UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2009.
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM ___
TO ___
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Franklin Covey
Co.
(Exact
name of registrant as specified in its charter)
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Utah
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1-11107
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87-0401551
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(State
or other jurisdiction of incorporation or organization)
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(Commission
File No.)
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(IRS
Employer Identification No.)
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2200
West Parkway Boulevard
Salt
Lake City, Utah 84119-2331
(Address
of principal executive offices, including zip code)
Registrant's
telephone number, including area code: (801) 817-1776
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $.05 Par Value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No
þ
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 þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer
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£
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Accelerated
filer
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þ
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Non-accelerated
filer
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£
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(Do
not check if a smaller reporting company)
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Smaller
reporting company
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£
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
þ
As of
February 27, 2009, the aggregate market value of the Registrant's Common Stock
held by non-affiliates of the Registrant was approximately $53.9 million, which
was based upon the closing price of $4.13 per share as reported by the New York
Stock Exchange.
As of
November 2, 2009, the Registrant had 16,960,319 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of
the Registrant's Definitive Proxy Statement for the Annual Meeting of
Shareholders, which is scheduled to be held on January 29, 2010, are
incorporated by reference in Part III of this Form 10-K.
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PART
I
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Business
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Risk
Factors
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Unresolved
Staff Comments
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Properties
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Legal
Proceedings
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Submission
of Matters to a Vote of Security Holders
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PART
II
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Market
for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
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Selected
Financial Data
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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Quantitative
and Qualitative Disclosures About Market Risk
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Financial
Statements and Supplementary Data
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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Controls
and Procedures
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Other
Information
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PART
III
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Directors,
Executive Officers and Corporate Governance
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Executive
Compensation
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Certain
Relationships and Related Transactions, and Director
Independence
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Principal
Accountant Fees and Services
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PART
IV
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Exhibits,
Financial Statement Schedules
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PART
I
ITEM 1. BUSINESS
Disclosure Regarding
Forward-Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to
our operations, results of operations, and other matters that are based on our
current expectations, estimates, assumptions, and projections. Words
such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,”
“plans,” “projects,” “believes,” “estimates,” and similar expressions are used
to identify these forward-looking statements. These statements are
not guarantees of future performance and involve risks, uncertainties, and
assumptions that are difficult to predict. Forward-looking statements
are based upon assumptions as to future events that might not prove to be
accurate. Actual outcomes and results could differ materially from
what is expressed or forecast in these forward-looking
statements. Risks, uncertainties, and other factors that might cause
such differences, some of which could be material, include, but are not limited
to, the factors discussed below under the section entitled “Risk
Factors.”
General
Franklin
Covey Co. (the Company, we, us, our, or FranklinCovey) is a leading global
provider of execution, leadership, and personal-effectiveness training with over
600 employees worldwide delivering principle-based curriculum and effectiveness
tools to our customers. Our consolidated net sales for the fiscal
year ended August 31, 2009 totaled $130.1 million and our shares of common stock
are traded on the New York Stock Exchange (NYSE) under the ticker symbol
“FC.”
We
operate globally with one common brand and business model designed to enable us
to provide clients around the world with the same high level of
service. To achieve this level of service we operate four regional
sales offices in the United States; wholly owned subsidiaries in Australia,
Japan, and the United Kingdom; and contract with licensee partners who deliver
our curriculum and provide services in over 150 other countries and territories
around the world.
Our
business-to-business service utilizes our expertise in training, consulting, and
technology that is designed to help our clients define great performance and
execute at the highest levels. We also provide clients with training
in management skills, relationship skills, and individual effectiveness, and can
provide personal-effectiveness literature and electronic educational solutions
to our clients as needed.
Our fiscal year ends on
August 31 of each year. Unless otherwise noted, references to
fiscal years apply to the 12 months ended August 31 of the specified
year.
During
the fourth quarter of fiscal 2008, we sold substantially all of the assets of
our Consumer Solutions Business Unit (CSBU) to a newly formed entity, Franklin
Covey Products, LLC (Refer to Note 3 of our consolidated financial statements in
Item 8 for further details on this transaction). The CSBU was
primarily responsible for the sale of our products such as planners, binders,
software, totes, and related accessories. Following the sale of the
CSBU, our efforts have been focused on providing superior training, consulting,
and other services that will enable our clients to achieve
greatness.
Services
Overview
Our
mission is to enable greatness in people and organizations
everywhere. To that end, we have developed industry-leading content,
tools, and methodologies to help organizations achieve four
outcomes:
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1.
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Sustained Superior
Performance. Great organizations succeed financially and
operationally in both the short and long term relative to their market and
strategic potential.
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2.
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Intensely Loyal
Customers. Great organizations earn not only the
“satisfaction” of their customers, but their true
loyalty.
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3.
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Highly Engaged and Loyal
Employees. The people who work in great organizations
are energized and passionate about what they
do.
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4.
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Distinctive
Contribution. Great organizations do more than “business
as usual”—they fulfill a unique mission that sets them apart from the
crowd.
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Our
content, tools, and methodologies are organized into key practice areas or
product lines, each offering targeted solutions that drive these four
outcomes. Our primary practice areas and product lines
include:
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1.
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Execution
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2.
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Leadership
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3.
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Individual
Effectiveness
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4.
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Winning
Customer Loyalty
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5.
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Trust
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6.
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Sales
Performance
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7.
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Education
Solutions
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8.
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E-Learning
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9.
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Custom
Solutions
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10.
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Media
Publishing
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The
following is a description of our primary practice areas and
curriculum.
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1.
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Execution
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Execution
remains one of the toughest challenges organizations face today. Our
internal studies show that only 13 percent of public companies meet yearly
financial expectations, 70 percent of strategic initiatives either fail or are
abandoned, and only 19 percent of workers say they can effectively translate the
company’s top goals into the work they do.
We
believe our Execution practice addresses these challenges. We work
directly with leadership teams to help them clarify the “wildly important goals”
that their strategy requires, identify key measures that lead to the achievement
of these goals, create clear and compelling scoreboards, and build a culture and
cadence of accountability so that the goals are achieved. Our key
execution offerings include:
The
4 Disciplines of Execution®:
Manager Certification
The
purpose of Manager Certification includes helping managers not only develop
specific skills, but to also create actual work plans. We help
managers leave the session with clearly identified goals and measures, a draft
scoreboard for their team, and an accountability plan to help everyone move
forward on the goals.
The
4 Disciplines of Execution®:
Skills Workshop and Team Work Session
The
purpose of the one- or two-day work session is to help teams understand the
methods and develop the skills of consistent execution. We help teams
clarify their goals, refine key measures, and generate new and better ways of
achieving the goals through peer-to-peer accountability.
Execution
Quotient® (xQ)
Assessment
This
offering allows organizations to measure their overall ability to execute their
most important goals. The xQ is a culture-wide assessment based on
factors that contribute to consistent and successful execution. This
assessment helps leaders identify areas where their goals may be at
risk.
What
the CEO Wants You to Know: Building Business Acumen™
This
training supports the Execution disciplines by helping individuals and teams
better understand the financial engine of their business and how they can
positively affect it. The material is based on the popular book What the CEO Wants You to
Know, by leading CEO and executive coach Ram Charan.
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2.
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Leadership
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Leadership
has a profound impact on performance, and is a key lever that mobilizes teams to
produce results.
We help
organizations develop leaders who build great teams through these 4
imperatives:
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1.
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Inspire
Trust: Build credibility as a leader so that people will
contribute their highest efforts.
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2.
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Clarify
Purpose: Define a clear and compelling purpose that
motivates people to offer their best to achieve the organizational
goals.
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3.
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Align
Systems: Create systems of success that support the
purpose and goals of the organization, enable people to do their best
work, operate independently of management, and sustain superior
performance over time.
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4.
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Unleash Talent: Develop
a winning team, where people’s unique talents are leveraged against clear
performance expectations in a way that encourages responsibility and
growth.
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Each of
our Leadership offerings addresses these imperatives or provides in-depth
training in one of these areas.
Leadership:
Great Leaders, Great Teams, Great Results™
This
comprehensive offering contains the entire core content of FranklinCovey’s
Leadership practice. During the program, leaders learn the 4 Imperatives of Great
Leaders and take specific actions to carry them out. The
workshop features award-winning videos that present the latest on our own
research and thinking, along with the best thinking of other leadership experts
including:
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·
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Jack
Welch, Winning
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·
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Fred
Reichheld, The Ultimate
Question
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Clayton
Christensen, The
Innovator’s Solution
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·
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Stephen
R. Covey, The 8th
Habit
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·
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Stephen
M. R. Covey, The Speed
of Trust
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·
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Ram
Charan, What the CEO
Wants You to Know
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Leadership
Foundations™
Our Leadership Foundations
workshop is designed to prepare emerging leaders to take on significant roles
and responsibilities in the future. Participants gain skills to
improve trust and influence with peers and superiors, link their work to a clear
and compelling team purpose, implement a system for executing critical
priorities, and leverage the talents of peers and co-workers to achieve
unprecedented results.
Leadership
Modular Series™
Drawn
from the content of our leadership-development program, the Leadership Modular Series
comprises seven stand-alone modules that teach imperatives leaders can apply
immediately to create a work environment that addresses the needs of the
knowledge worker. For leaders who cannot attend multiple days of
training, the Leadership
Modular Series lets them focus on one specific leadership competency,
three to four hours at a time. The series includes the following
instructor-led training modules:
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1.
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The
4 Imperatives of Great Leaders™
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2.
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Inspiring
Trust
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3.
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Clarifying
Your Team’s Purpose and Strategy
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4.
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Closing
the Execution Gap
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5.
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Building
Process Excellence
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6.
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Unleashing
Talent
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7.
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Leading
Across Generations
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The
7 Habits for Managers®
FranklinCovey’s
The 7 Habits for
Managers solution teaches the fundamentals of leading today’s mobile
knowledge worker. Both new and experienced managers acquire a set of
tools to help them meet today’s management challenges, including conflict
resolution, prioritization, performance management, accountability and trust,
execution, collaboration, and team and employee development. We help
participants in our The 7
Habits for Managers program to:
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·
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Increase
resourcefulness and initiative.
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·
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Define
the contribution they want to make in their role as
manager.
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Manage
performance through a balance of accountability and
trust.
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·
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Give
constructive feedback.
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·
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Improve
team decision-making skills by embracing diverse
viewpoints.
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Executive
Coaching
We offer
senior executives a coaching experience created in partnership with Columbia
University, which includes methodologies approved by the International Coach
Federation (ICF). We leverage content, methodology, and tools to
guide leaders in discovering and unleashing the potential they already
possess. In one-on-one or team sessions, our executive coaches help
senior-level executives work through complex issues, helping them establish
initiatives that are clear, defined, and actionable, and provide supportive
accountability until their goals are reached. We also offer
one-on-one executive coaching in leadership development, strategy, goal
execution, and personal work/life areas.
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3.
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Individual
Effectiveness
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Effective
organizations are characterized by highly effective individuals—individuals who
take initiative, set and achieve important goals, manage themselves well and are
highly productive, work well with others, solve problems, and create new and
valuable ideas.
Individual
effectiveness and resilience are particularly valuable in a difficult economic
environment. In such an environment, we believe that our approaches
to personal and interpersonal effectiveness are perhaps more critical than
ever.
The
7 Habits of Highly Effective People®—Signature
Program
Based on
the principles found in Dr. Stephen R. Covey’s best-selling business book, The 7 Habits of Highly Effective
People, this program drives organizational success by helping
participants gain the paradigms and behaviors of effective
people. Participants gain hands-on experience, applying principles
that yield greater productivity, improved communication, strengthened
relationships, increased influence, and focus on critical
priorities. Participants learn how to take initiative, identify and
balance key priorities, improve interpersonal communication, leverage creative
collaboration and problem solving, and build their personal resilience and
capability.
The
7 Habits of Highly Effective People®:
Introductory Workshop for Associates
This
workshop for employees at all levels is designed to tap the best they have to
give. We help employees become empowered with new knowledge, skills,
and tools to confront issues, work as a team, increase accountability, and raise
the bar on what they can achieve. Participants discover how to
maximize performance by avoiding dependence on others, gaining appropriate
independence, and moving on to where real success lies: being successfully
interdependent and collaborative with others.
FOCUS:
Achieving Your Highest Priorities™
Our
time-management workshop presents principles that help participants identify and
clarify their values, set goals, and plan weekly and daily to accomplish what
really counts. We help participants discover how to clearly define
goals and break them down into key tasks, eliminate unnecessary activities to
reduce stress, balance work and life priorities, and master information
management with a proven planning system.
FOCUS:
Achieving Your Highest Priorities—Microsoft®
Outlook®
Edition
This
practical workshop teaches participants to apply the principles from our
productivity training while using Microsoft Outlook as their scheduling
tool. We teach them how to prioritize tasks, messages, and
appointments to achieve what is most important to the organization and
themselves. In addition, we teach participants how to gain control of
competing demands on their time from email, voice mail, meetings, and
interruptions, plus we teach them a goal-setting process to become more
motivated and productive.
FOCUS:
Achieving Your Highest Priorities—IBM® Lotus
Notes®
Edition
The same
as the workshop for Microsoft Outlook above, this workshop also teaches
participants to apply the principles from our productivity training while using
IBM Lotus Notes as their scheduling tool. Participants learn to stay
focused and effective by integrating IBM Lotus Notes, paper, and PDA-type
productivity tools together; apply a planning process that gets better business
results; reduce stress by recognizing and eliminating distractions and
low-priority activities; and achieve balance and renewal, while avoiding burnout
and frustration.
Project
Management™ (One- and Two-Day Program)
Our
Project Management solution teaches a four-step process for managing projects,
large or small. This approach helps project managers and their teams
craft and deliver high-quality projects on time and within
budget. This solution is taught as a one- or two-day, facilitator-led
process, and encourages attendees to focus on their own current projects for a
hands-on experience.
Writing
Advantage™
The
FranklinCovey Writing
Advantage program teaches participants how to set quality writing
standards that help people increase productivity, resolve issues, avoid errors,
and heighten credibility. Participants learn a four-step process to
improve their writing skills. They learn how to write faster with
more clarity, and gain skills for revising and fine-tuning every style of
document.
Technical
Writing Advantage™
FranklinCovey’s
Technical Writing
Advantage program teaches participants the skills to improve the quality,
clarity, structure, and expected results of their technical
communication. This program teaches participants to take complex
ideas and make them understandable and memorable in written form.
Presentation
Advantage™
With our
Presentation Advantage
solution, participants learn how to craft presentations around essential
objectives, present key concepts and ideas with power and enthusiasm, design and
present effective visuals, and employ techniques for polishing and mastering
presentation delivery.
Meeting
Advantage™
The
FranklinCovey Meeting
Advantage solution teaches participants to plan effectively by
frontloading before a meeting, focusing productively during the meeting, and
following through successfully after the meeting.
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4.
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Winning
Customer Loyalty®
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Our
Winning Customer Loyalty practice helps leaders of multiunit organizations
create a culture where employees are engaged and equipped to deliver great
customer experiences. To do this, customer loyalty specialists draw
from an array of offerings to craft a solution that works with each company’s
culture, operating environment, and strategic vision. A typical
solution includes these components:
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·
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Customer
scores. Customer-satisfaction and loyalty scores for
every unit, every month.
|
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·
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Employee
scores. A targeted employee survey that gauges each
unit’s “Execution Quotient” (xQ), or the conditions required for an
engaged and focused workforce.
|
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·
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Loyalty
Portal. A Web-based dashboard that allows every unit to
see their scores, reach out to customers, and manage their team’s focus on
the key activities that drive customer
loyalty.
|
|
·
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“Lead measure”
identification. Our most senior consultants guide the
senior team through a “lead measure” identification process where, through
a combination of best practices
and
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strategic
assessments, key activities are identified that become the drivers of a
memorable customer experience.
|
·
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Systems
alignment. We help the senior team to align
compensation, training, and other systems around the most critical goals
and remove operational barriers to
execution.
|
|
·
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Manager
certification. Unit-level managers are certified to
engage their teams around their scores, lead measures, and key
activities.
|
|
·
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Frontline
training. We provide training in key areas such as
scoreboarding, focus and execution, leadership, and creating a culture of
service. Much of this training, as well as supportive tools, is
delivered to each unit through the Loyalty
Portal.
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5.
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Trust
|
We
believe that trust is the hallmark of effective leaders, teams, and
organizations. Trust-related problems like bureaucracy, fraud, and
excessive turnover discourage productivity, divert resources, and chip away at a
company’s brand. On the other hand, leaders who make building trust
an explicit goal of their job gain strategic advantages—accelerating growth,
enhancing innovation, improving collaboration and execution, and increasing
shareholder value. Our Trust practice is built on The New York Times
best-selling book, The Speed
of Trust by Stephen M. R. Covey, and includes offerings to help leaders
and team members develop the competencies to make trust a strategic
advantage.
Leading
at the Speed of Trust™
This
program engages leaders at all levels in identifying and closing the trust gaps
in their organization. Instead of paying “trust taxes,” organizations
can begin to realize “trust dividends.” We believe that doing
business at the “speed of trust” lowers costs, speeds up results, and increases
profits and influence. Our Leading at the Speed of Trust
solution is designed to help leaders:
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·
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Make
building trust an explicit goal of their
work.
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·
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Learn
how others perceive their trustworthiness from their personal tQ™ (Trust
Quotient) Report.
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·
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Understand
the real, measurable “trust taxes” they may be paying without realizing
it.
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·
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Change
“trust taxes” to “trust dividends,” which are the benefits that come from
growing relationships of trust.
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·
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Make
action plans to build trust accounts with all key
stakeholders.
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|
·
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Begin
using the language of trust as an important cultural
lever.
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Working
at the Speed of Trust™—For Associates
This
workshop helps individual contributors identify and address “trust gaps” in
their personal credibility and in their relationships at work. Using
examples from their work and focusing on real-world issues, participants
discover how to communicate transparently with peers and managers, improve their
track record of keeping commitments, focus on improving internal “customer
service” with others who depend on their work, and much more. Our
Working at the Speed of
Trust solution is designed to help associates:
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·
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Increase
personal credibility.
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|
·
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Exhibit
behaviors that increase trust.
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|
·
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Increase
trust with key stakeholders.
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·
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Create
an environment of high trust that will increase creativity, innovation,
and a greater commitment to achieving
results.
|
|
6.
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Sales
Performance
|
We
believe that sales performance is about helping clients
succeed. FranklinCovey provides an approach that delivers the “what
to do” and “how to do” for mutual seller/buyer benefits. Through
consulting, training, and coaching, our Sales Performance practice
helps sales leaders and salespeople act as genuine trusted business advisors who
create value and help clients succeed.
Helping
clients succeed is a mind-set, skill-set, and tool-set for becoming
client-centered. It is a way of thinking, being, and
behaving. We believe that it removes the stigmas that come with
sales,
and we
believe that it removes the adversarial interplay between sellers and
buyers. It is also a process for creating candid dialogue, fresh
thinking, innovative collaboration, insightful decision making, and robust
execution—with clients and within an organization.
The
acronym INORDER represents the underlying sales methodology we use in Helping Clients
Succeed. Each module in the methodology represents a different
stage in the sales process, starting from the front end with Initiating New
Opportunities (INO) and Qualifying Opportunities (ORD), then closing at the back
end with Winning and Growing Opportunities (ER). With our suite of
consultative sales-training solutions, we believe clients can transform their
salespeople into trusted business advisors who focus on helping their clients
succeed, resulting in increased sales, shortened sales cycles, improved margins,
and satisfied clients.
|
7.
|
Education
Solutions
|
The
FranklinCovey Education
Solutions practice is dedicated to helping educational organizations
build the culture that will produce great results. Our offerings address all
grade levels and help faculty and students develop the critical leadership and
effectiveness skills they will need to succeed in a knowledge-based, networked
world.
Primary
Education Solutions: The Leader in Me®
The Leader in Me process is
designed to be integrated into a school’s core curriculum and everyday
language. The methodology is designed to become part of the culture,
gain momentum, and help to produce improved results year after
year. We believe the methodology benefits schools and students in the
following ways:
|
·
|
Develops
students who have the skills and self-confidence to succeed as leaders in
the 21st century.
|
|
·
|
Decreases
discipline referrals.
|
|
·
|
Teaches
and develops character and leadership through existing core
curriculum.
|
|
·
|
Improves
academic achievement.
|
|
·
|
Raises
levels of accountability and engagement among both parents and
staff.
|
The Leader in Me process also
helps create a common language within a school, built on principle-based
leadership skills found in Dr. Stephen R. Covey’s best-selling book The 7 Habits of Highly Effective
People, and is designed to produce a holistic school-wide experience for
primary school teachers and their classrooms that proceeds in several
phases:
Phase 1: Faculty
Development
Through
facilitated peer-to-peer discussion, videos, and learning exercises, teachers
and administrators will:
|
·
|
Explore
and create a guiding vision for what “greatness” means within the culture
of their school.
|
|
·
|
Learn
and internalize the 7 Habits and understand how to apply the principles in
their classrooms.
|
|
·
|
Study
other schools that have integrated the 7 Habits and other leadership and
quality tools.
|
|
·
|
Become
certified to deliver The
7 Habits of Highly Effective People® training as a means of ongoing
professional development.
|
Phase 2: Implementation
Training
In this
phase, teachers and administrators will learn how to:
|
·
|
Integrate
the 7 Habits and other leadership principles into the school’s curriculum
and culture.
|
|
·
|
Apply
The Leader in Me
process to develop the specific 21st-century competencies students will
need to succeed at school, in their future careers, and in
life.
|
Phase 3: Classroom
Implementation
The Leader in Me includes
several tools to assist educators, students, and parents in implementation
during the first year, as well as reinforcing the process in following
years.
|
·
|
The Leader in Me Web
Community— www.TheLeaderInMe.org—features cross-curricular lesson plans,
award-winning videos, assessments, and a forum for educators, as well as
fun activities for students.
|
|
·
|
Student
Activity Guides for Lower/Upper Elementary and Annotated Teacher’s
Editions.
|
|
·
|
The 7 Habits of Happy
Kids™ poster set.
|
|
·
|
The 7 Habits of Happy
Kids book by Sean Covey.
|
|
·
|
The Leader in Me book
by Stephen R. Covey.
|
Secondary
Education Solutions: The 7 Habits of Highly Effective Teens®
The Introduction to The 7 Habits of
Highly Effective Teens® workshop from FranklinCovey, based on the
best-selling book of the same name by Sean Covey and the No. 1 best-selling
business book The 7 Habits of
Highly Effective People, gives young people a set of tools to deal with
life’ challenges. The training is a means for educators,
administrators, and superintendents to help improve student performance; reduce
conflicts, disciplinary problems, and truancy; and enhance cooperation and
teamwork among parents, teens, and teachers.
The 7 Habits of Highly Effective
Teens are essentially seven characteristics that many happy and
successful teens the world over have in common. The training provides
students with a step-by-step framework for boosting self-image, building
friendships, resisting peer pressure, achieving goals, improving communication
and relationships with parents, and much more. The habits build upon
each other and foster behavioral change and improvement from the inside
out.
We also
offer a workshop built around the book The 6 Most Important Decisions
You’ll Ever Make, also by Sean Covey. This book helps students
work through important and life-changing questions. This workshop is
designed to be flexible so it can fit a classroom or school-wide
schedule.
Higher
Education Solutions: Introduction to the 7 Habits of Highly Effective College
Students™
We
believe that undergraduates who start their freshman year with a plan are more
likely to complete their education and have successful careers. The 7 Habits of Highly Effective
College Students helps students succeed by discovering their personal
mission, setting goals, prioritizing tasks, and teaming with
others.
This
workshop contains eight hours of instructional material, which can be taught in
a one day or modular format. Facilitators lead programs through
instruction, multimedia presentations, and activities that provide students with
a forum in which to reflect individually, apply the content, and get to know
each other. Clients can become licensed to train their own students
onsite, or have our facilitators present a custom program on their
campus.
|
8.
|
E-Learning
|
Our E-Learning practice brings
the best of FranklinCovey to clients in innovative ways that transcend
traditional e-learning solutions. Clients get the quality experience
they expect from FranklinCovey in ways that allow them to reach their employees
throughout the world.
FranklinCovey
InSights™
We
believe that some of the best development happens when leaders teach their own
teams. FranklinCovey InSights represents a new paradigm of “Teach to
Learn” leadership. This library of bite-sized, Web-based learning
modules is built around our award-winning video presentations that leaders can
use to motivate their teams to improve performance. Designed to
address generational learning styles, the modules teach people to see and do
things differently, enabling teams to produce better results and make changes
over time.
LiveClicks™
LiveClicks is our webinar
delivery platform that allows clients to reach more people at less cost with
high-quality live training. LiveClicks webinar workshops
utilize our award-winning videos, interactive activities, and live instruction.
LiveClick webinars are
offered to the public with our consultants and client facilitators, who can also
become certified to teach LiveClicks webinars inside
their organizations.
The LiveClicks platform allows
clients to train more people, reach remote workers, and attract a new generation
of workers. Finally, LiveClicks can help
organizations stay green by reducing the carbon impact of travel. Our
LiveClicks titles
include:
|
·
|
Time
Management for Microsoft® Outlook®: Increasing Your Productivity Through
the Effective Use of Outlook™
|
|
·
|
Time
Management for IBM® Lotus Notes®: Increasing Your Productivity Through the
Effective Use of IBM Lotus Notes™
|
|
·
|
Resolving
Generational Conflict: Understanding and Navigating Generational
Differences at Work™
|
|
·
|
The
Diversity Advantage: Leveraging Differences at Work for Great
Results™
|
|
·
|
The
Speed of Trust® Series—Relationship
Trust
|
|
·
|
The
Speed of Trust® Series—Self Trust
|
|
·
|
The
7 Habits® for Managers Series
|
|
·
|
Be
Proactive®: Using Your Resourcefulness and Initiative to Get Things
Done
|
|
·
|
The
7 Habits® for Managers Series
|
|
·
|
Begin
With the End in Mind®: Defining Your Contribution and Leading With
Purpose
|
|
·
|
Project
Management Fundamentals: Managing Projects That
Succeed™
|
|
·
|
Business
Writing Skills: Getting Your Point Across With Power and
Influence™
|
The
7 Habits Interactive® Edition
The
award-winning 7 Habits of
Highly Effective People—Interactive Edition helps employees, regardless
of work location, to increase their effectiveness and productivity and feel a
stronger sense of cohesion. The 7 Habits Interactive
Edition heightens learning by helping participants to apply principles
that are designed to yield greater productivity, improved communication,
strengthened relationships, increased influence, and an improved focus on
critical priorities. During the three-hour online instruction,
participants engage in interactive exercises that illustrate how to use the 7
Habits in real work situations. Participants can then test their new
skills in a virtual simulation that shows the real-world triumphs and challenges
associated with the choices they have made. Participants can also
join a live one-day application workshop to study the content in more depth, and
practice what they have learned.
|
9.
|
Custom
Solutions
|
Whether
clients need a program customized, or require a new product developed for their
organization, our Custom
Client solutions has the process to build the
solution. Customization builds upon our existing content and clients’
unique content by using a specific process to deliver results. Our
five-step process, as outlined below, lowers development costs and strives to
improve our clients’ return on investment:
Diagnose
|
·
|
Identify
key stakeholder needs.
|
|
·
|
Identify
challenges and logistics.
|
|
·
|
Identify
audience, culture, budget, timeline, and success
measures.
|
Design
|
·
|
Clarify
learning objectives and priorities.
|
|
·
|
Confirm
audience and stakeholder needs.
|
|
·
|
Brainstorm
content alignment with learning
objectives.
|
Develop
|
·
|
Create
content for all deliverables.
|
|
·
|
Facilitate
client reviews.
|
|
·
|
Incorporate
changes.
|
|
·
|
Prepare
final materials.
|
Deliver
|
·
|
Training
delivered by training
professionals.
|
Learn
|
·
|
Gather
post-project feedback.
|
|
·
|
Define
areas of improvement and incorporate into the
process.
|
|
10.
|
Media
Publishing
|
Our Media
Publishing practice extends our influence into both traditional publishing and
new media channels. FranklinCovey Media Publishing offers books,
e-books, audio products, downloadable and paper-based tools, and content-rich
software applications for smart phones and other handheld devices (like the
Apple® iPhone®) to consumer and corporate markets.
Industry
Information
According
to the Training
Magazine 2009 Training Industry Survey, the total size of the U.S.
training industry is estimated to be $52.2 billion, which is down $4.0 billion
compared to the prior year, primarily due to prevailing economic
conditions. We are engaged in the performance skills segment of the
training industry. One of our competitive advantages in this highly
fragmented industry stems from our fully integrated training curricula,
measurement methodologies, and implementation tools to help organizations and
individuals measurably improve their effectiveness. This advantage
allows us to deliver not only training to both corporations and individuals, but
also to implement the training through the use of powerful behavior changing
tools with the capability to then measure the impact of the delivered training
and tools.
Over our
history, we have provided products and services to 97 of the Fortune 100
companies and more than 75 percent of the Fortune 500 companies. We
also provide products and services to a number of U.S. and foreign governmental
agencies, as well as numerous educational institutions. In addition,
we provide training curricula, measurement services and implementation tools
internationally, either through directly operated offices, or through
independent licensed providers.
Segment
Information
Prior to
the sale of CSBU in the fourth quarter of fiscal 2008, our business was
organized in two segments: (1) the CSBU, which was designed to sell products to
individual consumers and small businesses; and (2) the Organizational Solutions
Business Unit (OSBU), which was designed to serve organizational
clients. Following the sale of CSBU, the Company’s operations are
grouped into one operating segment. The following table sets forth,
for the fiscal periods indicated, the Company’s sales to external customers
based on prior segments for comparability purposes (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
Percent
change from prior year
|
2008
|
Percent
change from prior year
|
2007
|
|||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||
|
Domestic
|
$ | 83,193 | (16 | ) | $ | 99,308 | - | $ | 99,248 | |||||||||||
|
International
|
43,369 | (14 | ) | 50,179 | (3 | ) | 51,734 | |||||||||||||
| 126,562 | (15 | ) | 149,487 | (1 | ) | 150,982 | ||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||
|
Retail
|
- | (100 | ) | 42,167 | (22 | ) | 54,316 | |||||||||||||
|
Consumer
direct
|
- | (100 | ) | 38,662 | (19 | ) | 48,018 | |||||||||||||
|
Wholesale
|
- | (100 | ) | 16,970 | (6 | ) | 17,991 | |||||||||||||
|
CSBU
International
|
- | (100 | ) | 7,259 | (1 | ) | 7,342 | |||||||||||||
|
Other
CSBU
|
- | (100 | ) | 2,177 | (35 | ) | 3,336 | |||||||||||||
| - | (100 | ) | 107,235 | (18 | ) | 131,003 | ||||||||||||||
|
Total
operating segments
|
126,562 | (51 | ) | 256,722 | (9 | ) | 281,985 | |||||||||||||
|
Leasing
|
3,556 | 44 | 2,471 | 15 | 2,140 | |||||||||||||||
|
Total
consolidated sales
|
$ | 130,118 | (50 | ) | $ | 259,193 | (9 | ) | $ | 284,125 | ||||||||||
Additional
financial information related to our operating segments, as well as geographical
information can be found in the notes to our consolidated financial statements
(Note 20).
Clients
We have a
relatively broad base of organizational and individual clients. In
North America, we have more than 4,100 organizational clients consisting of
corporations, governmental agencies, educational institutions, and other
organizations. We have additional organizational clients throughout
the world, and we believe that our products, workshops, and seminars encourage
strong client loyalty. Employees in each of our domestic and
international distribution channels focus on providing timely and courteous
responses to client requests and inquiries. Due to the nature of our
business, we do not have a significant backlog of firm orders.
Competition
We
operate in a highly competitive and rapidly changing global marketplace and
compete with a variety of organizations that offer services comparable with
those that we offer. Competition in the performance skills training
and education industry is highly fragmented with few large
competitors. Based upon our fiscal 2009 consolidated sales of $130.1
million, we believe that we are a leading competitor in the organizational
training and education market. Other significant competitors in the
training market are Development Dimensions International, Institute for
International Research (IIR), Organizational Dynamics Inc., American Management
Association, Wilson Learning, Forum Corporation, EPS Solutions, and the Center
for Creative Leadership.
We derive
our revenues from a variety of companies with a broad range of sales volumes,
governments, educational institutions, and other institutions. We
believe that the principal competitive factors in the industry in which we
compete include the following:
|
·
|
Quality
of services and solutions
|
|
·
|
Skills
and capabilities of people
|
|
·
|
Innovative
training and consulting services combined with effective
products
|
|
·
|
Ability
to add value to client operations
|
|
·
|
Reputation
and client references
|
|
·
|
Price
|
|
·
|
Availability
of appropriate resources
|
|
·
|
Global
reach and scale
|
Given the
relative ease of entry in our training market, the number of our competitors
could increase, many of whom may imitate existing methods of distribution, or
could offer similar products and seminars at lower prices. Some of
these competitors may have greater financial and other resources than
us. However, we believe our curriculum based upon best-selling books,
which encompasses relevant high-quality video segments, has become a competitive
advantage. This advantage is strengthened and enhanced by our ability
to easily train individuals within organizations to become client facilitators
who in turn can effectively relay our curriculum throughout their
organization. Moreover, we believe that we are a market leader in the
United States in execution, leadership, and individual effectiveness training,
consulting and products. Increased competition from existing and
future competitors could, however, have a material adverse effect on our sales
and profitability.
Seasonality
Our
quarterly results of operations reflect minor seasonal trends primarily because
of the timing of corporate training, which is not typically scheduled as heavily
during holiday and vacation periods.
Quarterly
fluctuations may also be affected by other factors including the introduction of
new offerings, the addition of new organizational customers, and the elimination
of underperforming offerings.
Manufacturing and
Distribution
Following
the sale of CSBU in fiscal 2008, we no longer manufacture a significant portion
of our products. We purchase our training materials and related
products from various vendors and suppliers located both domestically and
internationally, and we are not dependent upon any one vendor for the production
of our training and related materials as the raw materials for these products
are readily available. We currently believe that we have good
relationships with our suppliers and contractors.
During
fiscal 2001, we entered into a long-term contract with Electronic Data Systems
(EDS) to provide warehousing and distribution services for our training products
and related accessories. EDS maintains a facility at the Company’s
headquarters as well as at other locations throughout North
America.
Trademarks, Copyrights, and
Intellectual Property
Our
success has resulted in part from our proprietary curriculum, methodologies, and
other intellectual property rights. We seek to protect our
intellectual property through a combination of trademarks, copyrights, and
confidentiality agreements. We claim rights for over 95 trademarks in
the United States and have obtained registration in the United States and many
foreign countries for many of our trademarks including FranklinCovey, The 7 Habits of
Highly Effective People, Principle–Centered Leadership, The 4 Disciplines of
Execution, PlanPlus, The 7 Habits, and The 8th Habit. We
consider our trademarks and other proprietary rights to be important and
material to our business.
