UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
(Mark
One) | |
|
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
quarterly period ended February 26, 2005
|
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
transition period from __________ to __________
Commission
file no. 1-11107
FRANKLIN
COVEY CO.
(Exact
name of registrant as specified in its charter)
Utah |
87-0401551 |
||
(State
of incorporation) |
(I.R.S.
employer identification number) |
||
2200
West Parkway Boulevard |
84119-2099 |
||
Salt
Lake City, Utah |
(Zip
Code) |
||
(Address
of principal executive offices) |
|||
Registrant’s
telephone number, |
|||
Including
area code |
(801)
817-1776 |
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
|
Yes |
x |
|
No |
o |
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
|
Yes |
o |
|
No |
x |
Indicate
the number of shares outstanding of each of the issuer’s classes of Common Stock
as of the latest practicable date:
20,135,743
shares of Common Stock as of April 4, 2005
|
3 | |
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38 | |
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
FRANKLIN
COVEY CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in
thousands, except per share amounts)
|
February
26,
2005 |
August
31,
2004 |
||||||
|
(unaudited) |
|||||||
ASSETS |
|||||||
Current
assets: |
|||||||
|
Cash,
cash equivalents, and short-term investments |
$ |
47,262 |
$ |
41,904 |
|||
|
Accounts
receivable, less allowance for doubtful accounts
of $1,356 and $1,034 |
18,290 |
18,636 |
|||||
|
Inventories |
23,423 |
23,693 |
|||||
|
Other
current assets |
4,656 |
5,794 |
|||||
|
Total
current assets |
93,631 |
90,027 |
|||||
|
Property
and equipment, net |
36,389 |
40,584 |
|||||
|
Intangible
assets, net |
85,426 |
87,507 |
|||||
|
Other
long-term assets |
9,045 |
7,593 |
|||||
$ |
224,491 |
$ |
225,711 |
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|||||||
|
Current
liabilities: |
|||||||
|
Current
portion of long-term debt |
$ |
120 |
$ |
120 |
|||
|
Accounts
payable |
8,716 |
14,018 |
|||||
|
Outsourcing
contract costs payable |
4,059 |
4,914 |
|||||
|
Income
taxes payable |
7,416 |
5,903 |
|||||
|
Accrued
liabilities |
29,391 |
31,244 |
|||||
|
Total
current liabilities |
49,702 |
56,199 |
|||||
|
Long-term
debt, less current portion |
1,341 |
1,350 |
|||||
|
Other
liabilities |
1,722 |
1,550 |
|||||
|
Total
liabilities |
52,765 |
59,099 |
|||||
|
Shareholders’
equity: |
|||||||
|
Preferred
stock - Series A, no par value; convertible into common stock
at $14 per
share; 4,000 shares authorized, 873 shares issued; liquidation
preference totaling $89,530 |
87,203 |
87,203 |
|||||
|
Common
stock - $0.05 par value; 40,000 shares authorized, 27,056
shares issued |
1,353 |
1,353 |
|||||
|
Additional
paid-in capital |
194,960 |
205,585 |
|||||
|
Accumulated
deficit |
(186 |
) |
(8,798 |
) | |||
|
Deferred
compensation on restricted stock grants |
(814 |
) |
(732 |
) | |||
|
Accumulated
other comprehensive income |
1,111 |
1,026 |
|||||
|
Treasury
stock at cost, 6,615 and 7,028 shares |
(111,901 |
) |
(119,025 |
) | |||
|
Total
shareholders’ equity |
171,726 |
166,612 |
|||||
$ |
224,491 |
$ |
225,711 |
||||
See notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
(unaudited) |
(unaudited) |
||||||||||||
Net
sales: |
|||||||||||||
|
Products |
$ |
55,175 |
$ |
57,009 |
$ |
99,226 |
$ |
108,785 |
|||||
|
Training
and services |
27,348 |
21,706 |
52,401 |
44,961 |
|||||||||
|
82,523 |
78,715 |
151,627 |
153,746 |
||||||||||
|
Cost
of sales: |
|||||||||||||
|
Products |
24,733 |
26,898 |
44,817 |
51,562 |
|||||||||
|
Training
and services |
7,725 |
7,192 |
15,586 |
15,033 |
|||||||||
|
32,458 |
34,090 |
60,403 |
66,595 |
||||||||||
|
Gross
margin |
50,065 |
44,625 |
91,224 |
87,151 |
|||||||||
|
Selling,
general, and administrative |
38,787 |
39,410 |
74,440 |
79,426 |
|||||||||
|
Depreciation |
2,320 |
3,222 |
4,498 |
6,813 |
|||||||||
|
Amortization |
1,043 |
1,043 |
2,087 |
2,087 |
|||||||||
|
Income
(loss) from operations |
7,915 |
950 |
10,199 |
(1,175 |
) | ||||||||
|
Interest
income |
165 |
141 |
282 |
227 |
|||||||||
|
Interest
expense |
(29 |
) |
(56 |
) |
(66 |
) |
(167 |
) | |||||
|
Income
(loss) before provision for income taxes |
8,051 |
1,035 |
10,415 |
(1,115 |
) | ||||||||
|
Provision
for income taxes |
(965 |
) |
(803 |
) |
(1,803 |
) |
(1,833 |
) | |||||
|
Net
income (loss) |
7,086 |
232 |
8,612 |
(2,948 |
) | ||||||||
|
Preferred
stock dividends |
(2,184 |
) |
(2,184 |
) |
(4,368 |
) |
(4,368 |
) | |||||
|
Net
income (loss) available to common shareholders |
$ |
4,902 |
$ |
(1,952 |
) |
$ |
4,244 |
$ |
(7,316 |
) | |||
|
Net
income (loss) available to common
shareholders
per share (Note 11): |
|||||||||||||
|
Basic |
$ |
.19 |
$ |
(.10 |
) |
$ |
.16 |
$ |
(.37 |
) | |||
|
Diluted |
$ |
.19 |
$ |
(.10 |
) |
$ |
.16 |
$ |
(.37 |
) | |||
|
Weighted
average number of common shares: |
|||||||||||||
|
Basic |
19,880 |
19,940 |
19,790 |
19,953 |
|||||||||
|
Diluted |
19,940 |
19,940 |
19,804 |
19,953 |
|||||||||
See notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
Two
Quarters Ended |
|||||||
|
February
26,
2005 |
February
28,
2004 |
||||||
|
(unaudited) |
|||||||
Cash
flows from operating activities: |
|||||||
|
Net
income (loss) |
$ |
8,612 |
$ |
(2,948 |
) | ||
|
Adjustments
to reconcile net income (loss) to net cash used for operating activities: |
|||||||
|
Depreciation
and amortization |
7,633 |
9,694 |
|||||
|
Loss
(gain) on disposal of assets |
32 |
(48 |
) | ||||
|
Restructuring
cost reversal |
(306 |
) |
-
|
||||
|
Amortization
of deferred compensation |
371 |
14 |
|||||
|
Compensation
related to CEO common stock grant |
404 |
-
|
|||||
|
Changes
in assets and liabilities: |
|||||||
|
Decrease
in accounts receivable, net |
627 |
3,685 |
|||||
|
Decrease
in inventories |
365 |
10,224 |
|||||
|
Decrease
(increase) in other assets |
(192 |
) |
1,937 |
||||
|
Decrease
in accounts payable, outsourcing contract costs
payable,
and accrued liabilities |
(8,222 |
) |
(20,420 |
) | |||
|
Increase
in other long-term liabilities |
169 |
155 |
|||||
|
Increase
in income taxes payable |
1,530 |
1,018 |
|||||
|
Net
cash provided by operating activities |
11,023 |
3,311 |
|||||
|
Cash
flows from investing activities: |
|||||||
|
Purchases
of property and equipment |
(1,120 |
) |
(1,923 |
) | |||
|
Purchases
of short-term investments |
(10,653 |
) |
(13,430 |
) | |||
|
Sales
of short-term investments |
8,963 |
2,500 |
|||||
|
Proceeds
from sale of property and equipment |
-
|
1,554 |
|||||
|
Net
cash used for investing activities |
(2,810 |
) |
(11,299 |
) | |||
|
Cash
flows from financing activities: |
|||||||
|
Principal
payments on long-term debt |
(62 |
) |
(44 |
) | |||
|
Proceeds
from sales of common stock from treasury |
35 |
83 |
|||||
|
Purchase
of treasury shares |
(22 |
) |
(85 |
) | |||
|
Payment
of preferred stock dividends |
(4,368 |
) |
(4,368 |
) | |||
|
Net
cash used for financing activities |
(4,417 |
) |
(4,414 |
) | |||
|
Effect
of foreign exchange rates on cash and cash equivalents |
(128 |
) |
2 |
||||
|
Net
increase (decrease) in cash and cash equivalents |
3,668 |
(12,400 |
) | ||||
|
Cash
and cash equivalents at beginning of the period |
31,174 |
41,916 |
|||||
|
Cash
and cash equivalents at end of the period |
$ |
34,842 |
$ |
29,516 |
|||
|
Supplemental
disclosure of cash flow information: |
|||||||
|
Cash
paid for interest |
$ |
53 |
$ |
225 |
|||
|
Cash
paid for income taxes |
$ |
602 |
$ |
444 |
|||
|
Non-cash
investing and financing activities: |
|||||||
|
Accrued
preferred stock dividends |
$ |
2,184 |
$ |
2,184 |
|||
|
Issuance
of restricted stock as deferred compensation |
$ |
486 |
$ |
829 |
|||
See notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Franklin
Covey Co. (the Company) provides integrated consulting, training, and
performance enhancement solutions to organizations and individuals in
productivity, leadership, strategy execution, sales force effectiveness,
effective communications, and other areas. Each integrated solution may include
components of training and consulting, assessment, and other application tools
that are generally available in paper-based or electronic formats. The Company’s
products and services are available through professional consulting services,
public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com. The
Company’s historically best-known offerings include the FranklinCovey
PlannerTM, courses
based on the best-selling book, The
Seven Habits of Highly Effective People, and the
productivity workshop entitled, “Focus: Achieving Your Highest Priorities.” The
Company’s latest offerings include facilitated work sessions, a course entitled
“The 4 Disciplines of Execution”, and its assessment tool, “xQ” (Execution
Quotient).
