November
2, 2006
Ms.
Linda
Cvrkel
Branch
Chief
Securities
and Exchange Commission
Division
of Corporate Finance
Washington,
D.C. 20549-0305
| RE: | Franklin Covey Co. (the Company) |
| Form 10-K for the year ended August 31, 2005 | |
| File No. 1-11107 | |
| Response to Commission Letter Dated November 1, 2006 |
Dear
Ms.
Cvrkel:
This
letter is written in response to the Staff’s review of the Company’s Form 10-K
for the year ended August 31, 2005 as outlined in the Commission’s letter dated
June 26, 2006 and subsequent letters dated July 24, 2006, August 17, 2006 and
November 1, 2006. The Company is providing the following additional information
regarding the treatment of outstanding management stock loan shares in the
Company’s calculation of earnings per share (EPS). The information presented in
this response is designed to provide the Staff with additional information
related to the Company’s conclusion regarding the income participation rights
and the future classification and treatment of the management common stock
loan
shares in its EPS calculations.
Form
10-K for the year ended August 31, 2005
| 1. |
We
note from your response to our comment in your letter dated September
14,
2006, that in order to determine the EPS treatment of the loan program
shares held in escrow, which was the result of the May 2006 modifications,
you are in the process of determining the legal income participation
rights of the management stock loan shares. Please provide us with
your
conclusions as to the EPS treatment of the shares held in escrow.
As part
of your response, please provide us with the details of your analysis
and
assumptions used in arriving at your
conclusions.
|
Response:
In order
to determine the EPS treatment of loan program shares held in the escrow
account, we requested the Company’s general outside counsel to complete a review
of the legal income participation rights of the management stock loan shares.
This review determined that the management loan shares held in the escrow
account continue to have the same dividend and income participation rights
as
other common shareholders. Accordingly, the Company believes 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, Issue
2.
According to EITF 03-06 Issue 2, a participating security is a security that
may
participate in undistributed earnings with common stock, whether that
participation is conditional upon the occurrence of a specified event or not.
Although EITF 03-06 Issue 2(a) specifically excludes stock-based compensation
instruments subject to SFAS No. 123R, Share-Based
Payment,
the
Company believes that the shares issued in the management stock loan program
were non-compensatory, which is further supported by the May 2004 and fiscal
2006 modifications, whereby the loan participants are essentially prevented
from
receiving compensation income from the loan shares and the Company is virtually
assured of never incurring any compensation cost related to the loans. In
addition, we note that the FASB Staff has an exposure draft position that would
require share-based awards that have nonforfeitable dividend rights to be
considered as participating securities in the calculation of EPS.
As
the
loan shares held in escrow were determined to be participating securities as
defined by EITF 03-06, the Company will include the management loan shares
in
its Basic EPS calculation because their rights to undistributed income continue
to be the same as other common shareholders. Since the management stock loan
shares do not have a clear contractual obligation to share in the losses of
the
Company (as defined by EITF 03-06), due to the favorable modifications made
to
the loan program in the past, the Company believes that the management loan
shares should be considered outstanding for purposes of Basic EPS in periods
of
net income and excluded from Basic EPS in periods of net loss starting in the
fourth quarter of fiscal 2006, which was the completion of the escrow agreement
modification.
The
Company is currently in the process of preparing its Form 10-K for the year
ended August 31, 2006 and will include disclosure reflecting this treatment
of
management stock loan shares in the notes to the consolidated financial
statements for the management stock loan and computation of EPS. Since the
Company recognized net income available to common shareholders for the quarter
and year ended August 31, 2006, the management common stock loan shares will
be
included in the calculation of Basic EPS.
Hopefully
the supplemental information presented above is fully responsive to
the
Staff’s comment on the Company’s conclusion regarding the management stock loan
shares in the calculation of Basic EPS. As previously mentioned in other
response letters, the accounting for Company’s management stock loan program has
been the subject of continuing dialogue and consultations with KPMG’s national
Department of Professional Practice, who agrees with the accounting conclusions
reached by the Company. Please contact me with any further questions that you
may have regarding these matters.
Sincerely,
| /s/ STEPHEN D. YOUNG | |||
|
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Stephen
D. Young
Chief Financial Officer
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