We own
sole or joint copyrights on our planning systems, books, manuals, text and other
printed information provided in our training seminars and other electronic media
products, including audio tapes and video tapes. We license, rather
than sell, facilitator workbooks and other seminar and training materials in
order to protect our intellectual property rights therein. We place
trademark and copyright notices on our instructional, marketing, and advertising
materials. In order to maintain the proprietary nature of our product
information, we enter into written confidentiality agreements with certain
executives, product developers, sales professionals, training consultants, other
employees, and licensees. Although we believe the protective measures
with respect to our proprietary rights are important, there can be no assurance
that such measures will provide significant protection from
competitors.
Employees
One of
our most important assets is our people. The diverse and global
makeup of our workforce allows us to serve a variety of clients on a worldwide
basis. We are committed to attracting, developing, and retaining
quality personnel and actively strive to reinforce our employees’ commitments to
our clients, culture, and values through creation of a motivational and
rewarding work environment.
At August
31, 2009, we had over 600 full- and part-time associates located in the United
States of America, Canada, Japan, the United Kingdom, and
Australia. During fiscal 2001, we outsourced a significant part of
our information technology services, customer service, distribution and
warehousing operations to EDS. A number of our former employees
involved in these operations are now employed by EDS to provide those services
to FranklinCovey. None of our associates are represented by a union
or other collective bargaining group. Management believes that its
relations with its associates are good and we do not currently foresee a
shortage in qualified personnel needed to operate our business.
Available
Information
The
Company’s principal executive offices are located at 2200 West Parkway
Boulevard, Salt Lake City, Utah 84119-2331, and our telephone number is (801)
817-1776.
We
regularly file reports with the Securities Exchange Commission
(SEC). These reports include, but are not limited to, Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
security transaction reports on Forms 3, 4, or 5. The public may read
and copy any materials that the Company files with the SEC at the SEC’s Public
Reference Room located at 100 F Street, NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic
versions of the Company’s reports, proxy and information statements, and other
information that the Company files with the SEC on its website at www.sec.gov.
The
Company makes our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
current reports on Form 8-K, and other reports filed or furnished with the SEC
available to the public, free of charge, through our website at www.franklincovey.com. These
reports are provided through our website as soon as is reasonably practicable
after we file or furnish these reports with the
SEC.
ITEM 1A. RISK FACTORS
Our
business environment, current domestic and international economic conditions,
and other specific risks may affect our future business decisions and financial
performance. The matters discussed below may cause our future results
to differ from past results or those described in forward-looking statements and
could have a material adverse effect on our business, financial condition,
liquidity, results of operations, and stock price, and should be considered in
evaluating our Company.
The
following list of potential risks does not contain the only risks currently
facing us. Additional business risks and uncertainties that are not
presently known to us or that are not currently believed to be material may also
harm our business operations and financial results in future
periods.
Our
results of operations could be adversely affected by economic and political
conditions and the effects of these conditions on our clients’ businesses and
their levels of business activity.
Global
economic and political conditions affect our clients’ businesses and the markets
in which they operate. A serious and/or prolonged economic downturn
combined with a negative or uncertain political climate could adversely affect
our clients’ financial condition and the business activity of our
clients. These conditions may reduce the demand for our services and
solutions or depress the pricing of those services and have a material adverse
impact on our results of operations. Changes in global economic
conditions may also shift demand to services for which we do not have
competitive advantages, and this could negatively affect the amount of business
that we are able to obtain. Such economic, political, and client
spending conditions are influenced by a wide range of factors that are beyond
our control and that we have no comparative advantage in
forecasting. If we are unable to successfully anticipate these
changing conditions, we may be unable to effectively plan for and respond to
those changes, and our business could be adversely affected.
Our
business success also depends in part upon continued growth in the use of
training and consulting services in business by our current and prospective
clients. In challenging economic environments, our clients may reduce
or defer their spending on new services and consulting solutions in order to
focus on other priorities. At the same time, many companies have
already invested substantial resources in their current means of conducting
their business and they may be reluctant or slow to adopt new approaches that
could disrupt existing personnel and/or processes. If the growth in
the general use of training and consulting services in business or our clients’
spending on these items declines, or if we cannot convince our clients or
potential clients to embrace new services and solutions, our results of
operations could be adversely affected.
In
addition, our business tends to lag behind economic cycles and, consequently,
the benefits of an economic recovery following a period of economic downturn may
take longer for us to realize than other segments of the economy.
We
operate in an intensely competitive industry and our competitors may develop
courses that adversely affect our ability to sell our offerings.
The
training and consulting services industry is intensely competitive with
relatively easy entry. Competitors continually introduce new programs
and services that may compete directly with our offerings or that may make our
offerings uncompetitive or obsolete. Larger and better capitalized
competitors may have superior abilities to compete for clients and skilled
professionals, reducing our ability to deliver quality work to our
clients. In
addition,
one or more of our competitors may develop and implement training courses or
methodologies that may adversely affect our ability to sell our curricula and
products to new clients. Any one of these circumstances could have a
material adverse effect on our ability to obtain new business and successfully
deliver our services and solutions.
Our
results of operations may be negatively affected if we cannot expand and develop
our services and solutions in response to client demand or if newly developed or
acquired services have increased costs.
Our
success depends upon our ability to develop and deliver services and consulting
solutions that respond to rapid and continuing changes in client
needs. We may not be successful in anticipating or responding to
these developments on a timely basis, and our offerings may not be successful in
the marketplace. The implementation, acquisition, and introduction of
new programs and solutions may reduce sales of our other existing programs and
services and may entail more risk than supplying existing offerings to our
clients. Newly developed or acquired solutions may also require
increased royalty payments or carry significant development costs that must be
expensed. In addition, the introduction of new or competing offerings
by current or future competitors may render one or more of our offerings
obsolete. Any one of these circumstances may have an adverse impact
upon our business and results of operations.
Our
business could be adversely affected if our clients are not satisfied with our
services.
The
success of our business model significantly depends on our ability to attract
new work from our base of existing clients, as well as new work from prospective
clients. Our business model also depends on the relationships our
senior executives and sales personnel develop with our clients so that we can
understand our clients’ needs and deliver services and solutions that are
specifically tailored to those needs. If a client is not satisfied
with the quality of work performed by us, or with the type of services or
solutions delivered, then we may incur additional costs to remediate the
situation, the profitability of that work might be decreased, and the client’s
dissatisfaction with our services could damage our ability to obtain additional
work from that client. In particular, clients that are not satisfied
might seek to terminate existing contracts prior to their scheduled expiration
date and could direct future business to our competitors. In
addition, negative publicity related to our client relationships, regardless of
its accuracy, may further damage our business by affecting our ability to
compete for new contracts with current and prospective clients.
Our
profitability could suffer if we are unable to control our operating
costs.
Our
future success and profitability depend in part on our ability to achieve an
appropriate cost structure and to improve our efficiency in the highly
competitive services industry in which we compete. In the current
economic environment, which has had an adverse impact on our sales performance,
our ability to control our operating costs and reduce these costs in light of
decreasing sales has increased significance. We regularly monitor our
operating costs and develop initiatives and business models that impact our
operations and are designed to improve our profitability. Our recent
initiatives have included revisions to existing processes and procedures, asset
sales, headcount reductions, exiting non-core businesses, redemptions of
preferred stock, and other internal initiatives designed to reduce our operating
costs. If we are unable to achieve targeted business model cost
levels and manage our costs and processes to produce additional efficiencies,
our competitiveness and profitability could decrease.
Our
profitability will suffer if we are not able to maintain our pricing and
utilization rates.
Our
profit margin on our services and solutions is largely a function of the rates
we are able to recover for our services and the utilization, or chargeability,
of our trainers, client partners, and consultants. Accordingly, if we
are unable to maintain sufficient pricing for our services or an appropriate
utilization rate for our training professionals without corresponding cost
reductions, our profit margin and overall profitability will
suffer. The rates that we are able to recover for our services are
affected by a number of factors, including:
|
·
|
Our
clients’ perceptions of our ability to add value through our programs and
products
|
|
·
|
Competition
|
|
·
|
General
economic conditions
|
|
·
|
Introduction
of new programs or services by us or our
competitors
|
|
·
|
Our
ability to accurately estimate, attain, and sustain engagement sales,
margins, and cash flows over longer contract
periods
|
Our
utilization rates are also affected by a number of factors,
including:
|
·
|
Seasonal
trends, primarily as a result of scheduled
training
|
|
·
|
Our
ability to forecast demand for our products and services and thereby
maintain an appropriate headcount in our employee
base
|
|
·
|
Our
ability to manage attrition
|
During
recently completed periods we have maintained favorable utilization
rates. However, there can be no assurance that we will be able to
maintain favorable utilization rates in future periods. Additionally,
we may not achieve a utilization rate that is optimal for us. If our
utilization rate is too high, it could have an adverse effect on employee
engagement and attrition. If our utilization rate is too low, our
profit margin and profitability may suffer.
If
our pricing structures do not accurately anticipate the cost and complexity of
performing our services, our contracts may become
unprofitable.
We
negotiate pricing terms with our clients utilizing a range of pricing structures
and conditions. Depending on the particular contract and service to be provided,
these terms include time-and-materials pricing, fixed-price pricing, and
contracts with features of both of these pricing models. Our pricing
is highly dependent on our internal forecasts and predictions about our projects
and the marketplace, which might be based on limited data and could turn out to
be inaccurate. If we do not accurately estimate the costs and time
necessary to deliver our work, our contracts could prove unprofitable for us or
yield lower profit margins than anticipated. There is a risk that we
may under price our contracts, fail to accurately estimate the costs of
performing the work, or fail to accurately assess the risks associated with
potential contracts. In particular, any increased or unexpected
costs, delays or failures to achieve anticipated cost savings, or unexpected
risks we encounter in connection with the performance of our work, including
those caused by factors outside our control, could make these contracts less
profitable or unprofitable, which could have an adverse effect on our profit
margin.
If
we are unable to attract, retain, and motivate high-quality employees, including
training consultants and other key training representatives, we will not be able
to compete effectively and will not be able to grow our business.
Our
success and ability to grow are dependent, in part, on our ability to hire,
retain, and motivate sufficient numbers of talented people with the increasingly
diverse skills needed to serve our clients and grow our
business. Competition for skilled personnel is intense at all levels
of experience and seniority. To address this competition, we may need
to further adjust our compensation practices, which could put upward pressure on
our costs and adversely affect our profit margins. At the same time,
the profitability of our business model is partially dependent on our ability to
effectively utilize personnel with the right mix of skills and experience to
effectively deliver our programs and content. There is a risk that at
certain points in time and in certain geographical regions, we will find it
difficult to hire and retain a sufficient number of employees with the skills or
backgrounds we require, or that it will prove difficult to retain them in a
competitive labor market. If we are unable to hire and retain
talented employees with the skills, and in the locations, we require, we might
not be able to deliver our content and solutions services. If we need
to re-assign personnel from other areas, it could increase our costs and
adversely affect our profit margins.
In order
to retain key personnel, we continue to offer a variable component of
compensation, the payment of which is dependent upon our sales performance and
profitability. We adjust our compensation levels and have adopted
different methods of compensation in order to attract and retain appropriate
numbers of employees with the necessary skills to serve our clients and grow our
business. We may also use equity-based performance incentives as a
component of our executives’ compensation, which may affect amounts of cash
compensation. Variations in any of these areas of compensation may
adversely impact our operating performance.
We
depend on key personnel, the loss of whom could harm our business.
Our
future success will depend, in part, on the continued service of key executive
officers and personnel. The loss of the services of any key
individuals could harm our business. Our future success also depends
on our ability to identify, attract, and retain additional qualified senior
personnel. Competition for such individuals in our industry is
intense, and we may not be successful in attracting and retaining such
personnel.
Our
global operations pose complex management, foreign currency, legal, tax, and
economic risks, which we may not adequately address.
We have
Company-owned offices in Australia, Japan, and the United Kingdom. We
also have licensed operations in numerous other foreign countries. As
a result of these foreign operations and their growing impact upon our results
of operations, we are subject to a number of risks, including:
|
·
|
Restrictions
on the movement of cash
|
|
·
|
Burdens
of complying with a wide variety of national and local
laws
|
|
·
|
The
absence in some jurisdictions of effective laws to protect our
intellectual property rights
|
|
·
|
Political
instability
|
|
·
|
Currency
exchange rate fluctuations
|
|
·
|
Longer
payment cycles
|
|
·
|
Price
controls or restrictions on exchange of foreign
currencies
|
While we
are not currently aware of any of the foregoing conditions materially adversely
affecting our operations, these conditions, which are outside of our control,
could change at any time.
We
may experience foreign currency gains and losses.
Our sales
outside of the United States totaled $47.7 million, or 37 percent of total
sales, for the year ended August 31, 2009. If our international
operations continue to grow and become a larger component of our overall
financial results, our revenues and operating results may be adversely affected
when the dollar strengthens relative to other currencies and may be positively
affected when the dollar weakens. In order to manage a portion of our
foreign currency risk, we make limited use of foreign currency derivative
contracts to hedge certain transactions and translation
exposure. There can be no guarantee that our foreign currency risk
management strategy will be effective in reducing the risks associated with
foreign currency transactions and translation.
Our
global operations expose us to numerous and sometimes conflicting legal and
regulatory requirements, and violation of these regulations could harm our
business.
Because
we provide services to clients in many countries, we are subject to numerous,
and sometimes conflicting, legal regimes on matters as diverse as import/export
controls, content requirements, trade restrictions, tariffs, taxation,
sanctions, government affairs, internal and disclosure control obligations, data
privacy, and labor relations. Violations of these regulations in the
conduct of our business could result in fines, criminal sanctions against us or
our officers, prohibitions on doing business, and damage to our
reputation. Violations of these regulations in connection with the
performance of our obligations to our clients also could result in liability for
monetary damages, fines and/or criminal prosecution, unfavorable publicity,
restrictions on our ability to process information, and allegations by our
clients that we have not performed our contractual obligations. Due
to the varying degrees of development of the legal systems of the countries in
which we operate, local laws might be insufficient to protect our
rights.
In many
parts of the world, including countries in which we operate, practices in the
local business community might not conform to international business standards
and could violate anticorruption regulations, including the United States
Foreign Corrupt Practices Act, which prohibits giving anything of value intended
to influence the awarding of government contracts. Although we have
policies and procedures to ensure legal and regulatory compliance, our
employees, licensee operators, and agents could take actions that violate these
requirements. Violations of these regulations could subject us to
criminal or civil enforcement actions, including fines and suspension or
disqualification from United States federal procurement contracting, any of
which could have a material adverse effect on our business.
We
have only a limited ability to protect our intellectual property rights, which
are important to our success.
Our
financial success depends, in part, upon our ability to protect our proprietary
methodologies and other intellectual property. The existing laws of
some countries in which we provide services might offer only limited protection
of our intellectual property rights. To protect our intellectual
property, we rely upon a combination of trade secrets, confidentiality policies,
nondisclosure and other contractual arrangements, as well as patent, copyright,
and trademark laws to protect our intellectual property rights. The
steps we take
in this
regard might not be adequate to prevent or deter infringement or other
misappropriation of our intellectual property, and we might not be able to
detect unauthorized use of, or take appropriate and timely steps to enforce, our
intellectual property rights, especially in foreign jurisdictions.
The loss
of proprietary methodologies or the unauthorized use of our intellectual
property may create greater competition, loss of revenue, adverse publicity, and
may limit our ability to reuse that intellectual property for other
clients. Any limitation on our ability to provide a service or
solution could cause us to lose revenue-generating opportunities and require us
to incur additional expenses to develop new or modified solutions for future
engagements.
Our
work with governmental clients exposes us to additional risks that are inherent
in the government contracting process.
Our
clients include national, provincial, state, and local governmental entities,
and our work with these governmental entities has various risks inherent in the
governmental contracting process. These risks include, but are not
limited to, the following:
|
·
|
Governmental
entities typically fund projects through appropriated
monies. While these projects are often planned and executed as
multi-year projects, the governmental entities usually reserve the right
to change the scope of or terminate these projects for lack of approved
funding and at their convenience. Changes in governmental priorities or
other political developments could result in changes in scope or in
termination of our projects.
|
|
·
|
Governmental
entities often reserve the right to audit our contract costs, including
allocated indirect costs, and conduct inquiries and investigations of our
business practices with respect to our government contracts. If the
governmental entity finds that the costs are not reimbursable, then we
will not be allowed to bill for those costs or the cost must be refunded
to the client if it has already been paid to us. Findings from an audit
also may result in our being required to prospectively adjust previously
agreed upon rates for our work, which may affect our future
margins.
|
|
·
|
If
a governmental client discovers improper activities in the course of
audits or investigations, we may become subject to various civil and
criminal penalties and administrative sanctions, which may include
termination of contracts, forfeiture of profits, suspension of payments,
fines and suspensions or debarment from doing business with other agencies
of that government. The inherent limitations of internal
controls may not prevent or detect all improper or illegal activities,
regardless of their adequacy.
|
|
·
|
Political
and economic factors such as pending elections, revisions to governmental
tax policies and reduced tax revenues can affect the number and terms of
new governmental contracts signed.
|
The
occurrences or conditions described above could affect not only our business
with the particular governmental agency involved, but also our business with
other agencies of the same or other governmental
entities. Additionally, because of their visibility and political
nature, governmental projects may present a heightened risk to our
reputation. Any of these factors could have a material adverse effect
on our business or our results of operations.
Our
strategy to focus on training and consulting services may not be successful and
may not lead to the desired financial results.
During
the fourth quarter of fiscal 2008, we sold substantially all of the assets of
our Consumer Solutions Business Unit (CSBU) to a newly formed entity, Franklin
Covey Products. Although we believe the sale of the CSBU assets will
allow us to focus our resources and abilities on our services and solutions
offerings, many of the aspects of this plan, including future economic
conditions and the business strength of our clients, are not within our control,
and we may not achieve our expected financial results within our anticipated
timeframe.
Our
results of operations and cash flows may be adversely affected if Franklin Covey
Products is unable to pay the working capital settlement, reimbursable
acquisition costs, or reimbursable operating expenses.
According
to the terms of the agreements associated with the sale of the CSBU assets that
closed in the fourth quarter of fiscal 2008, we are entitled to receive a $1.2
million payment for working capital delivered on the closing date of the sale
and to receive $2.3 million as reimbursement for specified costs necessary to
complete the transaction. Payment for these costs was originally due
in January 2009, but we extended the due date of the payment at Franklin Covey
Products’ request and obtained a promissory note from Franklin Covey Products
for the amount owed, plus accrued interest.
At the
time we received the promissory note from Franklin Covey Products, we believed
that we could obtain payment for the amounts owed, based on prior year
performance and forecasted financial performance in 2009. However,
the financial position of Franklin Covey Products deteriorated significantly
late in fiscal 2009 and the deterioration accelerated subsequent to August 31,
2009. As a result of its deteriorating financial position, we
reassessed the collectibility of the promissory note. Based on
revised expected cash flows and other operational issues, we determined that the
promissory note should be impaired at August 31, 2009. Accordingly,
we recorded a $3.6 million impaired asset charge and reversed $0.1 million of
interest income that was recorded during fiscal 2009 from the working capital
settlement and reimbursable transaction cost receivables.
We
receive reimbursement for certain operating costs, such as warehousing and
distribution costs, which are billed to the Company by third party
providers. At August 31, 2009 and 2008 we had $2.0 million and $4.1
million receivable from Franklin Covey Products, which have been classified in
other current assets. If Franklin Covey Products fails to reimburse
us for these costs, and we fail to obtain payment on the promissory note, our
future cash flows will be adversely affected.
If
we are unable to collect our accounts receivable on a timely basis, our results
of operations and cash flows could be adversely affected.
Our
business depends on our ability to successfully obtain payment from our clients
of the amounts they owe us for services performed. We evaluate the
financial condition of our clients and usually bill and collect on relatively
short cycles. We maintain allowances against our receivables and
unbilled services that we believe are adequate to reserve for potentially
uncollectible amounts. However, actual losses on client balances
could differ from those that we currently anticipate and, as a result, we might
need to adjust our allowances. In addition, there is no guarantee
that we will accurately assess the creditworthiness of our
clients. Macroeconomic conditions could also result in financial
difficulties for our clients, and as a result could cause clients to delay
payments to us,
request
modifications to their payment arrangements that could increase our receivables
balance, or not pay their obligations to us. Timely collection of
client balances also depends on our ability to complete our contractual
commitments and bill and collect our invoiced revenues. If we are
unable to meet our contractual requirements, we might experience delays in
collection of and/or be unable to collect our client balances, and if this
occurs, our results of operations and cash flows could be adversely
affected. In addition, if we experience an increase in the time to
bill and collect for our services, our cash flows could be adversely
affected.
Our
strategy of outsourcing certain functions and operations may fail to reduce our
costs for these services and may increase our risks.
We have
an outsourcing contract with Electronic Data Systems (EDS) to provide
warehousing, distribution, and information system operations. Under
the terms of the outsourcing contract and its addendums, EDS provides
warehousing and distribution services and supports our various information
systems. Due to the nature of our outsourced operations, we are
unable to exercise the same level of control over outsourced functions and the
actions of EDS employees in outsourced roles as our own employees. As
a result, the inherent risks associated with these outsourced areas of operation
may be increased.
Our
outsourcing contracts with EDS also contain early termination provisions that we
may exercise under certain conditions. However, in order to exercise
the early termination provisions, we would have to pay specified penalties to
EDS depending upon the circumstances of the contract termination.
We
have significant intangible asset, goodwill, and long-term asset balances that
may be impaired if cash flows from related activities decline.
At August
31, 2009 we had $69.0 million of intangible assets, which were primarily
generated from the fiscal 1997 merger with the Covey Leadership
Center. These intangible assets are evaluated for impairment based
upon cash flows (definite-lived intangible assets) and estimated royalties from
revenue streams (indefinite-lived intangible assets). We also have
goodwill and other long-term assets that may become impaired if the
corresponding cash flows associated with these assets declines in future
periods. Although our current sales and cash flows are sufficient to
support the carrying basis of these long-lived assets, if our sales and
corresponding cash flows decline, we may be faced with significant asset
impairment charges that would have an adverse impact upon our operating margin
and overall results of operations.
In
addition, our stock price is considered to be an indicator of the reliability or
risks associated with future cash flows and we may incur impairment charges on
these intangible assets in future periods based upon our market
capitalization.
Our
business could be negatively affected if we incur legal liability in connection
with providing our solutions and services.
If we
fail to meet our contractual obligations, fail to disclose our financial or
other arrangements with our business partners, or otherwise breach obligations
to clients, we could be subject to legal liability. We may enter into
non-standard agreements because we perceive an important economic opportunity or
because our personnel did not adequately adhere to our guidelines. We
may also find ourselves committed to providing services that we are unable to
deliver or whose delivery will cause us financial loss. If we cannot,
or do
not,
perform our obligations, we could face legal liability, and our contracts might
not always protect us adequately through limitations on the scope of our
potential liability. If we cannot meet our contractual obligations to
provide services and solutions, and if our exposure is not adequately limited
through the terms of our agreements, then we might face significant legal
liability, and our business could be adversely affected.
Failure
to comply with the terms and conditions of our credit facility may have an
adverse effect upon our business and operations.
Our line
of credit facility requires us to be in compliance with customary non-financial
terms and conditions as well as specified financial ratios. Failure
to comply with these terms and conditions or maintain adequate financial
performance to comply with specific financial ratios entitles the lender to
certain remedies, including the right to immediately call due any amounts
outstanding on the line of credit. Such events would have an adverse
effect upon our business and operations as there can be no assurance that we may
be able to obtain other forms of financing or raise additional capital on terms
that would be acceptable to us.
We
may need additional capital in the future, and this capital may not be available
to us on favorable terms or at all.
We may
need to raise additional funds through public or private debt offerings or
equity financings in order to:
|
·
|
Develop
new services, programs, or
offerings
|
|
·
|
Take
advantage of opportunities, including expansion of the
business
|
|
·
|
Respond
to competitive pressures
|
We are
currently in negotiations to renew the line of credit to ensure the future
availability of liquidity through this facility. We believe that we
will be successful in obtaining a new or extended line of credit from our
lender. Additional potential sources of liquidity include factoring
receivables, issuance of additional equity, or issuance of debt from public or
private sources. However, no assurance can be provided that we will
obtain a new or extended line of credit or obtain additional financing from
other sources on terms that would be acceptable to us. If necessary,
we will evaluate all of these options and select one or more of them depending
on overall capital needs and the associated cost of capital. If we
are unsuccessful in obtaining a renewal or extension of our line of credit, or
additional financing, we believe that cash flows from operations combined with a
number of initiatives we would implement in the months preceding the due date
will create sufficient liquidity to pay down the required outstanding balance on
the line of credit. These initiatives include deferral of capital
purchases for externally developed curriculum and uncommitted capital
expenditures; deferral of executive team compensation; deferral of certain
related party contractual royalties and earnout payments; substantial reduction
of associate salaries; reduction of operating expenses, including non-critical
travel; and deferral of payments to other vendors in order to generate
sufficient cash.
Any
additional capital raised through the sale of equity could dilute current
shareholders’ ownership percentage in us. Furthermore, we may be
unable to obtain the necessary capital on terms or conditions that are favorable
to us, or at all.
We
are the creditor for a management common stock loan program that may not be
fully collectible.
We are
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 the notes to our consolidated financial statements as
found in Item 8 of this Annual Report on Form 10-K. Our inability to
collect all, or a portion, of these receivables could have an adverse impact
upon our financial position and cash flows compared to full collection of the
loans.
We
may have exposure to additional tax liabilities.
As a
multinational company, we are subject to income taxes as well as non-income
based taxes in both the United States and various foreign tax
jurisdictions. Significant judgment is required in determining our
worldwide provision for income taxes and other tax liabilities. In
the normal course of a global business, there are many intercompany transactions
and calculations where the ultimate tax determination is
uncertain. As a result, we are routinely subject to audits by various
taxing authorities. Although we believe that our tax estimates are
reasonable, we cannot guarantee that the final determination of these tax audits
will not be different from what is reflected in our historical income tax
provisions and accruals.
We are
also subject to non-income taxes such as payroll, sales, use, value-added, and
property taxes in both the United States and various foreign
jurisdictions. We are routinely audited by tax authorities with
respect to these non-income taxes and may have exposure from additional
non-income tax liabilities.
We
could have liability or our reputation could be damaged if we do not protect
client data or if our information systems are breached.
We are
dependent on information technology networks and systems to process, transmit,
and store electronic information and to communicate among our locations around
the world and with our clients. Security breaches of this infrastructure could
lead to shutdowns or disruptions of our systems and potential unauthorized
disclosure of confidential information. We are also required at times
to manage, utilize, and store sensitive or confidential client or employee
data. As a result, we are subject to numerous U.S. and foreign
jurisdiction laws and regulations designed to protect this information, such as
the various U.S. federal and state laws governing the protection of health or
other individually identifiable information. If any person, including
any of our associates, negligently disregards or intentionally breaches our
established controls with respect to such data or otherwise mismanages or
misappropriates that data, we could be subject to monetary damages, fines,
and/or criminal prosecution. Unauthorized disclosure of sensitive or
confidential client or employee data, whether through systems failure, employee
negligence, fraud, or misappropriation could damage our reputation and cause us
to lose clients.
International
hostilities, terrorist activities, and natural disasters may prevent us from
effectively serving our clients and thus adversely affect our operating
results.
Acts of
terrorist violence, armed regional and international hostilities, and
international responses to these hostilities, natural disasters, global health
risks or pandemics, or the threat of or perceived potential for these events,
could have a negative impact on our directly owned or licensee
operations. These events could adversely affect our clients’ levels
of business activity and precipitate sudden significant changes in regional and
global economic conditions and cycles. These events also pose
significant risks to our people and to physical facilities and operations around
the world, whether the facilities are ours or those of our alliance partners or
clients. By disrupting communications and travel and increasing the
difficulty of obtaining and retaining highly skilled and qualified personnel,
these events could make it difficult or impossible for us or our licensee
partners to deliver services to clients. Extended disruptions of
electricity, other public utilities, or network services at our facilities, as
well as system failures at, or security breaches in, our facilities or systems,
could also adversely affect our ability to serve our clients. While
we plan and prepare to defend against each of these occurrences, we might be
unable to protect our people, facilities, and systems against all such
occurrences. We generally do not have insurance
for
losses
and interruptions caused by terrorist attacks, conflicts, and
wars. If these disruptions prevent us from effectively serving our
clients, our operating results could be adversely affected.
A
natural or man-made disaster in Salt Lake City, Utah could have an adverse
effect on our business.
Our
training materials and other related products are manufactured and shipped from
numerous sites located around the world. However, a significant
portion of our training materials are manufactured and shipped from facilities
located in Salt Lake City, Utah. In the event that these facilities
were severely damaged or destroyed as a result of a natural or man-made
disaster, we could suffer significant disruptions to our ability to obtain and
distribute training materials to our clients. Such events may have a
material adverse effect on our business prospects, results of operations, and
financial condition.
Our
future quarterly operating results are subject to factors that can cause
fluctuations in our stock price.
Historically,
our stock price has experienced significant volatility. We expect
that our stock price may continue to experience volatility in the future due to
a variety of potential factors that may include the following:
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·
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Fluctuations
in our quarterly results of operations and cash
flows
|
|
·
|
Increased
overall market volatility
|
|
·
|
Variations
between our actual financial results and market
expectations
|
|
·
|
Changes
in our key balances, such as cash and cash
equivalents
|
|
·
|
Currency
exchange rate fluctuations
|
|
·
|
Unexpected
asset impairment charges
|
|
·
|
Lack
of, or increased, analyst coverage
|
In
addition, the stock market has recently experienced substantial price and volume
fluctuations that have impacted our stock and other equity issues in the
market. These factors, as well as general investor concerns regarding
the credibility of corporate financial statements, may have a material adverse
effect upon our stock price in the future.
Ineffective
internal controls could impact our business and operating results.
Our
internal control over financial reporting may not prevent or detect
misstatements because of its inherent limitations, including the possibility of
human error, the circumvention or overriding of controls, or
fraud. Even effective internal controls can provide only reasonable
assurance with respect to the preparation and fair presentation of financial
statements. If we fail to maintain the adequacy of our internal
controls, including any failure to implement required new or improved controls,
or if the Company experiences difficulties in their implementation, our business
and operating results may be harmed and we could fail to meet our financial
reporting obligations.
The
Company’s use of accounting estimates involves judgment and could impact our
financial results.
Our most
critical accounting estimates are described in Management’s Discussion and
Analysis found in Item 7 of this report under the section entitled “Use of
Estimates and
Critical
Accounting Policies.” In addition, as discussed in various footnotes
to our financial statements as found in Item 8, we make certain estimates under
the provisions of SFAS No. 5, Accounting for Contingencies
(FASC 450-20), including decisions related to legal proceedings and
reserves. Because, by definition, these estimates and assumptions
involve the use of judgment, our actual financial results may differ from these
estimates.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Franklin
Covey’s executive offices are located in Salt Lake City, Utah. The
following is a summary of our properties and facilities utilized in the
operation of our business. Subsequent to the sale of our Canadian
facility in the fourth quarter of fiscal 2009, all of our facilities are
leased. Our corporate headquarters lease is accounted for as a
financing arrangement and all other facility lease agreements are accounted for
as operating leases that expire at various dates through the year
2025.
Corporate
Facilities
Corporate
Headquarters and Administrative Offices:
Salt Lake City, Utah (7
buildings)
Domestic Sales
Offices
Regional
Sales Offices:
United States (4
locations)
International
Facilities
International
Administrative/Sales Offices:
Australia (3 locations)
England (1 location)
Japan (1 location)
International
Distribution Facilities:
Australia (1 location)
England (1 location)
Japan (1 location)
New Zealand (1 location)
We
consider our existing facilities to be in good condition and suitable for our
current and anticipated level of operations in the upcoming fiscal
year.
A
significant portion of our corporate headquarters campus located in Salt Lake
City, Utah is subleased to several unrelated entities.
The
following significant developments occurred during fiscal 2009 that affected our
properties:
|
·
|
During
the fourth quarter of fiscal 2009, we completed the sale of our Canadian
administrative office and distribution facility. Following the
sale of the Consumer Solutions Business Unit in fiscal 2008, these
functions were consolidated with existing operations in the United
States.
|
ITEM 3. LEGAL PROCEEDINGS
We are
the subject of certain legal actions, which we consider routine to our business
activities. At August 31, 2009, we believe that, after consultation
with legal counsel, any potential liability under such actions will not
materially affect our financial position, liquidity, or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of our fiscal year ended August 31, 2009.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHAES OF EQUITY SECURITIES
FranklinCovey
common stock is listed and traded on the New York Stock Exchange (NYSE) under
the symbol “FC.” The following table sets forth the high and low sale
prices per share for our common stock, as reported on the NYSE, for the fiscal
years ended August 31, 2009 and 2008.
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended August 31, 2009:
|
||||||||
|
Fourth Quarter
|
$ | 7.24 | $ | 5.30 | ||||
|
Third Quarter
|
5.69 | 3.20 | ||||||
|
Second Quarter
|
6.05 | 3.61 | ||||||
|
First Quarter
|
9.45 | 4.02 | ||||||
|
Fiscal
Year Ended August 31, 2008:
|
||||||||
|
Fourth Quarter
|
$ | 9.32 | $ | 7.35 | ||||
|
Third Quarter
|
8.76 | 6.72 | ||||||
|
Second Quarter
|
8.00 | 6.86 | ||||||
|
First Quarter
|
7.75 | 5.91 | ||||||
We did
not pay or declare dividends on our common stock during the fiscal years ended
August 31, 2009 or 2008. We currently anticipate that we will retain
all available funds to repay our line of credit obligation, finance future
growth and business opportunities, and to purchase shares of our common
stock. We do not intend to pay cash dividends on our common stock in
the foreseeable future.
During
August 2008, we completed a modified “Dutch Auction” tender offer in which we
were able to purchase 3,027,027 shares of our common stock for $9.25 per share
plus costs necessary to conduct the tender offer. We did not acquire
a significant amount of our common stock during the fiscal year ended August 31,
2009.
As of
November 2, 2009, the Company had 16,960,319 shares of common stock outstanding,
which were held by 385 shareholders of record.
Purchases
of Common Stock
The
following table summarizes Company purchases of common stock during the fiscal
quarter ended August 31, 2009:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Dollar Value of Shares That May Yet Be Purchased Under the Plans or
Programs
(in
thousands)
|
|||||||||
|
May
31, 2009 to July 4, 2009
|
- | $ | - |
none
|
$ | 2,413 | |||||||
|
July
5, 2009 to August 1, 2009
|
- | - |
none
|
2,413 | |||||||||
|
August
2, 2009 to August 31, 2009
|
- | - |
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 previous
authorized common stock purchase plans were canceled. Following
the approval of this common stock purchase plan, we have purchased a total
of 1,009,300 shares of our common stock for $7.6 million through August
31, 2009 under the terms of this
plan.
|
Performance
Graph
The
following graph shows a comparison of cumulative total shareholder return
indexed to August 31, 2004, calculated on a dividend reinvested basis, for the
five fiscal years ended August 31, 2009 for Franklin Covey Co. common stock, the
S&P SmallCap 600 Index, and the S&P Commercial & Professional
Services Index. We were previously included in the S&P 600
SmallCap Index and was assigned to the S&P Diversified Commercial and
Professional Services Index within the S&P 600 SmallCap
Index. However, during fiscal 2009, the Diversified Commercial
Services Index was discontinued, and we have determined that the S&P 600
Commercial & Professional Services Index is appropriate for comparative
purposes. The Company believes that if it were included in an index
it would be included in the indices where it was previously listed, which would
include the Commercial & Professional Services Index. We are no
longer a part of the S&P 600 SmallCap Index, but we believe that the S&P
600 SmallCap Index and the Commercial and Professional Services Index continue
to provide appropriate benchmarks with which to compare our stock
performance.
