 of approximately 58
percent was higher than statutory combined rates primarily due to the accrual of
taxable interest income on the management stock loan program and withholding
taxes on royalty income from foreign licensees.
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 three quarters ended May 31,
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
6 – COMPREHENSIVE INCOME
Comprehensive
income is based on net income (loss) and includes charges and credits to equity
accounts that were not the result of transactions with
shareholders. Comprehensive income (loss) for the Company was
calculated as follows (in thousands):
|
|
Quarter
Ended
|
|
|
Three
Quarters Ended
|
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
Net
income (loss)
|
|
$ |
(1,511 |
) |
|
$ |
887 |
|
|
$ |
3,630 |
|
|
$ |
7,016 |
|
Other
comprehensive income (loss) items, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(121 |
) |
|
|
(30 |
) |
|
|
420 |
|
|
|
(14 |
) |
Comprehensive
income (loss)
|
|
$ |
(1,632 |
) |
|
$ |
857 |
|
|
$ |
4,050 |
|
|
$ |
7,002 |
|
NOTE
7 – 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 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
|
|
|
Three
Quarters Ended
|
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
Numerator
for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
(1,511 |
) |
|
$ |
887 |
|
|
$ |
3,630 |
|
|
$ |
7,016 |
|
Preferred
stock dividends
|
|
|
- |
|
|
|
(348 |
) |
|
|
- |
|
|
|
(2,215 |
) |
Net
income (loss) available to common shareholders
|
|
$ |
(1,511 |
) |
|
$ |
539 |
|
|
$ |
3,630 |
|
|
$ |
4,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding(1)
|
|
|
16,132 |
|
|
|
19,412 |
|
|
|
19,542 |
|
|
|
19,637 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options(2)
|
|
|
- |
|
|
|
34 |
|
|
|
7 |
|
|
|
31 |
|
Unvested
stock awards(2)
|
|
|
- |
|
|
|
292 |
|
|
|
266 |
|
|
|
265 |
|
Common
stock warrants(3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Diluted
weighted average shares outstanding
|
|
|
16,132 |
|
|
|
19,738 |
|
|
|
19,815 |
|
|
|
19,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$ |
(.09 |
) |
|
$ |
.03 |
|
|
$ |
.19 |
|
|
$ |
.24 |
|
Diluted
EPS
|
|
$ |
(.09 |
) |
|
$ |
.03 |
|
|
$ |
.18 |
|
|
$ |
.24 |
|
|
(1)
|
Since
the Company recognized a net loss for the quarter ended May 31, 2008,
basic weighted-average shares for that period excludes 3.5 million shares
of common stock held by management stock loan participants that were
placed in escrow. Basic weighted-average shares include the 3.5
million management stock loan shares for all other periods
presented.
|
|
(2)
|
Due
to the net loss reported for the quarter ended May 31, 2008, the dilutive
effects of in-the-money stock options and unvested stock awards were
excluded from the Company’s EPS calculation for the quarter because these
items were anti-dilutive.
|
|
(3)
|
The
conversion of 6.2 million common stock warrants is not assumed because the
average share price of our common stock was less than the exercise price
of the warrants and such conversion would be anti-dilutive for the periods
presented.
|
At both
May 31, 2008 and June 2, 2007, we had approximately 1.9 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
8 – SEGMENT INFORMATION
The
Company currently 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. As described in Note 2, during the quarter ended May 31,
2008 the Company entered into an agreement to sell substantially all of the
assets of the CSBU to a newly formed company. Refer to Note 2 for
further information regarding the sale of CSBU assets.
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 or loss 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
May
31, 2008
|
|
Sales
to External Customers
|
|
|
Gross
Profit
|
|
|
EBITDA
|
|
|
Depreciation
|
|
|
Amortization
|
|
Consumer
Solutions
Business
Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
7,896 |
|
|
$ |
4,626 |
|
|
$ |
(1,737 |
) |
|
$ |
218 |
|
|
$ |
- |
|
Consumer
direct
|
|
|
6,949 |
|
|
|
4,127 |
|
|
|
2,107 |
|
|
|
85 |
|
|
|
- |
|
Wholesale
|
|
|
5,046 |
|
|
|
2,698 |
|
|
|
2,569 |
|
|
|
- |
|
|
|
- |
|
CSBU
International
|
|
|
1,119 |
|
|
|
471 |
|
|
|
(62 |
) |
|
|
6 |
|
|
|
- |
|
Other
CSBU
|
|
|
1,280 |
|
|
|
3 |
|
|
|
(5,314 |
) |
|
|
99 |
|
|
|
- |
|
Total CSBU
|
|
|
22,290 |
|
|
|
11,925 |
|
|
|
(2,437 |
) |
|
|
408 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organizational
Solutions
Business
Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
23,111 |
|
|
|
14,058 |
|
|
|
482 |
|
|
|
257 |
|
|
|
899 |
|
International
|
|
|
13,660 |
|
|
|
9,774 |
|
|
|
4,014 |
|
|
|
187 |
|
|
|
3 |
|
Total
OSBU
|
|
|
36,771 |
|
|
|
23,832 |
|
|
|
4,496 |
|
|
|
444 |
|
|
|
902 |
|
Total
operating segments
|
|
|
59,061 |
|
|
|
35,757 |
|
|
|
2,059 |
|
|
|
852 |
|
|
|
902 |
|
Corporate
and eliminations
|
|
|
- |
|
|
|
- |
|
|
|
(512 |
) |
|
|
645 |
|
|
|
- |
|
Consolidated
|
|
$ |
59,061 |
|
|
$ |
35,757 |
|
|
$ |
1,547 |
|
|
$ |
1,497 |
|
|
$ |
902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
June
2, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Solutions
Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
10,010 |
|
|
$ |
5,706 |
|
|
$ |
(715 |
) |
|
$ |
169 |
|
|
$ |
- |
|
Consumer
direct
|
|
|
7,890 |
|
|
|
4,561 |
|
|
|
2,522 |
|
|
|
66 |
|
|
|
- |
|
Wholesale
|
|
|
6,901 |
|
|
|
3,851 |
|
|
|
3,704 |
|
|
|
- |
|
|
|
- |
|
CSBU
International
|
|
|
1,125 |
|
|
|
628 |
|
|
|
(176 |
) |
|
|
- |
|
|
|
- |
|
Other
CSBU
|
|
|
1,523 |
|
|
|
281 |
|
|
|
(4,765 |
) |
|
|
190 |
|
|
|
- |
|
Total CSBU
|
|
|
27,449 |
|
|
|
15,027 |
|
|
|
570 |
|
|
|
425 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organizational
Solutions
Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
23,143 |
|
|
|
15,078 |
|
|
|
2,706 |
|
|
|
185 |
|
|
|
899 |
|
International
|
|
|
13,917 |
|
|
|
9,531 |
|
|
|
3,375 |
|
|
|
215 |
|
|
|
7 |
|
Total
OSBU
|
|
|
37,060 |
|
|
|
24,609 |
|
|
|
6,081 |
|
|
|
400 |
|
|
|
906 |
|
Total
operating segments
|
|
|
64,509 |
|
|
|
39,636 |
|
|
|
6,651 |
|
|
|
825 |
|
|
|
906 |
|
Corporate
and eliminations
|
|
|
- |
|
|
|
- |
|
|
|
(2,302 |
) |
|
|
235 |
|
|
|
- |
|
Consolidated
|
|
$ |
64,509 |
|
|
$ |
39,636 |
|
|
$ |
4,349 |
|
|
$ |
1,060 |
|
|
$ |
906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Quarters Ended
May
31, 2008
|
|
Sales
to External Customers
|
|
|
Gross
Profit
|
|
|
EBITDA
|
|
|
Depreciation
|
|
|
Amortization
|
|
Consumer
Solutions
Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
38,659 |
|
|
$ |
23,416 |
|
|
$ |
2,930 |
|
|
$ |
697 |
|
|
$ |
- |
|
Consumer
direct
|
|
|
35,335 |
|
|
|
20,836 |
|
|
|
13,588 |
|
|
|
233 |
|
|
|
- |
|
Wholesale
|
|
|
12,227 |
|
|
|
6,707 |
|
|
|
6,282 |
|
|
|
- |
|
|
|
- |
|
CSBU
International
|
|
|
6,692 |
|
|
|
3,543 |
|
|
|
1,223 |
|
|
|
39 |
|
|
|
- |
|
Other
CSBU
|
|
|
3,721 |
|
|
|
432 |
|
|
|
(17,626 |
) |
|
|
464 |
|
|
|
- |
|
Total CSBU
|
|
|
96,634 |
|
|
|
54,934 |
|
|
|
6,397 |
|
|
|
1,433 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organizational
Solutions
Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
66,436 |
|
|
|
41,511 |
|
|
|
1,844 |
|
|
|
1,076 |
|
|
|
2,697 |
|
International
|
|
|
44,693 |
|
|
|
31,946 |
|
|
|
13,385 |
|
|
|
414 |
|
|
|
5 |
|
Total
OSBU
|
|
|
111,129 |
|
|
|
73,457 |
|
|
|
15,229 |
|
|
|
1,490 |
|
|
|
2,702 |
|
Total
operating segments
|
|
|
207,763 |
|
|
|
128,391 |
|
|
|
21,626 |
|
|
|
2,923 |
|
|
|
2,702 |
|
Corporate
and eliminations
|
|
|
- |
|
|
|
- |
|
|
|
(3,869 |
) |
|
|
1,121 |
|
|
|
- |
|
Consolidated
|
|
$ |
207,763 |
|
|
$ |
128,391 |
|
|
$ |
17,757 |
|
|
$ |
4,044 |
|