The
accompanying unaudited condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations of the Company as of the dates and for the periods indicated. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to Securities
and Exchange Commission (SEC) rules and regulations. The information included in
this quarterly report on Form 10-Q should be read in conjunction with the
financial statements and related notes included in the Company’s Annual Report
on Form 10-K for the fiscal year ended August 31, 2004.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
The
Company utilizes a modified 52/53-week fiscal year that ends on August 31 of
each year. Corresponding quarterly periods generally consist of 13-week periods
that end on November 27, 2004, February 26, 2005, and May 28, 2005 during fiscal
2005. Under the modified 52/53-week fiscal year, the quarter ended February 26,
2005 had the same number of business days as the quarter ended February 28,
2004. However, the two quarters ended February 26, 2005 had two fewer business
days than the two quarters ended February 28, 2004.
The
results of operations for the quarter ended February 26, 2005 are not indicative
of results expected for the entire fiscal year ending August 31,
2005.
Certain
reclassifications have been made to the fiscal 2004 financial statements to
conform with the current period presentation, including $10.7 million of cash
equivalents at August 31, 2004 that were reclassified to short-term investments
in order to conform to fiscal 2005 financial statement
presentation.
NOTE 2 - ACCOUNTING FOR STOCK-BASED
COMPENSATION
The
Company accounts for its stock-based compensation and awards using the
intrinsic-value method of accounting as outlined in Accounting Principles Board
(APB) Opinion 25 and related interpretations. Under the intrinsic-value
methodology, no compensation expense is recognized for stock option awards
granted at, or above, the fair market value of the stock on the date of grant.
Accordingly, no compensation expense has been recognized for the Company’s stock
option plans or employee stock purchase plan in its condensed consolidated
statements of operations, except as disclosed below. Had compensation expense
for the Company’s stock option plans and employee stock purchase plan been
determined in accordance with the fair value approach as defined by Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, the
Company’s net income (loss) available to common shareholders and corresponding
basic and diluted earnings per share would have been the following (in
thousands, except per share data):
|
|
Quarter
Ended |
Two
Quarters Ended |
|||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
Net
income (loss) available to common shareholders, as
reported |
$ |
4,902 |
$ |
(1,952 |
) |
$ |
4,244 |
$ |
(7,316 |
) | |||
|
Fair
value of stock-based compensation, net of tax |
(1,915 |
) |
(193 |
) |
(2,102 |
) |
(387 |
) | |||||
|
Net
income (loss) available to common shareholders, pro forma |
$ |
2,987 |
$ |
(2,145 |
) |
$ |
2,142 |
$ |
(7,703 |
) | |||
|
Basic
earnings (loss) per share, as reported |
$ |
.19 |
$ |
(.10 |
) |
$ |
.16 |
$ |
(.37 |
) | |||
|
Diluted
earnings (loss) per share, as reported |
$ |
.19 |
$ |
(.10 |
) |
$ |
.16 |
$ |
(.37 |
) | |||
|
Basic
earnings (loss) per share, pro forma |
$ |
.11 |
$ |
(.11 |
) |
$ |
.08 |
$ |
(.39 |
) | |||
|
Diluted
earnings (loss) per share, pro forma |
$ |
.11 |
$ |
(.11 |
) |
$ |
.08 |
$ |
(.39 |
) | |||
In
connection with changes in the Company’s Chief Executive Officer (CEO)
compensation plan (Note 14), the CEO was granted 187,000 shares of fully-vested
Company common stock and 225,000 shares of restricted stock (RSA) as a long-term
incentive during the quarter ended February 26, 2005. In addition, the Company
accelerated the vesting of the CEO’s 1.6 million stock options with an exercise
price of $14.00 per share. The impact of these stock-based awards on the
Company’s financial statements as of and for the period ended February 26, 2005
was as follows:
| · |
Fully-Vested
Stock Award - Based
upon guidance in APB Opinion 25, the fair value of the fully vested stock
award of 187,000 shares of common stock was calculated based upon the fair
value of the Company’s common stock at the measurement date. The
fully-vested stock award was valued at $2.16 per share, which was the
closing market price of the Company’s common stock on the measurement date
and resulted in $0.4 million of expense that was included as a component
of selling, general, and administrative expense. The cost of the common
stock issued from treasury was $3.2 million and the difference between the
cost of the treasury stock and fair value of the award, which totaled $2.8
million, was recorded as a reduction of additional paid-in
capital. |
| · |
Restricted
Stock Award -
The Company awarded the CEO 225,000 shares of restricted common stock as a
long-term incentive consistent with the restricted stock awards made to
other key employees in January 2004. As a result, the
fair value of the RSA was calculated on the measurement date and the
corresponding compensation expense was deferred as a component of
shareholders’ equity and is being expensed over the vesting period of the
award, subject to acceleration if specified earnings thresholds are
achieved. The CEO RSA was valued at $2.16 per share, which was the closing
market price of the Company’s common stock on the measurement date and
resulted in a $0.5 million increase to deferred compensation in the
Company’s balance sheet. The cost of the common stock shares issued from
treasury stock was $3.9 million and the difference between the cost of the
treasury stock and fair value of the award, which totaled $3.4 million,
was recorded as a reduction of additional paid-in capital. In addition,
the CEO received a cash bonus for a portion of the income tax consequences
of the RSA. The cash bonus totaled $0.2 million and was expensed as a
component of selling, general, and administrative expense when the RSA was
granted. |
| · |
Acceleration
of Stock Option Vesting Period -
The modification of the CEO options for accelerated vesting was accounted
for using guidance found in FASB Interpretation (FIN) No. 44, Accounting
for Certain Transactions Involving Stock Compensation.
According to FIN 44, the vesting acceleration created a new measurement
date. At the new measurement date, the fair value of the Company’s stock
was significantly less than the $14 per share exercise price of the CEO
stock options and the resulting intrinsic value at the new measurement
date for these options is zero. The previous intrinsic value of these
options when granted was also
zero.
|
The
restricted stock awards previously granted to key employees in January 2004 and
to the CEO in December 2004 contain accelerated vesting provisions if the
Company achieves specified earnings thresholds. During the quarter ended
February 26, 2005, the Company determined that it was probable that the Company
would achieve the specified earnings thresholds required to accelerate RSA
vesting during the quarter ending May 28, 2005. Accordingly, during the quarter
ended February 26, 2005, the Company expensed an additional $0.3 million of
deferred compensation for the expected accelerated vesting of the restricted
stock awards.
NOTE 3 - CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS
The
Company considers highly liquid investments with insignificant interest rate
risk and original maturities to the Company of three months or less to be cash
equivalents. Cash and cash equivalents primarily consist of interest-bearing
bank accounts, money market funds, and short-term certificates of
deposit.
The
Company considers highly liquid investments with an effective maturity to the
Company of more than three months and less than one year to be short-term
investments. The Company defines effective maturity as the shorter of the
original maturity to the Company or the effective maturity as a result of
periodic auction of its investments classified as available for sale. Management
determines the appropriate classification of investments at the time of purchase
and reevaluates such designation as of each balance sheet date. All of the
Company’s short-term investments, which totaled $12.4 million and $10.7 million
at February 26, 2005 and August 31, 2004, respectively, were classified as
available-for-sale securities and were recorded at fair value, which
approximated cost.
Realized
gains and losses on the sale of these available for sale short-term investments
were insignificant for the periods presented. Unrealized gains and losses on the
sale of these investments were also insignificant for the periods presented and
accordingly were not recorded as a component of other comprehensive income. The
Company uses the specific identification method to compute the gains and losses
on its short-term investments.