ITEM 6. SELECTED FINANCIAL DATA
The
selected consolidated financial data presented below should be read in
conjunction with the consolidated financial statements of Franklin Covey and the
related footnotes as found in Item 8 of this report on Form 10-K.
While
closing the first quarter of fiscal 2009, we identified errors due to improper
accounting for certain product sales in the fourth quarter of fiscal 2008, and
the improper calculation of inventory reserves from late fiscal 2006 through the
fourth quarter of fiscal 2008 in the financial statements of our directly owned
subsidiary in Japan. We assessed these errors and determined that
they were immaterial to previously reported amounts contained in our periodic
reports and have corrected the errors through subsequent periodic filings as
prescribed by Staff Accounting Bulletin No. 108. The information
found in the table below has been adjusted to reflect the correction of these
errors at our Japan subsidiary. For further information regarding
these errors, refer to Note 2 to the consolidated financial
statements.
During
fiscal 2008, we sold substantially all of the assets of our Consumer Solutions
Business Unit (CSBU), which was primarily responsible for the sale of our
products to consumers. Based upon applicable accounting guidance, the
operations of CSBU did not qualify for discontinued operations presentation, and
therefore, no prior periods were adjusted to reflect the sale of the CSBU
assets.
|
August
31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
In
thousands, except per share data
|
||||||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 130,118 | $ | 259,193 | $ | 284,125 | $ | 278,623 | $ | 283,542 | ||||||||||
|
Income
(loss) from operations
|
(11,439 | ) | 15,999 | 17,711 | 13,981 | 8,443 | ||||||||||||||
|
Net
income (loss) before income taxes
|
(14,461 | ) | 13,073 | 15,292 | 13,566 | 9,101 | ||||||||||||||
|
Income
tax benefit (provision)(1)
|
3,629 | (7,546 | ) | (7,827 | ) | 14,967 | 1,085 | |||||||||||||
|
Net
income (loss)(1)
|
(10,832 | ) | 5,527 | 7,465 | 28,533 | 10,186 | ||||||||||||||
|
Net
income (loss) available to common shareholders(1)
|
(10,832 | ) | 5,527 | 5,250 | 24,148 | (5,837 | ) | |||||||||||||
|
Earnings
(loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | (.81 | ) | $ | .28 | $ | .27 | $ | 1.20 | $ | (.34 | ) | ||||||||
|
Diluted
|
$ | (.81 | ) | $ | .28 | $ | .26 | $ | 1.17 | $ | (.34 | ) | ||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Total
current assets
|
$ | 40,142 | $ | 66,661 | $ | 69,653 | $ | 87,056 | $ | 105,182 | ||||||||||
|
Other
long-term assets
|
11,608 | 11,768 | 14,542 | 12,249 | 9,051 | |||||||||||||||
|
Total
assets
|
143,878 | 177,677 | 196,181 | 216,495 | 233,233 | |||||||||||||||
|
Long-term
obligations
|
32,191 | 38,762 | 35,178 | 35,347 | 46,171 | |||||||||||||||
|
Total
liabilities
|
74,874 | 99,500 | 95,476 | 83,185 | 100,407 | |||||||||||||||
|
Preferred
stock(2)
|
- | - | - | 37,345 | 57,345 | |||||||||||||||
|
Shareholders'
equity
|
69,004 | 78,177 | 100,705 | 133,310 | 132,826 | |||||||||||||||
|
(1)
|
Net
income in fiscal 2006 includes the impact of deferred tax asset valuation
allowance reversals totaling $20.3
million.
|
|
(2)
|
During
fiscal 2007, we redeemed all remaining outstanding shares of Series A
preferred stock at its liquidation preference of $25 per share plus
accrued dividends.
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The
following management’s discussion and analysis is intended to provide a summary
of the principal factors affecting the results of operations, liquidity and
capital resources, contractual obligations, and the critical accounting policies
of Franklin Covey Co. (also referred to as the Company, we, us, our, and
FranklinCovey, unless otherwise indicated) and subsidiaries. This
discussion and analysis should be read together with our consolidated financial
statements and related notes, which contain additional information regarding the
accounting policies and estimates underlying the Company’s financial
statements. Our consolidated financial statements and related notes
are presented in Item 8 of this report on Form 10-K.
FranklinCovey
is a leading global provider of execution, leadership, and
personal-effectiveness training with over 600 employees worldwide that delivered
principle-based curriculum and effectiveness tools to our
customers. We operate globally with one common brand and business
model designed to enable us to provide clients around the world with the same
high level of service. To achieve this level of service, we operate
four regional sales offices in the United States; wholly owned subsidiaries in
Australia, Japan, and the United Kingdom; and contract with licensee partners
who deliver our curriculum and provide services in over 150 other countries and
territories around the world. Our business-to-business service
utilizes our expertise in training, consulting, and technology that is designed
to help our clients define great performance and execute at the highest
levels. We also provide clients with training in management skills,
relationship skills, and individual effectiveness, and can provide
personal-effectiveness literature and electronic educational solutions to our
clients as needed.
Historically,
our solutions included products and services that encompassed training and
consulting, assessment, and various application tools that were generally
available in electronic or paper-based formats. Our products and
services were available through professional consulting services, public
workshops, retail stores, catalogs, and the Internet at www.franklincovey.com,
and our best-known offerings in the marketplace have included 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.
Over the
past several years, the strategic focus of our Consumer Solutions Business Unit
(CSBU), which was focused primarily on sales of our products, and our
Organizational Solutions Business Unit (OSBU), which was focused on the
development and delivery of training, consulting, and related services, changed
significantly. As a consequence of these changes in strategic
direction, we determined that the extent of overlap between our training and
consulting offerings and our products had diminished. After
significant analysis and deliberation, it became apparent that these business
units would be able to operate more effectively as separate companies, each with
clear and distinct strategic objectives, market definitions, and competitive
products and services. This conclusion persuaded us to sell
substantially all of the operations of the CSBU. During the fourth
quarter of our fiscal year ended August 31, 2008, we completed the sale of the
CSBU to a newly formed entity, Franklin Covey Products, LLC and reported a gain
of $9.1 million from the transaction. Franklin Covey Products, LLC
was formed with the objective of expanding the worldwide sales of Franklin Covey
products through proprietary channels and through third-party retailers as
governed by a comprehensive license agreement with the Company.
Following
the sale of the CSBU, we have been able to focus our full resources on the
continued expansion of our training, consulting, content-rich media, and thought
leadership businesses. Our business now primarily consists of
training, consulting, assessment services, and products to help organizations
and individuals achieve superior results by focusing on and executing on top
priorities, building the capability of knowledge workers, and aligning business
processes.
The sale
of CSBU had a significant impact on our financial statements since the CSBU and
corresponding product sales represented a substantial portion of our total
sales, and the business dynamics of a training
company
are considerably different than a consumer products company. Based on
relevant accounting literature, we were unable to present the operational
results of the CSBU in a discontinued operations format, which makes comparisons
of fiscal 2009 financial results to fiscal 2008 results difficult.
The key
factors that influence our operating results include the number of organizations
that are active customers; the number of people trained within those
organizations; the availability of budgeted training spending at our clients and
prospective clients, which is significantly influenced by general economic
conditions; and our ability to manage operating costs necessary to develop and
provide meaningful training and related products to our clients.
Our
fiscal year ends on August 31, and unless otherwise indicated, fiscal 2009,
fiscal 2008, and fiscal 2007 refer to the twelve-month periods ended August 31,
2009, 2008, and 2007.
RESULTS
OF OPERATIONS
Overview
of the Fiscal Year ended August 31, 2009
Our
results of operations in fiscal 2009 were primarily affected by the sale of CSBU
and by the prevailing economic conditions in the United States and the rest of
the world. During fiscal 2009, the economies of many countries
suffered through their worst performance in recent decades as the poor health of
many financial institutions, especially in the United States, curtailed lending
and overall economic growth throughout the year. These economic
conditions forced many of our clients and potential clients to reduce budgeted
spending for training or to temporarily defer the delivery of training
services. However, during our fourth quarter of fiscal 2009, we began
to see improvement in corporate spending and the delivery of programs and
training materials improved over previous quarters in fiscal 2009. We
anticipate that this improvement will continue during fiscal 2010, but we do not
anticipate returning to pre-recession sales levels until sometime in fiscal 2011
or later.
Following
the sale of CSBU assets, we spent much of fiscal 2009 defining the business
model for the new structure of the Company, and we initiated numerous cost
savings and organizational change efforts, including movement of certain
functions to field operations to improve efficiency, headcount reductions,
reduction of information technology spending, and other initiatives designed to
bring our cost structure in line with our projected business
model. However, as a result of these initiatives, we recorded
additional costs in fiscal 2009 related to severance, asset impairments, and
other areas that we believe will provide ongoing benefits in future
periods.
For the
year ended August 31, 2009, our consolidated sales decreased to $130.1 million
compared to $259.2 million in fiscal 2008. The decrease in sales was
primarily due to the sale of the CSBU combined with effects of a weakened
economy on training sales. For the year ended August 31, 2009, we
reported a loss from operations of $11.4 million compared to income from
operations of $16.0 million, including the gain from the sale of CSBU, in fiscal
2008. Our loss before taxes was $14.5 million compared to income
before taxes of $13.0 million in the prior year. We recorded a $3.6
million income tax benefit in fiscal 2009 compared to a $7.5 million income tax
provision in fiscal 2008, primarily due to reduced pre-tax income.
The
following information is intended to provide an overview of the primary factors
that influenced our financial results for the fiscal year ended August 31,
2009:
|
·
|
Sales
Performance –
Our consolidated sales decreased $129.1 million compared to the
prior year. The vast majority of the decline was attributable
to the sale of our CSBU operations and the corresponding reduction in
product sales. Of the $129.1 million decline, $107.2 million,
or 83 percent, was attributable to product sales from the
CSBU. Sales delivered through the Organizational Solutions
Business Unit (OSBU), which are comparable to the prior year and consist
primarily of training and consulting service sales in our domestic and
international divisions, decreased $22.9 million due to sales declines in
both domestic and international
|
operations. Our
leasing revenues increased $1.1 million, which was primarily attributable to new
sublease contracts for space at our corporate headquarters campus.
|
·
|
Gross
Profit – Consolidated gross profit decreased to $80.4 million in
fiscal 2009 compared to $161.0 million in fiscal 2008 primarily due to
decreased sales as described above. However, our gross margin,
which is gross profit stated as a percentage of sales, remained relatively
consistent with the prior year at 61.8 percent compared to 62.1 percent in
the prior year.
|
|
·
|
Operating
Costs – Our operating costs, excluding the gain on the sale of the
CSBU, decreased by $62.3 million compared to fiscal 2008, which was
primarily due to the sale of the CSBU. Decreased operating
expenses consisted primarily of a $63.4 million decrease in selling,
general, and administrative expenses, a $2.1 million increase in impaired
asset charges, a $1.2 million decrease in depreciation expense, and a $0.2
million increase in amortization
expense.
|
Further
details regarding these items can be found in the comparative analysis of fiscal
2009 compared to fiscal 2008 as discussed in this management’s discussion and
analysis.
The
following table sets forth, for the fiscal years indicated, the percentage of
total sales represented by the line items through income before income taxes in
our consolidated statements of operations:
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Training
and consulting services
|
88.3 | % | 53.3 | % | 48.5 | % | ||||||
|
Products
|
9.0 | 45.8 | 50.8 | |||||||||
|
Leasing
|
2.7 | 0.9 | 0.7 | |||||||||
|
Total
sales
|
100.0 | 100.0 | 100.0 | |||||||||
|
Training
and consulting services
|
31.4 | 17.3 | 15.2 | |||||||||
|
Products
|
5.4 | 20.1 | 22.8 | |||||||||
|
Leasing
|
1.4 | 0.5 | 0.5 | |||||||||
|
Total
cost of sales
|
38.2 | 37.9 | 38.5 | |||||||||
|
Gross
profit
|
61.8 | 62.1 | 61.5 | |||||||||
|
Selling,
general, and administrative
|
59.9 | 54.5 | 52.5 | |||||||||
|
Gain
on sale of CSBU assets
|
- | (3.5 | ) | - | ||||||||
|
Gain
on sale of manufacturing facility
|
- | - | (0.4 | ) | ||||||||
|
Restructuring
costs
|
1.6 | 0.8 | - | |||||||||
|
Impairment
of assets
|
2.7 | 0.6 | - | |||||||||
|
Depreciation
|
3.5 | 2.2 | 1.9 | |||||||||
|
Amortization
|
2.9 | 1.4 | 1.3 | |||||||||
|
Total
operating expenses
|
70.6 | 56.0 | 55.3 | |||||||||
|
Income
(loss) from operations
|
(8.8 | ) | 6.1 | 6.2 | ||||||||
|
Interest
income
|
- | 0.1 | 0.3 | |||||||||
|
Interest
expense
|
(2.3 | ) | (1.2 | ) | (1.1 | ) | ||||||
|
Income
(loss) before income taxes
|
(11.1 | )% | 5.0 | % | 5.4 | % | ||||||
Segment
Review
Prior to
the fiscal 2008 sale of our Consumer Solutions Business Unit (CSBU), the Company
had two operating segments: the Organizational Solutions Business
Unit (OSBU) and the CSBU. Following the sale, our operations
constitute one reportable segment. However, to improve comparability,
the sales information presented in the table below reflect fiscal 2009 and
fiscal 2008 operating results based upon
the
previously defined segments. The following is a description of these
segments, their primary operating components, and their significant business
activities:
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 and Canada. Our international sales group includes the
financial results of our directly owned foreign offices and royalty revenues
from licensees.
Consumer
Solutions Business Unit – This business unit was primarily focused on
sales to individual customers and small business organizations and included the
results of our domestic retail stores, consumer direct operations (primarily
Internet sales 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 included the financial
results of our paper planner manufacturing operations. Although CSBU
sales primarily consisted of products such as planners, binders, software,
totes, and related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may have been purchased through
the CSBU channels.
The
following table sets forth sales data by category and for our operating segments
for the periods indicated. For further information regarding our
reporting segments and geographic information, refer to Note 20 to our
consolidated financial statements as found in Item 8 of this report on Form 10-K
(in thousands).
|
YEAR
ENDED
AUGUST
31,
|
2009
|
Percent
change from prior year
|
2008
|
Percent
change from prior year
|
2007
|
|||||||||||||||
|
Sales
by Category:
|
||||||||||||||||||||
|
Training
and consulting services
|
$ | 114,910 | (17 | ) | $ | 138,112 | - | $ | 137,708 | |||||||||||
|
Products
|
11,652 | (90 | ) | 118,610 | (18 | ) | 144,277 | |||||||||||||
|
Leasing
|
3,556 | 44 | 2,471 | 15 | 2,140 | |||||||||||||||
| $ | 130,118 | (50 | ) | $ | 259,193 | (9 | ) | $ | 284,125 | |||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||
|
Domestic
|
$ | 83,193 | (16 | ) | $ | 99,308 | - | $ | 99,248 | |||||||||||
|
International
|
43,369 | (14 | ) | 50,179 | (3 | ) | 51,734 | |||||||||||||
| 126,562 | (15 | ) | 149,487 | (1 | ) | 150,982 | ||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||
|
Retail stores
|
- | (100 | ) | 42,167 | (22 | ) | 54,316 | |||||||||||||
|
Consumer direct
|
- | (100 | ) | 38,662 | (19 | ) | 48,018 | |||||||||||||
|
Wholesale
|
- | (100 | ) | 16,970 | (6 | ) | 17,991 | |||||||||||||
|
CSBU International
|
- | (100 | ) | 7,259 | (1 | ) | 7,342 | |||||||||||||
|
Other CSBU
|
- | (100 | ) | 2,177 | (35 | ) | 3,336 | |||||||||||||
| - | (100 | ) | 107,235 | (18 | ) | 131,003 | ||||||||||||||
|
Total
operating segments
|
126,562 | (51 | ) | 256,722 | (9 | ) | 281,985 | |||||||||||||
|
Leasing
|
3,556 | 44 | 2,471 | 15 | 2,140 | |||||||||||||||
|
Total
net sales
|
$ | 130,118 | (50 | ) | $ | 259,193 | (9 | ) | $ | 284,125 | ||||||||||
FISCAL
2009 COMPARED TO FISCAL 2008
Sales
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, trust, and effective communications that are provided
both domestically and internationally through our sales force or through
international licensee operations. Our consolidated training and
consulting service sales decreased by $23.2 million compared to the prior year,
which was attributable to unfavorable performance in both the domestic and
international divisions. We believe that the decrease in sales was
primarily due to unfavorable economic conditions, which eroded business
confidence and led to decreased training budgets and the deferral of scheduled
programs. The effects of the economic downturn were widespread and
led to economic contraction and reduced sales in many countries where we operate
through direct offices or through our licensees. These conditions led
to the following results in our domestic and international
divisions:
|
·
|
Domestic –
Our domestic training and consulting sales decreased by $16.1
million compared to the prior year. The decrease in domestic
sales was primarily due to: 1) reduced public seminar sales resulting from
the decision to reduce the number of events scheduled during the year and
from the decision to license the delivery rights of certain public
programs to a third party, which resulted in the Company recording a
licensee fee from these programs rather than the gross sale amount
previously recorded; 2) a decrease in the number of on-site events given
during the year, with a significant portion of the decrease occurring in
our sales performance group; 3) a decrease in our specialized seminar
events; and 4) lower books and audio sales as prior year sales were
favorably impacted by the release of The Leader in Me book
by Dr. Stephen R. Covey. Our training manual sales to our
independent facilitator partners (training conducted by clients using
their certified trainers) only decreased slightly from the prior
year. These decreases were partially offset by increased sales
of our Customer Loyalty offerings and Speed of Trust programs during the
year. During the quarter ended February 28, 2009, we acquired
CoveyLink Worldwide LLC (CoveyLink), which has developed training courses
and materials based upon the book entitled The Speed of Trust by
Stephen M.R. Covey.
|
We
believe that continued economic deterioration in the United States during the
fiscal year ended August 31, 2009 was a significant contributing factor to
decreased training and consulting sales during the year. However,
during our fourth quarter of fiscal 2009, we began to see improvement in
corporate spending and the delivery of programs and training materials improved
over previous quarters in fiscal 2009. We anticipate that this
improvement will continue during fiscal 2010.
|
·
|
International –
International sales decreased $6.8 million compared to the fiscal year
ending August 31, 2008. The decrease in international sales was
primarily due to: 1) decreased sales at our directly owned offices in
Japan and the United Kingdom; 2) lower royalty revenue recognized from our
licensees; 3) decreased international product sales in Japan; and 4) the
unfavorable impact of translation of foreign sales to the United States
dollar. Decreased sales in Japan and the United Kingdom were
primarily due to the continued weak economic conditions in those
countries. The translation of foreign sales to United States
dollars had a net $0.4 million unfavorable impact on our consolidated
sales during the fiscal year ended August 31,
2009.
|
Product
Sales –
Consolidated product sales, which were primarily sold through our CSBU
channels, declined $107.0 million compared to the prior year primarily due to
the sale of our CSBU during the fourth quarter of fiscal
2008. Remaining product sales primarily consist of products and
related accessories sold in Japan by our directly owned office in that
country.
Leasing
Sales – Leasing sales increased $1.1 million primarily due to the
addition of new leasing contracts that are generated from various arrangements
to lease office space at our Salt Lake City, Utah headquarters
campus.
Gross
Profit
Gross
profit consists of net sales less the cost of goods sold or the cost of services
provided. Our cost of sales includes materials used in the production
of planners and related products, assembly and manufacturing labor costs, direct
costs of conducting seminars, freight, and certain other overhead
costs. Gross profit may be affected by, among other things, prices of
materials, labor rates, product sales mix, changes in product discount levels,
production efficiency, and freight costs.
Prior to
the sale of CSBU assets in fiscal 2008, we recorded the costs associated with
operating our retail stores, call center, and Internet site as part of our
consolidated selling, general, and administrative
expenses. Therefore, our consolidated gross profit may not be
comparable with the gross profit of other companies that include similar costs
in their cost of sales.
Our
consolidated gross profit decreased to $80.4 million in fiscal 2009 compared to
$161.0 million in fiscal 2008. The decrease in gross profit was
primarily attributable to decreased product sales resulting from the sale of the
CSBU. Our consolidated gross margin, which is gross profit stated in
terms of a percentage of sales, was 61.8 percent of sales in fiscal 2009
compared to 62.1 percent in the prior year.
Our
training and consulting services gross margin was 64.5 percent compared to 67.6
percent in fiscal 2008. The decrease was primarily attributable to
decreased licensee royalty revenues, which have virtually no corresponding cost
of sales, increased royalty costs on certain programs sold, and increased
amortization of capitalized curriculum development costs.
Gross
margin on product sales decreased to 39.3 percent compared to 56.1 percent in
the prior year. The decrease was primarily due to the sale of the
CSBU, which eliminated virtually all of our domestic product
sales. Remaining product sales consist primarily of product sales
made in Japan, on which the gross margin decreased compared to the same period
of the prior year primarily due to adjustments to our inventory reserves in
Japan.
Operating Expenses
Selling, General
and Administrative –
Our SG&A expenses decreased $63.4 million compared to the prior
year. The decrease in SG&A expenses was primarily due to: 1) the
sale of the CSBU, which reduced consolidated SG&A by approximately $51.7
million compared to the prior year; 2) a $7.5 million decrease in compensation
costs resulting from lower sales and corresponding reductions to commissions and
other variable compensation elements; 3) a $2.9 million decrease in advertising
costs, primarily related to a decrease in the number of public programs held; 4)
$0.7 million of reduced travel and conference costs, primarily due to the
cancellation of our annual sales and delivery conference and focused cost
cutting measures; and 5) the favorable impacts of our restructuring plan on
various areas of our operations. These decreases were partially
offset by $1.4 million of increased warehousing costs that were previously
charged to CSBU cost centers, and $0.7 million of increased share-based
compensation costs due to reversals of share-based compensation expense in the
prior year that did not repeat in fiscal 2009. Following the sale of
our CSBU in the fourth quarter of fiscal 2008, we initiated a restructuring plan
that reduced the number of our domestic regional sales offices, decentralized
certain sales support functions, and significantly changed the operations of our
Canadian subsidiary. We continued these restructuring efforts in
fiscal 2009 and believe that they will have long-term benefits to our operating
results. Due to prevailing economic conditions, we have also
initiated numerous other cost savings efforts designed to reduce our overall
operating costs and improve profitability. While we expect these
efforts to have a significant impact on our cost structure, the outcome of these
efforts may not reduce our costs as quickly or as effectively as
planned.
Restructuring
Costs – Following the sale of our CSBU, we initiated a restructuring plan
that reduces the number of our domestic regional sales offices, decentralizes
certain sales support functions, and significantly changes the operations of our
Canadian subsidiary. The restructuring plan is intended to strengthen
the remaining domestic sales offices and reduce our overall operating costs, and
this effort continued into fiscal 2009. During fiscal 2009 we
expensed $2.0 million for anticipated severance costs necessary to complete the
restructuring plan. The remainder of the restructuring plan is
expected to be completed during fiscal 2010.
Impairment of
Assets – Based on the terms of the sale of CSBU assets, we were entitled
to receive a $1.2 million adjustment for working capital delivered on the
closing date of the sale and to receive $2.3 million as reimbursement for
specified costs necessary to complete the transaction. Payment for
these costs was originally due in January 2009, but we extended the due date of
the payment at Franklin Covey Products’ request and obtained a promissory note
from Franklin Covey Products for the amount owed, plus accrued
interest. At the time we received the promissory note from Franklin
Covey Products, we believed that we could obtain payment for the amounts owed,
based on prior year performance and forecasted financial performance in
2009. However, the financial position of Franklin Covey Products
deteriorated significantly late in fiscal 2009 and the deterioration accelerated
subsequent to August 31, 2009. As a result of this
deterioration, the Company reassessed the collectibility of the
promissory note. Based on revised expected cash flows and other
operational issues, we determined that the promissory note should be impaired at
August 31, 2009. Accordingly, we recorded a $3.6 million impaired
asset charge and reversed $0.1 million of interest income that was recorded
during fiscal 2009 from the working capital settlement and reimbursable
transaction cost receivables.
Depreciation – Depreciation expense
decreased by $1.2 million compared to the prior year. The decrease
was primarily due to the sale of the CSBU. During the fourth quarter
of fiscal 2009, we impaired certain software costs due to the decision to
replace our primary general ledger accounting system in fiscal 2010 and recorded
an additional $0.5 million depreciation charge. We also recorded
impairment charges totaling $0.6 million for two software applications that did
not function as anticipated and were written off during fiscal
2008.
Amortization –
Consolidated amortization expense increased by $0.2 million compared to
the prior year due to the acquisition of CoveyLink, which closed in fiscal
2009. We anticipate that amortization expense will total $3.8 million
in fiscal 2010.
Income
Taxes
Our
income tax benefit for fiscal 2009 was $3.6 million compared to a $7.5 million
provision in fiscal 2008. The income tax benefit was primarily due to
a pre-tax loss recognized in fiscal 2009 compared to pre-tax income for the same
period of the prior year. Our effective tax benefit rate of
approximately 25 percent was lower than statutory combined rates primarily due
to foreign withholding taxes for which we cannot utilize a foreign tax credit,
the accrual of taxable interest income on the management stock loan program, and
actual and deemed dividends from foreign subsidiaries for which we also cannot
utilize foreign tax credits.
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 remained consistent with the prior year and
was reflective of borrowings on our line of credit facility and payments made on
our building lease (financing obligation) during fiscal 2009.
FISCAL
2008 COMPARED TO FISCAL 2007
Sales
Training and
Consulting Services –
Our consolidated training and consulting service sales increased by $0.4
million compared to the prior year. Training and consulting service
sales performance in fiscal 2008 was primarily influenced by the following
factors in our domestic and international OSBU operations:
|
·
|
Domestic –
Our domestic training sales in fiscal 2008 were flat compared to
fiscal 2007, primarily due to lower sales from our sales performance
group, public programs, and our 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 fiscal 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. In
fiscal 2009, we closed our Canadian office and assigned the Canadian sales
personnel to domestic regions. The sales data presented above
reflect the transfer of Canadian sales from the international division to
the domestic division for all periods
presented.
|
Four of
our seven domestic offices generated increased year-over-year sales in fiscal
2008, and sales of our training materials to our client facilitators improved
compared to the prior year. Revenue from the number of training and
consulting days delivered increased two percent over the prior year as our
average revenue per day received increased. The number of training
days delivered, however, declined three percent compared to fiscal
2007.
|
·
|
International –
International sales decreased $1.6 million in fiscal 2008 compared to the
prior year. Sales from our three remaining directly owned
foreign offices as well as from licensee royalty revenues increased
compared to the prior year as each of these units achieved double-digit
growth. However, these increases were offset by 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 only receive royalty
revenue from their operations based upon gross sales. The
conversion of these operations to licensees had a $5.4 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 $3.7 million favorable impact
on our consolidated sales as foreign currencies strengthened against the
United States dollar during fiscal
2008.
|
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 $25.7 million in fiscal 2008 compared to the prior
year. The decline in overall product sales during fiscal 2008 was
primarily due to the sale of our CSBU operations in fiscal 2008 combined with
the following performance in CSBU delivery channels prior to the effective date
of the sale.
|
·
|
Retail Stores – Prior to
the sale of the CSBU operations, our retail sales decreased compared to
the prior year primarily due to reduced traffic in our retail locations,
which was partially due to a significant increase in the number of
wholesale outlets that sold our products and competed directly against our
retail stores, reduced demand for technology and related products, and
fewer store locations, which had a $2.5 million impact on retail
sales. Our retail store traffic, or the number of consumers
entering our retail locations, declined by approximately 18 percent on a
comparable basis (for stores which were open during the comparable
periods) 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 $0.9
million compared to the prior year. These factors combined to produce
a 7 percent decline in year-over-year comparable store sales versus the prior
year.
|
·
|
Consumer Direct – Sales
through our consumer direct channels (primarily the Internet and call
center) decreased 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 12
percent. Declining consumer orders through the call center
continues a long-term trend and decreased by approximately 14 percent
compared to the prior year, which we believe was partially the result of a
transition of customers to our other product
channels.
|
|
·
|
Wholesale – Sales
through our wholesale channel, which included sales to office superstores
and other retail chains, decreased 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 built
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 were flat through these channels
compared to the prior year before the sale of
CSBU.
|
|
·
|
Other CSBU – Other CSBU
sales consist primarily of domestic printing and publishing sales and
building sublease revenues. The decline in other CSBU sales was
primarily due to decreased external printing sales, which was partially
offset by a $0.3 million increase in sublease
revenue.
|
Gross
Profit
For
fiscal 2008, our consolidated gross profit decreased to $161.0 million compared
to $174.7 million in fiscal 2007. The decrease was primarily
attributable to the sale of CSBU and declining product sales during fiscal 2008
prior to the sale of CSBU. Our consolidated gross margin, which is
gross profit stated in terms of a percentage of sales, improved to 62.1 percent
of sales compared to 61.5 percent in fiscal 2007. The slight increase
in gross margin percentage was primarily attributable to the continuing shift
toward increased training and consulting sales, as a percent of total sales,
since training and consulting sales generally have higher margins than our
product sales. Training and consulting service sales increased to 53
percent of total sales during fiscal 2008 compared to 49 percent in the prior
year.
During
fiscal 2008, our training and consulting services gross margin decreased to 67.6
percent compared to 68.7 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.
For the
fiscal year ended August 31, 2008, our gross margin on product sales was 56.1
percent of sales compared to 55.0 percent in the prior year.
Operating
Expenses
Selling, General
and Administrative –
Consolidated SG&A expenses decreased $7.9 million, or 5 percent,
compared to the prior year (excluding the gain on the sale of the CSBU assets in
fiscal 2008 and a gain on the sale of a manufacturing facility in fiscal
2007). The decrease in SG&A expenses was primarily due to 1) the
fiscal 2008 sale of the CSBU, which reduced CSBU SG&A expenses by $9.7
million in the fourth quarter of fiscal 2008 compared to the prior year; 2) a
$1.7 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; 3) a $1.1 million decrease in bonuses and
commissions based on sales performance in the OSBU during the year; and 4)
smaller decreases in SG&A spending in
various
other areas of our operations. These decreases were partially offset
by 1) a $2.7 million increase in associate compensation primarily resulting from
the payment of awards and bonuses subsequent to the sale of the CSBU; 2) a $1.4
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; 3) a $0.9
million increase in legal fees primarily related to the EpicRealm litigation;
and 4) a $0.6 million increase in retail store closure costs that were primarily
incurred in connection with the buyout of two leases.
Gain on Sale of
CSBU Assets – During the fourth quarter of fiscal 2008, we sold
substantially all of the assets of our CSBU to Franklin Covey Products for $32.0
million in cash, subject to adjustments for working capital on the closing date
of the sale, which was effective July 6, 2008. 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 priority
capital contribution with a 10 percent return, and will have the opportunity to
earn contingent license fees if Franklin Covey Products achieves specified
performance objectives. We recognized a gain of $9.1 million on the
sale of the CSBU assets and according to specific accounting guidance, we
deferred a portion of the gain equal to our investment in Franklin Covey
Products. We will recognize the deferred gain over the life of the
long-term assets acquired by Franklin Covey Products or when cash is received
for payment of the priority contribution.
Restructuring
Costs – Following the sale of our CSBU, we initiated a restructuring plan
that reduces the number of our domestic regional sales offices, decentralizes
certain sales support functions, and significantly changes the operations of our
Canadian subsidiary. The restructuring plan is intended to strengthen
the remaining domestic sales offices and reduce our overall operating
costs. During fiscal 2008 we expensed $2.1 million for anticipated
severance costs necessary to complete the restructuring plan.
Impairment of
Assets – In the fourth quarter of fiscal 2008, we analyzed the expected
future revenues and corresponding cash flows expected to be generated from our
The 7 Habits of Highly
Effective People interactive program and concluded that the expected
future revenues, less direct costs, were insufficient to cover the carrying
value of the capitalized development costs. Accordingly, in the
fourth quarter of fiscal 2008 we recorded a $1.5 million impairment charge to
write this program down to its net realizable value.
Depreciation and
Amortization –
Consolidated depreciation expense increased to $5.7 million compared to
$5.4 million in 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. During the fourth quarter of fiscal 2008 we determined
that it was appropriate to reclassify depreciation expense on our subleased
corporate campus from cost of sales to depreciation expense. The
depreciation expense reclassified from product cost of sales totaled $0.7
million for the fiscal year ended August 31, 2007.
Amortization
expense from definite-lived intangible assets totaled $3.6 million for the
fiscal years ended August 31, 2008 and 2007.
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 remained consistent with the prior year and
was reflective of borrowings on our line of credit facility and payments made on
our building lease (financing obligation) during fiscal 2008.
Income
Taxes
Our
income tax provision for the fiscal year ended August 31, 2008 totaled $7.5
million compared to $7.8 million in fiscal 2007. Our effective tax
rate for fiscal 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. Since the Company is currently utilizing net
operating loss carryforwards, we were unable to reduce our domestic tax
liability through the use of foreign tax credits, which normally result from the
payment of foreign withholding taxes.
Preferred
Stock Dividends
Our
preferred stock dividends in fiscal 2008 declined $2.2 million compared to
fiscal 2007. The decrease in preferred stock dividends was due to the
redemption of all remaining outstanding shares of preferred stock during the
third quarter of fiscal 2007.
QUARTERLY
RESULTS
The
following tables set forth selected unaudited quarterly consolidated financial
data for the years ended August 31, 2009 and 2008. The quarterly
consolidated financial data reflects, in the opinion of management, all
adjustments necessary to fairly present the results of operations for such
periods. Results of any one or more quarters are not necessarily
indicative of continuing trends.