|
$ |
2,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Quarters Ended
June
2, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Solutions
Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
43,402 |
|
|
$ |
25,966 |
|
|
$ |
5,195 |
|
|
$ |
546 |
|
|
$ |
- |
|
Consumer
direct
|
|
|
38,674 |
|
|
|
22,792 |
|
|
|
15,630 |
|
|
|
154 |
|
|
|
- |
|
Wholesale
|
|
|
15,059 |
|
|
|
8,561 |
|
|
|
8,114 |
|
|
|
- |
|
|
|
- |
|
CSBU
International
|
|
|
6,153 |
|
|
|
3,721 |
|
|
|
1,020 |
|
|
|
- |
|
|
|
- |
|
Other
CSBU
|
|
|
4,360 |
|
|
|
394 |
|
|
|
(17,425 |
) |
|
|
963 |
|
|
|
- |
|
Total CSBU
|
|
|
107,648 |
|
|
|
61,434 |
|
|
|
12,534 |
|
|
|
1,663 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organizational
Solutions
Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
66,432 |
|
|
|
42,848 |
|
|
|
5,999 |
|
|
|
453 |
|
|
|
2,701 |
|
International
|
|
|
42,834 |
|
|
|
28,941 |
|
|
|
9,592 |
|
|
|
625 |
|
|
|
7 |
|
Total
OSBU
|
|
|
109,266 |
|
|
|
71,789 |
|
|
|
15,591 |
|
|
|
1,078 |
|
|
|
2,708 |
|
Total
operating segments
|
|
|
216,914 |
|
|
|
133,223 |
|
|
|
28,125 |
|
|
|
2,741 |
|
|
|
2,708 |
|
Corporate
and eliminations
|
|
|
- |
|
|
|
- |
|
|
|
(7,705 |
) |
|
|
722 |
|
|
|
- |
|
Consolidated
|
|
$ |
216,914 |
|
|
$ |
133,223 |
|
|
$ |
20,420 |
|
|
$ |
3,463 |
|
|
$ |
2,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation of operating segment EBITDA to consolidated income before taxes
is provided below (in thousands):
|
|
Quarter
Ended
|
|
|
Three
Quarters Ended
|
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
Reportable
segment EBITDA
|
|
$ |
2,059 |
|
|
$ |
6,651 |
|
|
$ |
21,626 |
|
|
$ |
28,125 |
|
Corporate
expenses
|
|
|
(512 |
) |
|
|
(2,302 |
) |
|
|
(3,869 |
) |
|
|
(7,705 |
) |
Consolidated
EBITDA
|
|
|
1,547 |
|
|
|
4,349 |
|
|
|
17,757 |
|
|
|
20,420 |
|
Gain
on sale of manufacturing facility
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,227 |
|
Depreciation
|
|
|
(1,497 |
) |
|
|
(1,060 |
) |
|
|
(4,044 |
) |
|
|
(3,463 |
) |
Amortization
|
|
|
(902 |
) |
|
|
(906 |
) |
|
|
(2,702 |
) |
|
|
(2,708 |
) |
Income
(loss) from operations
|
|
|
(852 |
) |
|
|
2,383 |
|
|
|
11,011 |
|
|
|
15,476 |
|
Interest
income
|
|
|
55 |
|
|
|
124 |
|
|
|
78 |
|
|
|
682 |
|
Interest
expense
|
|
|
(725 |
) |
|
|
(867 |
) |
|
|
(2,396 |
) |
|
|
(2,203 |
) |
Income
(loss) before provision for income taxes
|
|
$ |
(1,522 |
) |
|
$ |
1,640 |
|
|
$ |
8,693 |
|
|
$ |
13,955 |
|
The
cumulative adjustments resulting from revisions to share-based compensation
awards described in Note 4 are included in corporate expenses in the above
tables.
NOTE
9 – LICENSE AGREEMENT SETTLEMENT
In August
2005, EpicRealm Licensing (EpicRealm) filed an action in the United States
District Court for the Eastern District of Texas against the Company for patent
infringement. The action alleges that the Company infringed upon two
of EpicRealm’s patents directed to managing dynamic web page requests from
clients to a web server that in turn uses a page server to generate a dynamic
web page from content retrieved from a data source. The Company has
denied liability in the patent infringement and has filed certain counter-claims
related to the case since the filing of the action in District
Court. However, during the quarter ended May 31, 2008, the Company
paid EpicRealm a one-time license fee of $1.0 million for a non-exclusive,
irrevocable, perpetual, and royalty-free license to use any product, system, or
invention covered by the disputed patents. In connection with the
purchase of the license, EpicRealm and the Company agreed to dismiss their
claims with prejudice and we are released from further action regarding these
patents.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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
During
the quarter ended May 31, 2008, we announced that we had entered into a
definitive agreement with Peterson Partners to create a new company, Franklin
Covey Products, LLC (Franklin Covey Products). This new company
purchased substantially all of the assets of our Consumer Solutions Business
Unit (CSBU) and will focus on expanding sales of Franklin Covey products
pursuant to a comprehensive license agreement. The CSBU is primarily
responsible for sales of our products to both domestic and international
consumers through a variety of channels. Subsequent to May 31, 2008,
we completed the sale of the CSBU assets to Franklin Covey Products, which
becomes effective during our fiscal quarter ended August 31,
2008. Franklin Covey Products, which is controlled by Peterson
Partners, purchased the CSBU assets for $32.0 million in cash, subject to
adjustments for working capital on the closing date of the sale. On
the closing date of the sale, we invested $1.8 million to purchase a 19.5
percent voting interest in Franklin Covey Products, made a $1.0 million
preferred capital contribution with a 10 percent priority return, and have the
opportunity to earn contingent license fees if
Franklin Covey Products achieves specified performance
objectives. As a result of the sale of the CSBU assets, certain
forward-looking statements made in this management’s discussion and analysis
will be materially affected by the completion of the sale, the elimination of
CSBU operating results in future periods, and the accounting for our investment
in Franklin Covey Products.
Our third
fiscal quarter, which includes the months of March, April, and May, has
historically reflected stronger training and consulting sales, but seasonally
weaker product sales when compared to our first two fiscal
quarters. For the quarter ended May 31, 2008, our income from
operations decreased to a $0.9 million operating loss compared to $2.4 million
in operating income in the prior year. Our income (loss) before taxes
also declined compared to the prior year and was a loss of $1.5 million compared
to $1.6 million of income for the same period of fiscal 2007 and our net income
(loss) available to common shareholders decreased to a $1.5 million loss
compared to $0.5 million of income in the corresponding quarter of the prior
year.
The
primary factors that influenced our operating results during the quarter ended
May 31, 2008 were as follows:
·
|
Sales – Our consolidated
sales declined $5.4 million, which was the result of a $5.7 million
decrease in product sales that was partially offset by a slight increase
in 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. We
|
believe
that declining product sales were also impacted by weakening economic
conditions, especially in the United States. Training and consulting
services sales increased despite the unfavorable impact of the sales and
conversions of our Brazil and Mexico offices to licensee
operations.
·
|
Gross
Profit – Our consolidated gross profit totaled $35.8 million for
the quarter ended May 31, 2008 compared to $39.6 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, decreased to 60.5 percent of
sales compared to 61.4 percent in fiscal 2007. The decrease in
gross margin percentage was primarily attributable to lower gross margins
on our training and consulting sales. However, the impact of
decreased training and consulting gross margins was partially offset by
the continued shift toward increased training and consulting
sales as
a percent of total sales since training and consulting sales
generally have higher gross margins than our product
sales. Training and consulting service sales increased to 57
percent of total sales in the quarter ended May 31, 2008 compared to 52
percent in the same quarter of the prior
year.