NOTE 4 - INVENTORIES
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method, and were comprised of the following (in
thousands):
|
February
26,
2005 |
August
31,
2004 |
||||||
|
Finished
goods |
$ |
19,808 |
$ |
19,756 |
|||
|
Work
in process |
1,184 |
978 |
|||||
|
Raw
materials |
2,431 |
2,959 |
|||||
$ |
23,423 |
$ |
23,693 |
||||
NOTE 5 - INTANGIBLE ASSETS
The
Company’s intangible assets were comprised of the following (in
thousands):
|
February
26, 2005 |
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
|||||||
Definite-lived
intangible assets: |
||||||||||
|
License
rights |
$ |
27,000 |
$ |
(6,011 |
) |
$ |
20,989 |
|||
|
Curriculum |
58,225 |
(24,107 |
) |
34,118 |
||||||
|
Customer
lists |
18,774 |
(11,455 |
) |
7,319 |
||||||
|
Trade
names |
1,277 |
(1,277 |
) |
-
|
||||||
|
105,276 |
(42,850 |
) |
62,426 |
|||||||
|
Indefinite-lived
intangible asset: |
||||||||||
|
Covey
trade name |
23,000 |
-
|
23,000 |
|||||||
|
Balance
at February 26, 2005 |
$ |
128,276 |
$ |
(42,850 |
) |
$ |
85,426 |
|||
|
August
31, 2004 |
||||||||||
|
Definite-lived
intangible assets: |
||||||||||
|
License
rights |
$ |
27,000 |
$ |
(5,543 |
) |
$ |
21,457 |
|||
|
Curriculum |
58,221 |
(23,067 |
) |
35,154 |
||||||
|
Customer
lists |
18,774 |
(10,878 |
) |
7,896 |
||||||
|
Trade
names |
1,277 |
(1,277 |
) |
-
|
||||||
|
105,272 |
(40,765 |
) |
64,507 |
|||||||
|
Indefinite-lived
intangible asset: |
||||||||||
|
Covey
trade name |
23,000 |
-
|
23,000 |
|||||||
|
Balance
at August 31, 2004 |
$ |
128,272 |
$ |
(40,765 |
) |
$ |
87,507 |
|||
The range
of remaining estimated useful lives and weighted-average amortization period
over which the Company is amortizing its major categories of definite-lived
intangible assets at August 31, 2004 were as follows:
|
Category
of Intangible Asset |
Range
of Remaining Estimated Useful Lives |
Weighted
Average Amortization Period | ||
|
License
rights |
22
years |
30
years | ||
|
Curriculum |
2
to 22 years |
26
years | ||
|
Customer
lists |
1
to 12 years |
17
years |
The
Company’s aggregate amortization expense totaled $1.0 million for each of the
quarters ended February 26, 2005 and February 28, 2004. Total amortization
expense was $2.1 million for each of the two quarters ended February 26, 2005
and February 28, 2004.
NOTE 6 - SALE OF CORPORATE HEADQUARTERS
FACILITY
During
the quarter ended February 26, 2005, the Company entered into a
preliminary agreement to sell and leaseback its corporate headquarters
facility, located in Salt Lake City, Utah. In connection with the transaction,
the Company will enter into a 20-year master lease agreement with the purchaser,
a non-related private investment group. The Company will have six five-year
options to renew the master lease agreement and could therefore maintain its
operations at the current location for the next 50 years. The Company currently
expects that its net proceeds from the sale, after transaction costs, will be
approximately $32 million. A corresponding financing obligation will be
recognized in the Company’s consolidated financial statements for the sale price
of the headquarters facility. The completion of the sale is subject to customary
conditions, including a due diligence review, survey, and other related closing
conditions. In accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the
corporate headquarters facility will continue to be classified as held for use
since the Company intends to lease the buildings following the
sale.
NOTE 7 - RESTRUCTURING AND STORE CLOSURE
COSTS
Restructuring
Costs
During
fiscal 1999, the Company’s Board of Directors approved a plan to restructure the
Company’s operations, reduce its workforce, and formally exit the Company’s
leased office space located in Provo, Utah. The Company recorded a $16.3 million
restructuring charge during fiscal 1999 to record the expected costs of these
activities. Included in the restructuring charge were costs to provide severance
and related benefits, as well as expected costs to formally exit the leased
office space. This restructuring plan was substantially completed during fiscal
2000.
The
Company, under a long-term agreement, leased the Provo office space in buildings
that were owned by partnerships, the majority interest of which were owned by a
Vice-Chairman of the Board of Directors and certain other employees and former
employees of the Company. During the quarter ended November 27, 2004, the
Company exercised an option, available under its master lease agreement, to
purchase, and simultaneously sell, the office facility to the current tenant, an
unrelated party. Based on the continuing negative cash flow associated with
these buildings, and other factors, the Company determined that it was in its
best interest to exercise the option and sell the property. The negotiated
purchase price with the landlord was $14.0 million and the tenant agreed to
purchase the property for $12.5 million. These prices were within the range of
estimated fair values of the buildings as determined by an independent appraisal
obtained by the Company. The Company paid the difference between the sale and
purchase prices, plus other closing costs, which were included as a component of
the restructuring plan accrual. After accounting for the sale transaction, the
remaining fiscal 1999 restructuring costs, which totaled $0.3 million, were
credited to operating expenses under the caption, “Restructuring Cost Reversal”
in the Company’s condensed consolidated statement of operations for the two
quarters ended February 26, 2005.
Store
Closure Costs
During
fiscal 2004 and the second quarter of fiscal 2005, the Company closed certain
retail store locations. The Company closed 14 stores during the quarter ended
February 26, 2005 and closed 7 stores subsequent to February 26, 2005. The
Company may close other store locations if further analysis indicates that the
Company’s operating results may be improved through additional closures. The
Company has incurred severance and lease termination costs related to these
store closure activities, which are included as a component of selling, general,
and administrative expenses in the Company’s consolidated statements of
operations.
The components of the restructuring and store closure accrual were as
follows for the periods indicated (in thousands):
|
Severance
Costs |
Leased
Space
Exit
Costs |
Total |
||||||||
|
Balance
at August 31, 2004 |
$ |
16 |
$ |
2,766 |
$ |
2,782 |
||||
|
Charges
to the accrual |
178 |
67 |
245 |
|||||||
|
Amounts
utilized |
(16 |
) |
(2,207 |
) |
(2,223 |
) | ||||
|
Balance
at November 27, 2004 |
178 |
626 |
804 |
|||||||
|
Charges
to the accrual |
79 |
169 |
248 |
|||||||
|
Amounts
utilized |
(23 |
) |
(102 |
) |
(125 |
) | ||||
|
Balance
at February 26, 2005 |
$ |
234 |
$ |
693 |
$ |
927 |
||||
At
February 26, 2005, accrued store closure costs were recorded as accrued
liabilities in the Company’s condensed consolidated balance sheet. During the
two quarters ended February 26, 2005 the Company accrued and expensed $0.2
million of additional leased space exit costs related to changes in estimated
sublease receipts on 3 retail store closures that occurred during prior fiscal
years. Although the Company believes that its accruals for retail store closures
are adequate at February 26, 2005, these amounts are partially based upon
estimates and may change if actual amounts related to these activities
differ.
NOTE 8 - PREFERRED STOCK RECAPITALIZATION
On March
12, 2005, at the Annual Meeting of Shareholders, the Company’s shareholders
approved a plan to recapitalize the Company’s preferred stock. Under terms of
the recapitalization plan, the Company 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.
The new Series A preferred stock retains its common-equivalent voting rights and
will automatically convert to shares of Series B preferred stock if the holder
of the original Series A preferred stock sells, or transfers, 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. The recapitalization transaction will enable the
Company to:
| · |
Have
the conditional right to redeem shares of preferred
stock; |
| · |
Place
a limit on the period in which the Company may be required to issue common
stock. The new warrants to purchase shares of common stock expire in eight
years, compared to the perpetual right of previously existing Series A
preferred stock to convert to shares of common
stock; |
| · |
Increase
the Company’s ability to purchase shares of its common stock. All
purchases of common stock were previously subject to the approval of
Series A preferred shareholders; |
| · |
Create
the possibility that the Company may receive cash upon issuing additional
shares of common stock to Series A preferred shareholders. The warrants
have an exercise price of $8.00 per share compared to the existing right
of Series A preferred shareholders to convert their preferred shares into
common shares without paying cash; and |
| · |
Eliminate
the requirement to pay common stock dividends to preferred shareholders on
an “as converted” basis. |
Each
existing Series A preferred shareholder will receive a warrant to purchase a
number of common shares equal to 71.43 shares for each $1,000 ($14 per share) in
aggregate liquidation value of Series A preferred shares held immediately prior
to the recapitalization transaction. The exercise price of each warrant will be
$8.00 per share (subject to customary anti-dilution and exercise features) and
will be exercisable over an eight-year term.