While
closing the first quarter of fiscal 2009, we identified errors due to improper
accounting for certain product sales in the fourth quarter of fiscal 2008, and
the improper calculation of inventory reserves from late fiscal 2006 through the
fourth quarter of fiscal 2008 in the financial statements of our directly owned
subsidiary in Japan. We assessed the materiality of these errors in
accordance with Staff Accounting Bulletin (SAB) No. 108 and determined that the
errors were immaterial to previously reported amounts contained in our periodic
reports and we have corrected these errors in subsequent periodic
filings. The quarterly information presented below for fiscal 2008
has been adjusted to reflect the correction of these errors.
|
YEAR
ENDED AUGUST 31, 2009
|
||||||||||||||||
|
November
29
|
February
28
|
May
30
|
August
31
|
|||||||||||||
|
In
thousands, except per share amounts
|
||||||||||||||||
|
Net
sales
|
$ | 35,081 | $ | 29,903 | $ | 30,645 | $ | 34,489 | ||||||||
|
Gross
profit
|
21,697 | 18,683 | 18,935 | 21,098 | ||||||||||||
|
Selling,
general, and administrative expense
|
20,610 | 20,253 | 17,336 | 19,744 | ||||||||||||
|
Restructuring
costs
|
- | - | 843 | 1,204 | ||||||||||||
|
Impairment
of assets
|
- | - | - | 3,569 | ||||||||||||
|
Depreciation
|
903 | 906 | 994 | 1,729 | ||||||||||||
|
Amortization
|
902 | 903 | 995 | 961 | ||||||||||||
|
Loss
from operations
|
(718 | ) | (3,379 | ) | (1,233 | ) | (6,109 | ) | ||||||||
|
Loss
before income taxes
|
(1,493 | ) | (3,899 | ) | (2,178 | ) | (6,891 | ) | ||||||||
|
Net
loss
|
(569 | ) | (633 | ) | (5,053 | ) | (4,577 | ) | ||||||||
|
Loss
per share attributable to common shareholders:
|
||||||||||||||||
|
Basic
|
$ | (.04 | ) | $ | (.05 | ) | $ | (.38 | ) | $ | (.34 | ) | ||||
|
Diluted
|
$ | (.04 | ) | $ | (.05 | ) | $ | (.38 | ) | $ | (.34 | ) | ||||
|
YEAR
ENDED AUGUST 31, 2008
|
||||||||||||||||
|
December
1
|
March
1
|
May
31
|
August
31
|
|||||||||||||
|
In
thousands, except per share amounts
|
||||||||||||||||
|
Net
sales
|
$ | 73,574 | $ | 75,127 | $ | 59,061 | $ | 51,431 | ||||||||
|
Gross
profit
|
45,991 | 46,802 | 35,968 | 32,267 | ||||||||||||
|
Selling,
general, and administrative expense
|
38,771 | 37,652 | 34,210 | 30,685 | ||||||||||||
|
Gain
on sale of CSBU
|
- | - | - | (9,131 | ) | |||||||||||
|
Restructuring
costs
|
- | - | - | 2,064 | ||||||||||||
|
Impairment
of assets
|
- | - | - | 1,483 | ||||||||||||
|
Depreciation
|
1,380 | 1,532 | 1,679 | 1,101 | ||||||||||||
|
Amortization
|
899 | 901 | 902 | 901 | ||||||||||||
|
Income
(loss) from operations
|
4,941 | 6,717 | (823 | ) | 5,164 | |||||||||||
|
Income
(loss) before income taxes
|
4,040 | 5,971 | (1,493 | ) | 4,555 | |||||||||||
|
Net
income (loss)
|
1,992 | 3,047 | (1,482 | ) | 1,970 | |||||||||||
|
Earnings
(loss) per share available to common shareholders:
|
||||||||||||||||
|
Basic
|
$ | .10 | $ | .16 | $ | (.09 | ) | $ | .10 | |||||||
|
Diluted
|
$ | .10 | $ | .15 | $ | (.09 | ) | $ | .10 | |||||||
Our
quarterly results of operations in fiscal 2008 reflected seasonal trends that
were primarily the result of customers who renew their FranklinCovey Planners on
a calendar year basis. Domestic training sales are moderately
seasonal because of the timing of corporate training, which is not typically
scheduled as heavily during holiday and vacation periods.
The
fourth quarter of fiscal 2008 reflects the sale of CSBU assets, which reduced
sales and corresponding costs associated with the operations of the
CSBU. We recognized a $9.1 million gain on the sale of the CSBU
assets, which had a favorable impact on that period’s operating
results. In future periods we expect that our quarterly sales will be
less seasonal since they will not include product sales that are sold primarily
during November, December, and January.
Quarterly
fluctuations may also be affected by other factors including the introduction of
new offerings, the addition of new organizational customers, and the elimination
of underperforming offerings.
LIQUIDITY
AND CAPITAL RESOURCES
Summary
At August
31, 2009 we had $1.7 million of cash and cash equivalents compared to $15.9
million at August 31, 2008 and our net working capital (current assets less
current liabilities) decreased to a deficit of $3.2 million at August 31, 2009
compared to $5.3 million of working capital at August 31, 2008. The
change in working capital was primarily due to the utilization of substantially
all of the net cash proceeds from the sale of CSBU to purchase approximately 3.0
million shares of our common stock in a modified “Dutch Auction” tender
offer. The tender offer closed, fully subscribed, prior to August 31,
2008 and we recorded a $28.2 million liability for the shares on our
consolidated balance sheet with a corresponding increase to treasury stock in
shareholders’ equity. We paid the tender offer obligation during the
quarter ended November 29, 2008, which reduced our available cash.
Our
primary sources of liquidity are cash flows from the sale of services in the
normal course of business and proceeds from our revolving line of
credit. Our primary uses of liquidity include payments for operating
activities, capital expenditures, working capital, and debt
repayment. In connection with the sale of the CSBU assets during the
fourth quarter of fiscal 2008, our line of credit agreements with our previous
lenders were modified (the Modified Credit Agreement). The Modified
Credit Agreement removed one lender from the credit facility, but continued to
provide a total of $25.0 million of borrowing capacity until June 30, 2009, when
the borrowing capacity was scheduled to be reduced to $15.0
million. In addition, the interest rate on the credit facility
increased from LIBOR plus 1.10 percent to LIBOR plus 1.50
percent. During fiscal 2009, we entered into a second modification
agreement with the lender on the line of credit facility (the Second
Modification Agreement). Under the terms of the Second Modification
Agreement, our borrowing capacity on the line of credit will be reduced as
follows (in thousands):
|
Effective
Date
|
Borrowing
Capacity
|
|||
|
June
30, 2009
|
$ | 20,000 | ||
|
August
31, 2009
|
18,000 | |||
|
November
30, 2009
|
13,500 | |||
In
addition, any payments made to us by Franklin Covey Products from the working
capital settlement and reimbursable costs associated with the sale transaction
note are required to be paid on the line of credit and will reduce the available
borrowing capacity by the amount of the payments. Although we
impaired the working capital and reimbursable cost note receivable from Franklin
Covey Products in the fourth quarter of fiscal 2009, our available borrowing
capacity on the line of credit was not reduced. The Second
Modification Agreement also increased the effective interest rate from LIBOR
plus 1.50 percent to LIBOR plus 2.0 percent, effective on the date of the
agreement.
The
Modified Credit Agreement and Second Modification Agreement expire on March 14,
2010 (no change) and we may draw on the credit facilities, repay, and draw
again, on a revolving basis, up to the maximum loan amount available so long as
no event of default has occurred and is continuing. We may use the
line of credit facility for general corporate purposes as well as for other
transactions, unless prohibited by the terms of the Modified Credit Agreement or
Second Modification Agreement. The working capital line of credit
also contains customary representations and guarantees as well as provisions for
repayment and liens.
In
addition to customary non-financial terms and conditions, our line of credit
requires us to be in compliance with specified financial covenants, including:
(i) a funded debt-to-earnings ratio; (ii) a fixed charge coverage ratio; (iii) a
limitation on annual capital expenditures; and (iv) a defined amount of minimum
net worth. In the event of noncompliance with these financial
covenants and other defined events of default, the lenders are entitled to
certain remedies, including acceleration of the repayment of amounts outstanding
on the line of credit. The Second Modification Agreement also
modified the funded debt-to-earnings ratio and fixed charge coverage ratio over
the quarterly periods ended August 2009 and November 2009. During the
quarter ended August 31, 2009, we believe that we were in compliance with the
terms and financial covenants of our credit facility. At August 31,
2009, we had $12.9 million outstanding on the line of credit.
Based on
our forecasts for fiscal 2010, we identified the risk of non-compliance with
certain of the financial covenants required by our line of credit facility for
the quarterly measurement periods ending November 28, 2009 and February 27,
2010. In order to address the risk of non-compliance, we obtained a
modification to the line of credit agreement (the Third Modification Agreement)
in November 2009. The Third Modification Agreement relaxed the funded
debt-to-earnings ratio and fixed charge coverage ratio, and increased the
effective interest rate from LIBOR plus 2.0 percent to LIBOR plus 3.5
percent. We believe that we will be in compliance with the financial
covenants in future quarterly reporting periods as defined in the Third
Modification Agreement.
The
following table summarizes our cash flows from operating, investing, and
financing activities for the past three years (in thousands):
|
YEAR
ENDED AUGUST 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Total
cash provided by (used for):
|
||||||||||||
|
Operating
activities
|
$ | 5,282 | $ | 7,868 | $ | 13,370 | ||||||
|
Investing
activities
|
(3,203 | ) | 18,520 | (11,480 | ) | |||||||
|
Financing
activities
|
(16,248 | ) | (16,159 | ) | (26,376 | ) | ||||||
|
Effect
of exchange rates on cash
|
(47 | ) | (451 | ) | 25 | |||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | (14,216 | ) | $ | 9,778 | $ | (24,461 | ) | ||||
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
fiscal year ended August 31, 2009.
Cash
Flows from Operating Activities
Our cash
provided by operating activities totaled $5.3 million in fiscal 2009 compared to
$7.9 million during fiscal 2008. The decrease was primarily due to
reduced net income for the fiscal year and the sale of the CSBU, which had a
corresponding decrease in product sales. 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 fiscal 2009 was primarily related
to:
|
·
|
Decreased
accounts receivable resulting from improved collections of outstanding
receivable balances;
|
|
·
|
Payments
made to reduce accounts payable and accrued liabilities from seasonally
high balances at each August 31, and to pay accrued severance costs;
and
|
|
·
|
Reduced
inventory balances resulting from improved forecasting and purchasing
processes.
|
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
During
the fiscal year ended August 31, 2009 we used $3.2 million of net cash for
investing activities. Our primary uses of cash for investing
activities were the purchase of property and equipment, additional spending on
curriculum development, and the purchase of CoveyLink. Our purchases
of property and equipment, which totaled $2.3 million, consisted primarily of
computer software, computer hardware, and leasehold
improvements. During fiscal 2009, we spent $1.8 million for further
investment in the development of various programs and
curriculum. During the second quarter of fiscal 2009, we acquired the
assets of CoveyLink, which conducts seminars and provides consulting based upon
the book, The Speed of
Trust by Stephen M.R. Covey. Net cash used to acquire
CoveyLink, including legal and other professional fees, totaled $1.2
million. Partially offsetting these uses of cash was the receipt of
$1.8 million from the sale of our Canadian office facility.
During
fiscal 2010, we expect to spend $2.0 million on purchases of property and
equipment and $2.1 million on curriculum development
activities. Purchases of property and equipment are expected to
consist primarily of new computer software, computer hardware, and in other
areas as deemed necessary. However, actual capital spending is based
upon a variety of factors and may differ from these estimates.
Cash
Flows from Financing Activities
Net cash
used for financing activities during the fiscal year ended August 31, 2009
totaled $16.2 million, which consisted primarily of the payment of our $28.3
million tender offer obligation (as described above) and $1.2 million of debt
principal payments that were partially offset by $12.9 million of net proceeds
from our line of credit facility. We also received $0.3 million of
net proceeds from the sale of common shares held in treasury to participants in
our employee stock purchase plan.
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 are
currently in negotiations to renew the line of credit to ensure the future
availability of liquidity through this facility. We believe that we
will be successful in obtaining a new or extended line of credit from our
lender. Additional potential sources of liquidity include factoring
receivables, issuance of additional equity, or issuance of debt from public or
private sources. However, no assurance can be provided that we will
obtain a new or extended line of credit or obtain additional financing from
other sources on terms that would be acceptable to us. If necessary,
we will evaluate all of these options and select one or more of them depending
on overall capital needs and the associated cost of capital. If we
are unsuccessful in obtaining a renewal or extension of our line of credit, or
additional financing, we believe that cash flows from operations combined with a
number of initiatives we would implement in the months preceding the due date
will create sufficient liquidity to pay down the required outstanding balance on
the line of credit. These initiatives include deferral of capital
purchases for externally developed curriculum and uncommitted capital
expenditures; deferral of executive team compensation; deferral of certain
related party contractual royalties and earnout payments; substantial reduction
of associate salaries; reduction of operating expenses, including non-critical
travel; and deferral of payments to other vendors in order to generate
sufficient cash.
Considering
the foregoing, we anticipate that our existing capital resources should be
adequate to enable us to maintain our operations for at least the upcoming
twelve months. However, our ability to maintain adequate capital for
our operations in the future is dependent upon a number of factors, including
sales trends, our ability to contain costs, levels of capital expenditures,
collection of accounts receivable, and other factors. Some of the
factors that influence our operations are not within our control, such as
economic conditions and the introduction of new technology and products by our
competitors. We will continue to monitor our liquidity position and
may pursue additional financing alternatives, if required, to maintain
sufficient resources for future growth and capital
requirements. However, there can be no assurance such financing
alternatives will be available to us on acceptable terms, or at
all.
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 lease
payments resulting from the sale of our corporate campus (financing obligation);
payments to EDS for outsourcing services related to information systems,
warehousing, and distribution services; minimum rent payments for office and
warehouse space; the repayment of our line of credit obligation, which matures
in fiscal 2010; and short-term purchase obligations for inventory items and
other products and services used in the ordinary course of
business. Our expected payments on these obligations over the next
five fiscal years and thereafter are as follows (in thousands):
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||||||||||
|
Contractual
Obligations
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Required
lease payments on corporate campus
|
$ | 3,055 | $ | 3,116 | $ | 3,178 | $ | 3,242 | $ | 3,307 | $ | 40,230 | $ | 56,128 | ||||||||||||||
|
Minimum
required payments to EDS for outsourcing services(1)
|
4,138 | 4,138 | 4,138 | 4,138 | 4,138 | 7,107 | 27,797 | |||||||||||||||||||||
|
Minimum
operating lease payments(2)
|
1,673 | 1,606 | 1,498 | 1,148 | 1,108 | 2,218 | 9,251 | |||||||||||||||||||||
|
Line
of credit
|
12,949 | - | - | - | - | - | 12,949 | |||||||||||||||||||||
|
Purchase
obligations
|
2,801 | - | - | - | - | - | 2,801 | |||||||||||||||||||||
|
Total
expected contractual
obligation
payments
|
$ | 24,616 | $ | 8,860 | $ | 8,814 | $ | 8,528 | $ | 8,553 | $ | 49,555 | $ | 108,926 | ||||||||||||||
|
(1)
|
Our
obligation for outsourcing services contains an annual escalation based
upon changes in the Employment Cost Index, the impact of which was not
estimated in the above table. We are also contractually allowed
to collect amounts from Franklin Covey Products that reduce the amounts
shown in the table above.
|
|
(2)
|
The
operating agreement with Franklin Covey Products provides for
reimbursement of a portion of the warehouse leasing costs, the impact of
which is not included in the lease obligations in the table
above.
|
Our
contractual obligations presented above exclude unrecognized tax benefits under
FIN 48 of $4.2 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 the Notes to the consolidated
financial statements as presented in Item 8 of this report on Form
10-K.
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 the notes to our consolidated financial statements as
found in Item 8 of this report on Form 10-K. 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 this Annual Report on Form
10-K. Some of those accounting policies require us to make
assumptions and use judgments that may 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 and political conditions and other circumstances that are not in our
control, but which may have an impact on these estimates and our actual
financial results.
The
following items require the most significant judgment and often involve complex
estimates:
Revenue
Recognition
We derive
revenues primarily from the following sources:
|
·
|
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.
|
|
·
|
Products – We sold
planners, binders, planner accessories, handheld electronic devices, and
other related products that were primarily delivered through our CSBU
channels prior to the fourth quarter of fiscal 2008. We
continue to sell these products in certain international
locations.
|
We
recognize revenue in accordance with SAB No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 104, Revenue
Recognition. Accordingly, we recognize 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 or
determinable, and 4) collectibility is reasonably assured. For
training and service sales, these conditions are generally met upon presentation
of the training seminar or delivery of the consulting services. For
product sales, these conditions are generally met upon shipment of the product
to the customer or by completion of the sales transaction in a retail
store.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. For
transactions that contain more than one element, we recognize revenue in
accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables (FASC 605-25). When fair value exists
for all contracted elements, the overall contract consideration is allocated
among the separate units of accounting based upon their relative fair
values. Revenue for these units is recognized in accordance with our
general revenue policies once it has been determined that the delivered items
have standalone value to the customer. If fair value does not exist
for all contracted elements, revenue for the delivered items is recognized using
the residual method,
which
generally means that revenue recognition is postponed until the point is reached
when the delivered items have standalone value and fair value exists for the
undelivered items. Under the residual method, the amount of revenue
considered for recognition under our general revenue policies is the total
contract amount, less the aggregate fair value of the undelivered
items. Fair value of the undelivered items is based upon the normal
pricing practices for our existing training programs, consulting services, and
other products, which are generally the prices of the items when sold
separately.
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. Each
licensee is required to pay us royalties based upon a percentage of the
licensee’s sales. We recognize royalty income each period based upon
the sales information reported to the Company from the
licensee. Royalty revenue is reported as a component of training and
consulting service sales in our consolidated statements of
operations.
Revenue
is recognized on software sales in accordance with SOP 97-2, Software Revenue Recognition
(FASC 985-605-25) 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 our software
sales have multiple elements, including a license and post contract customer
support (PCS). Currently we do not have VSOE for either the license
or support elements of our software sales. Accordingly, revenue is
deferred until the only undelivered element is PCS and the total arrangement fee
is recognized over the support period.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Share-Based
Compensation
We have 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 Compensation Committee). 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 specified financial performance objectives
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 estimated
probable number of common shares to be awarded.
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 the corresponding use of estimated amounts produced additional
volatility in our consolidated financial statements as we recorded cumulative
adjustments to the estimated number of common shares to be awarded under the
LTIP grants as described above.
During
the quarter ended November 29, 2008, the Compensation Committee approved LTIP
awards for 205,700 shares of common stock (the target award) to be awarded if we
achieve the specified financial results of grant, which are primarily based on
cumulative operating income growth over the performance period ending August 31,
2011. However, due to ongoing organizational changes following the
sale of
the CSBU,
the Company’s structure evolved to the extent that the fiscal 2009 LTIP award
criteria were no longer consistent with our organization and performance goals
and in some cases the approved measurement criteria were no longer
measurable. As a result of these changes, combined with financial
performance during the first two quarters of the measurement period, the Company
determined that no shares would be awarded to participants under the terms of
the fiscal 2009 LTIP award. Accordingly, no compensation expense was
recognized for the fiscal 2009 LTIP award during fiscal 2009. All
other LTIP awards expired as of August 31, 2009 with no shares vesting to
participants under those awards.
We
estimate the value of our stock option awards on the date of grant using the
Black-Scholes option pricing model. However, we did not grant any
stock options during the fiscal years ended August 31, 2009 or 2008, and we did
not have any remaining unrecognized compensation expense attributable to
unvested stock options at August 31, 2009.
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 may either increase or
decrease our total allowance for doubtful accounts. For example, a 10
percent increase to our allowance for doubtful accounts at August 31, 2009 would
increase our reported loss from operations by approximately $0.1
million.
Inventory
Valuation
Following
the sale of CSBU, our inventories are comprised primarily of training materials
and training related 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 example, a 10
percent increase to our inventory reserves at August 31, 2009 would increase our
reported loss from operations by $0.1 million.
Indefinite-Lived
Intangible Assets and Goodwill
Intangible
assets that are deemed to have an indefinite life and goodwill balances 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. Our goodwill at August 31, 2009 was generated by the
acquisition of CoveyLink during the second quarter of fiscal
2009. The Covey trade name intangible asset was generated by the
merger with the Covey Leadership Center and has been deemed to have an
indefinite life. This intangible asset is tested for impairment using
the present value of estimated royalties on trade name related revenues, which
consist primarily of training seminars and international licensee
royalties. 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.
Our
impairment evaluation calculations for goodwill and the Covey trade name contain
uncertainties because they require 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 has
remained 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. The valuation methodology is also dependent upon
on our share price and corresponding market capitalization, which may differ
from estimated royalties used in our annual impairment testing. Based
upon the fiscal 2009 evaluation of the Covey trade name and goodwill, our
trade-name related revenues, licensee royalties, and overall sales levels would
have to suffer significant reductions before we would be required to impair
them. However, future declines in our share price may trigger
additional impairment testing and may result in impairment charges.
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. Based on
these criteria, we have projected positive cash flows over the remaining useful
lives of our principal assets, which is 17 years. 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.
Income
Taxes
We
regularly evaluate our United States federal and various state and foreign
jurisdiction income tax exposures. We account for certain aspects of
our income tax provision using the provisions of FIN 48 (FASC 740-10-05), 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. 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 require increased disclosure
of various income tax items. Taxes and penalties are components of
our overall income tax provision.
We record
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, we consider 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.
ACCOUNTING
PRONOUNCEMENTS ISSUED NOT YET ADOPTED
Business
Combinations – In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations (FASC 805) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (FASC 810-10). These
standards aim to improve and converge internationally the accounting for
business combinations and the reporting of noncontrolling interests in
consolidated financial statements. These statements are effective for
our fiscal year beginning September 1, 2009. We do not currently
anticipate that these statements will have a material impact upon our financial
condition or results of operations.
Revenue
Recognition – In October 2009, the FASB issued EITF 08-1, Revenue Recognition – Multiple
Element Arrangements (FASC 650-25). This consensus amends
existing guidance on multiple element revenue arrangements to improve the
ability of entities to recognize revenue from the sale of delivered items that
are part of a multiple-element arrangement when other items have not yet been
delivered. One of the current requirements is that there must be
objective and reliable evidence of the standalone selling price of the
undelivered items, which must be supported by vendor-specific objective evidence
(VSOE) or third-party evidence (TPE). This amendment eliminates the
requirements that all undelivered elements have VSOE or TPE before an entity can
recognize the portion of an overall arrangement that is attributable to items
that have already been delivered. The “residual method” of allocating
revenue is thereby eliminated, and entities are required to allocate the
arrangement consideration at the inception of the arrangement to all
deliverables using the relative selling price method. The consensus
is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning after June 15, 2010 and early adoption is
permitted. We have not yet completed a formal analysis of the
provisions of EITF 08-1.
REGULATORY
COMPLIANCE
The
Company is registered in states in which we do business that have a sales tax
and collects and remits sales or use tax on retail sales made through its stores
and catalog sales. Compliance with environmental laws and regulations
has not had a material effect on our operations.
INFLATION
AND CHANGING PRICES
Inflation
has not had a material effect on our operations. However, future
inflation may have an impact on the price of materials used in the production of
training products and related accessories, including paper and related raw
materials. We may not be able to pass on such increased costs to our
customers.
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain
written and oral statements made by the Company in this report 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 our expectations about future sales levels,
future training and consulting sales activity, anticipated expenses, the
adequacy of existing capital resources, the ability of the Company to obtain a
renewal or extension of its line of credit agreement, projected cost reduction
and strategic initiatives, our expectations about the effect of the sale of the
CSBU on our business, our expectations about our restructuring plan, expected
levels of depreciation and amortization expense, expectations regarding tangible
and intangible asset valuation expenses, the seasonality of future sales, the
seasonal fluctuations in cash used for and provided by operating activities,
expected improvements in cash flows from operating activities, future compliance
with the terms and conditions of our line of credit, the ability to borrow on
our line of credit, expected repayment of our line of credit in future periods,
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 this report on Form 10-K for the fiscal
year ended August 31, 2009, 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. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market
Risk of Financial Instruments
We are
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
Exchange 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.
Foreign Currency Forward
Contracts –
During the fiscal years ended August 31, 2009, 2008, and 2007, 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 did not meet specific
hedge accounting requirements, gains and losses on these contracts, which
expired on a quarterly basis, were recognized in current operations and were
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 statements of operations and
had the following net impact on the periods indicated (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Losses
on foreign exchange contracts
|
$ | (321 | ) | $ | (487 | ) | $ | (249 | ) | |||
|
Gains
on foreign exchange contracts
|
105 | 36 | 119 | |||||||||
|
Net
gain (loss) on foreign exchange contracts
|
$ | (216 | ) | $ | (451 | ) | $ | (130 | ) | |||
At August
31, 2009, all of our foreign currency forward contracts were
settled.
Interest
Rate Sensitivity
The
Company is exposed to fluctuations in interest rates primarily due to our line
of credit borrowings. At August 31, 2009, our debt obligations
consisted primarily of a long-term lease agreement (financing obligation)
associated with the sale of our corporate headquarters facility and a
variable-rate line of credit arrangement. Our overall interest rate
sensitivity is primarily influenced by amounts borrowed on the line of credit
and the prevailing interest rates, which may create additional expense if
interest rates increase in future periods. The financing obligation
has a payment structure equivalent to a long-term leasing arrangement with a
fixed interest rate of 7.7 percent and the line of credit obligation had a
weighted average interest rate of 2.3 percent at August 31, 2009. At
August 31, 2009 borrowing levels, a one percent increase in the interest rate on
our variable rate line of credit obligation would increase our interest expense
over the next year by approximately $0.1 million.
During
the fiscal years ended August 31, 2009, 2008, and 2007, we were not party to any
interest rate swap agreements or similar derivative instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Franklin
Covey Co.:
We have
audited Franklin Covey Co.’s internal control over financial reporting as of
August 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Franklin Covey Co.’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A
company’s internal control over financial reporting is a process designed 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. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Franklin Covey Co. maintained, in all material respects, effective
internal control over financial reporting as of August 31, 2009, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Franklin
Covey Co. and subsidiaries as of August 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the three-year
period ended August 31, 2009, and our report dated November 16, 2009 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG
LLP
Salt Lake
City, Utah
November
16, 2009
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Franklin
Covey Co.:
We have
audited the accompanying consolidated balance sheets of Franklin Covey Co. and
subsidiaries as of August 31, 2009 and 2008, and the related consolidated
statements of operations and comprehensive income (loss), shareholders’ equity,
and cash flows for each of the years in the three-year period ended August 31,
2009. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Covey Co. and
subsidiaries as of August 31, 2009 and 2008, and the results of their operations
and their cash flows for each of the years in the three-year period ended August
31, 2009, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Franklin Covey Co.’s internal control over
financial reporting as of August 31, 2009, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated November
16, 2009 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/ KPMG
LLP
Salt Lake
City, Utah
November
16, 2009
FRANKLIN
COVEY CO.
CONSOLIDATED
BALANCE SHEETS
|
AUGUST
31,
|
2009
|
2008
|
||||||
|
In
thousands, except per share data
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,688 | $ | 15,904 | ||||
|
Accounts
receivable, less allowance for doubtful accounts of $879 and
$1,066
|
22,877 | 27,114 | ||||||
|
Inventories
|
6,770 | 8,397 | ||||||
|
Deferred
income taxes
|
2,551 | 2,472 | ||||||
|
Note
receivable from equity method investee
|
- | 3,569 | ||||||
|
Income
taxes receivable
|
508 | - | ||||||
|
Prepaid
expenses and other assets
|
5,748 | 9,205 | ||||||
|
Total
current assets
|
40,142 | 66,661 | ||||||
|
Property
and equipment, net
|
22,629 | 26,928 | ||||||
|
Intangible
assets, net
|
68,994 | 72,320 | ||||||
|
Goodwill
|
505 | - | ||||||
|
Other
long-term assets
|
11,608 | 11,768 | ||||||
| $ | 143,878 | $ | 177,677 | |||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt and financing obligation
|
$ | 621 | $ | 670 | ||||
|
Line
of credit
|
12,949 | - | ||||||
|
Accounts
payable
|
8,758 | 8,713 | ||||||
|
Income
taxes payable
|
- | 384 | ||||||
|
Tender
offer obligation
|
- | 28,222 | ||||||
|
Accrued
liabilities
|
20,976 | 23,419 | ||||||
|
Total
current liabilities
|
43,304 | 61,408 | ||||||
|
Long-term
debt and financing obligation, less current portion
|
31,098 | 32,291 | ||||||
|
Other
liabilities
|
472 | 1,229 | ||||||
|
Deferred
income tax liabilities
|
- | 4,572 | ||||||
|
Total
liabilities
|
74,874 | 99,500 | ||||||
|
Commitments
and contingencies (Notes 1, 9, and 10)
|
||||||||
|
Shareholders’
equity:
|
||||||||
|
Common
stock, $.05 par value; 40,000 shares authorized, 27,056 shares
issued
|
1,353 | 1,353 | ||||||
|
Additional
paid-in capital
|
183,436 | 184,313 | ||||||
|
Common
stock warrants
|
7,597 | 7,597 | ||||||
|
Retained
earnings
|
13,980 | 24,812 | ||||||
|
Accumulated
other comprehensive income
|
1,961 | 1,006 | ||||||
|
Treasury
stock at cost, 10,080 shares and 10,203 shares
|
(139,323 | ) | (140,904 | ) | ||||
|
Total
shareholders’ equity
|
69,004 | 78,177 | ||||||
| $ | 143,878 | $ | 177,677 | |||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
YEAR
ENDED AUGUST 31,
|
2009
|
2008
|
2007
|
|||||||||
|
In
thousands, except per share amounts
|
||||||||||||
|
Net
sales:
|
||||||||||||
|
Training and consulting
services
|
$ | 114,910 | $ | 138,112 | $ | 137,708 | ||||||
|
Products
|
11,652 | 118,610 | 144,277 | |||||||||
|
Leasing
|
3,556 | 2,471 | 2,140 | |||||||||
| 130,118 | 259,193 | 284,125 | ||||||||||
|
Cost
of sales:
|
||||||||||||
|
Training and consulting
services
|
40,798 | 44,738 | 43,132 | |||||||||
|
Products
|
7,073 | 52,037 | 64,881 | |||||||||
|
Leasing
|
1,834 | 1,390 | 1,407 | |||||||||
| 49,705 | 98,165 | 109,420 | ||||||||||
|
Gross
profit
|
80,413 | 161,028 | 174,705 | |||||||||
|
Selling,
general, and administrative
|
77,943 | 141,318 | 149,220 | |||||||||
|
Gain
on sale of consumer solutions business unit
|
- | (9,131 | ) | - | ||||||||
|
Gain
on sale of manufacturing facility
|
- | - | (1,227 | ) | ||||||||
|
Restructuring
costs
|
2,047 | 2,064 | - | |||||||||
|
Impairment
of assets
|
3,569 | 1,483 | - | |||||||||
|
Depreciation
|
4,532 | 5,692 | 5,394 | |||||||||
|
Amortization
|
3,761 | 3,603 | 3,607 | |||||||||
|
Income (loss) from
operations
|
(11,439 | ) | 15,999 | 17,711 | ||||||||
|
Interest
income
|
27 | 157 | 717 | |||||||||
|
Interest
expense
|
(3,049 | ) | (3,083 | ) | (3,136 | ) | ||||||
|
Income (loss) before income
taxes
|
(14,461 | ) | 13,073 | 15,292 | ||||||||
|
Income
tax benefit (provision)
|
3,629 | (7,546 | ) | (7,827 | ) | |||||||
|
Net income (loss)
|
(10,832 | ) | 5,527 | 7,465 | ||||||||
|
Preferred
stock dividends
|
- | - | (2,215 | ) | ||||||||
|
Net income (loss) available to
common shareholders
|
$ | (10,832 | ) | $ | 5,527 | $ | 5,250 | |||||
|
Net
income (loss) available to common shareholders per share:
|
||||||||||||
|
Basic
|
$ | (.81 | ) | $ | .28 | $ | .27 | |||||
|
Diluted
|
$ | (.81 | ) | $ | .28 | $ | .26 | |||||
|
Weighted
average number of common shares:
|
||||||||||||
|
Basic
|
13,406 | 19,577 | 19,593 | |||||||||
|
Diluted
|
13,406 | 19,922 | 19,888 | |||||||||
|
COMPREHENSIVE
INCOME (LOSS):
|
||||||||||||
|
Net
income (loss)
|
$ | (10,832 | ) | $ | 5,527 | $ | 7,465 | |||||
|
Foreign
currency translation adjustments
|
955 | 46 | 448 | |||||||||
|
Comprehensive
income (loss)
|
$ | (9,877 | ) | $ | 5,573 | $ | 7,913 | |||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
YEAR
ENDED AUGUST 31,
|
2009
|
2008
|
2007
|
|||||||||
|
In
thousands
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net income (loss)
|
$ | (10,832 | ) | $ | 5,527 | $ | 7,465 | |||||
|
Adjustments to reconcile net
income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation and
amortization
|
8,038 | 9,533 | 10,030 | |||||||||
|
Amortization of capitalized
curriculum costs
|
2,263 | 2,124 | 1,303 | |||||||||
|
Gain on sale of consumer
solutions business unit assets
|
- | (9,131 | ) | - | ||||||||
|
Deferred income
taxes
|
(5,476 | ) | 4,152 | 5,274 | ||||||||
|
Share-based compensation cost
(benefit)
|
468 | (259 | ) | 1,394 | ||||||||
|
Loss (gain) on disposals of
assets
|
319 | 460 | (1,247 | ) | ||||||||
|
Restructuring
charges
|
2,047 | 2,064 | - | |||||||||
|
Impairment of
assets
|
3,569 | 1,483 | - | |||||||||
|
Changes in assets and
liabilities:
|
||||||||||||
|
Decrease (increase) in accounts
receivable, net
|
5,196 | (6,299 | ) | (3,574 | ) | |||||||
|
Decrease (increase) in
inventories
|
2,170 | 2,748 | (2,041 | ) | ||||||||
|
Decrease (increase) in receivable
from equity method investee
|
- | (7,672 | ) | - | ||||||||
|
Decrease (increase) in prepaid
expenses and other assets
|
4,136 | 4,985 | (789 | ) | ||||||||
|
Decrease in accounts payable and
accrued liabilities
|
(5,368 | ) | (1,512 | ) | (4,388 | ) | ||||||
|
Increase (decrease) in income
taxes payable/receivable
|
(983 | ) | (184 | ) | 94 | |||||||
|
Decrease in other long-term
liabilities
|
(265 | ) | (151 | ) | (151 | ) | ||||||
|
Net cash provided by operating
activities
|
5,282 | 7,868 | 13,370 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Proceeds from the sale of
consumer solutions business unit assets, net
|
- | 28,241 | - | |||||||||
|
Purchases of property and
equipment
|
(2,275 | ) | (4,164 | ) | (9,138 | ) | ||||||
|
Capitalized curriculum
development costs
|
(1,762 | ) | (4,042 | ) | (5,088 | ) | ||||||
|
Acquisition of business, net of
cash acquired
|
(1,157 | ) | - | - | ||||||||
|
Investment in equity method
investee
|
- | (2,755 | ) | - | ||||||||
|
Proceeds from disposal of
consolidated subsidiaries
|
201 | 1,180 | 150 | |||||||||
|
Proceeds from sales of property
and equipment, net
|
1,790 | 60 | 2,596 | |||||||||
|
Net cash provided by (used for)
investing activities
|
(3,203 | ) | 18,520 | (11,480 | ) | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Proceeds from line of credit
borrowing
|
77,044 | 69,708 | 50,951 | |||||||||
|
Payments on line of credit
borrowings
|
(64,095 | ) | (85,707 | ) | (34,952 | ) | ||||||
|
Redemptions of Series A preferred
stock
|
- | - | (37,345 | ) | ||||||||
|
Principal payments on long-term
debt and financing obligation
|
(1,211 | ) | (622 | ) | (605 | ) | ||||||
|
Purchases of common stock for
treasury
|
(28,270 | ) | - | (2,625 | ) | |||||||
|
Proceeds from sales of common
stock held in treasury
|
284 | 462 | 388 | |||||||||
|
Proceeds from management stock
loan payments
|
- | - | 27 | |||||||||
|
Payment of preferred stock
dividends
|
- | - | (2,215 | ) | ||||||||
|
Net cash used for financing
activities
|
(16,248 | ) | (16,159 | ) | (26,376 | ) | ||||||
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
(47 | ) | (451 | ) | 25 | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(14,216 | ) | 9,778 | (24,461 | ) | |||||||
|
Cash
and cash equivalents at beginning of the year
|
15,904 | 6,126 | 30,587 | |||||||||
|
Cash
and cash equivalents at end of the year
|
$ | 1,688 | $ | 15,904 | $ | 6,126 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash paid for income
taxes
|
$ | 2,788 | $ | 3,549 | $ | 2,370 | ||||||
|
Cash paid for
interest
|
3,026 | 3,146 | 2,973 | |||||||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Acquisition of treasury stock
from tender offer through liabilities
|
$ | - | $ | 28,222 | $ | - | ||||||
|
Promissory notes received from
sales of consolidated subsidiaries
|
- | - | 1,513 | |||||||||
|
Purchases of property and
equipment financed by accounts payable
|
77 | 314 | 895 | |||||||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
Series
A Preferred Stock Shares
|
Series
A Preferred Stock Amount
|
Common
Stock Shares
|
Common
Stock Amount
|
Additional
Paid-In Capital
|
Common
Stock Warrants
|
Retained
Earnings (Accumulated Deficit)
|
Accumulated
Other Comprehensive Income
|
Treasury
Stock Shares
|
Treasury
Stock
Amount
|
|||||||||||||||||||||||||||||||
|
In
thousands
|
||||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2006
|
1,494 | $ | 37,345 | 27,056 | $ | 1,353 | $ | 185,691 | $ | 7,611 | $ | 14,035 | $ | 653 | (7,083 | ) | $ | (113,379 | ) | |||||||||||||||||||||
|
Preferred
stock dividends
|
(2,215 | ) | ||||||||||||||||||||||||||||||||||||||
|
Preferred
stock redemptions
|
(1,494 | ) | (37,345 | ) | ||||||||||||||||||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(708 | ) | 100 | 1,096 | ||||||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(345 | ) | (2,603 | ) | ||||||||||||||||||||||||||||||||||||
|
Unvested
share award
|
(501 | ) | 32 | 501 | ||||||||||||||||||||||||||||||||||||
|
Share-based
compensation
|
1,394 | |||||||||||||||||||||||||||||||||||||||
|
Payments
on management common stock loans
|
27 | |||||||||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
448 | |||||||||||||||||||||||||||||||||||||||
|
Common
stock warrant activity
|
(13 | ) | (9 | ) | ||||||||||||||||||||||||||||||||||||
|
Sale
of Brazil subsidiary
|
(141 | ) | ||||||||||||||||||||||||||||||||||||||
|
Net
income
|
7,465 | |||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2007
|
- | $ | - | 27,056 | $ | 1,353 | $ | 185,890 | $ | 7,602 | $ | 19,285 | $ | 960 | (7,296 | ) | $ | (114,385 | ) | |||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(746 | ) | 96 | 1,234 | ||||||||||||||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(12 | ) | (103 | ) | ||||||||||||||||||||||||||||||||||||
|
Treasury
shares acquired through tender offer
|
(3,027 | ) | (28,222 | ) | ||||||||||||||||||||||||||||||||||||
|
Unvested
share award
|
(572 | ) | 36 | 572 | ||||||||||||||||||||||||||||||||||||
|
Share-based
compensation
|
(259 | ) | ||||||||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
46 | |||||||||||||||||||||||||||||||||||||||
|
Common
stock warrant activity
|
(5 | ) | ||||||||||||||||||||||||||||||||||||||
|
Net
income
|
5,527 | |||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2008
|
- | $ | - | 27,056 | $ | 1,353 | $ | 184,313 | $ | 7,597 | $ | 24,812 | $ | 1,006 | (10,203 | ) | $ | (140,904 | ) | |||||||||||||||||||||
|
Issuance
of common stock from treasury
|
(424 | ) | 57 | 708 | ||||||||||||||||||||||||||||||||||||
|
Unvested
share award
|
(921 | ) | 66 | 921 | ||||||||||||||||||||||||||||||||||||
|
Additional
tender offer costs
|
(48 | ) | ||||||||||||||||||||||||||||||||||||||
|
Share-based
compensation
|
468 | |||||||||||||||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
955 | |||||||||||||||||||||||||||||||||||||||
|
Net
loss
|
(10,832 | ) | ||||||||||||||||||||||||||||||||||||||
|
Balance
at August 31, 2009
|
- | $ | - | 27,056 | $ | 1,353 | $ | 183,436 | $ | 7,597 | $ | 13,980 | $ | 1,961 | (10,080 | ) | $ | (139,323 | ) | |||||||||||||||||||||
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Franklin
Covey Co. (hereafter referred to as us, we, our, or the Company) is a leading
global provider of execution, leadership, and personal-effectiveness
training. We operate globally with one common brand and business
model designed to enable us to provide clients around the world with the same
high level of service. To achieve this level of service, we operate
four regional sales offices in the United States; wholly owned subsidiaries in
Australia, Japan, and the United Kingdom; and contract with licensee partners
who deliver our curriculum and provide services in over 150 other countries and
territories around the world. Our business-to-business service builds
on our expertise in training, consulting, and technology that is designed to
help our clients define great performance and execute at the highest
levels. We also help clients accelerate great performance through
education in management skills, relationship skills, and individual
effectiveness, and can provide personal-effectiveness literature and electronic
educational solutions to our clients as needed. Our services and
products have historically been available through professional consulting
services, public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com,
and our best-known offerings in the marketplace have included 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.