|
·
|
Operating
Costs – Our operating costs decreased by $0.6 million compared to
the prior year, which was the result of a $1.1 million decrease in
selling, general, and administrative expenses and a $0.4 million increase
in depreciation expense. 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 May 31, 2008
Compared to the Quarter Ended June 2, 2007
Sales
The
following table sets forth sales data by category and for our operating segments
(in thousands):
|
|
Quarter
Ended
|
|
|
Three
Quarters Ended
|
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
Percent
Change
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
Percent
Change
|
|
Sales
by Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
25,197 |
|
|
$ |
30,857 |
|
|
|
(18
|
) |
|
$ |
105,872 |
|
|
$ |
118,248 |
|
|
|
(10 |
) |
Training
and consulting services
|
|
|
33,864 |
|
|
|
33,652 |
|
|
|
1 |
|
|
|
101,891 |
|
|
|
98,666 |
|
|
|
3 |
|
|
|
$ |
59,061 |
|
|
$ |
64,509 |
|
|
|
(8 |
) |
|
$ |
207,763 |
|
|
$ |
216,914 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Solutions Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Stores
|
|
$ |
7,896 |
|
|
$ |
10,010 |
|
|
|
(21 |
) |
|
$ |
38,659 |
|
|
$ |
43,402 |
|
|
|
(11 |
) |
Consumer Direct
|
|
|
6,949 |
|
|
|
7,890 |
|
|
|
(12 |
) |
|
|
35,335 |
|
|
|
38,674 |
|
|
|
(9 |
) |
Wholesale
|
|
|
5,046 |
|
|
|
6,901 |
|
|
|
(27 |
) |
|
|
12,227 |
|
|
|
15,059 |
|
|
|
(19 |
) |
CSBU
International
|
|
|
1,119 |
|
|
|
1,125 |
|
|
|
(1 |
) |
|
|
6,692 |
|
|
|
6,153 |
|
|
|
9 |
|
Other CSBU
|
|
|
1,280 |
|
|
|
1,523 |
|
|
|
(16 |
) |
|
|
3,721 |
|
|
|
4,360 |
|
|
|
(15 |
) |
|
|
|
22,290 |
|
|
|
27,449 |
|
|
|
(19 |
) |
|
|
96,634 |
|
|
|
107,648 |
|
|
|
(10 |
) |
Organizational
Solutions Business Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
23,111 |
|
|
|
23,143 |
|
|
|
- |
|
|
|
66,436 |
|
|
|
66,432 |
|
|
|
- |
|
International
|
|
|
13,660 |
|
|
|
13,917 |
|
|
|
(2 |
) |
|
|
44,693 |
|
|
|
42,834 |
|
|
|
4 |
|
|
|
|
36,771 |
|
|
|
37,060 |
|
|
|
(1 |
) |
|
|
111,129 |
|
|
|
109,266 |
|
|
|
2 |
|
Total
Sales
|
|
$ |
59,061 |
|
|
$ |
64,509 |
|
|
|
(8 |
) |
|
$ |
207,763 |
|
|
$ |
216,914 |
|
|
|
(4 |
) |
Product
Sales –
Consolidated product sales, which primarily consist of planners, binders,
totes, software and related accessories that are primarily sold through our CSBU
channels, declined $5.7 million compared to the prior year. The
decline in overall product sales during the quarter ended May 31, 2008 was
primarily due to the following performance in our CSBU delivery
channels:
·
|
Retail Stores – The
decline in retail sales was primarily due to reduced traffic in our retail
locations, which
was partially due to 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 $0.9 million impact on
retail sales. Our retail store traffic, or the number of
consumers entering our retail locations, declined by approximately 19
percent on a comparable basis (for stores which were open during the
comparable periods) compared to the third quarter of fiscal 2007 and
resulted in decreased sales of “core” products (e.g. planners, binders,
totes, and accessories). Due to declining demand for electronic
handheld planning products, during late fiscal 2007 we decided to exit the
low-margin handheld device and related electronics accessories business,
which reduced retail sales by $0.3 million compared to the prior
year. These factors combined to produce a 10 percent decline in
year-over-year comparable store sales versus the prior year. We
closed 4 retail locations during the quarter ended May 31, 2008 and were
operating 73 domestic retail locations at May 31, 2008 compared to 87
locations at June 2, 2007.
|
·
|
Consumer Direct – Sales
through our consumer direct channels (primarily eCommerce and call center)
decreased $0.9 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 15
percent. Declining consumer orders through the call center
continues a long-term trend and decreased by approximately 18 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 $1.9 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.
|
·
|
CSBU International –
This channel includes the product sales of our directly owned
international offices in Canada, the United Kingdom, Mexico, and
Australia. Product sales remained flat through these channels
compared to the prior year.
|
·
|
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 $0.2 million decrease in external printing sales
compared to the prior year. The decrease in printing sales was
primarily due to reduced demand for these
products.
|
Following
completion of the sale of our CSBU assets to Franklin Covey Products, we expect
that our product sales will decline sharply as the majority of sales reported
through the above channels are transitioned to Franklin Covey Products beginning
in the quarter ended August 31, 2008.
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 by $0.2 million compared to the prior year, and were significantly
impacted by the sales and transitions of our offices in Brazil and Mexico to
licensees, which decreased sales by $1.3 million compared to the prior
year. On a comparable basis, which excludes the impact of Brazil and
Mexico direct office sales in fiscal 2007, our training and consulting sales
increased by 5 percent when compared to fiscal 2007. Training and
consulting service sales performance during the quarter ended May 31, 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. Our
domestic division sales were flat compared to the prior
year. Increased sales from 5 of our 7 direct sales offices and
certain specialized events were offset by decreased sales in 2 of our
direct offices, lower sales from our sales performance group, and our
public program and media channels. The relatively flat domestic
sales performance during the quarter was reflective of the successful
launch of the Company’s new leadership offering during the second quarter
of fiscal 2007, which also had a favorable impact on domestic training and
consulting sales during the third quarter of fiscal
2007.
|
Sales in
our 5 geographical regions and 2 vertical market direct offices are comprised of
sales from 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. Our client-led facilitator training sales
increased 7 percent compared to the prior year even though the prior year
facilitator sales were favorably impacted by the release of our new leadership
offerings. However, increased facilitator sales were offset by
decreased consultant-led programs. During mid-April, the Company
experienced a softening in our booking pace that has lasted through the
remainder of the quarter ended May 31, 2008. As a result, the number
of domestic onsite program days delivered in the quarter decreased by 11 percent
compared to fiscal 2007.
·
|
International –
International sales decreased $0.3 million compared to the same quarter of
fiscal 2007 primarily as a result of the elimination of sales from our
wholly owned offices in Brazil and 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
$1.3 million unfavorable impact on our international sales, but the
conversion of these entities improved our income from their operations
during the quarter. Sales increased 11
percent over the prior year at our directly owned offices and
from foreign licensee royalty revenues. The translation of
foreign sales to United States dollars resulted in a $1.1 million
favorable impact to our consolidated sales as foreign currencies
strengthened against the United States dollar during the quarter ended May
31, 2008.
|
We do not
expect the sale of CSBU assets to Franklin Covey Products to have a material
impact on our OSBU sales in future periods.
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 $35.8 million for the
quarter ended May 31, 2008 compared to $39.6 million in fiscal
2007. The decrease in gross profit was primarily due to decreased
product sales during fiscal 2008 compared to the same quarter of the prior
year. Our consolidated gross margin, which is gross profit stated in
terms of a percentage of sales, decreased slightly to 60.5 percent of sales
compared to 61.4 percent in fiscal 2007. The decrease in gross margin
percentage was primarily attributable to lower margins on our training and
consulting sales, which was partially offset by 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 57 percent of total sales in the quarter ended May 31, 2008
compared to 52 percent in the same quarter of fiscal 2007.
Our gross
margin on product sales remained relatively consistent at 52.8 percent of sales
compared to 52.6 percent in fiscal 2007.
For the
quarter ended May 31, 2008, our training and consulting services gross margin
decreased to 66.3 percent compared to 69.5 percent in the prior
year. The decline in gross margin was primarily attributable to
increased amortization of capitalized development costs and increased sales of
low-margin specialized seminar events.
Following
the sale of the CSBU assets, we anticipate that our consolidated gross profit
will decline as the majority of our product sales are transitioned to Franklin
Covey products. However, we anticipate that our overall gross margin
will improve to a percentage closer to the current OSBU gross
margin.
Operating
Expenses
Selling, General
and Administrative –
Our selling, general, and administrative (SG&A) expenses decreased by
$1.1 million, or 3 percent, compared to the prior year. The decrease
in our consolidated SG&A expenses was primarily due to 1) the sales and
conversions of our Brazil and Mexico offices to licensee operations, which
reduced SG&A expenses by $1.0 million; 2) a $0.7 million decrease in
share-based compensation expense that was primarily due to the determination
that no shares will be awarded under our fiscal 2007 long-term incentive plan
and the corresponding reversal of accumulated share-based compensation expense
related to that plan; and 3) decreased rent and utility expenses totaling $0.7
million that were primarily attributable to a $0.4 million lease buyout received
from one of our tenants, the receipt of a $0.2 million contingent refund of
telephone expenses from one of our vendors based on usage through a contracted
period, and an overall reduction in rent, utilities, and related expenses
resulting from the closure of retail stores. These decreases in our
SG&A spending were partially offset by a $0.6 million increase in retail
store closure costs, a $0.3 million increase in public programs promotional
spending, and smaller increases in various other areas of the Company’s
operations.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future
profitability. During this assessment process, judgments are made as
to whether under-performing or unprofitable stores should be
closed. As a result of this evaluation process, we closed 4 retail
store locations during the quarter ended May 31, 2008. The costs
associated with closing retail stores are typically comprised of charges related
to vacating the premises, which may include a provision for the remaining term
on the lease, and severance and other personnel costs, which are included as a
component of SG&A expenses.
Depreciation – Depreciation expense for
the quarter ended May 31, 2008 increased to $1.5 million compared to $1.1
million in the prior year. Our depreciation expense increased
primarily due to the acceleration of $0.3 million of depreciation on a payroll
software module due to a revision in the estimated useful life of the
software.
Following
completion of the sale of CSBU assets, we anticipate that our operating expenses
in future periods will decline beginning in the quarter ended August 31,
2008.
Income
Taxes
For the
quarter ended May 31, 2008 we recorded an income tax benefit totaling $11,000
compared to an income tax provision of $0.8 million for the quarter ended June
2, 2007. The change in our income tax provision was primarily due to
the recognition of a pre-tax loss during the quarter ended May 31, 2008 compared
to pre-tax income in the prior year. Our income tax benefit rate for
the quarter was less 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 $0.3 million
compared to the prior year.