Upon
completion of the recapitalization transaction, Series A preferred rights were
amended to prevent the conversion of Series A preferred stock to shares of
common stock. Series B preferred stock rights were amended to be substantially
equivalent to Series A rights, except for the eliminated voting rights. The
rights of the new Series A and Series B preferred stock include the
following:
| · |
Liquidation
Preference -
Both Series A and Series B preferred stock have a liquidation preference
of $25 per share plus accrued unpaid dividends, which will be paid in
preference to the liquidation rights of all other equity
classes. |
| · |
Conversion -
Neither Series A nor Series B preferred stock is convertible to shares of
common stock. Series A preferred stock converts into shares of Series B
upon the sale or transfer of the Series A shares. Series B preferred stock
does not have any conversion rights. |
| · |
Dividends -
Both Series A and Series B preferred stock accrue dividends at 10.0
percent, payable quarterly, in preference to dividends on all other equity
classes. If dividends are in arrears for six or more quarters, the number
of the Company’s Board of Directors will be increased by two and the
Series A and Series B preferred shareholders will have the ability to
select these additional directors. |
| · |
Redemption -
The Company may redeem any of the Series A or Series B preferred shares
during the first year following the recapitalization at a price per share
equal to 100 percent of the liquidation preference. Subsequent to the
first anniversary of the recapitalization and before the fifth anniversary
of the transaction, the Company may only purchase preferred shares (up to
$30 million in aggregate) from Knowledge Capital, which holds the majority
of the Company’s preferred stock, at a premium that increases one
percentage point annually. After the sixth anniversary of the
recapitalization, the Company may redeem any shares of preferred stock at
101 percent of the liquidation preference on the date of
redemption. |
| · |
Change
in Control -
In the event of any change in control of the Company, Knowledge Capital,
to the extent that it still holds shares of Series A preferred stock, will
have the option to receive a cash payment equal to 101 percent of the
liquidation preference of its Series A preferred shares then held. The
remaining Series A and Series B preferred shareholders have no such
option. |
| · |
Voting
Rights -
Although the new Series A preferred shareholders will not have conversion
rights, they will still be entitled to voting rights. The holder of each
new share of Series A preferred stock will be entitled to the voting
rights they would have if they held two shares of common stock. The
cumulative number of votes will be based upon the number of votes
attributable to shares of Series A held immediately prior to the
recapitalization transaction less any transfers of Series A shares to
Series B shares or redemptions. In the event that a Series A preferred
shareholder exercises a warrant to purchase the Company’s common stock,
their Series A voting rights will be reduced by the number of the common
shares issued upon exercise of the warrant. This feature will prevent the
holders of Series A preferred stock from increasing their voting influence
through the acquisition of additional shares of common stock from the
exercise of the warrants. |
| · |
Registration
Rights -
The Company is required to use its best efforts to register the resale of
all shares of common stock and shares of Series B preferred stock issuable
upon the transfer and conversion of the Series A preferred stock held by
Knowledge Capital and certain permitted transferees of Knowledge Capital
within 240 days following the initial filing of the registration statement
covering such shares. The initial filing of the registration statement is
required to occur within 120 days following the closing of the
recapitalization transaction. Any failure by the Company to cause such
registration statement to be declared effective within the specified time
period would require the Company to pay to Knowledge Capital and such
permitted transferees a penalty amount for each share equal to two percent
per annum of the $25 face value of the preferred stock calculated based
upon the number of days that such registration statement has not been
declared effective. Additionally, the Company would have the obligation to
use its best efforts to register the resale of the shares of common stock
Knowledge Capital and certain permitted transferees could receive pursuant
to the exercise of the Warrant issuable to Knowledge Capital at the
closing of the recapitalization transaction, provided the obligation to
register the resale of such shares would be conditioned upon the weighted
average sales price of the common stock over the previous ten trading days
being at least 80 percent of the Warrant exercise price. The Company is
currently in the process of filing the initial registration
statement. |
In order
to account for the various aspects of the recapitalization transaction, the
Company considered guidance found in SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liability and
Equity,
Emerging Issues Task Force (EITF) Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock, and
EITF Issue D-98 Classification
and Measurement of Redeemable Securities. Based
upon the relevant guidance found in these pronouncements, the Company will
account for the various aspects of the preferred stock recapitalization as
follows:
New
Series A and Series B Preferred Stock - The new
shares of preferred stock will continue to be classified as a component of
shareholders’ equity since its conversion into cash or common stock is solely
within the control of the Company as there are no provisions in the
recapitalization documents that would obligate the Company to redeem shares of
the Series A or Series B preferred stock. In addition, by virtue of the Utah
Control Shares Act, the Company’s Bylaws, and the special voting rights of the
preferred shareholders, there are no circumstances under which a third party
could acquire controlling voting power of the Company’s stock without consent of
the Company’s Board of Directors and thus trigger the Company’s obligation to
redeem the new preferred stock. Due to the significant modifications to existing
shares of Series A and Series B preferred stock, the Company believes that
previously outstanding preferred stock is being replaced with new classes of
preferred stock and common stock warrants. As a result, the new preferred stock
will be recorded at its fair value on the date of modification, as determined by
an independent valuation firm. Consistent with other equity instruments, the
carrying value of the new preferred stock will not be subsequently adjusted to
its fair market value at the end of any reporting period. Based upon the
preliminary valuation of the preferred stock, each new share of preferred stock
has an estimated fair value of $20.77 per share on the date of the
recapitalization.
The
difference between the aggregate fair value of the consideration given (the new
Series A preferred stock and the common stock warrants) and the carrying value
of the previously existing Series A preferred stock, which is estimated to be a
gain of $7.7 million, will be reported as a negative preferred stock dividend,
which will increase net income available to common shareholders in the quarter
ending May 28, 2005.
Warrants
- - EITF
Issue 00-19 states that warrants should be classified as a component of
shareholders’ equity if 1) the warrant contract requires physical settlement or
net-share settlement or 2) the warrant contract gives the Company a choice of
net-cash settlement or settlement in its own shares. The Company believes that
the warrants should be accounted for as equity instruments because they meet
these requirements.
Accordingly,
the Company will record the warrants at their fair value, as determined by an
independent valuation firm, on the date of the transaction as a component of
shareholders’ equity. Subsequent changes in fair value will not be recorded in
the Company’s financial statements as long as the warrants remain classified as
shareholders’ equity in accordance with EITF Issue 00-19. Based upon a
preliminary independent valuation, the warrants have an estimated fair value of
$1.11 per share at the date of the recapitalization transaction. The number of
common stock warrants issued totaled 6.2 million.
Derivatives
- - The
modified preferred stock agreement contains a feature that allows the Company to
redeem preferred stock at its liquidation preference in the first year following
the recapitalization transaction and at 101 percent of the liquidation
preference after the sixth anniversary of recapitalization transaction. In
accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, the
Company has determined that this feature is clearly and closely related to the
host contract. Therefore, this embedded call option will not be accounted for
separately from the preferred stock.
A
separate agreement exists with Knowledge Capital, the entity that holds the
majority of the Series A preferred stock, which contains a call option to redeem
$30 million of preferred stock at 100 percent to 103 percent of the liquidation
preference as well as a “change in control” put option at 101 percent of the
liquidation preference. This agreement is a derivative and meets the criteria
found in paragraph 11 of SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity, to be
separately accounted for as a liability. Therefore, the incremental redemption
features (the amounts in excess of the 101 percent call option) will be valued
at fair value based upon the likelihood of exercise and the expected incremental
amount to be paid upon exercise. This derivative-based liability will require
adjustment to fair value at each reporting period and is expected to have an
initial value of zero on the date of the recapitalization
transaction.
Based
upon the foregoing, the following table presents the shareholders’ equity
section of the balance sheet as reported in the Company’s Form 10-Q for the
quarter ended February 26, 2005 compared to a pro forma presentation of
shareholders’ equity if the recapitalization transaction would have been
completed as of February 26, 2005 (in thousands):
|
Description |
As
Reported at February 26, 2005 |
Pro
Forma at February 26, 2005 |
|||||
|
Preferred
stock - Series A; no par value; 4,000 shares authorized, 873 and 3,494
shares issued; liquidation preference totaling $89,530 |
$ |
87,203 |
$ |
72,566 |
|||
|
Preferred
stock - Series B; no par value; 4,000 shares authorized, no shares
issued |
-
|
-
|
|||||
|
Common
stock - $0.05 par value; 40,000 shares authorized, 27,056 shares issued
|
1,353 |
1,353 |
|||||
|
Additional
paid-in capital |
194,960 |
194,960 |
|||||
|
Common
stock warrants |
-
|
6,925 |
|||||
|
Retained
earnings (accumulated deficit) |
(186 |
) |
7,526 |
||||
|
Deferred
compensation on restricted stock grants |
(814 |
) |
(814 |
) | |||
|
Accumulated
other comprehensive income |
1,111 |
1,111 |
|||||
|
Treasury
stock at cost, 6,615 shares |
(111,901 |
) |
(111,901 |
) | |||
|
Total
shareholders’ equity |
$ |
171,726 |
$ |
171,726 |
|||
The
accompanying pro forma information has been prepared for comparative purposes
only and may not be indicative of the actual impact of the recapitalization
transaction when finalized amounts are recorded. In addition, the pro forma
information does not give effect to any other transactions that have or may
occur subsequent to February 26, 2005.
NOTE 9 - INCOME TAXES
The
Company recorded income tax expense during the quarters ended February 26, 2005
and February 28, 2004 that totaled $1.0 million and $0.8 million, respectively,
and recognized income tax expense for each of the two quarters then ended
totaling $1.8 million. The Company’s income tax expense during these periods was
primarily due to taxable income in certain foreign tax jurisdictions. The
Company was unable to offset the tax liabilities in these jurisdictions with its
domestic operating loss. In addition, a history of significant operating
losses has precluded the Company from demonstrating that it is more likely than
not that the benefits of domestic operating loss carryforwards, together with
the benefits of deferred income tax assets, and deferred income tax deductions,
will be realized. Accordingly, the Company has recorded valuation allowances on
its domestic deferred income tax assets.