During
the fourth quarter of fiscal 2008, we completed the sale of substantially all of
the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed
entity, Franklin Covey Products, LLC (Note 3). The CSBU was primarily
responsible for the sale of our products, including the FranklinCovey Planner™,
to consumers through retail stores, catalogs, and our Internet
site. Following the sale of the CSBU, our business primarily consists
of training, consulting, assessment services, and products to help organizations
achieve superior results by focusing on and executing on top priorities,
building the capability of knowledge workers, and aligning business
processes. Through our organizational research and curriculum
development efforts, we seek to consistently create, develop, and introduce new
services and products that will help our clients achieve greatness.
Fiscal
Year
The
Company utilizes a modified 52/53-week fiscal year that ends on August 31 of
each year. Corresponding quarterly periods generally consist of
13-week periods that ended on November 29, 2008, February 28, 2009, and May 30,
2009 during fiscal 2009. Unless otherwise noted, references to fiscal
years apply to the 12 months ended August 31 of the specified year.
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the
Company and our wholly-owned subsidiaries, which consisted of Franklin
Development Corp., and our operations in Japan, the United Kingdom, and
Australia. Intercompany balances and transactions are eliminated in
consolidation.
Pervasiveness
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us 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.
Reclassifications
Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation. These reclassifications included
a change in the classification of building depreciation costs related to
subleased office space from product cost of sales to depreciation
expense. The depreciation expense reclassified from product cost of
sales totaled $0.7 million for the fiscal year ended August 31,
2007.
Correction
of Immaterial Errors
While
closing the first quarter of fiscal 2009, we identified errors due to improper
accounting for certain product sales in the fourth quarter of fiscal 2008, and
the improper calculation of inventory reserves from late fiscal 2006 through the
fourth quarter of fiscal 2008 in the financial statements of our directly owned
subsidiary in Japan. We assessed the materiality of these errors in
accordance with Staff Accounting Bulletin (SAB) No. 108 and determined that the
errors were immaterial to previously reported amounts contained in our periodic
reports, and we have corrected these errors in subsequent periodic
filings. For further information regarding the correction of these
errors, refer to Note 2.
Codification
of Accounting Standards
During
the fiscal year ended August 31, 2009, the Financial Accounting Standards Board
(FASB) launched its Financial Accounting Standards Codification
(FASC). The FASC is intended to be the sole source of authoritative
generally accepted accounting principles (GAAP) in the United
States. For interim and annual periods ending after September 15,
2009, authoritative references to accounting literature are required to cite the
applicable FASC sections. To assist the users of our financial
statements during the transitional period, we have included the corresponding
FASC reference following the reference to legacy authoritative
literature. Specific Securities and Exchange Commission (SEC)
references are unaffected by the FASC.
Cash
and Cash Equivalents
We
consider highly liquid investments with insignificant interest rate risk and
original maturities to the Company of three months or less to be cash
equivalents. We did not hold a significant amount of investments that
would be considered cash equivalent instruments at August 31, 2009 or
2008.
As of
August 31, 2009, we had demand deposits at various banks in excess of the
$250,000 limit for insurance by the Federal Deposit Insurance Corporation
(FDIC); however, the majority of our cash receipts are used to repay amounts
borrowed on our line of credit facility.
Trade
Accounts Receivable
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 the allowance for doubtful accounts on a regular
basis. Receivable balances past due over 90 days, which exceed a
specified dollar amount, are reviewed individually for
collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. We do not have any off-balance
sheet credit exposure related to our customers.
Inventories
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method. Elements of cost in inventories generally
include raw materials, direct labor, and overhead. Cash flows from
the sales of inventory are included in cash flows provided by operating
activities in our consolidated cash flows statements. Following the
sale of our Consumer Solutions Business Unit in the fourth quarter of fiscal
2008, our inventories are comprised primarily of training materials, books, and
related accessories and consisted of the following (in thousands):
|
AUGUST
31,
|
2009
|
2008
|
||||||
|
Finished
goods
|
$ | 6,542 | $ | 7,984 | ||||
|
Raw
materials
|
228 | 413 | ||||||
| $ | 6,770 | $ | 8,397 | |||||
Provision
is made to reduce excess and obsolete inventories to their estimated net
realizable value. At August 31, 2009 and 2008, our reserves for
excess and obsolete inventories totaled $0.9 million and $1.8
million. In assessing the realization of inventories, we make
judgments regarding future demand requirements and compare these estimates with
current and committed inventory levels. Inventory requirements may
change based on projected customer demand, training curriculum life-cycle
changes, longer- or shorter-than-expected usage periods, and other factors that
could affect the valuation of our inventories.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation expense, which
includes depreciation on our corporate campus that is accounted for as a
financing obligation (Note 4) and the amortization of assets recorded under
capital lease obligations, is calculated using the straight-line method over the
lesser of the expected useful life of the asset or the contracted lease
period. The Company generally uses the following depreciable lives
for our major classifications of property and equipment:
|
Description
|
Useful
Lives
|
|
Buildings
|
15-39
years
|
|
Machinery
and equipment
|
3-7
years
|
|
Computer
hardware and software
|
3
years
|
|
Furniture,
fixtures, and leasehold improvements
|
5-8
years
|
Leasehold
improvements are amortized over the lesser of the useful economic life of the
asset or the contracted lease period. We expense costs for repairs
and maintenance as incurred. Gains and losses resulting from the sale
of property and equipment are recorded in current operations.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an
estimate of undiscounted future net cash flows of the assets over the remaining
useful lives in determining whether the carrying value of the assets is
recoverable. If the carrying values of the assets exceed the
anticipated future cash flows of the assets, we recognize an impairment loss
equal to the difference between the carrying values of the assets and their
estimated fair values. Impairment of long-lived assets is assessed at
the lowest levels for which there are identifiable cash flows that are
independent from other groups of assets. The evaluation of long-lived
assets requires us to use estimates of future cash flows. We have
projected positive cash flows over the remaining useful lives of our principal
assets, which is 17 years. If forecasts and assumptions used to
support the realizability of our long-lived tangible and definite-lived
intangible assets change in the future, significant impairment charges could
result that would adversely affect our results of operations and financial
condition.
Indefinite-Lived
Intangible Assets and Goodwill
Intangible
assets that are deemed to have an indefinite life and acquired goodwill 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 (Note 5) has been
deemed to have an indefinite life. This intangible asset is tested
for impairment using the present value of estimated royalties on trade name
related revenues, which consist primarily of training seminars and work
sessions, international licensee sales, and related products. Our
reported goodwill resulted from the fiscal 2009 acquisition of CoveyLink, LLC
(Note 15). No impairment charges to the Covey trade name or
CoveyLink, LLC acquisition goodwill were recorded during the fiscal years ended
August 31, 2009, 2008, or 2007.
Capitalized
Curriculum Development Costs and Impairment of Assets
During
the normal course of business, we develop training courses and related materials
that we sell to our customers. Capitalized curriculum development
costs include certain expenditures to develop course materials such as video
segments, course manuals, and other related materials. Generally,
curriculum costs are capitalized when there is a major revision to an existing
course that requires a significant re-write of the course materials or
curriculum. Costs incurred to maintain existing offerings are
expensed when incurred. In addition, development costs incurred in
the research and development of new curriculum and software products to be sold,
leased, or otherwise marketed are expensed as incurred until technological
feasibility has been established in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed (FASC 985-20-25), and
Emerging Issues Task Force (EITF) Issue 96-6, Accounting for the Film and Software
Costs Associated with Developing Entertainment and Educational Software Products
(FASC 985-705-S99).
During
fiscal 2009, we capitalized costs incurred for the development of new leadership
offerings, as well as for various other courses. Capitalized
development costs are generally amortized over a five-year life, which is based
on numerous factors, including expected cycles of major changes to
curriculum. Capitalized curriculum development costs are reported as
a component of other long-term assets in our consolidated balance sheets and
totaled $6.3 million and $6.8 million at August 31, 2009 and
2008. Amortization of capitalized curriculum development costs is
reported as a component of cost of sales.
In fiscal
2008, we analyzed the expected future revenues and corresponding cash flows
expected to be generated from our The 7 Habits interactive
program and concluded that the expected future revenues, less direct selling and
maintenance costs, were insufficient to cover the carrying value of the
corresponding capitalized development costs. Accordingly, we recorded
a $1.5 million impairment charge in the fourth quarter of fiscal 2008 to write
the carrying value of this program down to its net realizable
value. No impairment charges were recorded in fiscal
2009.
Restricted
Investments
The
Company’s restricted investments consisted of insurance contracts and
investments in mutual funds that were held in a “rabbi trust” and were
restricted for payment to the participants of our deferred compensation plan
(Note 17). However, during the fourth quarter of fiscal 2009, our
Board of Directors decided to partially terminate our non-qualified deferred
compensation (NQDC) plan. Due to the partial termination of the NQDC
plan, all of the restricted investments held as trust assets were liquidated
prior to August 31, 2009 and were reported as a component of cash at August 31,
2009. At August 31, 2008, our restricted investments were classified
as trading securities and consisted of insurance contracts and mutual funds held
by the trust. The fair value of these restricted investments totaled
$0.5 million at August 31, 2008, and the balance was recorded as a component of
other long-term assets in the accompanying consolidated balance sheet for that
period.
Our
unrealized losses on these restricted investments, which were immaterial during
fiscal years 2009, 2008, and 2007, were recognized in the accompanying
consolidated statements of operations as components of selling, general, and
administrative expense.
Accrued
Liabilities
Significant
components of our accrued liabilities were as follows (in
thousands):
|
AUGUST
31,
|
2009
|
2008
|
||||||
|
Accrued
compensation
|
$ | 4,078 | $ | 4,152 | ||||
|
Unearned
revenue
|
3,692 | 4,564 | ||||||
|
Outsourcing
contract costs payable
|
2,531 | 4,446 | ||||||
|
Customer
credits
|
2,384 | 2,191 | ||||||
|
Restructuring
costs
|
1,299 | 2,055 | ||||||
|
Other
accrued liabilities
|
6,992 | 6,011 | ||||||
| $ | 20,976 | $ | 23,419 | |||||
Restructuring
Costs
Following
the sale of our CSBU in the fourth quarter of fiscal 2008, we initiated a
restructuring plan that reduced the number of our domestic regional sales
offices, decentralizes certain sales support functions, and significantly
changes the operations of our Canadian subsidiary. The restructuring
plan is intended to strengthen the remaining domestic sales offices and reduce
our overall operating costs. During fiscal 2009 and fiscal 2008, we
expensed $2.0 million and $2.1 million, respectively, for anticipated severance
costs necessary to complete the restructuring plan, of which $1.3 and $2.1
million were recorded as components of accrued liabilities at August 31, 2009
and 2008. The composition and utilization of the accrued
restructuring charge was as follows at August 31, 2009 (in
thousands):
|
Description
|
Accrued
Restructuring Costs
|
|||
|
Balance
at August 31, 2007
|
$ | - | ||
|
Restructuring
charges
|
2,064 | |||
|
Amounts
paid – employee severance
|
(9 | ) | ||
|
Balance
at August 31, 2008
|
$ | 2,055 | ||
|
Restructuring
charges
|
2,047 | |||
|
Amount
paid – employee severance
|
(2,803 | ) | ||
|
Balance
at August 31, 2009
|
$ | 1,299 | ||
We intend
to pay the majority of the restructuring plan liability during the year ending
August 31, 2010.
Foreign
Currency Translation and Transactions
The
functional currencies of the Company’s foreign operations are the reported local
currencies. Translation adjustments result from translating our
foreign subsidiaries’ financial statements into United States
dollars. The balance sheet accounts of our foreign subsidiaries are
translated into United States dollars using the exchange rate in effect at the
balance sheet date. Revenues and expenses are translated using
average exchange rates for each month during the fiscal year. The
resulting translation gains or losses were recorded as a component of
accumulated other comprehensive income in shareholders’
equity. Foreign currency transaction losses totaled $0.2 million,
$0.1 million, and $0.1 million during the fiscal years ended August 31, 2009,
2008, and 2007, and were reported as a component of our selling, general, and
administrative expenses.
Derivative
Instruments
During
the normal course of business, we are exposed to risks associated with foreign
currency exchange rate and interest rate fluctuations. Foreign
currency exchange rate exposures result from the Company’s operating results,
assets, and liabilities that are denominated in currencies other than the United
States dollar. In order to limit our exposure to these elements, we
have made limited use of derivative instruments. Each derivative
instrument that is designated as a hedge instrument is recorded on the balance
sheet at its fair value. Changes in the fair value of derivative
instruments that qualify for hedge accounting are recorded in accumulated other
comprehensive income, which is a component of shareholders’
equity. Changes in the fair value of derivative instruments that are
not designated as hedge instruments are immediately recognized as a component of
selling, general, and administrative expense in our consolidated statements of
operations. At August 31, 2009 we were not party to any derivative
financial instruments.
Sales
Taxes
We
collect sales tax on qualifying transactions with customers based upon
applicable sales tax rates in various jurisdictions. The Company
accounts for its sales taxes collected using the net method as defined by EITF
Issue No. 06-03, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
(FASC 605-45-50-3, 4); accordingly, we do not include sales taxes in net
sales reported in our consolidated financial statements.
Revenue
Recognition
We
recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in
Financial Statements, as amended by SAB No. 104, Revenue
Recognition. Accordingly, we recognize 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 or
determinable, and 4) collectibility is reasonably assured. For
training and service sales, these conditions are generally met upon presentation
of the training seminar or delivery of the consulting services. For
product sales, these conditions are generally met upon shipment of the product
to the customer or by completion of the sales transaction in a retail
store.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. For
transactions that contain more than one element, we recognize revenue in
accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables (FASC 605-25). When fair value
exists for all contracted elements, the overall contract consideration is
allocated among the separate units of accounting based upon their relative fair
values. Revenue for these units is recognized in accordance with our
general revenue policies once it has been determined that the delivered items
have standalone value to the customer. If fair value does not exist
for all contracted elements, revenue for the delivered items is recognized using
the residual method, which generally means that revenue recognition is postponed
until the point is reached when the delivered items have standalone value and
fair value exists for the undelivered items. Under the residual
method, the amount of revenue considered for recognition under our general
revenue policies is the total contract amount, less the aggregate fair value of
the undelivered items. Fair value of the undelivered items is based
upon the normal pricing practices for our existing training programs, consulting
services, and other products, which are generally the prices of the items when
sold separately.
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 their sales to clients. We recognize royalty income
each period based upon the sales information reported to us from our
licensees. Licensee royalty revenues are included as a component of
training sales and totaled $8.6 million, $10.1 million, and $7.6 million for the
fiscal years ended August 31, 2009, 2008, and 2007.
Revenue
is recognized on software sales in accordance with Statement of Position (SOP)
97-2, Software Revenue
Recognition (FASC 985-605-25) 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). Nearly all of the Company’s software sales consist of ready
to use “off-the-shelf” software products that have multiple elements, including
a license and post contract customer support (PCS). Currently, we do
not have VSOE for either the license or support elements of our software
sales. Accordingly, revenue is deferred until the only undelivered
element is PCS and the total arrangement fee is recognized over the support
period. Following the sale of the CSBU in the fourth quarter of
fiscal 2008, our software sales have been insignificant. However,
during fiscal 2008 and fiscal 2007, we had software sales totaling $2.5 million
and $3.2 million, which are included as a component of product sales in our
consolidated statements of operations for those periods.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Share-Based
Compensation
We record
the compensation expense for all share based-payments to employees and
non-employees, including grants of stock options and the compensatory elements
of our employee stock purchase plan, in our consolidated statements of
operations based upon their fair values. For more information on our
share-based compensation plans, refer to Note 14.
Shipping
and Handling Fees and Costs
All
shipping and handling fees billed to customers are recorded as a component of
net sales. All costs incurred related to the shipping and handling of
products are recorded in cost of sales.
Advertising
Costs
Costs for
newspaper, television, radio, and other advertising are expensed as incurred or
recognized over the period of expected benefit for direct response and catalog
advertising. Direct response advertising costs, which consist
primarily of printing and mailing costs for seminar mailers, are charged to
expense over the period of projected benefit, which ranges from three to 12
months. Advertising costs included in selling, general, and
administrative expenses totaled $5.5 million, $15.5 million, and $15.9 million
for the fiscal years ended August 31, 2009, 2008, and 2007. Our
direct response advertising costs reported in other current assets totaled $0.1
million and $0.5 million at August 31, 2009 and 2008.
Income
Taxes
Our
income tax provision has been determined using the asset and liability approach
of accounting for income taxes. Under this approach, deferred income
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The income
tax provision represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred income taxes
result from differences between the financial and tax bases of our assets and
liabilities and are adjusted for tax rates and tax laws when changes are
enacted. A
valuation
allowance is provided against deferred income tax assets when it is more likely
than not that all or some portion of the deferred income tax assets will not be
realized. Interest and penalties related to uncertain tax positions
are recognized as components of income tax expense in our consolidated
statements of operations.
The
Company provides for income taxes, net of applicable foreign tax credits, on
temporary differences in our investment in foreign subsidiaries, which consist
primarily of unrepatriated earnings.
Comprehensive
Income
Comprehensive
income includes changes to equity accounts that were not the result of
transactions with shareholders. Comprehensive income is comprised of
net income or loss and other comprehensive income and loss items. Our
comprehensive income and losses generally consist of changes in the cumulative
foreign currency translation adjustment.
Liquidity
At August
31, 2009 our line of credit has a remaining maturity of less than one year and
is therefore classified as a current obligation on our consolidated balance
sheet. We are
currently in negotiations to renew the line of credit to ensure the future
availability of liquidity through this facility. We believe that we
will be successful in obtaining a new or extended line of credit from our
lender. Additional potential sources of liquidity include factoring
receivables, issuance of additional equity, or issuance of debt from public or
private sources. However, no assurance can be provided that we will
obtain a new or extended line of credit or obtain additional financing from
other sources on terms that would be acceptable to us. If necessary,
we will evaluate all of these options and select one or more of them depending
on overall capital needs and the associated cost of capital. If we
are unsuccessful in obtaining a renewal or extension of our line of credit, or
additional financing, we believe that cash flows from operations combined with a
number of initiatives we would implement in the months preceding the due date
will create sufficient liquidity to pay down the required outstanding balance on
the line of credit. These initiatives include deferral of capital
purchases for externally developed curriculum and uncommitted capital
expenditures; deferral of executive team compensation; deferral of certain
related party contractual royalties and earnout payments; substantial reduction
of associate salaries; reduction of operating expenses, including non-critical
travel; and deferral of payments to other vendors in order to generate
sufficient cash.
Subsequent
Events
Subsequent
events have been evaluated through November 16, 2009, the date of the issuance
of our consolidated financial statements.
Accounting
Pronouncements Issued Not Yet Adopted
Business
Combinations – In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations (FASC 805) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (FASC 810-10). These
standards aim to improve and converge internationally the accounting for
business combinations and the reporting of noncontrolling interests in
consolidated financial statements. The provisions of these statements
are effective for our fiscal year beginning September 1, 2009. We do
not currently anticipate that these statements will have a material impact upon
our financial condition or results of operations.
Revenue
Recognition – In October 2009, the FASB issued EITF 08-1, Revenue Recognition – Multiple
Element Arrangements (FASC 650-25). This consensus amends
existing guidance on multiple element revenue arrangements to improve the
ability of entities to recognize revenue from the sale of delivered items that
are part of a multiple-element arrangement when other items have not yet been
delivered. One of the current requirements is that there must be
objective and reliable evidence of the standalone selling price of the
undelivered items, which must be supported by vendor-specific objective evidence
(VSOE)
or
third-party evidence (TPE). This amendment eliminates the
requirements that all undelivered elements have VSOE or TPE before an entity can
recognize the portion of an overall arrangement that is attributable to items
that have already been delivered. The “residual method” of allocating
revenue is thereby eliminated and entities are required to allocate the
arrangement consideration at the inception of the arrangement to all
deliverables using the relative selling price method. The consensus
is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning after June 15, 2010, and early adoption is
permitted. We have not yet completed a formal analysis of the
provisions of EITF 08-1.
|
2.
|
CORRECTION
OF IMMATERIAL ERRORS
|
While
closing the first quarter of fiscal 2009, we identified errors due to improper
accounting for certain product sales in the fourth quarter of fiscal 2008, and
the improper calculation of inventory reserves from late fiscal 2006 through the
fourth quarter of fiscal 2008 in the financial statements of our directly owned
subsidiary in Japan.
During
the fourth quarter of fiscal 2008, certain product sales were recorded where
delivery had not occurred resulting in an overstatement of
revenues. In addition, we determined that our Japanese subsidiary’s
inventory reserve calculation did not appropriately capture all considerations
of old and outdated material resulting in an overstatement in the value of our
inventory.
The
revenue recognition error resulted in a $0.9 million overstatement of sales,
which had a $0.6 million impact on gross profit, in the fourth quarter of fiscal
2008. The inventory reserve calculation errors from the fourth
quarter of fiscal 2006 through August 31, 2008 cumulatively totaled $0.7
million.
We
assessed the materiality of these errors in accordance with SAB No. 108 and
determined that the errors were immaterial to previously reported amounts
contained in our periodic reports and we have corrected these errors in
subsequent periodic filings. The effects of recording these
immaterial corrections in our financial statements for the fiscal years
presented are as follows (in thousands):
|
For
the Fiscal Year Ended
August
31, 2008
|
||||||||
|
As
Reported
|
As
Revised
|
|||||||
|
Sales
|
$ | 260,092 | $ | 259,193 | ||||
|
Gross
profit
|
161,789 | 161,028 | ||||||
|
Operating
income
|
16,760 | 15,999 | ||||||
|
Net
income
|
5,848 | 5,527 | ||||||
|
Accounts
receivable
|
28,019 | 27,114 | ||||||
|
Inventories
|
8,742 | 8,397 | ||||||
|
Retained
earnings
|
25,337 | 24,812 | ||||||
|
Total
shareholders’ equity
|
78,754 | 78,177 | ||||||
|
For
the Fiscal Year Ended
August
31, 2007
|
||||||||
|
As
Reported
|
As
Revised
|
|||||||
|
Gross
profit
|
$ | 175,078 | $ | 174,705 | ||||
|
Operating
income
|
18,084 | 17,711 | ||||||
|
Net
income
|
5,414 | 5,250 | ||||||
|
Inventories
|
24,033 | 23,583 | ||||||
|
Retained
earnings
|
19,489 | 19,285 | ||||||
|
Total
shareholders’ equity
|
100,919 | 100,705 | ||||||
|
3.
|
SALE
OF THE CONSUMER SOLUTIONS BUSINESS
UNIT
|
General
During
the fourth quarter of fiscal 2008, we joined 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 with the objective of expanding the
worldwide sales of Franklin Covey Products as governed by a comprehensive
license agreement between us and Franklin Covey Products. Franklin
Covey Products, which is controlled by Peterson Partners, purchased the CSBU
assets for $32.0 million in cash plus a $1.2 million adjustment for working
capital delivered on the closing date of the sale, which was effective July 6,
2008. We also incurred $3.7 million of direct costs related to the
sale of the CSBU assets, a portion of which is reimbursable from Franklin Covey
Products.
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 priority capital contribution with a 10 percent return, and will have
the opportunity to earn contingent license fees if Franklin Covey Products
achieves specified performance objectives. We recognized a gain of
$9.1 million on the sale of the CSBU assets, and according to guidance found in
EITF Issue No. 01-2, Interpretations of APB Opinion No.
29 (FASC 845-10-15), we deferred a portion of the gain equal to our
investment in Franklin Covey Products. We will recognize the deferred
gain over the life of the long-term assets acquired by Franklin Covey Products
or when cash is received for payment of the priority contribution.
The
carrying amounts of the assets and liabilities of the CSBU that were sold to
Franklin Covey Products were as follows (in thousands):
|
Description
|
||||
|
Cash
and cash equivalents
|
$ | 38 | ||
|
Accounts
receivable, net
|
6,675 | |||
|
Inventories
|
12,665 | |||
|
Other
current assets
|
2,291 | |||
|
Property
and equipment, net
|
8,435 | |||
|
Other
assets
|
158 | |||
|
Total
assets sold
|
$ | 30,262 | ||
|
Accounts
payable
|
$ | 3,589 | ||
|
Accrued
liabilities
|
6,748 | |||
|
Total
liabilities sold
|
$ | 10,337 | ||
Accounting
for the Investment in Franklin Covey Products
Based
upon the guidance found in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FASC 205-20-45), EITF Issue No. 03-13,
Applying the Conditions in
Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report
Discontinued Operations (FASC 205-20-50, 55), and SAB 103, Topic 5Z4,
Disposal of Operation with
Significant Interest Retained, we determined that the operations of CSBU
should not be reported as discontinued operations because we will continue to
have significant influence over the operations of Franklin Covey Products and
may participate in their future cash flows. As a result of this
determination, we have not presented the financial results of the CSBU as
discontinued operations in the accompanying consolidated financial statements,
and we do not anticipate discontinued operations presentation in future interim
and annual reporting periods.
As a
result of Franklin Covey Products’ structure as a limited liability company with
separate owner capital accounts and the guidance found in EITF Issue No. 03-16,
Accounting for Investments in
Limited Liability Companies (FASC 323-30) and SOP 78-9, Accounting for Investments in Real
Estate Ventures (FASC 970-323-25), we determined that the Company’s
investment in Franklin Covey Products is more
than
minor and that we are required to account for our investment in Franklin Covey
Products using the equity method of accounting. We record our share
of Franklin Covey Products’ profit and loss based upon specified allocations as
defined in the associated operating agreement. In addition, our
ownership interest may be diluted in future periods if ownership shares of
Franklin Covey Products granted to certain members of its management
vest.
During
fiscal 2009, Franklin Covey Products recognized a net loss. However,
we do not have any obligation to fund the losses of Franklin Covey Products and
therefore, our portion of their net losses during fiscal 2009 and fiscal 2008
were not recorded in our consolidated statements of operations. The
net book value of the investment in Franklin Covey Products was zero as of
August 31, 2009 and 2008.
We
receive reimbursement for certain operating costs, such as warehousing and
distribution costs, which are billed to the Company by third party
providers. At August 31, 2009 and 2008 we had $2.0 million and $4.1
million receivable from Franklin Covey Products, which have been classified in
other current assets.
Impairment
of Working Capital and Reimbursable Transaction Costs Note
Based on
the terms of the sale transaction, the Company was entitled to receive a $1.2
million adjustment for working capital delivered on the closing date of the sale
and to receive $2.3 million as reimbursement for specified costs necessary to
complete the transaction. Payment for these costs was originally due
in January 2009, but we extended the due date of the payment at Franklin Covey
Products’ request and obtained a promissory note from Franklin Covey Products
for the amount owed, plus accrued interest. The promissory note
includes accrued interest through the date of the note, matures on September 30,
2013, and bears interest at 10 percent per year.
At the
time we received the promissory note from Franklin Covey Products, we believed
that we could obtain payment for the amount owed, based on prior year
performance and forecasted financial performance in 2009. However,
the financial position of Franklin Covey Products deteriorated significantly
late in fiscal 2009, and the deterioration accelerated subsequent to August 31,
2009. As a result of this deterioration, the Company reassessed
the collectibility of the promissory note as of August 31,
2009. Based on revised expected cash flows and other operational
issues, we determined that the promissory note should be impaired at August 31,
2009. Accordingly, we recorded a $3.6 million impaired asset charge
and reversed $0.1 million of interest income that was recorded during fiscal
2009 from the working capital settlement and reimbursable transaction cost
receivables.
|
4.
|
PROPERTY
AND EQUIPMENT
|
Our
property and equipment were comprised of the following (in
thousands):
|
AUGUST
31,
|
2009
|
2008
|
||||||
|
Land
and improvements
|
$ | 1,312 | $ | 1,626 | ||||
|
Buildings
|
32,385 | 34,573 | ||||||
|
Machinery
and equipment
|
2,333 | 2,969 | ||||||
|
Computer
hardware and software
|
19,221 | 20,010 | ||||||
|
Furniture,
fixtures, and leasehold improvements
|
9,803 | 9,640 | ||||||
| 65,054 | 68,818 | |||||||
|
Less
accumulated depreciation
|
(42,425 | ) | (41,890 | ) | ||||
| $ | 22,629 | $ | 26,928 | |||||
In the
fourth quarter of fiscal 2009, we completed the sale of our administrative
office and distribution facility located in Ontario, Canada to an unrelated
entity. The sale price was $2.0 million and the carrying value of the
building at the date of the sale was $1.9 million. After deducting
customary closing costs and other costs necessary to complete the sale of the
building, we recorded a $0.1 million loss,
which was
recorded as a component of depreciation expense in our consolidated statement of
operations for the year ended August 31, 2009. Based on guidance
found in SFAS No. 66, Accounting for Sales of Real
Estate (FASC 360-20-15), the transaction was accounted for as a sale, and
we will have no further obligations or responsibilities related to the property
that was sold. A portion of the proceeds from the sale of the
building was used to repay the mortgage obligation associated with the property
(Note 8).