Three Quarters Ended May 31,
2008 Compared to the Three Quarters Ended June 2, 2007
Sales
Product
Sales – Our
consolidated product sales, which are primarily generated by our CSBU channels,
declined by $12.4 million compared to the prior year. We believe that
the product sales declines experienced during the first three quarters of fiscal
2008 were impacted by deteriorating economic conditions in the United States,
which generally reduced consumer spending during the 2007 holiday shopping
season. The following is a description of sales performance in our
CSBU channels for the three quarters ended May 31, 2008:
·
|
Retail Stores – The
decline in retail sales was primarily due to reduced traffic in our retail
locations, reduced demand for technology and related products, and fewer
store locations, which had a $1.9 million impact on retail
sales. Our retail store traffic declined by approximately 8
percent compared to the first three 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 low-margin
handheld device and related electronics accessories business, which
reduced retail sales by $0.8 million compared to the prior
year. These factors combined to produce a 5 percent decline in
year-over-year comparable store sales versus the prior
year.
|
·
|
Consumer Direct – Sales
through our consumer direct channels decreased by $3.3 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 13 percent compared to the
prior year and declining customer orders through the call center continues
a long-term trend and decreased by 17 percent, which we believe is
partially due to consumers transitioning to our other product
channels.
|
·
|
Wholesale – Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, decreased $2.8 million primarily due to the
transition of a portion of our wholesale business to a new wholesale
distribution partner.
|
·
|
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.
|
·
|
Other CSBU – The $0.6
million decrease in other CSBU sales was primarily due to decreased
printing services sales that occurred during the second and third quarters
of fiscal 2008.
|
Following
completion of the sale of our CSBU assets to Franklin Covey Products, we expect
that our product sales will decline sharply as the majority of sales reported
through the above channels are transitioned to Franklin Covey Products beginning
in the quarter ended August 31, 2008.
Training and
Consulting Services –
Our consolidated training and consulting service sales increased $3.2
million compared to the prior year. Training and consulting service
sales
performance
during the first three quarters of fiscal 2008 was influenced by the following
performance and trends in the OSBU divisions:
·
|
Domestic –
Our domestic training sales were flat compared to the three
quarters ended June 2, 2007, primarily due to lower sales from our public
programs, sales performance group, and book and audio
divisions. Decreased sales from these groups were partially
offset by increased sales from our combined geographical and vertical
market sales offices and by increased sales from specialized seminar
events. During the first 2 fiscal quarters of 2008, sales
through our direct sales offices improved over the prior year as
acceptance of our core product offerings, which includes The Seven Habits of Highly
Effective People, Leadership: Great Leaders, Great Teams, Great Results,
and The 4
Disciplines of Execution continued to
strengthen.
|
·
|
International –
International sales increased $1.9 million compared to the prior
year. Combined sales from our remaining directly owned foreign
offices as well as from licensee royalty revenues increased $6.0 million,
or 17 percent, compared to the prior year. 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 $3.6 million unfavorable impact on our international sales
but improved our income from these operations compared to the prior
year. The translation of foreign sales to United States dollars
had a $3.0 million favorable impact on our consolidated sales as foreign
currencies strengthened against the United States dollar during the three
quarters ended May 31, 2008.
|
We do not
expect the sale of CSBU assets to Franklin Covey Products to have a material
impact on our OSBU sales in future periods.
Gross
Profit
For the
three quarters ended May 31, 2008, our consolidated gross profit decreased to
$128.4 million compared to $133.2 million in the
same period of 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, improved to 61.8 percent of sales compared to
61.4 percent in the first three 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 49 percent of total sales for the three quarters
ended May 31, 2008 compared to 45 percent in the prior year.
Our gross
margin on product sales remained relatively consistent at 56.0 percent of sales
compared to 55.6 percent in the prior year.
During
the first three quarters of fiscal 2008, our training and consulting services
gross margin decreased to 67.8 percent compared to 68.4 percent in the prior
year. The slight decrease was primarily attributable to increased
amortization of capitalized curriculum costs during the fiscal year, which was
partially offset by increased licensee royalty revenues, which have virtually no
corresponding cost of sales.
Following
the sale of the CSBU assets, we anticipate that our consolidated gross profit
will decline as the majority of our product sales are transitioned to Franklin
Covey products. However, we anticipate that our overall gross margin
will improve to a percentage closer to the current OSBU gross
margin.
Operating
Expenses
Selling, General
and Administrative –
Consolidated SG&A expenses decreased $2.2 million, or 2 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 $2.9 million; 2) a $1.8 million
decrease in share-based compensation primarily due to the determination that no
shares will be awarded under our fiscal 2006 or fiscal 2007 long-term incentive
plans and the corresponding reversal of share-based compensation expense from
those plans; 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 1) a $1.3 million increase in promotional costs in our OSBU,
which were primarily comprised of increased spending for “Greatness Summit”
programs for our clients and increased spending on public programs promotional
materials; 2) a $0.6 million increase in retail store closure costs that were
primarily incurred in connection with the buyout of two leases; and 3) smaller
increases in SG&A spending in various other areas of our
operations.
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, which is included in operating
results for the three quarters ended June 2, 2007.
Depreciation and
Amortization –
Consolidated depreciation expense increased to $4.0 million compared to
$3.5 million for the first three quarters of fiscal 2007. The
increase in our depreciation expense in fiscal 2008 was primarily due to the
acceleration of $0.3 million of depreciation on a payroll software module that
had a revision to its estimated useful life as we decided to outsource our
payroll services and an impairment charge totaling $0.3 million for software
that did not function as anticipated and was written
off. Depreciation expense in the prior year also included an
impairment charge totaling $0.3 million that we recorded to reduce the carrying
value of one of our printing presses to be sold to its anticipated sale
price. Based upon write-offs recorded in fiscal 2008, the sale of
CSBU assets, anticipated capital spending in the remainder of fiscal 2008, and
purchases in prior years, we expect that total depreciation expense in fiscal
2008 will decrease compared to overall fiscal 2007 depreciation
expense.
Amortization
expense from definite-lived intangible assets totaled $2.7 million for the three
quarters ended May 31, 2008 and June 2, 2007. We currently expect
that intangible asset amortization expense will total $3.6 million in fiscal
2008.
Following
completion of the sale of CSBU assets, we anticipate that our operating expenses
in future periods will decline beginning in the quarter ended August 31,
2008.
Interest
Income and Expense
Interest
Income – Our interest income decreased compared to the prior year
primarily due to reduced cash balances compared to the prior year and a
reduction of interest rates on our depository accounts.
Interest
Expense – Interest expense increased primarily due to borrowings on our
line of credit facility during the three quarters ended May 31,
2008.
Income
Taxes
Our
income tax provision for the three quarters ended May 31, 2008 totaled $5.1
million compared to $6.9 million for the comparable period of fiscal
2007. The decrease in our income tax provision was primarily due to
reduced pre-tax income compared to the prior year. Our effective tax
rate for the three quarters ended May 31, 2008 of approximately 58 percent was
higher than statutory combined rates primarily due to the accrual of taxable
interest income on the management stock loan program and withholding taxes on
royalty income from foreign licensees.
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 by $2.2
million compared to the prior year.
LIQUIDITY
AND CAPITAL RESOURCES
At May
31, 2008 we had $4.9 million of cash and cash equivalents compared to $6.1
million at August 31, 2007. During the quarter ended May 31, 2008 we
announced the sale of substantially all of the assets of our
CSBU. Subsequent to the quarter ended May 31, 2008, we completed the
sale transaction. The sale price was
$32.0 million in cash and concurrent with the closing of the sale agreement, the
Company contributed approximately $1.8 million to the new entity for
approximately 19.5 percent of the voting interest and another $1.0 million in
the form of a preferred contribution (refer to Note 2 to the condensed
consolidated financial statements for further information regarding the sale of
CSBU assets).
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
agreements require 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. In connection
with the
anticipated sale of our Consumer Solutions Business Unit, we obtained a letter
of consent from the lending institutions on our $25.0 million line of credit
facility that prevented an instance of non-compliance with certain terms and
conditions related to material changes and transfers of
assets. During the quarter ended May 31, 2008, we believe that we
were in compliance with the other terms and financial covenants of our credit
facilities. At May 31, 2008, we had $8.2 million outstanding on the
line of credit, which was classified as a current liability on our condensed
consolidated balance sheets.
Subsequent
to May 31, 2008, and in connection with the sale of CSBU assets, we signed an
agreement to modify our line of credit facility. Under terms of the
modification agreement, our available borrowing capacity will remain at $25.0
million until June 30, 2009, when the borrowing capacity will be reduced to
$15.0 million. In addition, the interest rate on the credit facility
will increase from LIBOR plus 1.10 percent to LIBOR plus 1.50 percent, effective
on the date of the modification agreement.
The
following discussion is a description of the primary factors affecting our cash
flows and their effects upon our liquidity and capital resources during the
three quarters ended May 31, 2008.
Cash
Flows From Operating Activities
Our cash
provided by operating activities totaled $11.8 million for the three quarters
ended May 31, 2008 compared to $8.7 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 three quarters ended May 31, 2008 was primarily
related to 1) decreased inventory balances resulting from the sale of goods
during our seasonally busy months of December and January and improved
management of inventory levels during our third fiscal quarter; 2) payments to
reduce accounts payable and accrued liabilities from seasonally high balances at
August 31; and 3) increased accounts receivable balances primarily resulting
from wholesale shipments during the quarter ended May 31, 2008, increased OSBU
sales, and the effects of foreign exchange rates on our international
receivables. 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 $4.5 million for the three quarters ended
May 31, 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
$2.8 million, consisted primarily of computer hardware, computer software, and
leasehold improvements. During the three quarters ended May 31, 2008,
we capitalized $2.9 million related to the development of various programs and
curriculum. Partially offsetting these uses of cash was the receipt
of $1.1 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 and the receipt of $0.1 million
from sales of property and equipment.
Cash
Flows From Financing Activities
Net cash
used for financing activities through the three quarters ended May 31, 2008
totaled $7.9 million, which primarily consisted of payments on our line of
credit and other debt obligations. During the three quarters ended
May 31, 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 $8.2 million at
May 31, 2008.