NOTE 10 - COMPREHENSIVE INCOME
Comprehensive
income includes charges and credits to equity accounts that are not the result
of transactions with shareholders and is comprised of net income or loss and
other comprehensive income and loss items. Comprehensive income for the Company
was as follows (in thousands):
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
Net
income (loss) |
$ |
7,086 |
$ |
232 |
$ |
8,612 |
$ |
(2,948 |
) | ||||
|
Other
comprehensive income (loss) items: |
|||||||||||||
|
Adjustment
for fair value of hedge derivatives |
(26 |
) |
-
|
(318 |
) |
-
|
|||||||
|
Foreign
currency translation adjustments |
(232 |
) |
69 |
403 |
791 |
||||||||
|
Comprehensive
income (loss) |
$ |
6,828 |
$ |
301 |
$ |
8,697 |
$ |
(2,157 |
) | ||||
NOTE 11 - EARNINGS PER SHARE
Basic
earnings per common share (EPS) is calculated by dividing net income or 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 or
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. The
Company’s Series A preferred shareholders (prior to recapitalization) were
entitled to participate in dividends payable to holders of common stock pro rata
based upon the number of shares of common stock into which the Series A
preferred stock is convertible. Accordingly, the Company uses the two class
method as defined in SFAS No. 128, Earnings
Per Share, and
EITF Issue 03-6, Participating
Securities and the Two-Class Method under FASB Statement No.
128 to
calculate basic EPS. The two class method assumes that 100 percent of the
Company’s earnings are distributed as dividends to each participating equity
class based upon their respective ability to participate in such declared
dividends. The following table presents the computation of the Company’s EPS for
the periods indicated (in thousands, except per share amounts):
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
Net
income (loss) |
$ |
7,086 |
$ |
232 |
$ |
8,612 |
$ |
(2,948 |
) | ||||
|
Convertible
preferred stock dividends |
(2,184 |
) |
(2,184 |
) |
(4,368 |
) |
(4,368 |
) | |||||
|
Net
income (loss) after preferred stock dividends |
$ |
4,902 |
$ |
(1,952 |
) |
$ |
4,244 |
$ |
(7,316 |
) | |||
|
Convertible
preferred stock dividends |
$ |
2,184 |
$ |
2,184 |
$ |
4,368 |
$ |
4,368 |
|||||
|
Weighted
average preferred shares on an as converted basis |
6,239 |
6,239 |
6,239 |
6,239 |
|||||||||
|
Distributed
EPS - preferred |
$ |
.35 |
$ |
.35 |
$ |
.70 |
$ |
.70 |
|||||
|
Undistributed
income (loss) |
$ |
4,902 |
$ |
(1,952 |
) |
$ |
4,244 |
$ |
(7,316 |
) | |||
|
Preferred
ownership on an as converted basis |
24 |
% |
24 |
% |
24 |
% |
24 |
% | |||||
|
Preferred
shareholders interest in undistributed income (loss) (1) |
1,176 |
-
|
1,019 |
-
|
|||||||||
|
Weighted
average preferred shares on an as converted basis |
6,239 |
6,239 |
6,239 |
6,239 |
|||||||||
|
Undistributed
EPS - preferred |
$ |
.19 |
$ |
-
|
$ |
.16 |
$ |
-
|
|||||
|
Undistributed
income (loss) |
$ |
4,902 |
$ |
(1,952 |
) |
$ |
4,244 |
$ |
(7,316 |
) | |||
|
Common
stock ownership |
76 |
% |
76 |
% |
76 |
% |
76 |
% | |||||
|
Common
shareholder interest in undistributed income (loss) (1) |
$ |
3,726 |
$ |
(1,952 |
) |
$ |
3,225 |
$ |
(7,316 |
) | |||
|
Weighted
average common shares outstanding - Basic |
19,880 |
19,940 |
19,790 |
19,953 |
|||||||||
|
Common
share equivalents (2) |
60 |
-
|
14 |
-
|
|||||||||
|
Weighted
average common shares outstanding - Diluted |
19,940 |
19,940 |
19,804 |
19,953 |
|||||||||
|
Basic
EPS - Common |
$ |
.19 |
$ |
(.10 |
) |
$ |
.16 |
$ |
(.37 |
) | |||
|
Diluted
EPS - Common |
$ |
.19 |
$ |
(.10 |
) |
$ |
.16 |
$ |
(.37 |
) | |||
(1)
Preferred
shareholders do not participate in any undistributed losses with common
shareholders, therefore no adjustment to the fiscal 2004 loss per share
information was made.
(2) For the three months and six months ended February 28, 2004, conversion of common share equivalents is not assumed because such conversion would be anti-dilutive.
(2) For the three months and six months ended February 28, 2004, conversion of common share equivalents is not assumed because such conversion would be anti-dilutive.
At
February 26, 2005 the Company had approximately 2.3 million stock options
outstanding which were not included in the computation of diluted EPS because
the options’ exercise price was greater than the average market price of the
Company’s common shares.
Subsequent
to February 26, 2005, the Company’s shareholders approved the recapitalization
of the Company’s preferred stock (Note 8). In connection with the
recapitalization, the Series A preferred stock is no longer convertible into
shares of common stock and the existing preferred shareholders were issued 6.2
million warrants (the equivalent number of common shares that could have been
issued to Series A preferred shareholders on an “as converted” basis) to
purchase common stock with an exercise price of $8.00 per share. These warrants,
which expire in eight years, may have a dilutive impact on the Company’s EPS in
future periods.
NOTE 12 - ACCOUNTING FOR DERIVATIVE
INSTRUMENTS
During
the normal course of business, the Company is exposed to fluctuations in foreign
currency exchange rates due to its international operations and fluctuations in
interest rates. To manage risks associated with foreign currency exchange and
interest rates, the Company makes 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, the
Company’s 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, the Company does not enter into
derivative contracts for trading or speculative purposes, nor is the Company
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. The Company enters into derivative agreements only with
highly rated counterparties.
Foreign
Currency Exposure
Due to
the global nature of the Company’s operations, the Company is 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 the Company’s foreign currency risk management
activities is to reduce foreign currency risk in the consolidated financial
statements. In order to manage foreign currency risks, the Company makes limited
use of foreign currency forward contracts and other foreign currency related
derivative instruments. Although the Company cannot eliminate all aspects of its
foreign currency risk, the Company believes that its strategy, which includes
the use of derivative instruments, can reduce the impacts of foreign currency
related issues on its consolidated financial statements.
During
the quarter and two quarters ended February 26, 2005, the Company utilized
foreign currency forward contracts to manage the volatility of certain
intercompany financing transactions and other transactions that are denominated
in foreign currencies. Because these contracts do not meet specific hedge
accounting requirements, gains and losses on these contracts, which expire on a
quarterly basis, are recognized currently and are used to offset a portion of
the gains or losses of the related accounts. The gains and losses on these
contracts were recorded as a component of selling, general, and administrative
expense in the Company’s consolidated statements of operations and resulted in
the following net gains or losses for the periods indicated (in
thousands):
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
Losses
on foreign exchange contracts |
$ |
(58 |
) |
$ |
(148 |
) |
$ |
(353 |
) |
$ |
(539 |
) | |
|
Gains
on foreign exchange contracts |
3 |
-
|
3 |
24 |
|||||||||
|
Net loss
on foreign exchange contracts |
$ |
(55 |
) |
$ |
(148 |
) |
$ |
(350 |
) |
$ |
(515 |
) | |
At
February 26, 2005, the fair value of these contracts, which was determined using
the estimated amount at which contracts could be settled based upon forward
market exchange rates, was insignificant. The notional amounts of the Company’s
foreign currency sell contracts that did not qualify for hedge accounting were
as follows at February 26, 2005 (in thousands):
|
Contract
Description |
Notional
Amount in Foreign Currency |
Notional
Amount in U.S. Dollars |
|||||
|
Australian
Dollars |
1,760 |
$ |
1,366 |
||||
|
Mexican
Pesos |
9,200 |
812 |
|||||
|
Japanese
Yen |
40,000 |
391 |
|||||
During
the quarter and two quarters ended February 26, 2005, the Company also entered
into foreign currency forward contracts that were designed to manage foreign
currency risks related to the value of the Company’s net investment in its
directly-owned operations located in Canada, Japan, and the United Kingdom.
These three offices comprise the majority of the Company’s net investment in
foreign operations. These foreign currency forward instruments, which expire on
a monthly basis, qualified for hedge accounting and corresponding gains and
losses were recorded as a component of other comprehensive income in the
Company’s consolidated balance sheet. The gains and losses on these contracts
were as follows for the periods presented (in thousands):
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
Losses
on net investment hedge contracts |
$ |
(72 |
) |
$ |
-
|
$ |
(384 |
) |
$ |
-
|
|||
|
Gains
on net investment hedge contracts |
46 |
-
|
66 |
-
|
|||||||||
|
Net loss
on net investment hedge contracts |
$ |
(26 |
) |
$ |
-
|
$ |
(318 |
) |
$ |
-
|
|||
As of
February 26, 2005, the Company had settled its net investment hedge contracts.