During
fiscal 2007, we completed a project to reconfigure our printing operations to
improve our printing services’ efficiency, reduce operating costs, and improve
our printing services’ flexibility in order to 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. We completed the sale of the manufacturing facility
during the second quarter of fiscal 2007. 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 $1.1 million and
accordingly, we recognized a $1.2 million gain on the sale of the manufacturing
facility. The manufacturing facility assets sold were primarily
reported as a component of corporate assets for segment reporting
purposes. Due to a lower-than-expected sale price on one of the
printing presses to be sold, we recorded an impairment charge totaling $0.3
million to reduce the carrying value of the printing press to its anticipated
sale price. The impairment charge was included as a component of
depreciation expense in our consolidated statement of operations for the fiscal
year ended August 31, 2007.
|
5.
|
INTANGIBLE
ASSETS AND GOODWILL
|
Our
intangible assets and goodwill were comprised of the following (in
thousands):
|
AUGUST
31, 2009
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||
|
Definite-lived
intangible assets:
|
||||||||||||
|
License
rights
|
$ | 27,000 | $ | (10,229 | ) | $ | 16,771 | |||||
|
Curriculum
|
58,257 | (31,441 | ) | 26,816 | ||||||||
|
Customer
lists
|
15,111 | (12,704 | ) | 2,407 | ||||||||
|
Trade
names
|
377 | (377 | ) | - | ||||||||
| 100,745 | (54,751 | ) | 45,994 | |||||||||
|
Indefinite-lived
intangible asset:
|
||||||||||||
|
Covey
trade name
|
23,000 | - | 23,000 | |||||||||
| $ | 123,745 | $ | (54,751 | ) | $ | 68,994 | ||||||
|
Goodwill
|
$ | 505 | $ | - | $ | 505 | ||||||
|
AUGUST
31, 2008
|
||||||||||||
|
Definite-lived
intangible assets:
|
||||||||||||
|
License
rights
|
$ | 27,000 | $ | (9,292 | ) | $ | 17,708 | |||||
|
Curriculum
|
58,237 | (29,896 | ) | 28,341 | ||||||||
|
Customer
lists
|
14,684 | (11,413 | ) | 3,271 | ||||||||
|
Trade
names
|
377 | (377 | ) | - | ||||||||
| 100,298 | (50,978 | ) | 49,320 | |||||||||
|
Indefinite-lived
intangible asset:
|
||||||||||||
|
Covey
trade name
|
23,000 | - | 23,000 | |||||||||
| $ | 123,298 | $ | (50,978 | ) | $ | 72,320 | ||||||
Our
intangible assets are amortized over the estimated useful life of the
asset. The range of remaining estimated useful lives and
weighted-average amortization period over which we are amortizing the major
categories of definite-lived intangible assets at August 31, 2009 were as
follows:
|
Category
of Intangible Asset
|
Range
of Remaining Estimated Useful Lives
|
Weighted
Average Amortization Period
|
||
|
License
rights
|
17
years
|
30
years
|
||
|
Curriculum
|
10
to 17 years
|
26
years
|
||
|
Customer
lists
|
2
to 3 years
|
14
years
|
During
fiscal 2009 we acquired the assets of CoveyLink Worldwide, LLC (Note
15). Based upon the purchase price allocation and an evaluation of
the assets acquired and liabilities assumed, we recorded a $0.4 million increase
in our intangible assets, for the fair value of customer relationships and the
practice leader agreement, and $0.5 million of goodwill. The
intangible assets were aggregated with our customer list intangibles and will be
amortized on an accelerated basis that is based on their expected cash flows
over the estimated useful lives of the assets, which is approximately three
years. In addition, the previous owners of CoveyLink Worldwide, LLC,
which includes a son of the Vice-Chairman of our Board of Directors, are also
entitled to earn annual contingent payments based upon earnings growth over the
next five years. We anticipate that these contingent payments will
increase the amount of goodwill recorded as they are earned.
Our
aggregate amortization expense from definite-lived intangible assets totaled
$3.8 million, $3.6 million, and $3.6 million, for fiscal years 2009, 2008, and
2007. Amortization expense for our intangible assets over the next
five years is expected to be as follows (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2010
|
$ | 3,755 | ||
|
2011
|
3,542 | |||
|
2012
|
2,493 | |||
|
2013
|
2,459 | |||
|
2014
|
2,453 | |||
|
6.
|
LINE
OF CREDIT
|
During
fiscal 2007 we entered into secured revolving line-of-credit agreements with two
lenders that provided a combined total of $25.0 million of borrowing capacity to
the Company. In connection with the sale of the CSBU assets (Note 3)
during the fourth quarter of fiscal 2008, the credit agreements with these
lenders were modified (the Modified Credit Agreement). The Modified
Credit Agreement removed one lender, but continued to provide a total of $25.0
million of borrowing capacity until June 30, 2009, when the borrowing capacity
was scheduled to be reduced to $15.0 million. However, during the
fourth quarter of fiscal 2009, we entered into a second modification agreement
with the lender on our line of credit facility (the Second Modification
Agreement). Under terms of the Second Modification Agreement, our
borrowing capacity will be reduced as follows (in thousands):
|
Effective
Date
|
Borrowing
Capacity
|
|||
|
June
30, 2009
|
$ | 20,000 | ||
|
August
31, 2009
|
18,000 | |||
|
November
30, 2009
|
13,500 | |||
In
addition, any payments made to us by Franklin Covey Products from the working
capital settlement and reimbursable costs associated with the sale transaction
note receivable are required to be paid on the line of credit and will reduce
the available borrowing capacity by the amount of the
payments. Although we impaired the working capital and reimbursable
cost note receivable from Franklin Covey Products in
the
fourth quarter of fiscal 2009, our available borrowing capacity on the line of
credit was not reduced. The Second Modification Agreement increased
the effective interest rate on our line of credit from LIBOR plus 1.50 percent
to LIBOR plus 2.0 percent (2.3 percent and 4.0 percent at August 31, 2009 and
2008, respectively), which was effective on the date of the
agreement.
The
Second Modification Agreement, consistent with previous arrangements, expires on
March 14, 2010, and we may draw on the credit facilities, repay, and draw again,
on a revolving basis, up to the maximum available loan amount so long as no
event of default has occurred and is continuing. The Company may use
the proceeds from the line of credit for general corporate purposes as well as
for other transactions, unless prohibited by the terms of the Second
Modification Agreement or Modified Credit Agreement.
We
accounted for the Second Modification Agreement and Modified Credit Agreement
using the guidance found in EITF 96-19, Debtor’s Accounting for a
Modification or Exchange of Debt Instruments (FASC 470-50) and EITF
98-14, Debtor’s Accounting for
Changes in Line-of-Credit or Revolving Debt Arrangements (FASC
470-50-40). The additional expense was recorded as a component of
interest expense and was immaterial to our consolidated financial
statements.
In
addition to customary non-financial terms and conditions, the Modified Credit
Agreement requires us to be in compliance with specified financial covenants,
which did not change from the original credit agreements, 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 lender is entitled to certain
remedies, including acceleration of the repayment of amounts outstanding on the
line of credit. The Second Modification Agreement also modified the
funded debt to earnings ratio and fixed charge coverage ratio for the quarterly
periods ended August 2009 and November 2009 and contains customary
representations and guarantees as well as provisions for repayment and
liens. We believe that we were in compliance with the terms and
covenants of the Second Modification Agreement at August 31, 2009.
Based on
our forecasts for fiscal 2010, we identified the risk of non-compliance with
certain of the financial covenants required by our line of credit facility for
the quarterly measurement periods ending November 28, 2009 and February 27,
2010. In order to address the risk of non-compliance, we obtained a
modification to the line of credit agreement (the Third Modification Agreement)
in November 2009. The Third Modification Agreement relaxed the funded
debt to earnings ratio and fixed charge coverage ratio, and increased the
effective interest rate from LIBOR plus 2.0 percent to LIBOR plus 3.5
percent. The Company believes that it will be in compliance with the
financial covenants in future quarterly reporting periods as defined in the
Third Modification Agreement.
In
connection with the original credit agreements, the Company entered into a
promissory note, a security agreement, repayment guaranty agreements, and a
pledge and security agreement. These agreements remain in place with
the remaining lender and pledge substantially all of the Company’s assets
located in the United States to the lender in the Modified Credit
Agreement.
7.
TENDER OFFER OBLIGATION
During
the fourth quarter of fiscal 2008, we conducted a modified “Dutch Auction”
tender offer to purchase up to $28.0 million of shares of our common stock at a
specified range of prices, not including transaction costs (Note
11). The tender offer closed on August 27, 2008 as intended, and we
announced the preliminary results of the tender offer on August 28,
2008. The final results of the tender offer were announced on
September 5, 2008, and we completed the payment process for the shares of common
stock shortly thereafter. Based upon guidance found in SFAS No. 150,
Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(FASC 480-10-25), we believe that an obligation to purchase the tender
offer shares was created prior to August 31, 2008. As a result of
this
determination,
at August 31, 2008 we recorded a $28.2 million liability in current liabilities
for the tender offer obligation, which includes $0.2 million of customary
transaction costs for broker fees, legal services, and printing services,
etc. We recorded a corresponding increase to treasury stock for the
shares acquired in the shareholders’ equity section of our consolidated balance
sheet. This obligation was paid during fiscal 2009.
|
8.
|
LONG-TERM
DEBT AND FINANCING OBLIGATION
|
Our
long-term debt and financing obligation were comprised of the following (in
thousands):
|
AUGUST
31,
|
2009
|
2008
|
||||||
|
Financing
obligation on corporate campus, payable in monthly installments of $254,
including principal and interest, for the first five years with two
percent annual increases thereafter (imputed interest at 7.7%), through
June 2025
|
$ | 31,719 | $ | 32,283 | ||||
|
Mortgage
payable in monthly installments of $9 CDN, plus interest at the CDN prime
rate (4.8% at August 31, 2008), secured by real estate and paid in full
during fiscal 2009
|
- | 678 | ||||||
| 31,719 | 32,961 | |||||||
|
Less
current portion
|
(621 | ) | (670 | ) | ||||
|
Total
long-term debt and financing obligation, less current
portion
|
$ | 31,098 | $ | 32,291 | ||||
During
the fourth quarter of fiscal 2009, we used a portion of the proceeds from the
sale of our Canadian administrative office and distribution facility (Note 4) to
repay the mortgage on the building in full. The carrying value of the
mortgage payable approximated the amount paid to extinguish the obligation and
therefore no significant gain or loss was required to be recognized upon
repayment.
Future
principal maturities of our financing obligation were as follows at August 31,
2009 (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2010
|
$ | 621 | ||
|
2011
|
734 | |||
|
2012
|
857 | |||
|
2013
|
992 | |||
|
2014
|
1,139 | |||
|
Thereafter
|
27,376 | |||
| $ | 31,719 | |||
In
connection with the sale and leaseback of our corporate headquarters facility
located in Salt Lake City, Utah, we entered into a 20-year master lease
agreement with the purchaser, an unrelated private investment
group. The 20-year master lease agreement also contains six five-year
renewal options that will allow us to maintain our operations at the current
location for up to 50 years. Although the corporate headquarters
facility was sold and the Company has no legal ownership of the property, SFAS
No. 98, Accounting for Leases
(FASC 840-40-20), precluded us from recording the transaction as a sale
since we have subleased a significant portion of the property that was
sold. Accordingly, we accounted for the sale as a financing
transaction, which required us to continue reporting the corporate headquarters
facility as an asset (Note 4) and to record a financing obligation for the sale
price. The future minimum payments under the financing obligation for
the initial 20 year lease term are as follows (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2010
|
$ | 3,055 | ||
|
2011
|
3,116 | |||
|
2012
|
3,178 | |||
|
2013
|
3,242 | |||
|
2014
|
3,307 | |||
|
Thereafter
|
40,230 | |||
|
Total
future minimum financing obligation payments
|
56,128 | |||
|
Less
interest
|
(25,722 | ) | ||
|
Present
value of future minimum financing obligation payments
|
$ | 30,406 | ||
The
difference between the carrying value of the financing obligation and the
present value of the future minimum financing obligation payments represents the
carrying value of the land sold in the financing transaction, which is not
depreciated. At the conclusion of the master lease agreement, the
remaining financing obligation and carrying value of the land will be written
off of the Company’s financial statements.
|
9.
|
OPERATING
LEASES
|
Lease
Expense
In the
normal course of business, we lease office space and warehouse and distribution
facilities under non-cancelable operating lease agreements. We rent
office space, primarily for international and domestic regional sales
administration offices, in commercial office complexes that are conducive to
sales and administrative operations. We also rent warehousing and
distribution facilities that are designed to provide secure storage and
efficient distribution of our products. These operating lease
agreements generally contain renewal options that may be exercised at our
discretion after the completion of the base rental term. In addition,
many of the rental agreements provide for regular increases to the base rental
rate at specified intervals, which usually occur on an annual
basis. At August 31, 2009, we had operating leases that have
remaining terms ranging from less than one year to approximately 7
years. Following the sale of our CSBU assets, we no longer lease
retail store space and Franklin Covey Products is contractually obligated to pay
a portion of our minimum rental payments on certain warehouse and distribution
facilities. The following table summarizes our future minimum lease
payments under operating lease agreements and the lease amounts receivable from
Franklin Covey Products at August 31, 2009 (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
Required
Minimum Lease Payments
|
Receivable
from Franklin Covey Products
|
Net
Required Minimum Lease Payments
|
|||||||||
|
2010
|
$ | 1,673 | $ | (404 | ) | $ | 1,269 | |||||
|
2011
|
1,606 | (422 | ) | 1,184 | ||||||||
|
2012
|
1,498 | (475 | ) | 1,023 | ||||||||
|
2013
|
1,148 | (529 | ) | 619 | ||||||||
|
2014
|
1,108 | (584 | ) | 524 | ||||||||
|
Thereafter
|
2,218 | (1,167 | ) | 1,051 | ||||||||
| $ | 9,251 | $ | (3,581 | ) | $ | 5,670 | ||||||
We
recognize lease expense on a straight-line basis over the life of the lease
agreement. Contingent rent expense is recognized as it is
incurred. Total rent expense recorded in selling, general, and
administrative expense from operating lease agreements was $3.2 million, $8.7
million, and $10.8 million for the years ended August 31, 2009, 2008, and
2007. Additionally, certain retail store leases contained terms that
require additional, or contingent, rental payments based upon the realization of
certain sales thresholds. Our contingent rental payments under these
arrangements were insignificant during the fiscal years ended August 31, 2009,
2008, and 2007.
Lease
Income
We have
subleased a significant portion of our corporate headquarters office space
located in Salt Lake City, Utah to multiple, unrelated tenants as well as to
Franklin Covey Products. The cost basis of the office space available
for lease was $33.3 million, which had a carrying value of $16.2 million at
August 31, 2009. Future minimum lease payments due to us from our
sublease agreements at August 31, 2009 were as follows (in
thousands):
|
YEAR
ENDING
AUGUST
31,
|
||||
|
2010
|
$ | 3,094 | ||
|
2011
|
2,265 | |||
|
2012
|
2,334 | |||
|
2013
|
2,090 | |||
|
2014
|
1,906 | |||
|
Thereafter
|
10,274 | |||
| $ | 21,963 | |||
Sublease
payments made to the Company totaled $3.6 million, $2.7 million, and $2.4
million, during the fiscal years ended August 31, 2009, 2008, and 2007 of which
$0.2 million and $0.3 million was recorded as a reduction of rent expense
associated with underlying lease agreements in our selling, general, and
administrative expense in fiscal 2008 and 2007.
|
10.
|
COMMITMENTS
AND CONTINGENCIES
|
EDS
Outsourcing Contract
The
Company has an outsourcing contract with Electronic Data Systems (EDS) to
provide information technology system support and product warehousing and
distribution services. During fiscal 2009, primarily as a result of
the sale of CSBU assets, we amended the terms of the outsourcing contract with
EDS. Under terms of the amended outsourcing contract with EDS: 1) the
outsourcing contract and its addendums will continue to expire on June 30, 2016;
2) Franklin Covey and Franklin Covey Products will have separate information
systems services support contracts; 3) we will no longer be required to purchase
specified levels of computer hardware technology; and 4) our warehouse and
distribution costs will consist of an annual fixed charge, which is partially
reimbursable by Franklin Covey Products, plus variable charges for actual
activity levels. The warehouse and distribution fixed charge contains
an annual escalation clause based upon changes in the Employment Cost
Index. The following schedule summarizes our estimated minimum
information systems support and fixed warehouse and distribution charges,
without the effect of estimated escalation charges, to EDS for services over the
remaining life of the outsourcing contract (in thousands):
|
YEAR
ENDING
AUGUST
31,
|
Estimated
Gross Minimum and Fixed Charges
|
Receivable
from Franklin Covey Products
|
Estimated
Net Minimum and Fixed Charges
|
|||||||||
|
2010
|
$ | 4,138 | $ | (2,159 | ) | $ | 1,979 | |||||
|
2011
|
4,138 | (2,159 | ) | 1,979 | ||||||||
|
2012
|
4,138 | (2,159 | ) | 1,979 | ||||||||
|
2013
|
4,138 | (2,159 | ) | 1,979 | ||||||||
|
2014
|
4,138 | (2,159 | ) | 1,979 | ||||||||
|
Thereafter
|
7,107 | (3,955 | ) | 3,152 | ||||||||
| $ | 27,797 | $ | (14,750 | ) | $ | 13,047 | ||||||
Our
actual payments to EDS include a variable charge for certain warehousing and
distribution activities and may fluctuate in future periods based upon actual
sales and activity levels.
During
fiscal years 2009, 2008, and 2007, we expensed $7.1 million, $26.7 million, and
$30.1 million for services provided under terms of the EDS outsourcing
contract. The total amount expensed each year under the EDS contract
includes freight charges, which are billed to the Company based upon
activity. Freight charges included in our total EDS costs totaled
$1.8 million, $8.8 million, and $9.6 million during the years ended August 31,
2009, 2008, and 2007, respectively.
The
outsourcing contracts contain early termination provisions that the Company may
exercise under certain conditions. However, in order to exercise the
early termination provisions, we would have to pay specified penalties to EDS
depending upon the circumstances of the contract termination.
Purchase
Commitments
During
the normal course of business, we issue purchase orders to various external
vendors for products and services. At August 31, 2009, we had
purchase commitments totaling $2.8 million for products and services to be
delivered primarily in fiscal 2010. Other purchase commitments for
materials, supplies, and other items incident to the ordinary conduct of
business were immaterial, both individually and in aggregate, to the Company’s
operations at August 31, 2009.
Legal
Matters
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 alleged 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
denied liability in the patent infringement and filed counter-claims related to
the case subsequent to the filing of the action in District
Court. However, during the fiscal year ended August 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 were released from further action
regarding these patents.
The
Company is also the subject of certain legal actions, which we consider routine
to our business activities. At August 31, 2009, we believe that,
after consultation with legal counsel, any potential liability to the Company
under such actions will not materially affect our financial position, liquidity,
or results of operations.
|
11.
|
SHAREHOLDERS’
EQUITY
|
Preferred
Stock
Series
A – In accordance
with the terms and provisions of the preferred stock recapitalization approved
in fiscal 2005, we redeemed all remaining outstanding shares of Series A
preferred stock during the third quarter of fiscal 2007 at the liquidation
preference of $25 per share plus accrued dividends. In accordance
with the terms and provisions of the recapitalization, we redeemed the
outstanding shares of Series A preferred stock as shown below (in
thousands):
|
Fiscal
Year
|
Shares
of Preferred Stock Redeemed
|
Carrying
Value of Redeemed Preferred Shares
|
||||||
|
2007
|
1,494 | $ | 37,345 | |||||
|
2006
|
800 | 20,000 | ||||||
|
2005
|
1,200 | 30,000 | ||||||
| 3,494 | $ | 87,345 | ||||||
Series
B – The preferred
stock recapitalization completed in fiscal 2005 significantly changed the rights
and preferences of our Series B preferred stock. New shares of Series
A preferred stock would have automatically converted to shares of Series B
preferred stock if the holder of the original Series A preferred stock sold, or
transferred, the preferred stock to another party. Series B preferred
stock does not have common-equivalent voting rights, but retains substantially
all other characteristics of the new Series A preferred stock. At
August 31, 2009, there were 4.0 million shares of Series B preferred stock
authorized, but no shares outstanding.
Common
Stock Warrants
Pursuant
to the terms of the preferred stock recapitalization plan, in fiscal 2005 we
completed a one-to-four forward split of the existing Series A preferred stock
and then bifurcated each share of Series A preferred stock into a new share of
Series A preferred stock that is no longer convertible into common stock, and a
warrant to purchase shares of common stock. Accordingly, we issued
6.2 million common stock warrants with an exercise price of $8.00 per share
(subject to customary anti-dilution and exercise features), which will be
exercisable over an eight-year term that expires in March 2013. These
common stock warrants were recorded in shareholders’ equity at fair value on the
date of the recapitalization as determined by a Black-Scholes valuation
methodology, which totaled $7.6 million. During the fiscal years
ended August 31, 2009 and 2008, our common stock warrant activity was
insignificant.
Treasury
Stock
Following
the completion of the sale of CSBU assets (Note 3), we used substantially all of
the net proceeds from the sale to conduct a modified “Dutch Auction” tender
offer (the Tender Offer) to purchase up to $28.0 million of our common stock at
a price not less than $9.00 per share or greater than $10.50 per share, not
including transaction costs. The Tender Offer closed fully subscribed
on August 27, 2008, and we were able to purchase 3,027,027 shares of our common
stock at $9.25 per share plus normal transaction costs that were added to the
cost basis of the shares. We recorded a $28.2 million current
liability at August 31, 2008 for these shares (Note 7) with a corresponding
increase in treasury stock.
During
fiscal 2006, our Board of Directors authorized the purchase of up to $10.0
million of our currently outstanding common stock and canceled all previously
approved common stock purchase plans. Common stock purchases under
this approved plan are made at our discretion for prevailing market prices and
are subject to customary regulatory requirements and
considerations. The Company does not have a timetable for the
purchase of these common shares, and the authorization by the Board of Directors
does not have an expiration date. Through August 31, 2007, we
purchased 1,009,300 shares of our common stock under the terms of the fiscal
2006 plan for $7.6 million. We did not purchase any shares of our
common stock under this purchase plan during fiscal 2009 or fiscal 2008, and at
August 31, 2009 we had $2.4 million remaining for future purchases under the
terms of this approved plan.
We have
issued shares of treasury stock to participants in our employee stock purchase
plan (ESPP) and for stock options and warrants as shown below (in thousands,
except for share amounts):
|
Fiscal
Year
|
Shares
Issued to ESPP Participants
|
Shares
Issued from the Exercise of Stock Options and Warrants
|
Total
Treasury Shares Issued for Stock Options, Warrants and
ESPP
|
Cash
Proceeds Received from the Issuance of Treasury Shares
|
||||||||||||
|
2009
|
55,448 | 1,000 | 56,448 | $ | 284 | |||||||||||
|
2008
|
68,702 | 15,371 | 84,073 | 462 | ||||||||||||
|
2007
|
55,513 | 37,500 | 93,013 | 321 | ||||||||||||
In
addition to the treasury shares shown above, we issued 66,112; 36,000; and
31,500 shares of our common stock held in treasury in connection with unvested
stock awards during fiscal years 2009, 2008, and 2007 (Note 14).
|
12.
|
MANAGEMENT
COMMON STOCK LOAN PROGRAM
|
During
fiscal 2000, certain of our management personnel borrowed funds from an external
lender, on a full-recourse basis, to acquire shares of our common
stock. The loan program closed during fiscal 2001 with 3.825 million
shares of common stock purchased by the loan participants for a total cost of
$33.6 million, which was the market value of the shares acquired and distributed
to loan participants. The Company initially participated on these
management common stock loans as a guarantor to the lending
institution. However, in connection with a new credit facility
obtained during fiscal 2001, we acquired the loans from the external lender at
fair value and are now the creditor for these loans. The loans in the
management stock loan program initially accrued interest at 9.4 percent
(compounded quarterly), are full-recourse to the participants, and were
originally due in March 2005. Although interest continues to accrue
on the outstanding balance over the life of the loans to the participants, the
Company ceased recording interest receivable (and related interest income)
related to these loans in fiscal 2002.
In May
2004, our Board of Directors approved modifications to the terms of the
management stock loans. While these changes had significant
implications for most management stock loan program participants, the Company
did not formally amend or modify the stock loan program
notes. Rather, the Company chose to forego certain of its rights
under the terms of the loans and granted participants the modifications
described below in order to potentially improve their ability to pay, and the
Company’s ability to collect, the outstanding balances of the
loans. These modifications to the management stock loan terms applied
to all current and former employees whose loans do not fall under the provisions
of the Sarbanes-Oxley Act of 2002. Loans to the Company’s officers
and directors (as defined by the Sarbanes-Oxley Act of 2002) were not affected
by the approved modifications and loans held by those persons, which totaled
$0.8 million, were repaid on the original due date of March 30,
2005.
The May
2004 modifications to the management stock loan terms included the
following:
Waiver of Right
to Collect – The
Company waived its right to collect the outstanding balance of the loans prior
to the earlier of (a) March 30, 2008, or (b) the date after March 30, 2005 on
which the closing price of the Company’s stock multiplied by the number of
shares purchased equals the outstanding principal and accrued interest on the
management stock loans (the Breakeven Date).
Lower Interest
Rate – Effective
May 7, 2004, the Company prospectively waived collection of all interest on the
loans in excess of 3.16 percent per annum, which was the “Mid-Term Applicable
Federal Rate” for May 2004.
Use of the
Company’s Common Stock to Pay Loan Balances – The Company may consider
receiving shares of our common stock as payment on the loans, which were
previously only payable in cash.
Elimination of
the Prepayment Penalty –
The Company will waive its right to charge or collect any prepayment
penalty on the management common stock loans.
These
modifications, including the reduction of the loan program interest rate, were
not applied retroactively and participants remain obligated to pay interest
previously accrued using the original interest rate. Also during
fiscal 2005, our Board of Directors approved loan modifications for a former
executive officer and a former director substantially similar to loan
modifications previously granted to other loan participants in the management
stock loan program as described above.
Prior to
the May 2004 modifications, the Company accounted for the loans and the
corresponding shares using a loan-based accounting model that included guidance
found in SAB 102, Selected
Loan Loss Allowance Methodology and Documentation Issues; SFAS No. 114,
Accounting by Creditors
for
Impairment of A Loan - an
Amendment of FASB Statements No. 5 and 15 (FASC 310-10-35); and SFAS No.
5, Accounting for
Contingencies (FASC 450-20). However, due to the nature of the
May 2004 modifications, the Company reevaluated its accounting for the
management stock loan program. Based upon guidance found in EITF
Issue 00-23, Issues Related to
the Accounting for Stock Compensation under APB Opinion No. 25 and FASB
Interpretation No. 44, and EITF Issue 95-16, Accounting for Stock Compensation
Agreements with Employer Loan Features under APB Opinion No. 25, we
determined that the management common stock loans should be accounted for as
non-recourse stock compensation instruments. While this accounting
treatment does not alter the legal rights associated with the loans to the
employees as described above, the modifications to the terms of the loans were
deemed significant enough to adopt the non-recourse accounting model as
described in EITF 00-23. As a result of this accounting treatment,
the remaining carrying value of the notes and interest receivable related to
financing common stock purchases by related parties, which totaled $7.6 million
prior to the loan term modifications, was reduced to zero with a corresponding
reduction in additional paid-in capital. Since the Company was unable
to exercise control over the underlying management common stock loan shares, the
loan program shares continued to be included in Basic earnings per share (EPS)
following the May 2004 modifications.
We
currently account for the management common stock loans as equity-classified
stock option arrangements. Under the provisions of SFAS No. 123R,
additional compensation expense will be recognized only if the Company takes
action that constitutes a modification which increases the fair value of the
arrangements. This accounting treatment also precludes us from
reversing the amounts expensed as additions to the loan loss reserve, totaling
$29.7 million, which were recorded in prior periods.
During
fiscal 2006, the Company offered participants in the management common stock
loan program the opportunity to formally modify the terms of their loans in
exchange for placing their shares of common stock purchased through the loan
program in an escrow account that allows the Company to have a security interest
in the loan program shares. The key modifications to the management
common stock loans for the participants accepting the fiscal 2006 offer were as
follows:
Modification of
Promissory Note – The management stock loan due date was changed to be
the earlier of (a) March 30, 2013, or (b) the Breakeven Date as defined by the
May 2004 modifications. The interest rate on the loans increased from
3.16 percent compounded annually to 4.72 percent compounded
annually.
Redemption of
Management Loan Program Shares – The Company has the right to redeem the
shares on the due date in satisfaction of the promissory notes as
follows:
|
·
|
On
the Breakeven Date, the Company has the right to purchase and redeem from
the loan participants the number of loan program shares necessary to
satisfy the participant’s obligation under the promissory
note. The redemption price for each such loan program share
will be equal to the closing price of the Company’s common stock on the
Breakeven Date.
|
|
·
|
If
the Company’s stock has not closed at or above the breakeven price on or
before March 30, 2013, the Company has the right to purchase and redeem
from the participants all of their loan program shares at the closing
price on that date as partial payment on the participant’s
obligation.
|
The
fiscal 2006 modifications were intended to give the Company a measure of control
of the outstanding loan program shares and to facilitate payment of the loans
should the market value of the Company’s stock equal the principal and accrued
interest on the management stock loans. If a loan participant
declines the offer to modify their management stock loan, their loan will
continue to have the same terms and conditions that were previously approved in
May 2004 by the Company’s Board of Directors, and their loans will be due at the
earlier of March 30, 2008 or the Breakeven Date. Consistent with the
May 2004 modifications, stock loan participants will be unable to realize a gain
on the loan program shares unless they pay cash to satisfy the promissory note
obligation prior to the due date. As of the closing date of the
extension offer, which was substantially completed in June 2006,
management
stock
loan participants holding approximately 3.5 million shares, or 94 percent of the
remaining loan shares, elected to accept the extension offer and placed their
management stock loan shares into the escrow account. The Company is
currently in the process of collecting amounts due from participants that
declined to place their shares in the escrow account during fiscal
2006.
As a
result of this modification, the Company reevaluated its accounting treatment
regarding the loan shares and their inclusion in Basic EPS. Since the
management stock loan shares held in the escrow account continue to have the
same income participation rights as other common shareholders, the Company has
determined that the escrowed loan shares are participating securities as defined
by EITF 03-06, Participating
Securities and the Two-Class Method under FASB Statement No. 128 (FASC
260-10-45). As a result, the management loan shares are included in
the calculation of Basic EPS in periods of net income and excluded from Basic
EPS in periods of net loss.
During
fiscal 2009, the effective interest rate on the management stock loans was
reduced to 1.65 percent, compounded annually, which was the “Mid-Term Applicable
Federal Rate” on the date of the interest rate change.
The
inability of the Company to collect all, or a portion, of these receivables
could have an adverse impact upon our financial position and cash flows compared
to full collection of the loans.
|
13.
|
FINANCIAL
INSTRUMENTS
|
Fair
Value of Financial Instruments
The book
value of our financial instruments at August 31, 2009 and 2008 approximated
their fair values. The assessment of the fair values of our financial
instruments is based on a variety of factors and
assumptions. Accordingly, the fair values may not represent the
actual values of the financial instruments that could have been realized at
August 31, 2009 or 2008, or that will be realized in the future, and do not
include expenses that could be incurred in an actual sale or
settlement. The following methods and assumptions were used to
determine the fair values of our financial instruments, none of which were held
for trading or speculative purposes:
Cash and Cash
Equivalents – The
carrying amounts of cash and cash equivalents approximate their fair values due
to the liquidity and short-term maturity of these instruments.
Accounts
Receivable – The
carrying value of accounts receivable approximate their fair value due to the
short-term maturity and expected collection of these instruments.
Other
Assets – Our
other assets, including notes receivable, were recorded at the net realizable
value of estimated future cash flows from these instruments.
Debt
Obligations – At
August 31, 2009, our debt obligations consisted of a variable-rate line of
credit. The interest rate on our line of credit obligation is
variable and is adjusted to reflect current market interest rates that would be
available to us for a similar instrument. As a result, the carrying
value of the outstanding balance on the line of credit approximates its fair
value.
Derivative
Instruments
During
the normal course of business, we are exposed to fluctuations in foreign
currency exchange rates due to our international operations 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 that do not
exceed 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 were 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 the Company through its
use of derivatives. Additionally, we enter into derivative agreements
only with highly rated counterparties.
Foreign Currency
Exposure – 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.
During
the fiscal years ended August 31, 2009, 2008, and 2007, 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 did not meet specific hedge
accounting requirements, gains and losses on these contracts, which expire on a
quarterly basis, are recognized in current operations, 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 selling, general, and
administrative expense in our consolidated statements of operations and had the
following impact on the periods indicated (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Losses
on foreign exchange contracts
|
$ | (321 | ) | $ | (487 | ) | $ | (249 | ) | |||
|
Gains
on foreign exchange contracts
|
105 | 36 | 119 | |||||||||
|
Net
losses on foreign exchange contracts
|
$ | (216 | ) | $ | (451 | ) | $ | (130 | ) | |||
At August
31, 2009, all of our foreign currency forward contracts were
settled.
Interest Rate
Risk Management –
Due to the limited nature of our interest rate risk, we do not make regular use
of interest rate derivatives, and we were not a party to any interest rate
derivative instruments during the fiscal years ended August 31, 2009, 2008, and
2007.
14.
SHARE-BASED COMPENSATION PLANS
Overview
We
utilize various share-based compensation plans as integral components of our
overall compensation and associate retention strategy. Our
shareholders have approved various stock incentive plans that permit us to grant
performance awards, unvested stock awards, employee stock purchase plan (ESPP)
shares, and stock options. In addition, our Board of Directors and
shareholders may, from time to time, approve fully vested stock
awards. At August 31, 2009, our stock option incentive plan, which
permits the granting of performance awards, unvested stock awards to employees,
and incentive stock options had approximately 2,209,000 shares available for
granting and our 2004 ESPP plan had approximately
777,000
shares authorized for purchase by plan participants. The total cost
of our share-based compensation plans for the fiscal years ended August 31,
2009, 2008, and 2007 were as follows (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Performance
awards
|
$ | - | $ | (1,338 | ) | $ | 835 | |||||
|
Unvested
share awards
|
427 | 969 | 481 | |||||||||
|
Compensation
cost of the ESPP
|
41 | 79 | 75 | |||||||||
|
Stock
options
|
- | 31 | 3 | |||||||||
| $ | 468 | $ | (259 | ) | $ | 1,394 | ||||||
The
compensation cost of our share-based compensation plans was included in selling,
general, and administrative expenses in the accompanying consolidated statements
of operations, and no share-based compensation was capitalized during fiscal
years 2009, 2008 or 2007. 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 our share-based
compensation plans.
Performance-Based
Awards
Our
shareholders have approved 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
Organization and Compensation Committee (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 and are valued at the closing price of our common stock
on the grant date. The number of common shares that are finally
awarded to LTIP participants is variable and is based entirely upon the
achievement of specified financial performance objectives 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 estimated probable number of common shares to be
awarded.