Sources
of Liquidity
Going
forward, we will continue to incur costs necessary for the operation and
potential growth of the business. We anticipate using cash on hand,
cash provided by the sale of goods and services to our clients on the condition
that we can continue to generate positive cash flows from operating activities,
proceeds from our line of credit, and other financing alternatives, if
necessary, for these expenditures. We anticipate that our existing
capital resources should be adequate to enable us to maintain our operations for
at least the upcoming twelve months. However, our ability to maintain
adequate capital for our operations in the future is dependent upon a number of
factors, including sales trends, our ability to contain costs, purchases of our
common stock, levels of capital expenditures, collection of accounts receivable,
and other factors. Some of the factors that influence our operations
are not within our control, such as economic conditions and the introduction of
new technology and products by our competitors. We will continue to
monitor our liquidity position and may pursue additional financing alternatives,
if required, to maintain sufficient resources for future growth and capital
requirements. However, there can be no assurance 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. Through May 31, 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 5 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 within our control, but which may have an
impact on these estimates and our actual financial results.
The
following items require significant judgment and often involve complex
estimates:
Revenue
Recognition
We derive
revenues primarily from the following sources:
·
|
Products – We sell
planners, binders, planner accessories, handheld electronic devices, and
other related products that are mainly sold through our CSBU
channels.
|
·
|
Training and Consulting
Services – We provide training and consulting services to both
organizations and individuals in leadership, productivity, strategic
execution, goal alignment, sales force performance, and communication
effectiveness skills. These training programs and services are
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 quarters ended March 1, 2008 or May 31, 2008.
Sales
Growth
|
Percent
of Target Shares Awarded
|
30.0%
|
115%
|
135%
|
150%
|
175%
|
200%
|
22.5%
|
90%
|
110%
|
125%
|
150%
|
175%
|
15.0%
|
65%
|
85%
|
100%
|
125%
|
150%
|
11.8
%
|
50%
|
70%
|
85%
|
110%
|
135%
|
7.5%
|
30%
|
50%
|
65%
|
90%
|
115%
|
|
$36.20
|
$56.80
|
$72.30
|
$108.50
|
$144.60
|
|
Cumulative
Operating Income (millions)
|
During
fiscal 2007, the Compensation Committee granted performance awards for 429,312
shares of common stock under the terms of the LTIP. The Company must
achieve minimum levels of sales growth and cumulative operating income in order
for participants to receive any shares under the fiscal 2007 LTIP
grant. 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 recorded 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 our assessment of the fiscal 2007 LTIP at May 31, 2008, we determined that
no shares of common stock would be awarded to participants under the terms of
the fiscal 2007 LTIP grant. Consistent with the analysis of the
fiscal 2006 LTIP grant, we expect sufficient levels of operating income to be
recognized for the fiscal 2007 award, but expected sales growth is expected to
be insufficient for any shares to be awarded under this plan. The
revised sales projections included actual performance through May 31, 2008 and
estimated sales performance through fiscal 2009 based upon revised assumptions,
which were adversely affected by slowing economic conditions in the United
States and other countries in which the Company has
operations. Although training and consulting sales are expected to
increase in fiscal 2009 compared to fiscal 2008, the growth rate was
insufficient to offset expected declines in product sales and the impact of
transitioning our Mexico and Brazil offices to licensees. As a result
of this determination, we recorded cumulative adjustments totaling $1.0 million
to reduce selling, general, and administrative expenses during the three
quarters ended May 31, 2008.
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 three quarters ended May 31, 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 May 31, 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 May 31, 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 May 31, 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. We do not believe that the sale of the CSBU assets will
result in any material asset impairments to the Company’s 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 the
impact to the Company and its financial performance of the sale of the
CSBU, 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 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 three quarters ended May 31, 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
|
|
|
Three
Quarters Ended
|
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
|
May
31,
2008
|
|
|
June
2,
2007
|
|
Losses
on foreign exchange contracts
|
|
$ |
(90 |
) |
|
$ |
(137 |
) |
|
$ |
(417 |
) |
|
$ |
(210 |
) |
Gains
on foreign exchange contracts
|
|
|
11 |
|
|
|
49 |
|
|
|
11 |
|
|
|
82 |
|
Net
gain (loss) on foreign exchange contracts
|
|
$ |
(79 |
) |
|
$ |
(88 |
) |
|
$ |
(406 |
) |
|
$ |
(128 |
) |
At May
31, 2008, the fair value of our foreign currency forward contracts, which was
determined using the estimated amount at which contracts could be settled based
upon forward market exchange rates, was insignificant. The notional
amount of our foreign currency sell contracts that did not qualify for hedge
accounting was as follows at May 31, 2008 (in thousands):
Contract
Description
|
|
Notional
Amount in Foreign Currency
|
|
|
Notional
Amount in U.S. Dollars
|
|
|
|
|
|
|
|
|
Great
British Pounds
|
|
|
570 |
|
|
$ |
1,147 |
|
During
the quarter and three quarters ended May 31, 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 May 31, 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.
Our
interest expense has benefitted from declining interest rates on our
variable-rate debt and reduced borrowing during the three quarters ended May 31,
2008; however, at May 31, 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 and three quarters ended May 31, 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
1. LEGAL
PROCEEDINGS
In August
2005, EpicRealm Licensing (EpicRealm) filed an action in the United States
District Court for the Eastern District of Texas against the Company for patent
infringement. The action alleges that the Company infringed upon two
of EpicRealm’s patents directed to managing dynamic web page requests from
clients to a web server that in turn uses a page server to generate a dynamic
web page from content retrieved from a data source. The Company has
denied liability in the patent infringement and has filed certain counter-claims
related to the case since the filing of the action in District
Court. However, during the quarter ended May 31, 2008, the Company
paid EpicRealm a one-time license fee of $1.0 million for a non-exclusive,
irrevocable, perpetual, and royalty-free license to use any product, system, or
invention covered by the disputed patents. In connection with the
purchase of the license, EpicRealm and the Company agreed to dismiss their
claims with prejudice and the Company is released from further action regarding
these patents.
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 May 31, 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:
|
|
|
|
|
|
|
|
|
|
|
March
2, 2008 to April 5, 2008
|
|
|
- |
|
|
$ |
- |
|
none
|
|
$ |
2,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
6, 2008 to May 3, 2008
|
|
|
- |
|
|
|
- |
|
none
|
|
|
2,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
4, 2008 to May 31, 2008
|
|
|
- |
|
|
|
- |
|
none
|
|
|
2,413 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Common Shares
|
|
|
- |
|
|
$ |
- |
|
none
|
|
|
|
|
|
(1)
|
In
January 2006, our Board of Directors approved the purchase of up to $10.0
million of our outstanding common stock. All previously
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 May 31,
2008.
|
Item
5. OTHER
INFORMATION
On July
3, 2008, the Company and the other selling companies identified therein, and
Franklin Covey Products, LLC and the other purchasing companies identified
therein, entered into a letter agreement (the Amendment) related to, and
amending, the Master Asset Purchase Agreement (the Purchase Agreement), dated as
of May 22, 2008, by and among the Company, the other selling companies
identified in the Purchase Agreement, and Franklin Covey Products,
LLC.
Pursuant
to the Amendment, among other things, the Company has undertaken to form a
wholly-owned subsidiary as a bankruptcy remote special purpose entity following
the closing of the transaction and to contribute to the special purpose entity
all of the intellectual property that the Company will license to Franklin Covey
Products, LLC, pursuant to a license agreement to be entered into between the
Company and Franklin Covey Products, LLC at the closing of the asset
sale.
The
foregoing description of the Amendment and related matters is qualified in its
entirety by reference to the Amendment, which is filed as Exhibit 2.2 hereto and
incorporated herein by reference.
Item
6. EXHIBITS
2.1
|
Master
Asset Purchase Agreement between Franklin Covey Products, LLC and Franklin
Covey Co. dated May 22, 2008 (filed as exhibit 2.1 to Form 8-K/A as filed
with the Commission on May 29, 2008 and incorporated herein by
reference).
|
2.2
|
Amendment
to Master Asset Purchase Agreement between Franklin Covey Products, LLC
and Franklin Covey Co. dated May 22, 2008**
|
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**
|
** Filed
herewith.
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.
|
|
|
|
FRANKLIN
COVEY CO.
|
Date:
|
July
10, 2008
|
|
By:
|
/s/ Robert A. Whitman |
|
|
|
|
Robert
A. Whitman
Chief
Executive Officer
|
Date:
|
July
10, 2008
|
|
By:
|
/s/ Stephen D. Young |
|
|
|
|
Stephen
D. Young
Chief
Financial Officer
|
ex22_071008.htm
Exhibit 2.2
Franklin
Covey Co.
2200 West
Parkway Blvd.
Salt Lake
City, UT 84119
July 3,
2008
Franklin
Covey Products, LLC
2250 West
Parkway Blvd.
Salt Lake
City, UT 84119
Re: Agreements Related to and
Amendment of Master Asset Purchase Agreement
Reference is made to that certain
Master Asset Purchase Agreement (the “Purchase Agreement”), dated as of May 22,
2008, by and among Franklin Covey Products, LLC (“Buyer”), Franklin Covey Co.