However, the Company may utilize net investment hedge contracts in future
periods as a component of its overall foreign currency risk
strategy.
Interest
Rate Exposure
Due to
the limited nature of its interest rate risk, the Company does not make regular
use of interest rate derivatives and the Company was not a party to any interest
rate derivative instruments during the quarter or two quarters ended February
26, 2005 or February 28, 2004.
NOTE 13 - SEGMENT INFORMATION
The
Company has two reporting segments: the Consumer and Small Business Unit (CSBU)
and the Organizational Solutions Business Unit (OSBU). The following is a
description of the Company’s reporting segments, their primary operating
components, and their significant business activities:
Consumer
and Small Business Unit - This
business unit is primarily focused on sales to individual customers and includes
the results of the Company’s domestic retail stores, consumer direct operations
(catalog and eCommerce), wholesale operations and other related distribution
channels, including government product sales and external publishing sales. The
CSBU results of operations also include the financial results of the Company’s
paper planner manufacturing operations. Although CSBU sales primarily consist of
products such as planners, binders, software, and handheld electronic planning
devices, virtually any component of the Company’s leadership, productivity, and
strategy execution solutions may be purchased through CSBU
channels.
Organizational
Solutions Business Unit - The OSBU
is primarily responsible for the development, marketing, sale, and delivery of
productivity, leadership, strategy execution, 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 the Organizational
Solutions Group (OSG) and international operations. The OSG is responsible for
the domestic sale and delivery of the Company’s training and consulting
services. The Company’s international sales group includes the financial results
of its directly owned foreign offices and royalty revenues from
licensees.
The
Company’s chief operating decision maker is the CEO, and each of the reportable
segments has a president who reports directly to the CEO. The primary
measurement tool used in business unit performance analysis is earnings before
interest, taxes, depreciation, and amortization (EBITDA), which may not be
calculated as similarly titled amounts are calculated by other companies. For
segment reporting purposes, the Company’s consolidated EBITDA can be calculated
as its income or loss from operations excluding depreciation and amortization
charges.
In the
normal course of business, the Company may make structural and cost allocation
revisions to its segment information to reflect new reporting responsibilities
within the organization. All prior period segment information has been revised
to conform to the most recent classifications and organizational changes. The
Company accounts for its segment information on the same basis as the
accompanying condensed consolidated financial statements.
SEGMENT
INFORMATION
(in thousands)
|
|
Consumer
and Small Business Unit |
Organizational
Solutions Business Unit |
|||||||||||||||||||||||
|
Quarter
Ended February 26, 2005 |
Retail |
Consumer
Direct |
Wholesale |
Other
CSBU |
OSG |
International |
Corporate
and Eliminations |
Consolidated |
|||||||||||||||||
|
Sales
to external customers |
$ |
28,055 |
$ |
16,765 |
$ |
4,897 |
$ |
765 |
$ |
17,784 |
$ |
14,257 |
$ |
82,523 |
|||||||||||
|
Gross
margin |
16,599 |
9,698 |
2,318 |
(1,045 |
) |
12,556 |
9,939 |
50,065 |
|||||||||||||||||
|
EBITDA |
6,183 |
7,471 |
2,157 |
(6,264 |
) |
2,435 |
3,559 |
(4,263 |
) |
11,278 |
|||||||||||||||
|
Depreciation |
844 |
247 |
172 |
78 |
337 |
642 |
2,320 |
||||||||||||||||||
|
Amortization |
86 |
954 |
2 |
1 |
1,043 |
||||||||||||||||||||
|
Quarter
Ended February 28, 2004 |
|||||||||||||||||||||||||
|
Sales
to external customers |
32,668 |
16,265 |
3,663 |
634 |
13,110 |
12,375 |
78,715 |
||||||||||||||||||
|
Gross
margin |
18,314 |
9,182 |
1,405 |
(1,137 |
) |
8,374 |
8,487 |
44,625 |
|||||||||||||||||
|
EBITDA |
5,764 |
5,757 |
1,120 |
(5,995 |
) |
(1,692 |
) |
2,791 |
(2,530 |
) |
5,215 |
||||||||||||||
|
Depreciation |
818 |
259 |
313 |
179 |
325 |
1,328 |
3,222 |
||||||||||||||||||
|
Amortization |
86 |
954 |
2 |
1 |
1,043 |
||||||||||||||||||||
|
Two
Quarters Ended February 26, 2005 |
|||||||||||||||||||||||||
|
Sales
to external customers |
46,443 |
33,901 |
8,480 |
1,750 |
32,912 |
28,141 |
151,627 |
||||||||||||||||||
|
Gross
margin |
26,977 |
19,852 |
4,077 |
(1,676 |
) |
22,576 |
19,418 |
91,224 |
|||||||||||||||||
|
EBITDA |
6,536 |
15,422 |
3,702 |
(12,590 |
) |
3,044 |
7,158 |
(6,488 |
) |
16,784 |
|||||||||||||||
|
Depreciation |
1,522 |
493 |
349 |
154 |
663 |
1,317 |
4,498 |
||||||||||||||||||
|
Amortization |
172 |
1,907 |
4 |
4 |
2,087 |
||||||||||||||||||||
|
Two
Quarters Ended February 28, 2004 |
|||||||||||||||||||||||||
|
Sales
to external customers |
55,336 |
34,477 |
10,126 |
1,222 |
27,058 |
25,527 |
153,746 |
||||||||||||||||||
|
Gross
margin |
30,297 |
19,832 |
4,468 |
(2,228 |
) |
17,188 |
17,594 |
87,151 |
|||||||||||||||||
|
EBITDA |
5,209 |
13,160 |
3,886 |
(12,771 |
) |
(3,037 |
) |
6,036 |
(4,758 |
) |
7,725 |
||||||||||||||
|
Depreciation |
1,788 |
568 |
692 |
431 |
632 |
2,702 |
6,813 |
||||||||||||||||||
|
Amortization |
172 |
1,908 |
4 |
3 |
2,087 |
||||||||||||||||||||
A
reconciliation of reportable segment EBITDA to consolidated loss before income
taxes is provided below (in thousands):
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
Reportable
segment EBITDA |
$ |
15,541 |
$ |
7,745 |
$ |
23,272 |
$ |
12,483 |
|||||
|
Restructuring
cost reversal |
306 |
||||||||||||
|
Corporate
expenses |
(4,263 |
) |
(2,530 |
) |
(6,794 |
) |
(4,758 |
) | |||||
|
Consolidated
EBITDA |
11,278 |
5,215 |
16,784 |
7,725 |
|||||||||
|
Depreciation |
(2,320 |
) |
(3,222 |
) |
(4,498 |
) |
(6,813 |
) | |||||
|
Amortization |
(1,043 |
) |
(1,043 |
) |
(2,087 |
) |
(2,087 |
) | |||||
|
Income
(loss) from operations |
7,915 |
950 |
10,199 |
(1,175 |
) | ||||||||
|
Interest
income |
165 |
141 |
282 |
227 |
|||||||||
|
Interest
expense |
(29 |
) |
(56 |
) |
(66 |
) |
(167 |
) | |||||
|
Income
(loss) before provision for income taxes |
$ |
8,051 |
$ |
1,035 |
$ |
10,415 |
$ |
(1,115 |
) | ||||
NOTE 14 - CEO COMPENSATION AGREEMENT
During
November 2004, the Company’s Board of Directors approved a proposal to change a
number of items with regard to the Company’s CEO employment agreement. The
changes to the CEO’s employment agreement were completed during December 2004
and the corresponding costs related to the new agreement were recorded in the
quarter ended February 26, 2005. Refer to Note 2 - “Accounting For Stock-Based
Compensation” for a detailed discussion regarding the financial statement
impacts of the changes to the CEO’s employment agreement. At the request of the
CEO, the changes to his employment agreement included the
following:
| · |
The
previously existing CEO employment agreement, which extended until 2007,
was canceled and the CEO became an “at-will”
employee. |
| · |
The
CEO signed a waiver forgoing claims on past compensation not
taken. |
| · |
The
CEO agreed to be covered by change in control and severance policies
provided for other Company executives rather than the “golden parachute”
severance package in his previously existing
agreement. |
| · |
In
accordance with the provisions of the Sarbanes-Oxley Act of 2002, the CEO
will not be entitled to obtain a loan in order to exercise his stock
options. |
In return
for these changes to the CEO’s compensation structure and in recognition of the
CEO’s leadership in achieving substantial improvements in the Company’s
operating results, the Company agreed to the following:
| · |
The
CEO’s cash compensation, both base compensation and incentive
compensation, will remain essentially
unchanged. |
| · |
The
vesting period on the CEO’s 1.6 million stock options with an exercise
price of $14.00 per share was accelerated and all of these options are now
fully vested. |
| · |
A
grant of 225,000 shares of restricted stock as a long-term incentive
consistent with the restricted stock awards made to other key employees in
January 2004. In addition, the Company granted the CEO 187,000 shares of
common stock that is fully vested. The compensation cost of both of these
awards is $0.9 million, of which $0.5 million was initially recorded as
deferred compensation in shareholders’ equity and amortized over five
years, subject to accelerated vesting if certain performance thresholds
are met (Note 2). |
| · |
The
Company will also provide life insurance and disability coverage in an
amount equal to 2.5 times the CEO’s cash compensation, using insurance
policies that are similar to those approved for other executives. The cost
of this life insurance policy on the CEO is expected to be
insignificant. |
NOTE 15 - SUBSEQUENT EVENT
Val J.