During
the first quarter of fiscal 2009, the Compensation Committee approved LTIP
awards for 205,700 shares of common stock (the target award) to be awarded if we
achieve the specified financial results of grant, which were primarily based on
cumulative operating income growth over the performance period ending August 31,
2011. The fair value of our common stock was $4.60 per share on the
grant date of the fiscal 2009 LTIP award. However, due to ongoing
organizational changes following the sale of the CSBU, the Company’s structure
evolved to the extent that the fiscal 2009 LTIP award criteria were no longer
consistent with our organization and performance goals and, in some cases, the
approved award criteria were no longer measurable. As a result of
these changes, combined with financial performance during the first two quarters
of the measurement period, the Company determined that no shares would be
awarded to participants under the terms of the fiscal 2009 LTIP
award.
During
the third quarter of fiscal 2009, the Compensation Committee formally terminated
the fiscal 2009 and fiscal 2007 LTIP awards because no shares were expected to
be awarded to participants under the terms of these
awards. Accordingly, no compensation expense was recognized for LTIP
awards during fiscal 2009.
As we
completed our evaluations of the LTIP awards during fiscal 2008, we reduced the
number of shares expected to be awarded under the fiscal 2007 and fiscal 2006
LTIP grants based on current financial performance and expected future financial
performance. As a result of these evaluations, we determined that no
shares of common stock were expected to be awarded under any LTIP grant, and all
previously recognized share-based compensation expense, which totaled $1.3
million, was reversed
during
fiscal 2008. On August 31, 2008, the fiscal 2006 LTIP award expired
with no shares granted to participants. Adjustments to decrease
share-based compensation resulting from the regular evaluation of LTIP awards
totaled $0.4 million in fiscal 2007, and all previously recognized tax benefits,
which totaled $0.3 million for the fiscal year ended August 31, 2007, were
reversed in fiscal 2008. There were no awards granted under the terms
of the LTIP during the fiscal year ended August 31, 2008.
Unvested
Stock Awards
The fair
value of our unvested stock awards is calculated by multiplying the number of
shares awarded by the closing market price of our common stock on the date of
the grant. The corresponding compensation cost of unvested stock
awards is amortized to selling, general, and administrative expense on a
straight-line basis over the vesting period of the award, which generally ranges
from three to five years. The following is a description of our
unvested stock awards granted to certain members of our Board of Directors and
to our employees.
Board of Director
Awards – The non-employee directors’ stock incentive plan (the Directors’
Plan) is designed to provide non-employee directors of the Company, who are
ineligible to participate in our employee stock incentive plan, an opportunity
to acquire an interest in the Company through the acquisition of shares of
common stock. Based upon a report from its external compensation
consultant regarding competitive compensation practices for Boards of Directors
of similar sized public companies, and to provide closer alignment with current
and emerging market practices which support the Board’s stewardship role, the
Compensation Committee approved changes to the fiscal 2009 and future awards
under the Directors’ Plan. These changes included: 1) a change from
an annual grant of 4,500 shares to a whole-share grant equal to $40,000; 2) a
change in the vesting period from three years to one year; 3) a change in the
grant date from March 31 of each year to January (following the Annual
Shareholders’ Meeting) of each year; and 4) a minimum stock ownership
requirement for directors. No previously granted awards were subject
to these approved changes.
Under the
provisions of the Directors’ Plan, we issued 66,112 shares, 36,000 shares, and
31,500 shares of our common stock to eligible members of the Board of Directors
during the fiscal years ended August 31, 2009, 2008, and 2007. The
fair value of the shares awarded under the Directors’ Plan was $0.3 million,
$0.3 million, and $0.2 million during fiscal 2009, 2008, and 2007, which was
calculated on the grant date of the award. The corresponding
compensation cost is being recognized over the vesting period of the awards,
which ranges from one to three years. The cost of the common stock
issued from treasury stock for these awards was $0.9 million, $0.6 million, and
$0.5 million in fiscal years 2009, 2008, and 2007.
Employee
Awards – During
fiscal 2005 and in prior periods, we granted unvested stock awards to certain
employees as long-term incentives. These unvested stock awards
originally cliff vested five years from the grant date or on an accelerated
basis if we achieved specified earnings levels. The compensation cost
of these unvested stock awards was based on the fair value of our common shares
on the grant date and was expensed on a straight-line basis over the vesting
(service) period of the awards. The recognition of compensation cost
was accelerated when we believed that it was probable that we would achieve the
specified earnings thresholds and the shares would vest.
In the
fourth quarter of fiscal 2008, our Board of Directors accelerated the vesting of
all remaining outstanding unvested share awards previously granted to
employees. Based upon guidance in SFAS No. 123R, we determined that
the accelerated vesting of these awards constituted modifications to the awards
that required separate analysis for awards granted to CSBU employees and for
awards granted to Organizational Solutions Business Unit (OSBU) and corporate
employees. Since the unvested share awards granted to CSBU employees
would not have vested under the original terms of the award (due to the sale of
CSBU assets), the CSBU awards were revalued on the date of the
modification. The fair value of our common stock was higher on the
modification date than on the grant date, which resulted in $0.4 million of
additional share-based compensation expense in the fourth quarter of fiscal
2008. We determined that the OSBU and corporate awards would have
vested under the original award terms, and based upon SFAS No. 123R, we
accelerated the remaining unrecognized compensation cost, which
increased
share-based compensation by $0.2 million during the fourth quarter of fiscal
2008. Following the accelerated vesting of these awards, we do not
have any remaining unrecognized compensation cost for unvested share awards
granted to employees.
During
the fourth quarter of fiscal 2007, the financial performance goals were reached
for certain employees and one-half of their awards were
accelerated. Other awards were vested during fiscal 2007 in
connection with the termination of certain management employees. The
accelerated vesting of these awards were accounted for as modifications under
the provisions of SFAS No. 123R during fiscal 2007. The additional
share-based compensation expense resulting from these modifications totaled $0.1
million.
The
following information applies to our unvested stock awards for the fiscal year
ended August 31, 2009:
|
Number
of Shares
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|||||||
|
Unvested
stock awards at August 31, 2008
|
94,500 | $ | 7.73 | |||||
|
Granted
|
66,112 | 4.84 | ||||||
|
Forfeited
|
- | - | ||||||
|
Vested
|
(27,000 | ) | 7.84 | |||||
|
Unvested
stock awards at August 31, 2009
|
133,612 | $ | 6.28 | |||||
At August
31, 2009, there was $0.3 million of total unrecognized compensation cost related
to unvested stock awards granted to our Board of Directors, which is expected to
be recognized over the weighted-average vesting period of approximately one
year. Compensation expense related to our unvested stock awards
totaled $0.4 million, $1.0 million, and $0.5 million in fiscal years 2009, 2008,
and 2007, and the total recognized tax benefit from unvested stock awards
totaled $0.2 million, $0.4 million, and $0.2 million for the fiscal years ended
August 31, 2009, 2008, and 2007, respectively. The intrinsic value of
our unvested stock awards at August 31, 2009 was $0.7 million.
Employee
Stock Purchase Plan
We have
an employee stock purchase plan (Note 17) that offers qualified employees the
opportunity to purchase shares of our common stock at a price equal to 85
percent of the average fair market value of the Company’s common stock on the
last trading day of the calendar month in each fiscal quarter. Based
upon guidance in SFAS No. 123R, we determined that the discount offered to
employees under the ESPP is compensatory, and the amount is therefore expensed
at each grant date. During the fiscal year ended August 31, 2009, a
total of 55,448 shares were issued to participants in the ESPP.
Stock
Options
The
Company has an incentive stock option plan whereby options to purchase shares of
our common stock may be issued to key employees at an exercise price not less
than the fair market value of the Company’s common stock on the date of
grant. The term, not to exceed ten years, and exercise period of each
incentive stock option awarded under the plan are determined by a committee
appointed by our Board of Directors.
Information
related to stock option activity during the fiscal year ended August 31, 2009 is
presented below:
|
Number
of Stock Options
|
Weighted
Avg. Exercise Price Per Share
|
Weighted
Avg. Remaining Contractual Life (Years)
|
Aggregate
Intrinsic Value (thousands)
|
|||||||||||||
|
Outstanding
at August 31, 2008
|
2,027,800 | $ | 12.82 | |||||||||||||
|
Granted
|
- | |||||||||||||||
|
Exercised
|
(1,000 | ) | 6.56 | |||||||||||||
|
Forfeited
|
(264,800 | ) | 9.18 | |||||||||||||
|
Outstanding
at August 31, 2009
|
1,762,000 | $ | 13.37 | 1.0 | $ | 50 | ||||||||||
|
Options
vested and exercisable at August 31, 2009
|
1,762,000 | $ | 13.37 | 1.0 | $ | 50 | ||||||||||
Company
policy generally allows terminated employees 90 days from the date of
termination to exercise vested stock options. However, in connection
with the sale of our CSBU (Note 3) during fiscal 2008, we granted extensions to
former CSBU employees, who had vested stock options, which allow the stock
options to be exercised up to the original expiration date. We
determined that these extensions were modifications to the stock options under
the guidance found in SFAS No. 123R. The incremental compensation
expense resulting from the modification of these stock options was calculated
through the use of a Black-Scholes valuation model and totaled approximately
$31,000, which was expensed during the fourth quarter of fiscal 2008 since the
modified stock options were fully vested prior to the modification
date.
The
Company did not grant any stock options during the fiscal years ended August 31,
2009, 2008 or 2007, and has no remaining unamortized service cost related to
granted stock options.
The
following additional information applies to our stock options outstanding at
August 31, 2009:
|
Range
of
Exercise
Prices
|
Number
Outstanding at August 31, 2009
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Options
Exercisable at August 31, 2009
|
Weighted
Average Exercise Price
|
|||||||||||||||||
| $ | 2.78 – $2.78 | 18,000 | 0.3 | $ | 2.78 | 18,000 | $ | 2.78 | ||||||||||||||
| $ | 6.56 – $8.19 | 142,000 | 0.9 | 7.55 | 142,000 | 7.55 | ||||||||||||||||
| $ | 14.00 – $14.00 | 1,602,000 | 1.0 | 14.00 | 1,602,000 | 14.00 | ||||||||||||||||
| 1,762,000 | 1,762,000 | |||||||||||||||||||||
The
Company received proceeds totaling approximately $7,000; $21,000; and $0.1
million in fiscal years 2009, 2008, and 2007 from the exercise of common stock
options. The intrinsic value of stock options exercised was $2,500;
$0.1 million; and $0.3 million for the fiscal years ended August 31, 2009, 2008,
and 2007, and the fair value of options that vested during fiscal 2008 and
fiscal 2007 totaled $9,375 each year. All stock options were fully
vested on August 31, 2008.
15.
ACQUISITION OF COVEYLINK
Effective
December 31, 2008, we acquired the assets of CoveyLink Worldwide, LLC
(CoveyLink). CoveyLink conducts seminars and training courses and
provides consulting based upon the book The Speed of Trust by Stephen
M.R. Covey, who is the son of our Vice Chairman of the Board of
Directors.
Based
primarily upon the guidance found in EITF Issue 98-3, Determining Whether a Nonmonetary
Transaction Involves Receipt of Production Assets or of a Business, we
determined that the CoveyLink
operation
constituted a business, and we accounted for the acquisition of CoveyLink using
the guidance found in SFAS No. 141, Business
Combinations. The purchase price was $1.0 million in cash plus
or minus an adjustment for specified working capital and the costs necessary to
complete the transaction, which resulted in a total initial purchase price of
$1.2 million. The previous owners of CoveyLink, which includes
Stephen M.R. Covey, are also entitled to earn annual contingent payments based
upon earnings growth over the next five years. Based upon the
preliminary purchase price allocation and evaluation of the assets acquired and
liabilities assumed, we recorded a $0.4 million increase in our intangible
assets, for the fair value of customer relationships and the practice leader
agreement, and $0.5 million of goodwill (Note 5). The entire amount
of the acquired goodwill is expected to be deductible for income tax
purposes. We also acquired $0.6 million of net accounts receivable,
$0.2 million of other assets, and $0.5 million of accounts payable and current
accrued liabilities on the acquisition date.
The
accompanying consolidated financial statements include the financial results of
CoveyLink from January 1, 2009 through August 31, 2009. However, the
CoveyLink results of operations had an immaterial impact on our consolidated
financial statements.
Prior to
the acquisition date, CoveyLink had granted a non-exclusive license to the
Company related to The Speed
of Trust book and related training courses for which we paid CoveyLink
specified royalties. As part of the CoveyLink acquisition, an amended
and restated license of intellectual property was signed that granted us an
exclusive, perpetual, worldwide, transferable, royalty-bearing license to use,
reproduce, display, distribute, sell, prepare derivative works of, and perform
the licensed material in any format or medium and through any market or
distribution channel.
16.
SALE OF OPERATIONS IN BRAZIL AND MEXICO
During
the fourth quarter of fiscal 2007 we completed the sales of our wholly-owned
subsidiary located in Brazil and the training operations of our wholly-owned
subsidiary in Mexico. These operations were sold to third-party
entities that will continue to conduct business in Brazil and Mexico as
licensees and will be required to pay the Company royalties consistent with
other foreign licensees. Since we will continue to participate in the
cash flows of these subsidiaries through royalty payments, which are based
primarily upon the sales recorded by the licensees, and we expect to have
significant continuing involvement in the operations of the licensees, we
determined that the financial results of these subsidiaries should not be
reported as discontinued operations in our consolidated statements of
operations. The financial results of these subsidiaries were
previously reported in the international segment of the Organizational Solutions
Business Unit.
The sales
of the Brazil and Mexico subsidiaries were structured such that the net assets
of the subsidiaries were sold at their carrying values plus reimbursement of
severance costs paid in Mexico. The carrying amounts of the assets
and liabilities of our Brazil subsidiary and training operations of Mexico,
which were sold during the quarter ended August 31, 2007 were as follows (in
thousands):
|
Description
|
Brazil
|
Mexico
|
Total
|
|||||||||
|
Cash
|
$ | 95 | $ | - | $ | 95 | ||||||
|
Accounts
receivable, net
|
374 | 210 | 584 | |||||||||
|
Inventories
|
155 | 134 | 289 | |||||||||
|
Other
current assets
|
220 | 28 | 248 | |||||||||
|
Property
and equipment, net
|
365 | 43 | 408 | |||||||||
|
Other
assets
|
51 | 375 | 426 | |||||||||
|
Total
assets sold
|
$ | 1,260 | $ | 790 | $ | 2,050 | ||||||
|
Accounts
payable
|
$ | 127 | $ | - | $ | 127 | ||||||
|
Accrued
liabilities
|
260 | - | 260 | |||||||||
|
Total
liabilities sold
|
$ | 387 | $ | - | $ | 387 | ||||||
Certain
assets and liabilities that were previously held for sale in Mexico were
retained by the Company and were reclassified as assets to be held and used at
August 31, 2007. We received promissory notes for the sales prices
totaling $1.5 million, of which $1.2 million was due during fiscal
2008. Due to the disposition of these subsidiaries, we recorded a
$0.1 million benefit from the cumulative translation adjustment related to
assets and liabilities sold, which was offset by expenses necessary to complete
the transaction. The net costs to complete the sales transactions
resulted in an immaterial loss that was included in consolidated selling,
general and administrative expenses for the year ended August 31,
2007.
|
17.
|
EMPLOYEE
BENEFIT PLANS
|
Profit
Sharing Plans
We have
defined contribution profit sharing plans for our employees that qualify under
Section 401(k) of the Internal Revenue Code. These plans provide
retirement benefits for employees meeting minimum age and service
requirements. Qualified participants may contribute up to 75 percent
of their gross wages, subject to certain limitations. These plans
also provide for matching contributions to the participants that are paid by the
Company. The matching contributions, which were expensed as incurred,
totaled $0.9 million, $1.5 million, and $1.5 million during the fiscal 2009,
fiscal 2008, and fiscal 2007. The Company does not sponsor or
participate in any defined benefit pension plans.
Employee
Stock Purchase Plan
The
Company has an employee stock purchase plan (ESPP) 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 our common stock on the
last trading day of each quarter. A total of 55,448; 68,702; and
55,513 shares were issued to ESPP participants during the fiscal years ended
August 31, 2009, 2008, and 2007, which had a corresponding cost basis of $0.7
million, $0.9 million, and $0.5 million, respectively. The Company
received cash proceeds from the ESPP participants totaling $0.3 million, $0.4
million, and $0.3 million for fiscal years 2009, 2008, and 2007.
Deferred
Compensation Plan
We have a
non-qualified deferred compensation (NQDC) plan that provided certain key
officers and employees the ability to defer a portion of their compensation
until a later date. Deferred compensation amounts used to pay
benefits were held in a “rabbi trust,” which invested in insurance contracts,
various mutual funds, and shares of the Company’s common stock as directed by
the plan participants. However, due to legal changes resulting from
the American Jobs Creation Act of 2004, the Company determined to cease
compensation deferrals to the NQDC plan after December 31,
2004. Following the cessation of deferrals to the NQDC plan, the
number of participants remaining in the plan has steadily declined, and during
the fourth quarter of fiscal 2009 our Board of Directors decided to partially
terminate the NQDC plan.
Due to
the partial termination of the plan, all of the NQDC trust assets were
liquidated prior to August 31, 2009, except for shares of our common stock that
are held for future distribution to plan participants. Subsequent to
August 31, 2009, the liquidated assets were distributed to plan participants,
and the NQDC plan liability was paid in full. The NQDC plan’s assets
were liquidated for $0.3 million, which was received in cash prior to August 31,
2009, and the fair value of NQDC plan assets at August 31, 2008 was $0.5
million. The NQDC plan’s liabilities totaled $0.5 million and $0.7
million at August 31, 2009 and 2008. At August 31, 2009, the cost
basis of the shares of our common stock held by the rabbi trust was $0.5
million.
We
expensed charges totaling $0.1 million during each of the fiscal years ended
August 31, 2009, 2008, and 2007 related to insurance premiums and external
administration costs for our deferred compensation plan.
|
18.
|
INCOME
TAXES
|
The
benefit (provision) for income taxes consisted of the following (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 33 | $ | (39 | ) | $ | (350 | ) | ||||
|
State
|
35 | (248 | ) | (135 | ) | |||||||
|
Foreign
|
(1,812 | ) | (2,906 | ) | (2,109 | ) | ||||||
| (1,744 | ) | (3,193 | ) | (2,594 | ) | |||||||
|
Deferred:
|
||||||||||||
|
Federal
|
4,846 | (4,276 | ) | (4,880 | ) | |||||||
|
State
|
279 | (205 | ) | (433 | ) | |||||||
|
Foreign
|
(68 | ) | 12 | 49 | ||||||||
|
Change
in valuation allowance
|
316 | 116 | 31 | |||||||||
| 5,373 | (4,353 | ) | (5,233 | ) | ||||||||
| $ | 3,629 | $ | (7,546 | ) | $ | (7,827 | ) | |||||
Income
from operations before income taxes consisted of the following (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
United
States
|
$ | (14,390 | ) | $ | 8,857 | $ | 11,914 | |||||
|
Foreign
|
(71 | ) | 4,216 | 3,378 | ||||||||
| $ | (14,461 | ) | $ | 13,073 | $ | 15,292 | ||||||
The
differences between income taxes at the statutory federal income tax rate and
income taxes reported in our consolidated statements of operations were as
follows:
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Federal
statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal effect
|
2.2 | 3.5 | 3.7 | |||||||||
|
Foreign
jurisdictions tax differential
|
(1.6 | ) | 2.7 | 1.2 | ||||||||
|
Tax
differential on income subject to both U.S. and foreign
taxes
|
(7.3 | ) | 8.5 | 4.3 | ||||||||
|
Uncertain
tax positions
|
- | (1.6 | ) | (0.9 | ) | |||||||
|
Tax
on management stock loan interest
|
(2.7 | ) | 5.3 | 5.2 | ||||||||
|
Non-deductible
executive compensation
|
(0.6 | ) | 2.2 | - | ||||||||
|
Other
|
0.1 | 2.1 | 2.7 | |||||||||
| 25.1 | % | 57.7 | % | 51.2 | % | |||||||
We paid
significant amounts of withholding tax on foreign royalties during fiscal years
2009, 2008, and 2007. However, no domestic foreign tax credits were
available to offset the foreign withholding taxes during those
years.
The
Company accrues taxable interest income on outstanding management common stock
loans (Note 12). Consistent with the accounting treatment for these
loans, the Company is not recognizing interest income for book purposes, thus
resulting in a permanent book versus tax difference.
The
significant components of our deferred tax assets and liabilities were comprised
of the following (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
||||||
|
Deferred
income tax assets:
|
||||||||
|
Net
operating loss carryforward
|
$ | 12,094 | $ | 7,815 | ||||
|
Sale
and financing of corporate headquarters
|
11,729 | 11,912 | ||||||
|
Investment
in Franklin Covey Products
|
2,934 | 2,986 | ||||||
|
Foreign
income tax credit carryforward
|
2,159 | 2,159 | ||||||
|
Impairment
of Franklin Covey Products note receivable
|
1,395 | - | ||||||
|
Impairment
of investment in Franklin Covey Coaching, LLC
|
1,151 | 1,701 | ||||||
|
Alternative
minimum tax carryforward
|
847 | 881 | ||||||
|
Bonus
and other accruals
|
725 | 1,135 | ||||||
|
Inventory
and bad debt reserves
|
607 | 832 | ||||||
|
Sales
returns and contingencies
|
454 | 414 | ||||||
|
Deferred
compensation
|
334 | 503 | ||||||
|
Other
|
553 | 559 | ||||||
|
Total
deferred income tax assets
|
34,982 | 30,897 | ||||||
|
Less:
valuation allowance
|
(2,159 | ) | (2,475 | ) | ||||
|
Net
deferred income tax assets
|
32,823 | 28,422 | ||||||
|
Deferred
income tax liabilities:
|
||||||||
|
Intangibles
step-ups – definite lived
|
(10,867 | ) | (11,863 | ) | ||||
|
Intangibles
step-ups – indefinite lived
|
(8,658 | ) | (8,647 | ) | ||||
|
Property
and equipment depreciation
|
(6,728 | ) | (7,294 | ) | ||||
|
Intangible
asset impairment and amortization
|
(2,803 | ) | (2,018 | ) | ||||
|
Unremitted
earnings of foreign subsidiaries
|
(181 | ) | (586 | ) | ||||
|
Other
|
(104 | ) | (85 | ) | ||||
|
Total
deferred income tax liabilities
|
(29,341 | ) | (30,493 | ) | ||||
|
Net
deferred income taxes
|
$ | 3,482 | $ | (2,071 | ) | |||
Deferred
income tax amounts are recorded as follows in our consolidated balance sheets
(in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
||||||
|
Current
assets
|
$ | 2,551 | $ | 2,472 | ||||
|
Long-term
assets
|
931 | 29 | ||||||
|
Long-term
liabilities
|
- | (4,572 | ) | |||||
|
Net
deferred income tax asset (liability)
|
$ | 3,482 | $ | (2,071 | ) | |||
A federal
net operating loss of $33.3 million was generated in fiscal
2003. During fiscal years 2005 through 2008, a total of $29.6 million
of the fiscal 2003 loss carryforward was utilized, leaving a remaining loss
carryforward from fiscal 2003 of $3.7 million, which expires on August 31,
2023. The federal net operating loss carryforward generated in fiscal
2004 totaled $21.2 million and expires on August 31, 2024. In fiscal
2009, a federal net operating loss of $9.8 million was generated, which expires
on August 31, 2029. The total loss carryforward includes $1.3 million
of deductions applicable to additional paid-in capital that will be credited
once all loss carryforward amounts are utilized.
The state
net operating loss carryforward of $33.3 million generated in fiscal 2003 was
reduced by the utilization of $29.6 million during fiscal years 2005 through
2008 for a net carryforward amount of $3.7 million, which primarily expires
between August 31, 2009 and August 31, 2018. The state net
operating
loss
carryforward of $21.2 million generated in fiscal 2004 primarily expires between
August 31, 2009 and August 31, 2019. The state net operating loss
carryforward of $9.8 million generated in fiscal 2009 expires primarily between
August 31, 2012 and August 31, 2024.
Our net
operating loss carryforwards are effectively no longer limited by Section 382 of
the Internal Revenue Code, since the amount of loss allowable in any future year
under Section 382 exceeds our actual loss carryforward amount.
Our
foreign income tax credit carryforward of $2.2 million that was generated during
fiscal 2002 expires on August 31, 2012.
Valuation
Allowance on Deferred Tax Assets
Although
fiscal 2009 produced a domestic pre-tax book loss, we have determined that
projected future taxable income is adequate to allow for realization of all
domestic deferred tax assets, except for those related to foreign tax
credits. We considered sources of taxable income, including future
reversals of taxable temporary differences, future taxable income exclusive of
reversing temporary differences and carryforwards, and reasonable, practical
tax-planning strategies to generate additional taxable income. Based
on the factors described above, we concluded that realization of our domestic
deferred tax assets, except for foreign tax credit carryforwards, is more likely
than not at August 31, 2009.
To
realize the benefit of our deferred income tax assets, we must generate total
taxable income of approximately $100 million over the next 4
years. Taxable income of approximately $59 million results from the
reversal of temporary taxable differences. The remaining taxable
income of approximately $41 million must be generated by the operations of the
Company. The table below presents the pre-tax book income,
significant book versus tax differences, and taxable income for the years ended
August 31, 2009, 2008, and 2007 (in thousands).
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Domestic
pre-tax book income
|
$ | (14,390 | ) | $ | 8,857 | $ | 11,914 | |||||
|
Deferred
taxable loss on sale of assets to Franklin Covey Products
|
- | 4,431 | - | |||||||||
|
Deferred
gain for book purposes on sale of assets to Franklin Covey
Products
|
- | 2,755 | - | |||||||||
|
Impairment
of note receivable from Franklin Covey Products
|
3,706 | - | - | |||||||||
|
Interest
on management common stock loans
|
1,133 | 1,968 | 2,243 | |||||||||
|
Property
and equipment depreciation and dispositions
|
1,480 | (10,420 | ) | 1,170 | ||||||||
|
Amortization/write-off
of intangible assets
|
(1,010 | ) | (2,039 | ) | (2,814 | ) | ||||||
|
Changes
in accrued liabilities
|
(806 | ) | (2,588 | ) | (1,217 | ) | ||||||
|
Share-based
compensation
|
187 | (1,144 | ) | 933 | ||||||||
|
Deduction
for foreign income taxes
|
(1,410 | ) | (1,260 | ) | (951 | ) | ||||||
|
Actual
and deemed foreign dividends
|
930 | 604 | 439 | |||||||||
|
Other
book versus tax differences
|
341 | 156 | 44 | |||||||||
| $ | (9,839 | ) | $ | 1,320 | $ | 11,761 | ||||||
Adoption
of FIN 48
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109 (FASC
740-10-05). 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. 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.
A
reconciliation of the beginning and ending amount of gross unrecognized tax
benefits is as follows (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
||||||
|
Beginning
balance
|
$ | 4,232 | $ | 4,349 | ||||
|
Additions
based on tax positions related to the current year
|
434 | 267 | ||||||
|
Additions
for tax positions in prior years
|
51 | 31 | ||||||
|
Reductions
for tax positions of prior years resulting from the lapse of applicable
statute of limitations
|
(271 | ) | (292 | ) | ||||
|
Other
reductions for tax positions of prior years
|
(221 | ) | (123 | ) | ||||
|
Ending
balance
|
$ | 4,225 | $ | 4,232 | ||||
The total
amount of unrecognized tax benefits that, if recognized, would affect the
effective tax rate is $3.0 million. Included in the ending balance of
gross unrecognized tax benefits is $3.1 million related to individual states’
net operating loss carryforwards. Interest and penalties related to
uncertain tax positions are recognized as components of income tax
expense. The net accruals and reversals of interest and penalties
increased income tax expense by an insignificant amount in fiscal 2009 and
reduced income tax expense by a total of $0.1 million during fiscal
2008. The balance of interest and penalties included on our
consolidated balance sheet at August 31, 2009 and 2008 is $0.2 million and $0.1
million, respectively. As a result of the lapse of applicable
statutes of limitations, during the next 12 months we expect a decrease of
approximately $0.5 million in unrecognized tax benefits primarily related to
international transactions.
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.
|
2002-2009
|
Canada
|
|
2004-2009
|
Japan,
United Kingdom
|
|
2005-2009
|
United
States – state and local income tax
|
|
2006-2009
|
United
States – federal income tax
|
|
19.
|
EARNINGS
PER SHARE
|
Basic
earnings per common share (EPS) is calculated by dividing net income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is calculated by dividing net
income (loss) available to common shareholders by the weighted-average number of
common shares outstanding plus the assumed exercise of all dilutive securities
using the treasury stock method or the “as converted” method, as
appropriate. Due to modifications to our management stock loan
program (Note 12), 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 (FASC 260-10-45), 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.
During
fiscal 2009, we adopted the provisions of FASB Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities
(FSP EITF 03-6-1) (FASC 260-10-45). This pronouncement requires
unvested share-based compensation instruments that have participation rights in
dividends or undistributed earnings to be considered participating securities
for purposes of determining EPS. Our unvested share awards granted to
members of our board of directors (and employees in previous periods) have
participation rights as described in FSP EITF 03-6-1 on the same basis as
outstanding shares of common stock and were determined to be participating
securities. However, these unvested shares are not obligated to
participate in undistributed losses and are thus excluded from the EPS
calculation in periods of net loss. The provisions of FSP EITF 03-6-1
require all prior period EPS data to be adjusted
retrospectively. However, due to the relatively small number of
unvested share-based compensation instruments outstanding during periods of net
income presented below, the adoption of FSP EITF 03-6-1 did not change our
reported EPS, and we have elected to present the EPS calculation consistent with
prior periods. The Company anticipates that the provisions of FSP
EITF 03-6-1 will continue to be immaterial in future periods based on expected
grants of unvested share awards.
The
following table presents the computation of our EPS for the periods indicated
(in thousands, except per share amounts):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income (loss)
|
$ | (10,832 | ) | $ | 5,527 | $ | 7,465 | |||||
|
Preferred
stock dividends
|
- | - | (2,215 | ) | ||||||||
|
Net
income (loss) available to common shareholders
|
$ | (10,832 | ) | $ | 5,527 | $ | 5,250 | |||||
|
Weighted
average common shares outstanding – Basic
|
13,406 | 19,577 | 19,593 | |||||||||
|
Effect
of dilutive securities(1):
|
||||||||||||
|
Stock
options
|
- | 10 | 29 | |||||||||
|
Unvested
stock awards
|
- | 213 | 266 | |||||||||
|
Common
stock warrants(2)
|
- | 122 | - | |||||||||
|
Weighted
average common shares outstanding – Diluted
|
13,406 | 19,922 | 19,888 | |||||||||
|
Basic
EPS
|
$ | (.81 | ) | $ | .28 | $ | .27 | |||||
|
Diluted
EPS
|
$ | (.81 | ) | $ | .28 | $ | .26 | |||||
|
(1)
|
Since
the Company recognized net income for the fiscal years ended August 31,
2008 and 2007, basic weighted average shares for those periods include 3.5
million shares of common stock held by management stock loan participants
that were placed in escrow. These shares were excluded from
basic weighted-average shares for the fiscal year ended August 31,
2009.
|
|
(2)
|
For
the fiscal years ended August 31, 2009 and 2007, the conversion of 6.2
million common stock warrants is not assumed because such conversion would
be anti-dilutive.
|
At August
31, 2009, 2008, and 2007, we had 1.7 million, 1.8 million, and 1.9 million stock
options outstanding (Note 14) that were not included in the calculation of
diluted weighted average shares outstanding for those periods because the
options’ exercise prices were greater than the average market price of our
common stock. We also have 6.2 million common stock warrants
outstanding that have an exercise price of $8.00 per share (Note
11). These warrants, which expire in March 2013, and the
out-of-the-money stock options described above will have a more pronounced
dilutive impact on our EPS calculation in future periods if the market price of
our common stock increases.
|
20.
|
SEGMENT
INFORMATION
|
Reportable
Segments
Prior to
the sale of the CSBU (Note 3), the Company had two operating
segments: the Organizational Solutions Business Unit (OSBU) and the
CSBU. Following the sale, our operations constitute one reportable
segment. However, to improve comparability, the amounts presented in
the table below reflect fiscal 2009 and fiscal 2008 operating results based upon
the previously defined segments and include the impact of the sale of the CSBU,
which closed during the fourth quarter of fiscal 2008. The following
is a description of these segments, their primary operating components, and
their significant business activities:
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 and Canada. Our international sales group includes the
financial results of our directly owned foreign offices and royalty revenues
from licensees.
Consumer
Solutions Business Unit – This business unit was primarily focused on
sales to individual customers and small business organizations and included the
results of our domestic retail stores, consumer direct operations (primarily
Internet sales 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 included the financial
results of our paper planner manufacturing operations. Although CSBU
sales primarily consisted of products such as planners, binders, software,
totes, and related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may have been purchased through
the CSBU channels.
The
Company’s chief operating decision maker is the Chief Executive Officer (CEO),
and 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 income or loss from operations excluding depreciation,
amortization, the gain from the sale of CSBU in fiscal 2008, and the gain from
the sale of a manufacturing facility in fiscal 2007.
The
fiscal 2009 restructuring charge totaled $2.0 million, of which $1.9 million was
allocated to the domestic division and $0.1 million was allocated to the
international division. The fiscal 2009 asset impairment charge of
$3.6 million was expensed through our corporate operations. The
fiscal 2008 restructuring charge, which totaled $2.1 million, was allocated $1.1
million to domestic and $1.0 million to international. The $1.5
million asset impairment was attributed to domestic financial results in the
following segment information.
In the
normal course of business, we may make structural and cost allocation revisions
to our segment information to reflect new reporting responsibilities within the
organization. During fiscal 2009, we closed our directly owned
Canadian office and assigned our Canadian sales and support personnel to various
domestic sales regions. Accordingly, the results of our Canadian
operations are now included in the domestic component of the OSBU
segment. We also made other less significant organizational changes
during fiscal 2009. All prior period segment information has been
revised to conform to the most recent classifications and organizational
changes, and we account for our segment information on the same basis as the
accompanying consolidated financial statements.