(the “Company”), and the other Selling Companies identified therein, and that
certain Purchase Companies Assignment Agreement of even date herewith, by and
among Buyer, Franklin Covey Products Canada ULC, a Canadian corporation (“FCP
Canada”), FC Products de Mexico, S. de R. L. de C.V., a Mexican company (“FCP
Mexico”), and Franklin Covey Products Europe Limited, a company registered in
the UK (“FCP Europe,” and together with Buyer, FCP Mexico and FCP Canada, the
“Purchasing Companies”). The Company, Buyer, the other Purchasing
Companies and the other Selling Companies, wish to amend the Purchase Agreement
and enter into the other agreements related to the Purchase Agreement as set
forth herein. Capitalized terms used but not otherwise defined herein
shall have the meanings given to such terms in the Purchase
Agreement.
1. The
following exhibits to this letter agreement, in the form attached hereto, are
deemed to be the exhibits to the Purchase Agreement as if delivered on the date
of and in connection with the execution of the Purchase Agreement:
Exhibit A
– Master License Agreement
Exhibit B
– Master Shared Services Agreement
Exhibit C
– Buyer Operating Agreement
Exhibit D
– Supply Agreement
Exhibit
E1 – Lease Agreement (Office)
Exhibit
E2 – Sub-sublease (Warehouse)
Exhibit F
– Bill of Sale
Exhibit
F1 – Bill of Sale for FC Mexico
Exhibit G
– Assignment and Assumption Agreement
Exhibit
G1 – Assignment and Assumption Agreement for FC Mexico
2. Each of
Schedule 3.4, Schedule 6.5(a)(i) and Schedule 6.5(a)(ii) to the Purchase
Agreement, as attached to the Purchase Agreement and delivered to Buyer in
connection with the execution of the Purchase Agreement, is replaced in its
entirety with Schedule 3.4, Schedule 6.5(a)(i) and Schedule 6.5(a)(ii),
respectively, as attached hereto, and any reference to Schedule 3.4, Schedule
6.5(a)(i) or Schedule 6.5(a)(ii) in the Purchase Agreement is deemed to refer to
Schedule 3.4, Schedule 6.5(a)(i) or Schedule 6.5(a)(ii), respectively, as
attached hereto.
3. For
purposes of preparing the Estimated Closing Date Balance Sheet and the Closing
Date Balance Sheet, and in determining the Estimated Closing Date Net Current
Assets and the
Closing
Date Net Current Assets, any assets of Franklin Covey de Mexico S. de R. L. de
C.V. (“FC Mexico”) and relating to the Mexican Business (as defined in the
Master Shared Services Agreement) will be deemed to be Acquired Assets, and any
liabilities of FC Mexico relating to the Mexican Business will be deemed to be
Assumed Liabilities. Upon receipt by FCP Mexico of all Mexican
Authorizations (as defined in the Master Shared Services Agreement), FC Mexico
will deliver to FCP Mexico a bill of sale for such Acquired Assets relating to
the Mexican Business that are Tangible Personal Property, in substantially the
form of Exhibit F1, and an assignment and assumption agreement for Acquired
Assets relating to the Mexican Business that are Acquired Contracts and Acquired
Leases, in substantially the form of Exhibit G1, duly executed by FC
Mexico.
4. The first
sentence of Section 2.1 of the Purchase Agreement is hereby amended and restated
to read as follows (with new text shown in bold and italics):
“2.1 Purchase
and Sale of Acquired Assets. At the Closing and on the terms
and subject to the conditions set forth in this Agreement, the Company agrees to
sell, or to cause the Selling Subsidiaries to sell (the Company and the Selling
Subsidiaries being collectively referred to herein as the “Selling Companies”), to Buyer
or such directly or
indirectly wholly-owned Subsidiaries of Buyer as Buyer may designate in
writing to the Company prior to the Closing (Buyer and such designated directly or
indirectly wholly-owned Subsidiaries being collectively referred to as
the “Purchasing
Companies”), and Buyer agrees to buy, or to cause the other Purchasing
Companies to buy, from the Selling Companies, free and clear of all Encumbrances
other than Permitted Encumbrances and Encumbrances listed on Schedule 3.7(c), all right,
title and interest in and to all of the assets of the Company or the Selling
Subsidiary, as applicable, that are used exclusively in the Business as
conducted on the date hereof (collectively, the “Acquired Assets”), as more
specifically described below (but excluding the Excluded Assets):”
5. Section
2.9(b)(i)(D) of the Purchase Agreement is hereby amended and restated in full to
read as follows (with new text shown in bold and italics):
“(D) a
contribution of $1,755,000
to Buyer
from Franklin Covey Client Sales, Inc., by wire transfer of immediately
available funds to the account designated by Buyer to the Company no later than
three business days prior to the Closing, to acquire a 19.5% equity interest in
Buyer, before giving effect to any grants of interest to certain employees of
the Company in connection with the Closing, as contemplated in the Buyer
Operating Agreement;”
6. Section
2.9(b)(i)(E) of the Purchase Agreement is hereby amended and restated in full to
read as follows (with new text shown in bold and italics):
“(E) a
contribution of $1,000,000 to Buyer from Franklin
Covey Client Sales, Inc., by wire transfer of immediately available funds
to the account designated by Buyer to the Company no later than three business
days prior to the Closing, constituting the FC Priority Contribution (as defined
in the Buyer Operating Agreement);”
7. The first
sentence of Section 9.3(a) of the Purchase Agreement is hereby amended and
restated to read as follows (with new text shown in bold and
italics):
“(a) Any
party (the “Indemnifying Party”) will indemnify, defend and hold harmless the
other party and its officers, directors, employees, agents, shareholders and
Affiliates (collectively, the “Indemnified Parties”) against any Loss arising
from, relating to or constituting any Litigation instituted by any third party
arising out of the actions or inactions of the Indemnifying
Party (or allegations thereof) whether occurring prior to, on or after
the Closing Date that are or may be Losses, other than those relating solely to
a breach by the Buyer or the Company, as applicable, of this Agreement (any such
third party action or proceeding being referred to as a “Third Party
Action”).”
8. Buyer
hereby waives the following conditions to the obligations of Buyer in the
Purchase Agreement to take the actions required of it at the
Closing:
(a)
|
The
condition set forth in Section 7.1(d) of the Purchase Agreement requiring
the Company to obtain each Required Consent, except for Required Consents
relating to the leasehold interests in the real property leased or
otherwise used or occupied by the Company exclusively for the Business as
listed on Schedule 2.1(a)(i) of the Purchase Agreement, as such schedule
may have been updated pursuant to Section 10.11(b) of the Purchase
Agreement prior to the Closing, will have been obtained and be in full
force and effect. The Company has obtained the Consents listed
on Attachment
1 to this letter agreement.
|
(b)
|
The
condition set forth in Section 7.1(e) of the Purchase Agreement requiring
the Company to obtain at least 70% of Required Consents relating to the
leasehold interests in the real property leased or otherwise used or
occupied by the Company exclusively for the Business as listed on Schedule
2.1(a)(i) of the Purchase Agreement, as such schedule may have been
updated pursuant to Section 10.11(b) of the Purchase Agreement prior to
the Closing will have been obtained and be in full force and
effect. The Company has obtained the lease Consents listed on
Attachment
2 to this letter agreement. The Company acknowledges and
agrees that it will continue to use commercially reasonable efforts to
obtain the Required Consents relating to the leasehold interests, and will
promptly inform the Buyer of any changes in the status
thereof.
|
9. The
following are hereby amended and restated:
(a)
|
Article
I of the Purchase Agreement is hereby amended by adding the following
definitions:
|
““Additional Reimbursable
Expenses” has the meaning set forth in Section
2.10(d)(iii).”
““Estimated Reimbursable
Expenses” means the Company’s good faith estimate, as of the Closing
Date, for Reimbursable Expenses delivered to Buyer on or prior to the Closing
Date.”
““Paid Reimbursable Expenses”
has the meaning set forth in Section 2.10(a).”
““Reimbursable Expense Set-Off”
has the meaning set forth in Section 2.10(d)(iv).”
(b)
|
The
definition of “Reimbursable Expenses” in Article I of the Purchase
Agreement is hereby amended and restated in full to read as follows (with
revised text shown in bold and
italics):
|
““Reimbursable Expenses” means all costs and
expenses paid or
accrued by the Company for the benefit of the Buyer at the Buyer’s
written request or with the Buyer’s written consent prior to or after the
Closing Date.”
(c)
|
The
first sentence of Section 2.8(a) of the Purchase Agreement is hereby
amended and restated in full to read as follows (with revised text shown
in bold and italics):
|
“(a) At
Closing, a cash amount equal to the Estimated Purchase Price plus the amount of
the Estimated
Reimbursable Expenses; provided, however, that if
the sum or difference, as applicable, of the aggregate amount of the Estimated
Reimbursable Expenses plus the amount, if any,
by which the Estimated Closing Date Net Current Assets exceeds the Target Net
Current Assets or minus the amount, if any, by which the Target Net Current
Assets exceeds the Estimated Closing Date Net Current Assets results in a
positive amount payable by Buyer to the Company (collectively,
the “Estimated Buyer Shortfall
Amount”), then, only to the extent Buyer reasonably determines in good
faith that it has insufficient Available Cash to fund the payment of the
Estimated Buyer Shortfall Amount, Buyer may deliver to the Company at Closing a
subordinated promissory note with an aggregate principal amount equal to such
amount of the Estimated Buyer Shortfall Amount that Buyer is not able to fund in
cash (the “Working Capital
Note”) (the amount of cash to be delivered to the Company at Closing
pursuant to this Section 2.8(a) shall be referred to as the “Cash Payment
Amount”).”