Christensen, Executive Vice-President, General Counsel and Secretary of the
Company, terminated his service as an executive officer and employee of the
Company, on March 29, 2005. Under the terms of the corresponding Separation
Agreement, the Company will pay to Mr. Christensen a lump-sum severance amount
totaling $0.9 million, less applicable withholdings. In addition, he will
receive the cash performance bonus he would have been entitled to for the
current fiscal year as if he had remained employed in his prior position and his
performance objectives for the year were met, which is estimated to be $0.15
million. In addition to these payments, his shares of restricted stock were
fully vested and he will be entitled to receive a bonus totaling $57,000, which
is calculated equivalent to other bonuses awarded in the January 2004 RSA (Note
2), to offset a portion of the income taxes resulting from the vesting of his
restricted stock award. The Company also waived the requirement that his
fully-vested stock options be exercised within 90 days of his termination and
allows the options to be exercised through the term of the option
agreement.
Subsequent
to entering into the Separation Agreement, the Company and Mr. Christensen
entered into a Legal Services Agreement on March 29, 2005. Under terms of the
Legal Services Agreement, the Company will retain Mr. Christensen as independent
legal counsel to provide services to the Company for a minimum of 1,000 hours
per year. The Legal Services Agreement will allow the Company to benefit from
Mr. Christensen’s extensive institutional knowledge and experience gained from
serving as the Company’s General Counsel as well as his experience representing
the Company as external counsel for several years prior to joining the Company,
while allowing Mr. Christensen one-half of his time to pursue other interests
apart from providing legal services. The Company will pay Mr. Christensen
an annual retainer in the amount of $0.2 million, the equivalent of $225 per
hour for each hour of legal services, and $325 per hour for every hour of legal
services, if any, provided in excess of 1,000 hours in any given year.
Further, Mr. Christensen will be an independent contractor and not entitled to
Company benefits for performing these services.
Subsequent to his separation, the Board of Directors
approved modifications to his management stock loan substantially similar to the
modifications granted to other loan participants by the Board of Directors in
May 2004 under which the Company will forego certain of its rights under the
terms of the loans in order to potentially improve the participants' ability to
pay, and the Comany's ability to collect, the outstanding balances of the
loans.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s
discussion and analysis contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based upon management’s current expectations and are subject to various
uncertainties and changes in circumstances. Important factors that could cause
actual results to differ materially from those described in forward-looking
statements are set forth below under the heading Safe Harbor Statement Under the
Private Securities Litigation Reform Act of 1995.
The
Company suggests that the following discussion and analysis be read in
conjunction with the Consolidated Financial Statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended August 31,
2004.
RESULTS OF OPERATIONS
Overview
Our
second fiscal quarter, which includes the months of December, January, and
February, historically represents our seasonally busiest months as many of our
clients renew their planners on a calendar basis and purchase gifts, including
binders, leather totes, and planning tools for the holidays. As a result, this
quarter generally has better operating results than other quarters of
our fiscal year. Our financial results for the quarter and two quarters
ended February 26, 2005 represented significant improvements over the comparable
periods of the prior year and continued the favorable momentum that began in
prior periods. For the quarter ended February 26, 2005, our income from
operations improved to $7.9 million, compared to $1.0 million in the prior year.
Our operating income for the two quarters ended February 26, 2005 likewise
improved to $10.2 million compared to a loss of $1.2 million in the prior year.
Our net income available to common shareholders for the quarter ended February
26, 2005 was $4.9 million compared to a net loss in the prior year of $2.0
million. For the two quarters ended February 26, 2005, our net income available
to common shareholders was $4.2 million compared to a net loss of $7.3 million
for the corresponding period of fiscal 2004. The primary factors that influenced
our operating results for the quarter ended February 26, 2005 were as
follows:
| · |
Sales
Performance - Training
and consulting services sales increased $5.6 million compared to the
prior year, which was attributable to increased training and consulting
sales in both domestic and international delivery channels. In addition,
our seminar booking pace in fiscal 2005 continues to exceed prior year
levels. We have also recently completed significant enhancements to our
The
7 Habits of Highly Effective People training
courses and related products, which were released in March 2005. We
believe that our increased booking pace and refreshed course materials and
related products, in combination with our other training offerings, will
be a factor in continuing improvements in our training and consulting
sales performance. |
Product
sales decreased by $1.8 million, which was primarily due to the impact of closed
retail stores and declining technology and specialty product sales, which were
partially offset by the timing of wholesale product orders and increased “core”
product (e.g. binders and planners) sales compared to the prior
year.
| · |
Gross
Margin Improvement -
Our gross margin improved compared to the prior year primarily due to
increased training and consulting sales as a percent of total sales,
favorable product and training program mix changes, reduced product costs,
and lower overall costs in delivering our training and consulting service
sales. |
| · |
Decreased
Operating Costs -
Overall operating costs decreased by $1.5 million, primarily due to
reduced depreciation and selling, general, and administrative (SG&A)
expenses. Consistent with prior periods, we continue to seek for and
implement strategies that will enable the Company to reduce its operating
costs in order to improve profitability. |
Although
the Company recognized improved financial results compared to the prior year,
management does not believe that current operating performance is entirely
satisfactory and is continuing its efforts to increase sales, improve gross
margins, and reduce operating costs in order to achieve consistently profitable
operations. Further details regarding our operating results and liquidity are
provided throughout the following management’s discussion and
analysis.
Quarter
Ended February 26, 2005 Compared to the Quarter Ended February 28,
2004
Sales
The
following table sets forth sales data for our operating segments (in
thousands):
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||||||||
|
February
26, 2005 |
February
28, 2004 |
Percent
Change |
February
26, 2005 |
February
28, 2004 |
Percent
Change |
||||||||||||||
Consumer
and Small
Business
Unit: |
|||||||||||||||||||
|
Retail
Stores |
$ |
28,055 |
$ |
32,668 |
(14) |
|
$ |
46,443 |
55,336 |
(16) |
| ||||||||
|
Consumer
Direct |
16,765 |
16,265 |
3 |
33,901 |
34,477 |
(2) |
| ||||||||||||
|
Wholesale |
4,897 |
3,663 |
34 |
8,480 |
10,126 |
(16) |
| ||||||||||||
|
Other
CSBU |
765 |
634 |
21 |
1,750 |
1,222 |
43 |
|||||||||||||
|
50,482 |
53,230 |
(5) |
|
90,574 |
101,161 |
(10) |
| ||||||||||||
|
Organizational
Solutions
Business
Unit: |
|||||||||||||||||||
|
Organizational
Solutions Group |
17,784 |
13,110 |
36 |
32,912 |
27,058 |
22 |
|||||||||||||
|
International |
14,257 |
12,375 |
15 |
28,141 |
25,527 |
10 |
|||||||||||||
|
32,041 |
25,485 |
26 |
61,053 |
52,585 |
16 |
||||||||||||||
|
Total
Sales |
$ |
82,523 |
$ |
78,715 |
5 |
$ |
151,627 |
$ |
153,746 |
(1) |
| ||||||||
Product
Sales - Product
sales, which primarily consist of planners, binders, software, and handheld
electronic planning devices, which are primarily sold through our Consumer and
Small Business Unit (CSBU) channels, declined $1.8 million, or three percent,
compared to the quarter ended February 28, 2004. The decline in product sales
was primarily due to sales performance in our retail store channel, which
declined $4.6 million, or 14 percent, compared to the prior year. The following
is a description of significant sales fluctuations in our CSBU
channels:
| · |
Retail
Sales -
The decline in retail sales was primarily due to the impact of fewer
stores, which totaled $3.0 million, and reduced technology and specialty
product sales, which totaled $2.2 million. Declining technology and
specialty product sales were partially offset by increased “core” product
sales. Overall product sales trends were reflected by a five percent
decline in comparable store (stores which were open during the comparable
periods) sales. During fiscal 2004, we closed 18 retail store locations
and we have closed 14 additional stores during the second quarter of
fiscal 2005. At February 26, 2005, we were operating 121 retail stores
compared to 144 stores at February 28,
2004. |
| · |
Consumer
Direct -
Sales through our consumer direct channels (catalog and eCommerce) were
generally consistent with the prior year and improved primarily due to
increased “core” product sales compared to the prior
year. |
| · |
Wholesale
Sales - Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, increased primarily due to the timing of product
sales to these entities. |
Training
and Consulting Services Sales - We offer
a variety of training solutions, training related products, and consulting
services focused on productivity, leadership, strategy execution, sales force
performance, and effective communications training programs that are provided
both domestically and internationally through the Organizational Solutions
Business Unit (OSBU). Our overall training and related service sales increased
by $5.6 million, or 26 percent, compared to the same period of the prior year.