SEGMENT
INFORMATION
|
(in
thousands)
|
||||||||||||||||||||||||||||
|
Fiscal
Year Ended
August
31, 2009
|
Sales
to External Customers
|
Gross
Profit
|
EBITDA
|
Depreciation
|
Amortization
|
Segment
Assets
|
Capital
Expenditures
|
|||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
$ | 83,193 | $ | 48,808 | $ | (5,212 | ) | $ | 2,304 | $ | 3,748 | $ | 75,743 | $ | 3,397 | |||||||||||||
|
International
|
43,369 | 29,883 | 11,441 | 377 | 13 | 13,766 | 343 | |||||||||||||||||||||
|
Total
OSBU
|
126,562 | 78,691 | 6,229 | 2,681 | 3,761 | 89,509 | 3,740 | |||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Consumer
direct
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Wholesale
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
CSBU
International
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Other
CSBU
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Total
CSBU
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Total
operating segments
|
126,562 | 78,691 | 6,229 | 2,681 | 3,761 | 89,509 | 3,740 | |||||||||||||||||||||
|
Corporate
and eliminations
|
3,556 | 1,722 | (9,375 | ) | 1,851 | - | 54,369 | 94 | ||||||||||||||||||||
|
Consolidated
|
$ | 130,118 | $ | 80,413 | $ | (3,146 | ) | $ | 4,532 | $ | 3,761 | $ | 143,878 | $ | 3,834 | |||||||||||||
|
Fiscal
Year Ended
August
31, 2008
|
||||||||||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
$ | 99,308 | $ | 62,237 | $ | 374 | $ | 1,407 | $ | 3,596 | $ | 85,016 | $ | 4,796 | ||||||||||||||
|
International
|
50,179 | 36,201 | 15,368 | 778 | 7 | 16,190 | 521 | |||||||||||||||||||||
|
Total
OSBU
|
149,487 | 98,438 | 15,742 | 2,185 | 3,603 | 101,206 | 5,317 | |||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
42,167 | 25,474 | 2,849 | 697 | - | - | 263 | |||||||||||||||||||||
|
Consumer
direct
|
38,662 | 22,657 | 14,667 | 233 | - | - | 110 | |||||||||||||||||||||
|
Wholesale
|
16,970 | 9,266 | 8,788 | - | - | - | - | |||||||||||||||||||||
|
CSBU
International
|
7,259 | 3,802 | 1,244 | 40 | - | - | - | |||||||||||||||||||||
|
Other
CSBU
|
2,177 | 310 | (19,341 | ) | 391 | - | - | 912 | ||||||||||||||||||||
|
Total
CSBU
|
107,235 | 61,509 | 8,207 | 1,361 | - | - | 1,285 | |||||||||||||||||||||
|
Total
operating segments
|
256,722 | 159,947 | 23,949 | 3,546 | 3,603 | 101,206 | 6,602 | |||||||||||||||||||||
|
Corporate
and eliminations
|
2,471 | 1,081 | (7,786 | ) | 2,146 | - | 76,471 | 401 | ||||||||||||||||||||
|
Consolidated
|
$ | 259,193 | $ | 161,028 | $ | 16,163 | $ | 5,692 | $ | 3,603 | $ | 177,677 | $ | 7,003 | ||||||||||||||
|
Fiscal
Year Ended
August
31, 2007
|
||||||||||||||||||||||||||||
|
Organizational
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Domestic
|
$ | 99,248 | $ | 64,238 | $ | 10,477 | $ | 893 | $ | 3,599 | $ | 85,949 | $ | 6,193 | ||||||||||||||
|
International
|
51,734 | 35,292 | 12,135 | 690 | 8 | 17,715 | 628 | |||||||||||||||||||||
|
Total
OSBU
|
150,982 | 99,530 | 22,612 | 1,583 | 3,607 | 103,664 | 6,821 | |||||||||||||||||||||
|
Consumer
Solutions Business Unit:
|
||||||||||||||||||||||||||||
|
Retail
|
54,316 | 31,932 | 4,666 | 735 | - | 8,607 | 1,761 | |||||||||||||||||||||
|
Consumer
direct
|
48,018 | 27,829 | 18,509 | 222 | - | 620 | 358 | |||||||||||||||||||||
|
Wholesale
|
17,991 | 10,087 | 9,475 | - | - | - | - | |||||||||||||||||||||
|
CSBU
International
|
7,342 | 4,373 | 894 | - | - | - | - | |||||||||||||||||||||
|
Other
CSBU
|
3,336 | 221 | (22,561 | ) | 1,187 | - | 9,052 | 5,503 | ||||||||||||||||||||
|
Total
CSBU
|
131,003 | 74,442 | 10,983 | 2,144 | - | 18,279 | 7,622 | |||||||||||||||||||||
|
Total
operating segments
|
281,985 | 173,972 | 33,595 | 3,727 | 3,607 | 121,943 | 14,443 | |||||||||||||||||||||
|
Corporate
and eliminations
|
2,140 | 733 | (8,110 | ) | 1,667 | - | 74,238 | 678 | ||||||||||||||||||||
|
Consolidated
|
$ | 284,125 | $ | 174,705 | $ | 25,485 | $ | 5,394 | $ | 3,607 | $ | 196,181 | $ | 15,121 | ||||||||||||||
Capital
expenditures in the OSBU domestic segment include $1.8 million, $4.0 million,
and $5.1 million of spending on capitalized curriculum during the fiscal years
ended August 31, 2009, 2008 and 2007, respectively.
A
reconciliation of reportable segment EBITDA to consolidated income (loss) before
taxes is provided below (in thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Reportable
segment EBITDA
|
$ | 6,229 | $ | 23,949 | $ | 33,595 | ||||||
|
Corporate
expenses
|
(9,375 | ) | (7,786 | ) | (8,110 | ) | ||||||
|
Consolidated
EBITDA
|
(3,146 | ) | 16,163 | 25,485 | ||||||||
|
Gain
on sale of CSBU assets
|
- | 9,131 | - | |||||||||
|
Gain
on sale of manufacturing facility
|
- | - | 1,227 | |||||||||
|
Depreciation
|
(4,532 | ) | (5,692 | ) | (5,394 | ) | ||||||
|
Amortization
|
(3,761 | ) | (3,603 | ) | (3,607 | ) | ||||||
|
Consolidated
income (loss) from operations
|
(11,439 | ) | 15,999 | 17,711 | ||||||||
|
Interest
income
|
27 | 157 | 717 | |||||||||
|
Interest
expense
|
(3,049 | ) | (3,083 | ) | (3,136 | ) | ||||||
|
Income
(loss) before income taxes
|
$ | (14,461 | ) | $ | 13,073 | $ | 15,292 | |||||
Interest
expense and interest income are primarily generated at the corporate level and
are not allocated to the segments. Income taxes are likewise
calculated and paid on a corporate level (except for entities that operate in
foreign jurisdictions) and are not allocated to segments for
analysis.
Corporate
assets, such as cash, accounts receivable, and other assets are not generally
allocated to business segments for business analysis
purposes. However, inventories, intangible assets, goodwill,
identifiable fixed assets, and certain other assets are classified by
segment. A reconciliation of segment assets to consolidated assets is
as follows (in thousands):
|
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Reportable
segment assets
|
$ | 89,509 | $ | 101,206 | $ | 121,943 | ||||||
|
Corporate
assets
|
54,513 | 78,010 | 76,047 | |||||||||
|
Intercompany
accounts receivable
|
(144 | ) | (1,539 | ) | (1,809 | ) | ||||||
| $ | 143,878 | $ | 177,677 | $ | 196,181 | |||||||
Enterprise-Wide
Information
Our
revenues are derived primarily from the United States. However, we
also operate wholly-owned offices or contract with licensees to provide products
and services in various countries throughout the world. Our
consolidated revenues were derived from the following countries (in
thousands):
|
YEAR
ENDED
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Net
sales:
|
||||||||||||
|
United
States
|
$ | 82,437 | $ | 197,181 | $ | 219,152 | ||||||
|
Japan
|
23,939 | 25,611 | 24,166 | |||||||||
|
Canada
|
6,555 | 10,389 | 8,400 | |||||||||
|
United
Kingdom
|
5,235 | 10,174 | 9,843 | |||||||||
|
Australia
|
3,314 | 4,313 | 4,016 | |||||||||
|
Singapore
|
1,652 | 1,443 | 1,306 | |||||||||
|
Brazil/South
America
|
1,039 | 1,283 | 4,314 | |||||||||
|
Korea
|
917 | 1,234 | 1,377 | |||||||||
|
Indonesia/Malaysia
|
706 | 794 | 710 | |||||||||
|
Mexico
|
138 | 1,905 | 4,362 | |||||||||
|
Others
|
4,186 | 4,866 | 6,479 | |||||||||
| $ | 130,118 | $ | 259,193 | $ | 284,125 | |||||||
At August
31, 2009, we had wholly-owned offices in Australia, Japan, and the United
Kingdom. Our long-lived assets were held in the following locations
for the periods indicated (in thousands):
|
AUGUST
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Long-lived
assets:
|
||||||||||||
|
United States
|
$ | 101,335 | $ | 106,878 | $ | 121,279 | ||||||
|
Americas
|
- | 2,230 | 2,433 | |||||||||
|
Japan
|
1,835 | 1,509 | 1,453 | |||||||||
|
United Kingdom
|
410 | 258 | 976 | |||||||||
|
Australia
|
156 | 141 | 387 | |||||||||
| $ | 103,736 | $ | 111,016 | $ | 126,528 | |||||||
Inter-segment
sales were immaterial and are eliminated in consolidation.
|
21.
|
RELATED
PARTY TRANSACTIONS
|
The
Company pays the Vice-Chairman and a former Vice-Chairman of the Board of
Directors a percentage of the proceeds received for seminars that they
present. During the fiscal years ended August 31, 2009, 2008, and
2007, we expensed charges totaling $1.4 million, $2.9 million, and $2.0 million
to the Vice-Chairman and former Vice Chairman for their seminar
presentations. We also pay the Vice-Chairman and former Vice-Chairman
a percentage of the royalty proceeds received from the sale of certain books
that were authored by them. During fiscal 2009, 2008, and 2007, we
expensed $0.2 million, $0.3 million, and $0.2 million for royalties to the
Vice-Chairman and former Vice-Chairman under these agreements. At
August 31, 2009 and 2008, we had accrued $0.8 million and $0.6 million payable
to the Vice-Chairman and former Vice-Chairman under the forgoing
agreements. These amounts were included as a component of accrued
liabilities in our consolidated balance sheets.
We pay a
son of the Vice-Chairman of the Board of Directors, who is also an employee of
the Company, a percentage of the royalty proceeds received from the sales of
certain books authored by the son of the Vice-Chairman. During the
fiscal years ended August 31, 2009, 2008, and 2007, we expensed $0.1 million,
$0.7 million, and $0.4 million to the son of the Vice-Chairman for these
royalties and had $0.1 million accrued at August 31, 2009 and 2008 as payable
under the terms of this arrangement. These amounts are included in
accrued liabilities in our consolidated balance sheets.
During
fiscal 2006, we signed a non-exclusive license agreement for certain
intellectual property with a son of the Vice-Chairman of the Board of Directors,
who was previously an officer of the Company and a member of our Board of
Directors. We are required to pay the son of the Vice-Chairman
royalties for the use of certain intellectual property developed by the son of
Vice-Chairman. The amount expensed for these royalties due to the son
of the Vice-Chairman totaled $0.5 million, $0.3 million, and $0.2 million during
the fiscal years ended August 31, 2009, 2008, and 2007,
respectively. During fiscal 2009, we acquired CoveyLink (Note 15),
which was owned by this son of the Vice-Chairman, and signed an amended license
agreement as well as a speaker services agreement. Based on the
provisions of the speakers’ services agreement, we pay the son of the
Vice-Chairman a portion of the speaking revenues received for his
presentations. During fiscal 2009, we expensed $0.8 million for
payment from these presentations, which are based upon the concepts found in
The Speed of Trust,
which was authored by the son of the Vice-Chairman.
As part
of a preferred stock offering to a private investor, an affiliate of the
investor, who was then a director of the Company, was named as the Chairman of
the Board of Directors and was later elected as CEO. This individual
continues to serve as our Chairman of the Board and CEO at August 31,
2009. In addition, one of the affiliates of the private investor was
named to our Board of Directors and continues to serve in that
position. In connection with the preferred stock offering, we paid an
affiliate of the investor $0.1 million during the fiscal year ended August 31,
2007 for monitoring fees, which were eventually eliminated by redemptions of
outstanding Series A preferred stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
An
evaluation was conducted under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer,
of 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, our Chief Executive Officer and our Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
Management’s
Report on Internal Control Over Financial Reporting
The
management of Franklin Covey Co. is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company (including
its consolidated subsidiaries) and all related information appearing in the
Company’s annual report on Form 10-K. The Company’s internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal control
over financial reporting includes those policies and procedures
that:
|
1.
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
2.
|
provide
reasonable assurance that the transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with the authorization of management and/or
of our Board of Directors; and
|
|
3.
|
provide
reasonable assurance regarding the prevention or timely detection of any
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness in future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting using the
criteria set forth in
Internal Control—Integrated
Framework as issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based upon this evaluation, our
management concluded that our internal control over financial reporting was
effective as of the end of the period covered by this annual report on Form
10-K.
Our
independent registered public accounting firm, KPMG LLP, has audited the
consolidated financial statements included in this annual report on Form 10-K
and, as part of their audit, has issued an audit report, included herein, on the
effectiveness of our internal control over financial reporting. Their
report is included in Item 8 of this Report on Form 10-K.
Changes
in Internal Control Over Financial Reporting
As
previously noted in the Company’s Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission on January 29, 2009, and Quarterly Reports on
Form 10-Q for the quarterly periods in fiscal 2009, we determined that material
weaknesses existed at our Japan subsidiary that relate to: 1) the lack of
controls to ensure the approval and appropriate accounting treatment of
non-standard shipping terms on product sales and 2) the calculation of inventory
reserves which was not designed in a manner to evaluate obsolescence at the
individual product level. In order to address these material
weaknesses, we have designed and implemented controls to require the approval of
non-standard shipping terms on product sales and to require the approval of the
inventory reserve calculation in Japan. We have also significantly
strengthened management oversight of the accounting function in Japan through
the use of our corporate accounting and finance group.
We have
monitored the operating effectiveness of these controls during fiscal 2009 and
have determined that these material weaknesses were remediated at August 31,
2009.
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f)), other than described above, during the fourth
quarter ended August 31, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
There was
no information to be disclosed in a current Report on Form 8-K during fourth
quarter of fiscal 2009 that was not previously reported.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Certain
information required by this Item is incorporated by reference to the sections
entitled “Nominees for Election to the Board of Directors,” “Directors Whose
Terms of Office Continue,” “Executive Officers,” “Section 16(a) Beneficial
Ownership Compliance,” “Corporate Governance,” and “Board of Director Meetings
and Committees” in our definitive Proxy Statement for the annual meeting of
shareholders, which is scheduled to be held on January 29, 2010. The
definitive Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended.
The Board
of Directors has determined that one of the Audit Committee members, Robert
Daines, is a “financial expert” as defined in Regulation S-K 407(d)(5) adopted
under the Securities Exchange Act of 1934, as amended. Our Board of
Directors has determined that Mr. Daines is an “independent director” as defined
by the New York Stock Exchange (NYSE).
We have
adopted a code of ethics for our senior financial officers that include the
Chief Executive Officer, the Chief Financial Officer, and other members of the
Company’s financial leadership team. This code of ethics is available
on our website at www.franklincovey.com. We
intend to satisfy the disclosure requirement regarding any amendment to, or a
waiver of, any provision of the Company’s code of ethics through filing a
current report on Form 8-K for such events if they occur.
ITEM 11. EXECUTIVE COMPENSATION
The
information required by this Item is incorporated by reference to the sections
entitled “Compensation Discussion and Analysis,” “Compensation Committee
Interlocks and Insider Participation,” and “Compensation Committee Report” in
the Company’s definitive Proxy Statement for the annual meeting of shareholders,
which is scheduled to be held on January 29, 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
| [a] | [b] | [c] | ||||||||||
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants,
and rights
|
Weighted-average
exercise price of outstanding options, warrants, and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
[a])
|
|||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||||
|
Equity
compensation plans approved by security holders(1)(2)
|
1,762 | $ | 13.37 | 2,209 | ||||||||
|
(1)
|
Excludes
133,612 shares of unvested (restricted) stock awards that are subject to
forfeiture.
|
|
(2)
|
As
of August 31, 2009, all previously awarded long-term incentive plan (LTIP)
awards were either expired or cancelled, and these awards have no impact
upon the amounts disclosed.
|
The
remaining information required by this Item is incorporated by reference to the
section entitled “Principal Holders of Voting Securities” in the Company’s
definitive Proxy Statement for the annual meeting of shareholders, which is
scheduled to be held on January 29, 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
The
information required by this Item is incorporated by reference to the section
entitled “Certain Relationships and Related Transactions” and “Corporate
Governance” in the Company’s definitive Proxy Statement for the annual meeting
of shareholders, which is scheduled to be held on January 29, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
information required by this Item is incorporated by reference to the section
entitled “Principal Accountant Fees” in the Company’s definitive Proxy Statement
for the annual meeting of shareholders, which is scheduled to be held on January
29, 2010.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
SCHEDULES
(a) List
of documents filed as part of this report:
|
1.
|
Financial Statements.
The consolidated financial statements of the Company and Report of
Independent Registered Public Accounting Firm thereon included in the
Annual Report to Shareholders on Form 10-K for the year ended August 31,
2009, are as follows:
|
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets at August 31, 2009 and 2008
Consolidated
Statements of Operations and Statements of Comprehensive Income (Loss) for the
years ended August 31, 2009, 2008, and 2007
Consolidated
Statements of Shareholders’ Equity for the years ended August 31, 2009, 2008,
and 2007
Consolidated
Statements of Cash Flows for the years ended August 31, 2009, 2008, and
2007
Notes to
Consolidated Financial Statements
|
2.
|
Financial
Statement Schedules.
|
Schedule
II – Valuation and Qualifying Accounts and Reserves (Filed as Exhibit 99.2 to
this Report on Form 10-K).
Other
financial statement schedules are omitted because they are not required or
applicable, or the required information is shown in the financial statements or
notes thereto, or contained in this report.
|
3.
|
Exhibit
List.
|
|
Exhibit
No.
|
Exhibit
|
Incorporated
By Reference
|
Filed
Herewith
|
|
2.1
|
Master
Asset Purchase Agreement between Franklin Covey Products, LLC and Franklin
Covey Co. dated May 22, 2008
|
(19)
|
|
|
2.2
|
Amendment
to Master Asset Purchase Agreement between Franklin Covey Products, LLC
and Franklin Covey Co. dated May 22, 2008
|
(20)
|
|
|
3.1
|
Articles
of Restatement dated March 4, 2005 amending and restating the Company’s
Articles of Incorporation
|
(8)
|
|
|
3.2
|
Amendment
to Amended and Restated Articles of Incorporation of Franklin Covey
(Appendix C)
|
(12)
|
|
3.3
|
Amended
and Restated Bylaws of the Registrant
|
(1)
|
|
|
4.1
|
Specimen
Certificate of the Registrant’s Common Stock, par value $.05 per
share
|
(2)
|
|
|
4.2
|
Stockholder
Agreements, dated May 11, 1999 and June 2, 1999
|
(5)
|
|
|
4.3
|
Registration
Rights Agreement, dated June 2, 1999
|
(5)
|
|
|
4.4
|
Restated
Shareholders Agreement, dated as of March 8, 2005, between the Company and
Knowledge Capital Investment Group
|
(8)
|
|
|
4.5
|
Restated
Registration Rights Agreement, dated as of March 8, 2005, between the
Company and Knowledge Capital Investment Group
|
(8)
|
|
|
10.1*
|
Amended
and Restated 1992 Employee Stock Purchase Plan
|
(3)
|
|
|
10.2*
|
Amended
and Restated 2000 Employee Stock Purchase Plan
|
(6)
|
|
|
10.3*
|
Amended
and Restated 2004 Employee Stock Purchase Plan
|
(15)
|
|
|
10.4*
|
Amended
and Restated 1992 Stock Incentive Plan
|
(4)
|
|
|
10.5*
|
First
Amendment to Amended and Restated 1992 Stock Incentive
Plan
|
(16)
|
|
|
10.6*
|
Third
Amendment to Amended and Restated 1992 Stock Incentive
Plan
|
(17)
|
|
|
10.7*
|
Fifth
Amendment to the Franklin Covey Co. Amended and Restated 1992 Stock
Incentive Plan (Appendix A)
|
(12)
|
|
|
10.8*
|
Forms
of Nonstatutory Stock Options
|
(1)
|
|
|
10.9*
|
Amended
and Restated Option Agreement, dated December 8, 2004, by and between the
Company and Robert A. Whitman
|
(7)
|
|
|
10.10
|
Restated
Monitoring Agreement, dated as of March 8, 2005, between the Company and
Hampstead Interests, LP
|
(8)
|
|
|
10.11
|
Warrant,
dated March 8, 2005, to purchase 5,913,402 shares of Common Stock issued
by the Company to Knowledge Capital Investment Group
|
(8)
|
|
|
10.12
|
Form
of Warrant to purchase shares of Common Stock to be issued by the Company
to holders of Series A Preferred Stock other than Knowledge Capital
Investment Group
|
(8)
|
|
|
10.13*
|
Franklin
Covey Co. 2004 Non-Employee Directors’ Stock Incentive
Plan
|
(9)
|
|
|
10.14*
|
The
first amendment to the Franklin Covey Co. 2004 Non-Employee Director Stock
Incentive Plan, (Appendix B)
|
(12)
|
|
|
10.15*
|
Form
of Option Agreement for the 2004 Non-Employee Directors Stock Incentive
Plan
|
(9)
|
|
|
10.16*
|
Form
of Restricted Stock Agreement for the 2004 Non-Employees Directors Stock
Incentive Plan
|
(9)
|
|
|
10.17
|
Master
Lease Agreement between Franklin SaltLake LLC (Landlord) and Franklin
Development Corporation (Tenant)
|
(10)
|
|
|
10.18
|
Purchase
and Sale Agreement and Escrow Instructions between Levy Affiliated
Holdings, LLC (Buyer) and Franklin Development Corporation (Seller) and
Amendments
|
(10)
|
|
10.19
|
Redemption
Extension Voting Agreement between Franklin Covey Co. and Knowledge
Capital Investment Group, dated October 20, 2005
|
(11)
|
|
|
10.20
|
Agreement
for Information Technology Services between each of Franklin Covey Co.,
Electronic Data Systems Corporation, and EDS Information Services LLC,
dated April 1, 2001
|
(13)
|
|
|
10.21
|
Additional
Services Addendum No. 1 to Agreement for Information Technology Services
between each of Franklin Covey Co., Electronic Data Systems Corporation,
and EDS Information Services LLC, dated June 30, 2001
|
(13)
|
|
|
10.22
|
Amendment
No. 2 to Agreement for Information Technology Services between each of
Franklin Covey Co., Electronic Data Systems Corporation, and EDS
Information Services LLC, dated June 30, 2001
|
(13)
|
|
|
10.23
|
Amendment
No. 6 to the Agreement for Information Technology Services between each of
Franklin Covey Co., Electronic Data Systems Corporation, and EDS
Information Services L.L.C. dated April 1, 2006
|
(14)
|
|
|
10.24
|
Revolving
Line of Credit Agreement ($18,000,000) by and between JPMorgan Chase Bank,
N.A. and Franklin Covey Co. dated March 14, 2007
|
(18)
|
|
|
10.25
|
Secured
Promissory Note between JPMorgan Chase Bank, N.A. and Franklin Covey Co.
dated March 14, 2007
|
(18)
|
|
|
10.26
|
Security
Agreement between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey
Marketing, LTD., and JPMorgan Chase Bank, N.A. and Zions First National
Bank, dated March 14, 2007
|
(18)
|
|
|
10.27
|
Repayment
Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey
Marketing, LTD., and JPMorgan Chase Bank N.A., dated March 14,
2007
|
(18)
|
|
|
10.28
|
Pledge
and Security Agreement between Franklin Covey Co. and JPMorgan Chase Bank,
N.A. and Zions First National Bank, dated March 14, 2007
|
(18)
|
|
|
10.29
|
Revolving
Line of Credit Agreement ($7,000,000) by and between Zions First National
Bank and Franklin Covey Co. dated March 14, 2007
|
(18)
|
|
|
10.30
|
Secured
Promissory Note between Zions First National Bank and Franklin Covey Co.
dated March 14, 2007
|
(18)
|
|
10.31
|
Repayment
Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin Covey
Marketing, LTD., and Zions First National Bank, dated March 14,
2007
|
(18)
|
|
|
10.32
|
Master
License Agreement between Franklin Covey Co. and Franklin Covey Products,
LLC
|
(21)
|
|
|
10.33
|
Supply
Agreement between Franklin Covey Products, LLC and Franklin Covey Product
Sales, Inc.
|
(21)
|
|
|
10.34
|
Master
Shared Services Agreement between The Franklin Covey Products Companies
and the Shared Services Companies
|
(21)
|
|
|
10.35
|
Amended
and Restated Operating Agreement of Franklin Covey Products,
LLC
|
(21)
|
|
|
10.36
|
Sublease
Agreement between Franklin Development Corporation and Franklin Covey
Products, LLC
|
(21)
|
|
|
10.37
|
Sub-Sublease
Agreement between Franklin Covey Co. and Franklin Covey Products,
LLC
|
(21)
|
|
|
10.38
|
Loan
Modification Agreement between Franklin Covey Co. and JPMorgan Chase Bank,
N.A. dated July 8, 2008
|
(21)
|
|
|
10.39
|
General
Services Agreement between Franklin Covey Co. and Electronic Data Systems
(EDS) dated October 27, 2008
|
(22)
|
|
|
10.40*
|
Second
Amendment to the Franklin Covey Co. Non-Employee Directors Stock Incentive
Plan
|
(23)
|
|
|
10.41
|
Asset
Purchase Agreement by and Among Covey/Link LLC, CoveyLink Worldwide LLC,
Franklin Covey Co., and Franklin Covey Client Sales, Inc. dated December
31, 2008
|
(24)
|
|
|
10.42
|
Amended
and Restated License of Intellectual Property by and Among Franklin Covey
Co. and Covey/Link LLC, dated December 31, 2008
|
(24)
|
|
|
10.43
|
Loan
Modification Agreement between Franklin Covey Co. and JPMorgan Chase Bank,
N.A. dated November 11, 2009
|
(25)
|
|
|
Subsidiaries
of the Registrant
|
éé
|
||
|
Consent
of Independent Registered Public Accounting Firm
|
éé
|
||
|
Rule
13a-14(a) Certification of the Chief Executive Officer
|
éé
|
||
|
Rule
13a-14(a) Certification of the Chief Financial Officer
|
éé
|
||
|
Section
1350 Certifications
|
éé
|
||
|
Report
of KPMG LLP, Independent Registered Public Accounting Firm, on
Consolidated Financial Statement Schedule for the years ended August 31,
2009, 2008, and 2007
|
éé
|
||
|
Financial
Statement Schedule II – Valuation and Qualifying Accounts and
Reserves.
|
éé
|
|
(1)
|
Incorporated
by reference to Registration Statement on Form S-1 filed with the
Commission on April 17, 1992, Registration No.
33-47283.
|
|
(2)
|
Incorporated
by reference to Amendment No. 1 to Registration Statement on Form S-1
filed with the Commission on May 26, 1992, Registration No.
33-47283.
|
|
(3)
|
Incorporated
by reference to Report on Form 10-K filed November 27, 1992, for the year
ended August 31, 1992.**
|
|
(4)
|
Incorporated
by reference to Registration Statement on Form S-1 filed with the
Commission on January 3, 1994, Registration No.
33-73728.
|
|
(5)
|
Incorporated
by reference to Schedule 13D (CUSIP No. 534691090 as filed with the
Commission on June 14, 1999). Registration No.
005-43123.
|
|
(6)
|
Incorporated
by reference to Report on Form S-8 filed with the Commission on May 31,
2000, Registration No. 333-38172.
|
|
(7)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on December
14, 2004.**
|
|
(8)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on March 10,
2005.**
|
|
(9)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on March 25,
2005.**
|
|
(10)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on June 27,
2005.**
|
|
(11)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on October
24, 2005.**
|
|
(12)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A filed with the
Commission on December 12, 2005.**
|
|
(13)
|
Incorporated
by reference to Report on Form 10-Q filed July 10, 2001, for the quarter
ended May 26, 2001.**
|
|
(14)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on April 5,
2006.**
|
|
(15)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A filed with the
Commission on February 1, 2005.**
|
|
(16)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A dated November
5, 1993.**
|
|
(17)
|
Incorporated
by reference to Definitive Proxy Statement on Form DEF 14A filed with the
Commission on December 3, 1999.**
|
|
(18)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on March 19,
2007.**
|
|
(19)
|
Incorporated
by reference to Report on Form 8-K/A filed with the Commission on May 29,
2008.**
|
|
(20)
|
Incorporated
by reference to Report on Form 10-Q filed July 10, 2008, for the Quarter
ended May 31, 2008.**
|
|
(21)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on July 11,
2008.**
|
|
(22)
|
Incorporated
by reference to Report on Form 10-K filed with the Commission on November
14, 2008.**
|
|
(23)
|
Incorporated
by reference to Report on Form 10-Q filed with the Commission on January
13, 2009.**
|
|
(24)
|
Incorporated
by reference to Report on Form 10-Q filed with the Commission on April 9,
2009.**
|
|
(25)
|
Incorporated
by reference to Report on Form 8-K filed with the Commission on November
16, 2009.**
|
|
éé
|
Filed
herewith and attached to this report.
|
|
*
|
Indicates
a management contract or compensatory plan or
agreement.
|
|
**
|
Registration
No. 001-11107.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on November 16, 2009.
FRANKLIN
COVEY CO.
|
By:
|
/s/ Robert A. Whitman
|
|
|
Robert
A. Whitman
Chairman
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Robert A. Whitman
|
Chairman
of the Board and Chief Executive Officer
|
November
16, 2009
|
|
Robert
A. Whitman
|
||
|
/s/ Stephen R. Covey
|
Vice-Chairman
of the Board
|
November
16, 2009
|
|
Stephen
R. Covey
|
||
|
/s/ Clayton M. Christensen
|
Director
|
November
16, 2009
|
|
Clayton
M. Christensen
|
||
|
/s/ Robert H. Daines
|
Director
|
November
16, 2009
|
|
Robert
H. Daines
|
||
|
/s/ E.J. “Jake” Garn
|
Director
|
November
16, 2009
|
|
E.J.
“Jake” Garn
|
||
|
/s/ Dennis G. Heiner
|
Director
|
November
16, 2009
|
|
Dennis
G. Heiner
|
||
|
/s/ Donald J. McNamara
|
Director
|
November
16, 2009
|
|
Donald
J. McNamara
|
||
|
/s/ Joel C. Peterson
|
Director
|
November
16, 2009
|
|
Joel
C. Peterson
|
||
|
/s/ E. Kay Stepp
|
Director
|
November
16, 2009
|
|
E.
Kay Stepp
|
Exhibit
21
FRANKLIN
COVEY CO.
Subsidiaries
Domestic:
Franklin
Development Corporation (a Utah corporation)
Franklin
Covey Travel, Inc. (a Utah corporation)
Franklin
Covey Client Sales, Inc. (a Utah corporation)
International:
Franklin
Covey Canada, Ltd. (a Canada corporation)
Franklin
Covey Europe, Ltd. (England, Wales)
Franklin
Covey Proprietary Limited (Queensland Australia)
Franklin
Covey Japan Co. Ltd. (Japan)
Franklin
Covey de Mexico, S. de R.L. de C.V. (Mexico)
Exhibit
23
Consent
of Independent Registered Public Accounting Firm
The Board
of Directors
Franklin
Covey Co.:
We
consent to the incorporation by reference in the registration statements (Nos.
333-139048, 333-131485, 333-123602, 333-128131, 333-38172, 333-34498, 333-89541,
033-73624, and 033-51314) on Forms S-3 and S-8 of Franklin Covey Co. of our
reports dated November 16, 2009, with respect to the consolidated balance sheets
of Franklin Covey Co. as of August 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the three-year
period ended August 31, 2009, the related consolidated financial statement
schedule, and the effectiveness of internal control over financial reporting as
of August 31, 2009, which reports appear in the August 31, 2009 annual report on
Form 10-K of Franklin Covey Co.
/s/ KPMG
LLP
Salt Lake
City, UT
November
16, 2009
Exhibit
31.1
SECTION
302 CERTIFICATION
I, Robert
A. Whitman, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K 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:
November 16, 2009
|
||
| /s/ Robert A. Whitman | ||
|
Robert
A. Whitman
Chief
Executive
Officer
|
||
Exhibit
31.2
SECTION
302 CERTIFICATION
I,
Stephen D. Young, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K 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
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|
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: November
16, 2009
|
||
| /s/ Stephen D. Young | ||
|
Stephen
D. Young
Chief
Financial
Officer
|
||
Exhibit 32
CERTIFICATION
In
connection with the annual report of Franklin Covey Co. (the “Company”) on Form
10-K for the period ended August 31, 2009, as filed with the Securities and
Exchange Commission (the “Report”), we, Robert A. Whitman, 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
Chief
Executive Officer
|
Stephen
D. Young
Chief
Financial Officer
|
||
|
Date:
November 16, 2009
|
Date:
November 16,
2009
|
Exhibit
99.1
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Franklin
Covey Co.:
Under
date of November 16, 2009, we reported on the consolidated balance sheets of
Franklin Covey Co. and subsidiaries as of August 31, 2009 and 2008, and the
related consolidated statements of operations and comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the three-year
period ended August 31, 2009, which are included in Franklin Covey Co’s Annual
Report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the Annual Report on Form
10-K. This financial statement schedule is the responsibility of the
Company’s management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG
LLP
Salt Lake
City, Utah
November
16, 2009
Exhibit 99.2
SCHEDULE
II
FRANKLIN
COVEY CO.
VALUATION
AND QUALIFYING ACCOUNTS AND RESERVES
For the Three Years Ended
August 31, 2009
(Dollars
in Thousands)
|
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
||||||||||||
|
Additions
|
||||||||||||||||
|
Description
|
Balance
at Beginning of Period
|
Charged
to Costs and Expenses
|
Deductions
|
Balance
at End of Period
|
||||||||||||
|
Year
ended August 31, 2007:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 979 | $ | 207 | $ | (365 | )(1) | $ | 821 | |||||||
|
Allowance
for inventories
|
3,388 | 3,015 | (1,702 | )(2) | 4,701 | |||||||||||
| $ | 4,367 | $ | 3,222 | $ | (2,067 | ) | $ | 5,522 | ||||||||
|
Year
ended August 31, 2008:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 821 | $ | 501 | $ | (256 | )(1)(3) | $ | 1,066 | |||||||
|
Allowance
for inventories
|
4,701 | 1,278 | (4,202 | )(2)(4) | 1,777 | |||||||||||
| $ | 5,522 | $ | 1,779 | $ | (4,458 | ) | $ | 2,843 | ||||||||
|
Year
ended August 31, 2009:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 1,066 | $ | 81 | $ | (268 | )(1) | $ | 879 | |||||||
|
Allowance
for inventories
|
1,777 | 1,621 | (2,544 | )(2) | 854 | |||||||||||
| $ | 2,843 | $ | 1,702 | $ | (2,812 | ) | $ | 1,733 | ||||||||
(1)
Represents a write-off of accounts deemed uncollectible
(2) Reduction in the allowance
is due to a write-off of obsolete inventories
|
(3)
Includes $23 of the allowance for doubtful accounts that was sold with the
Consumer Solutions Business Unit
assets
|
|
(4)
Includes $3,058 of inventory reserves that were sold with the Consumer
Solutions Business Unit
assets
|