(d)
|
Section
2.8(b) of the Purchase Agreement is hereby amended and restated in full to
read as follows (with revised text shown in bold and
italics):
|
“(b) If
the parties determine there are Excess Net Current Assets or Additional
Reimbursable Expenses pursuant to Section 2.10(d), Buyer will pay to the
Company an aggregate cash amount equal to such
Excess Net Current Assets or Additional
Reimbursable Expenses, as applicable, as set forth in Sections 2.10(d)
and (e); provided, however, if Buyer reasonably determines in good faith that it
has insufficient Available Cash to fund such cash payment of the amount of such
Excess Net Current Assets or Additional
Reimbursable Expenses, as
applicable,
then Buyer may deliver to the Company an additional subordinated promissory note
with an aggregate principal amount equal to the aggregate amount of such
Excess Net Current Assets and Additional
Reimbursable Expenses, as applicable that Buyer is not able
to fund in cash (the “Adjustment Note” and together with the Working Capital
Note, the “Buyer Notes”). The Adjustment Note will be in a form
reasonably acceptable to the Company and Buyer, each acting in good faith, and
will be payable and will bear interest on the same terms as the Working Capital
Note.”
(e)
|
Section
2.10 of the Purchase Agreement is hereby amended and restated in full to
read as follows (with additional text shown in bold and italics and
deleted text shown in bold and
struckthrough):
|
2.10 Post-Closing Adjustment to
Estimated Purchase Price
(a) The
Company will promptly prepare and deliver to Buyer within 60 days after the
Closing Date (i) a
balance sheet (the “Closing Date Balance Sheet”) for the Business as of the
close of business on the Closing Date with respect to the Acquired Assets and
the Assumed Liabilities and in accordance with GAAP applied on a basis
consistent with the preparation of the Latest Financial Statements, and (ii) a final
list of all Reimbursable Expenses paid by the Company (the “Paid Reimbursable
Expenses”). The Closing Date Balance Sheet will include a
determination of the Closing Date Net Current Assets of the Business as of the
close of business on the Closing Date. “Closing Date Net Current
Assets” means the excess of Current Assets over Current Liabilities shown on the
Closing Date Balance Sheet. “Current Assets” means the current assets
shown on a balance sheet that are Acquired Assets and are not Excluded
Assets. “Current Liabilities” means the current liabilities shown on
a balance sheet that are Assumed Liabilities and are not Retained Liabilities,
excluding the short term portion of any long term Liability. The
Company will make the workpapers and back up materials used in preparing the
Closing Date Balance Sheet and the Paid
Reimbursable Expenses available to Buyer and its accountants and other
representatives at reasonable times and upon reasonable notice during (i) the
review by Buyer of the Closing Date Balance Sheet and the Paid
Reimbursable Expenses and (ii) the resolution by the Company and Buyer of
any objections to the Closing Date Balance Sheet or the Paid
Reimbursable Expenses.
(b) Buyer
may object to the Closing Date Balance Sheet on the basis that it was not
prepared in accordance with GAAP applied on a basis consistent with the
preparation of the Latest Financial Statements or that the calculation of
Closing Date Net Current Assets contains mathematical errors. If
Buyer has any objections to the Closing Date Balance Sheet, or
the Closing Date Net Current Assets or the Paid
Reimbursable Expenses, Buyer will deliver a detailed statement describing
such objections to the Company within 30 days after receiving the Closing Date
Balance Sheet and the Paid Reimbursable Expenses. Buyer and the
Company will attempt in good faith to resolve any such objections. If
Buyer and the Company do not reach a resolution of all objections within 30 days
after the Company has received the statement of objections, Buyer and
the
Company
will select a mutually acceptable accounting firm to resolve any remaining
objections. If Buyer and the Company are unable to agree on the
choice of an accounting firm, they will select a nationally recognized
accounting firm by lot (after excluding the regular outside accounting firms of
Buyer and the Company). The accounting firm will determine, (i) in
accordance with GAAP applied on a basis consistent with the preparation of the
Latest Financial Statements, the amounts to be included in the Closing Date
Balance Sheet and the Closing Date Net Current Assets, and (ii) the Paid
Reimbursable Expenses. The parties will provide the accounting
firm, within 10 days of its selection, with a definitive statement of the
position of each party with respect to each unresolved objection and will advise
the accounting firm that the parties accept the accounting firm as the
appropriate Person to interpret this Agreement for all purposes relevant to the
resolution of the unresolved objections. The Company and the Buyer,
as applicable, will provide the accounting firm access to the books and records
of the Company. The accounting firm will have 30 days to carry out a
review of the unresolved objections and prepare a written statement of its
determination regarding each unresolved objection. The determination
of any accounting firm so selected will be set forth in writing and will be
conclusive and binding upon the parties. The Company will revise the
Closing Date Balance Sheet and the determination of the Closing Date Net Current
Assets as appropriate to reflect the resolution of any objections to the Closing
Date Balance Sheet pursuant to this Section 2.10(b).
(c) If
Buyer and the Company submit any unresolved objections to an accounting firm for
resolution as provided in Section 2.10(b), Buyer and the Company will each bear
their respective costs and expenses and will share equally in the fees and
expenses of the accounting firm.
(d) Within
10 business days after the date on which both the
Closing Date Net Current Assets and the Paid
Reimbursable Expenses are finally determined pursuant to this Section
2.10:
(i) If
the Closing Date Net Current Assets exceeds the Estimated Closing Date Net
Current Assets (the amount of such excess, the “Excess Net Current Assets”),
Buyer will pay to the Company an aggregate amount equal to the Excess Net
Current Assets, or, as provided in Section 2.8(b), deliver to the Company the
Adjustment Note.
(ii) If
the Closing Date Net Current Assets is less than the Estimated Net Current
Assets (the amount of such difference, the “Net Current Assets Shortfall”), the
aggregate amount of accrued interest and then principal owing pursuant to the
Working Capital Note, if any, will be reduced by an amount equal to the Net
Current Assets Shortfall, and, to the extent the Net Current Assets Shortfall
exceeds the amount owing pursuant to the Working Capital Note, if any, the
Company will pay the balance to Buyer.
(iii) If
the Paid Reimbursable Expenses exceed the Estimated Reimbursable Expenses (the
amount of such excess, the “Additional
Reimbursable
Expenses”), Buyer will pay to the Company an aggregate amount equal to the
Additional Reimbursable Expenses, or, as provided in Section 2.8(b), deliver to
the Company the Adjustment Note.
(iv) If
the Paid Reimbursable Expenses are less than Estimated Reimbursable Expenses
(the amount of such difference, the “Reimbursable Expense Set-Off”), the
aggregate amount of first accrued interest and then principal owing pursuant to
the Working Capital note, if any, will be reduced by an amount equal to the
Reimbursable Expense Set-Off, and, to the extent the Reimbursable Expense
Set-Off exceeds the amount owing pursuant to the Working Capital note, if any,
the Company will pay the balance to Buyer.
(e) All
payments of cash to be made to Buyer or the Company pursuant to this Section
2.10 will be made by wire transfer of immediately available funds to the
accounts designated by Buyer or the Company, as applicable.
(f) Any
payment made pursuant to this Section 2.10 will be the exclusive remedy provided
in this Agreement or otherwise for any breach of representation or warranty with
respect to any element of the Closing Date Balance Sheet.
(g) Judgment
upon the award rendered by the accounting firm may be entered in any court of
competent jurisdiction.
10. Article 2
of the Purchase Agreement is hereby amended by adding a new Section 2.15 to read
as follows:
“2.15 Formation
of Delaware Special Purpose Entity. Within ninety (90) days
following the Closing Date, the Company will form a bankruptcy remote special
purpose entity that will be a Delaware limited liability company (“Delaware
Newco”) and be wholly-owned by the Company and formed pursuant to the Delaware
Limited Liability Company Act, Title 6, Chapter 18, of Delaware Code Annotated,
as amended from time to time (the “Delaware LLC Act”), all in the form and
manner as mutually satisfactory to Buyer and the Company and consented to by
those lending institutions providing the Financing and the Company’s secured
lenders. In forming Delaware Newco, the Company will take the
following actions:
(a) The
Company will prepare a customary certificate of formation for Delaware Newco
(the “Certificate of Formation”), which may also include, to the extent mutually
agreed by Buyer and the Company, one or more of the provisions described in
Section 2.15(b) below and other customary separateness covenants.
(b) The
Company shall prepare a limited liability company agreement for the operation
and governance of Delaware Newco (such agreement, the “Newco LLC Agreement”),
which Newco LLC Agreement will be in a form
mutually
agreed upon between the Company and Buyer and contain customary terms and
conditions for a bankruptcy remote special purpose entity, including, but not
limited to, the following provisions:
(i) setting
forth the purpose of Delaware Newco to engage in the following
activities: (A) acquire, own and hold the Licensed Materials (as
defined in the Master License Agreement), (B) to exclusively license such
Licensed Materials to Buyer and the Company on terms consistent with the Master
License Agreement, and (C) to engage in any lawful act or activity and to
exercise any powers permitted to limited liability companies organized under the
laws of the State of Delaware that are related or incidental to and necessary,
convenient or advisable for the accomplishment of the above-mentioned
purposes;
(ii) customary
covenants limiting the activities of Delaware Newco, as well as covenants aimed
at respecting the separate legal entity status of Delaware Newco;
(iii) a
provision restricting the ability to (A) dissolve Delaware Newco, (B) sell all
or substantially all of the assets of Delaware Newco, (C) amend
the provisions of the Newco LLC Agreement relating to the matters
described in paragraph (b)(iv) of this Section 2.15, and (D) preclude Delaware
Newco from incurring any financial obligation or granting any Encumbrance with
respect to its assets;
(iv) a
requirement that Delaware Newco shall have at all times at least one (1)
independent manager as defined in the Newco LLC Agreement (the “Independent
Director”), whose consent shall be required for Delaware Newco to take any
action set forth in subsection 2.15(b)(iii) above or any action relating to the
bankruptcy of Delaware Newco (“Bankruptcy”), including, without limitation, the
bankruptcy or insolvency of Delaware Newco, including any voluntary or
involuntary commencement of any case under the Bankruptcy Code, Title 11 of the
United States Code, or commencement of any other bankruptcy arrangement,
reorganization, receivership, custodianship, or similar proceeding under any
federal, state, or foreign law (provided, however, such Independent Director
shall have a right to consent only to such actions and shall not participate in
or receive information with respect to any other matters or decisions coming
before the board of managers or directors of Delaware Newco). The
Newco LLC Agreement, pursuant to Section 18-1101 of the Delaware Limited
Liability Company Act, shall provide that the Independent Director shall have no
liability for a breach of fiduciary duties, except for a breach of fiduciary
duties in connection with the actions of Independent Director relating to the
actions set forth in subsection 2.15(b)(iii) above or relating to the Bankruptcy
of Delaware Newco;
(v) a
provision providing that the Bankruptcy of the Company (or its successor in
interest) shall not cause the Company (or its successor in interest) to cease to
be a member of Delaware Newco, and upon the occurrence of such an event,
Delaware Newco will continue without dissolution;
(vi) a
provision providing that upon dissolution of the sole initial member of Delaware
Newco, the Independent Director shall, without any action of any Person or
simultaneously with the Company ceasing to be a member of the Company,
automatically be admitted to Delaware Newco as a special member thereof (the
“Special Member”); provided that no Special Member shall (A) have any interest
in the profits, losses and capital of Delaware Newco or any right to receive any
distribution of Delaware Newco’s assets, (B) be required to make any capital
contributions to Delaware Newco, (C) receive any limited liability company
interest in Delaware Newco, (D) possess any authority to bind Delaware Newco, in
such capacity as a Special Member, or (E) have any right to vote on, approve or
otherwise consent to any action by, or matter relating to, Delaware Newco,
except as required by any mandatory provision of the Delaware LLC Act;
and
(vii) a
waiver of the Company (or its successor in interest) and any Independent
Director of any right it might have to agree in writing to dissolve Delaware
Newco upon the Bankruptcy of the Company (or its successor in interest) or the
occurrence of an event that causes the Company (or its successor in interest) to
cease to be a member of Delaware Newco.
(c) The
Company and the Buyer will attempt in good faith to jointly select the one (1)
individual to serve as the Independent Director (as defined in Section 2.15(b)
above) of Newco Delaware;
(d) The
Company will deliver the form of the Certificate of Formation and the Newco LLC
Agreement to Buyer for Buyer’s approval, and within fifteen (15) days from
receipt thereof Buyer shall either (i) provide the Company with the Buyer’s
confirmation of approval as to the provided form of such documents, or (ii)
provide the Company with notice of Buyer’s withholding of approval, which notice
shall include in detail the Buyer’s reasonable objections to the form of such
documents so provided. Until the form of each of the Certificate of
Formation and the Newco LLC Agreement is expressly approved in writing by the
Buyer, the Company shall have the right to supplement, modify or otherwise alter
such documents, but in each event subject to the consent of Buyer, which consent
shall not be unreasonably withheld or delayed. Buyer and the Company
may otherwise act in good faith in jointly preparing the Certificate of
Formation and the Newco LLC Agreement.
(e) Upon
approval of the form of the Certificate of Formation and the Newco LLC Agreement
between Buyer and the Company and consented to by those lending institutions
providing the Financing and the Company’s secured
lenders,
the Company will (i) file the Certificate of Formation with the Secretary of
State of the State of Delaware, and (ii) execute and deliver the Newco LLC
Agreement.
(f) As
soon as reasonably practicable following the execution and delivery of the Newco
LLC Agreement pursuant to Section 2.15(d), the Company shall contribute to
Delaware Newco, (i) all of its right, title and interest in and to the Licensed
Materials, free and clear of all Encumbrances, and (ii) all of its right, title
and interest in and to the License Agreement, it being understood that such
assignment shall be by a separate instrument in a form mutually agreeable to
Buyer and the Company, and (iii) capital from time to time in amounts reasonably
sufficient to allow Delaware Newco to perform its obligations under the Master
License Agreement and the Newco LLC Agreement.
(g) As
soon as reasonably practicable following the execution and delivery of the Newco
LLC Agreement, the Company, acting diligently, shall initiate recording of the
assignments of the Licensed Materials and License Agreement or related
documents, as required, with each of the applicable Trademark and Copyright
Offices (as defined in the Master License Agreement) throughout the
world. Buyer will either pay directly or reimburse the Company for
all costs associated with the work done at Buyer’s request or with Buyer’s
consent pursuant to this paragraph (g); such costs to include, without
limitation, legal fees and recording, registration and similar
costs.
(h) As
soon as reasonably practicable following the execution and delivery of the Newco
LLC Agreement, the Company and Buyer shall amend the Master License Agreement to
the extent necessary to (i) accurately reflect the assignment of the Company’s
rights thereunder, and (ii) provide for the license of the Licensed Materials to
the Company and the Buyer as appropriate or necessary in order that the Company
and Buyer are able to perform their respective obligations under such agreement,
as amended.”
11. The
parties hereto acknowledge that Buyer has assigned a portion of its rights under
the Purchase Agreement to the Purchasing Companies to purchase a portion of the
Acquired Assets, all pursuant to that Assignment Agreement, dated as of July 3,
2008, by and among Buyer and the other Purchasing Companies.
Except as expressly modified herein,
the Purchase Agreement remains in full force and effect in accordance with its
terms. In the event of any conflict or inconsistency between the
Purchase Agreement and this letter agreement with respect to the subject matter
hereof, this letter agreement shall control. This letter agreement
may be executed in one or more counterparts, each of which shall be deemed an
original and all of which shall constitute one agreement.
[Remainder of page left intentionally
blank; signature page follows]
IN WITNESS WHEREOF, the parties have
executed this letter agreement as of the date first set forth
above.
BUYER:
|
FRANKLIN
COVEY PRODUCTS, LLC
|
By:
|
|
Name:
|
James
B. Nelson
|
Title:
|
Manager
|
THE
COMPANY:
|
FRANKLIN
COVEY CO.
|
By:
|
|
Name:
|
Robert
A. Whitman
|
Title:
|
Chairman
and Chief Executive Officer
|
THE SELLING
SUBSIDIARIES:
|
FRANKLIN
COVEY CANADA, LTD.
|
By:
|
|
Name:
|
Robert
A. Whitman
|
Title:
|
President
|
FRANKLIN
COVEY DE MEXICO S. DE R.L. DE C.V.
|
By:
|
|
Name:
|
Robert
A. Whitman
|
Title:
|
President
|
FRANKLIN
COVEY EUROPE, LTD.
|
By:
|
|
Name:
|
Robert
A. Whitman
|
Title:
|
President
|
FRANKLIN
COVEY CLIENT SALES, INC.
|
By:
|
|
Name:
|
Sarah
Merz
|
Title:
|
President
|
FRANKLIN
COVEY CATALOG SALES, INC.
|
By:
|
|
Name:
|
Sarah
Merz
|
Title:
|
President
|
FRANKLIN
COVEY PRODUCT SALES, INC.
|
By:
|
|
Name:
|
Sarah
Merz
|
Title:
|
President
|
FRANKLIN
COVEY PRINTING, INC.
|
By:
|
|
Name:
|
Robert
A. Whitman
|
Title:
|
President
|
FRANKLIN
COVEY PRODUCTS EUROPE LIMITED
|
By:
|
|
Name:
|
Sarah
Merz
|
Title:
|
Director
|
FRANKLIN
COVEY PRODUCTS CANADA ULC
|
By:
|
|
Name:
|
|
Title:
|
|
FC
PRODUCTS DE MEXICO, S. DE R.L. DE C.V.
|
By:
|
|
Name:
|
Sarah
Merz
|
Title:
|
Manager
|
ex31_1.htm
Exhibit
31.1
SECTION
302 CERTIFICATION
I, Robert
A. Whitman, certify that:
1.
|
I
have reviewed this quarterly report on Form 10-Q of Franklin Covey
Co.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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)
|
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;
|
c)
|
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
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
|
July 10, 2008
|
/s/ Robert A. Whitman |
|
|
Robert
A. Whitman
|
|
|
Chief
Executive Officer
|
ex31_2.htm
Exhibit
31.2
SECTION
302 CERTIFICATION
I,
Stephen D. Young, certify that:
1.
|
I
have reviewed this quarterly report on Form 10-Q of Franklin Covey
Co.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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)
|
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;
|
c)
|
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
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
|
July 10, 2008
|
/s/ Stephen D. Young |
|
|
Stephen
D. Young
|
|
|
Chief
Financial Officer
|
ex32.htm
Exhibit 32
CERTIFICATION
In
connection with the quarterly report of Franklin Covey Co. (the “Company”) on
Form 10-Q for the quarterly period ended May 31,
2008, as filed with the Securities and Exchange Commission (the
“Report”), we, Robert A. Whitman, Chairman
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:
1.
|
The
Report fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934, and
|
2.
|
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.
|
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 |
Robert
A. Whitman
|
|
Stephen
D. Young
|
Chief
Executive Officer
|
|
Chief
Financial Officer
|
Date: July
10, 2008
|
|
Date: July
10, 2008
|