The improvement in training sales was reflected in increased domestic training
program sales, which are delivered through our Organizational Sales Group (OSG),
as well as through our international operations. OSG sales performance improved
in nearly all of our domestic sales regions and was primarily attributable to
increased sales of “Helping Clients Succeed,” “The 4 Disciplines of
Leadership,” and
The 7
Habits of Highly Effective People training
courses. We currently expect our domestic training and services sales to
continue to strengthen as our seminar booking pace continues to exceed prior
year levels. International sales improved primarily due to increased sales in
Japan, increased licensee royalty revenues, and the translation of foreign sales
amounts as foreign currencies strengthened against the United States dollar. The
favorable impact of currency translation on reported international revenues
totaled $0.4 million for the quarter ended February 26, 2005.
Gross
Margin
Gross
margin consists of net sales less the cost of goods sold or services provided.
Our overall gross margin for the quarter improved to 60.7 percent of sales,
compared to 56.7 percent in the comparable quarter of fiscal 2004. This overall
gross margin improvement is consistent with gross margin performance during our
first quarter of fiscal 2005 and was primarily due to increased training and
consulting sales as a percent of total sales, favorable product mix changes, and
improved margins on our training and consulting service sales. Training and
consulting service sales, which typically have higher gross margins than our
product sales, increased to 33 percent of total sales during the quarter ended
February 26, 2005 compared to 28 percent in the prior year. Our gross margin on
product sales improved to 55.2 percent compared to 52.8 percent in fiscal 2004
and was primarily due to a favorable shift in our product mix as sales of
higher-margin paper products and binders increased as a percent of total sales,
while sales of lower-margin technology and specialty products continue to
decline. Additionally, the overall margin on paper and binder sales has improved
through focused cost reduction efforts and improved inventory
management.
Training
and related consulting services gross margin, as a percent of sales of
these services, improved to 71.8 percent compared to 66.9 percent in the
corresponding quarter of fiscal 2004. The improvement in our training and
consulting services gross margin was primarily due to a shift in training sales
mix toward higher-margin courses,
reduced costs for training materials, such as participant manuals and related
items, and overall lower costs associated with training sales.
Operating
Expenses
Selling,
General and Administrative - Our
selling, general, and administrative expenses decreased $0.6 million, or two
percent, compared to the corresponding quarter of the prior year. Total SG&A
expenses as a percent of sales decreased to 47.0 percent compared to 50.0
percent in fiscal 2004. We continue to implement cost-cutting strategies that
have been successful in reducing our operating costs, including retail store
closures, headcount reductions, consolidation of corporate office space, and
other measures designed to focus our resources on critical activities and
projects. However, during the quarter ended February 26, 2005 our cost reduction
efforts were partially offset by expenses related to changes in the CEO’s
compensation, additional costs associated with the preferred stock
recapitalization, and increased commission expenses related to increased
training sales. We also recognized $0.4 million of expense related to the
closure of retail store locations during the quarter. In addition, we
will record $1.2 million of expense related to the severance agreement with a
former executive officer during the quarter ended May 28, 2005.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future profitability. During
this assessment process, judgments are made as to whether under-performing or
unprofitable stores should be closed. As a result of this evaluation process, we
closed 14 stores during the quarter ended February 26, 2005, have closed 7 more
stores subsequent to February 26, 2005, and currently plan to close 8 additional
retail locations during the remainder fiscal 2005. The number of retail stores
that we plan to close may increase if further analysis indicates that the
Company’s operating results may be improved through additional closures, due to
the higher costs associated with operating our retail store channel. Retail
locations that are currently scheduled to be closed primarily consist of under
performing stores or stores in markets where we have multiple retail locations.
In addition, nearly all of the planned retail store closures are in locations
where the underlying leases expire during fiscal 2005. The costs associated with
closing retail stores are typically comprised of charges related to vacating the
premises, which may include a provision for the remaining term on the lease, and
severance and other personnel costs. These store closure costs totaled $0.4
million in the quarter ended February 26, 2005 and were included as a component
of SG&A expenses. Based upon our continuing analyses of retail store
performance, we may close additional retail stores and will continue to incur
costs associated with closing these stores in future periods.
Depreciation
and Amortization - Depreciation
expense decreased $0.9 million, or 28 percent, compared to the second quarter of
fiscal 2004 primarily due to the full depreciation or disposal of certain
property and equipment balances and the effects of significantly reduced capital
expenditures during preceding fiscal years. Based upon these events and current
capital spending trends, we expect that depreciation expense will continue to
decline compared to prior periods during the remainder of fiscal
2005.
Amortization
expense on definite-lived intangible assets totaled $1.0 million for the
quarters ended February 26, 2005 and February 28, 2004. We expect intangible
asset amortization expense to total $4.2 million during fiscal
2005.
Income
Taxes
The
provision for income taxes increased to $1.0 million compared to $0.8 million in
the prior year. The increase was primarily due to fluctuations in our income tax
expense in foreign tax jurisdictions. As of February 26, 2005, given
our history of significant operating losses, we had provided a valuation
allowance against substantially all of our domestic deferred income tax
assets.
Two
Quarters Ended February 26, 2005 Compared to the Two Quarters Ended February 28,
2004
Sales
Product
sales, which primarily consist of planners, binders, software, and handheld
electronic planning devices, which are primarily sold through our CSBU channels,
declined $9.6 million, or nine percent, compared to the prior year. The decline
in product sales was primarily due to decreased sales in our retail and
wholesale delivery channels. The majority of the decline in product sales
occurred during our first quarter as overall product sales declined only $1.8
million during our second quarter, when compared to the prior year. The
following is a description of sales fluctuations in our CSBU channels for the
two quarters ended February 26, 2005:
| · |
Retail
Sales -
The decline in retail sales was primarily due to reduced technology and
specialty product sales, which totaled $5.4 million, and the impact of
fewer stores, which totaled $5.0 million. Declining technology and
specialty product sales were partially offset by increased “core” product
sales, which totaled $1.0 million. Overall product sales trends were
reflected by an eight percent decline in year-to-date comparable store
sales. |
| · |
Consumer
Direct -
Sales through our consumer direct channels (catalog and eCommerce) were
generally consistent with the prior year and the slight decline was
primarily due to decreased technology and specialty product sales compared
to the prior year. |
| · |
Wholesale
Sales - Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, decreased primarily due to the timing of product
sales to these entities. In the previous fiscal year, we recognized
significant wholesale sales as we opened new wholesale channels and sold
product to fill these new venues. We expect wholesale sales will improve
during the remainder of fiscal 2005 and that total wholesale sales will be
consistent with fiscal 2004 sales
performance. |
| · |
Other
CSBU Sales -
Other CSBU sales primarily consist of external printing and publishing
sales and building lease revenues. We have leased a substantial portion of
our corporate campus in Salt Lake City, Utah and have recognized $0.4
million of lease revenue during fiscal 2005, which has been classified as
other CSBU sales. During fiscal 2005, we have also made an effort to
increase external printing sales in order to increase the utilization of
our printing and publishing assets, which has improved printing and
publishing sales compared to the prior
year. |
Product
sales were also favorably affected by increased international catalog sales and
increased retail sales in Japan, which totaled $1.6 million compared to the
prior year. Although sales from these channels are recorded in the international
segment of OSBU, sales from these OSBU channels are classified as product sales,
in our condensed consolidated statements of operations.
We offer
a variety of training solutions, training related products, and consulting
services focused on productivity, leadership, strategy execution, sales force
performance, and effective communications training programs that are provided
both domestically and internationally through the OSBU. Our overall training and
related consulting services sales increased by $7.4 million, or 17 percent,
compared to the same period of fiscal 2004. The improvement in training sales
was reflected in increased domestic program sales, which are delivered through
the OSG, as well as through our international operations. OSG sales performance
has improved in nearly all of our domestic sales regions and in our sales
performance group. We currently expect our domestic training and consulting
services sales to continue to strengthen in fiscal 2005. International sales
improved primarily due to increased sales in Japan and Mexico, increased
licensee royalty revenues, and the translation of foreign sales amounts as
foreign currencies strengthened against the United States dollar. These
increases were partially offset by decreased sales performance in Canada and
Brazil.
Gross
Margin
Our
overall gross margin for the two quarters ended February 26, 2005 improved to
60.2 percent of sales, compared to 56.7 percent in the comparable period of
fiscal 2004. The improvement in our overall gross margin was primarily due to
increased training and consulting sales as a percent of total sales, favorable
product mix changes, and improved margins on our training and consulting service
sales. Training and consulting service sales, which typically have higher gross
margins than the majority of our product sales, increased to 35 percent of total
sales during the two quarters ended February 26, 2005 compared to 29 percent in
the prior year. Our gross margin on product sales improved to 54.8 percent
compared to 52.6 percent in fiscal 2004 and was primarily due to a favorable
shift in our product mix as sales of higher-margin paper products and binders
increased as a percent of total sales, while sales of lower-margin technology
and specialty products continue to decline. Additionally, the overall margin on
paper and binder sales has improved through focused cost reduction efforts, and
improved inventory management.
Training
and related consulting services gross margin, as a percent of sales of these
services, improved to 70.3 percent compared to 66.6 percent in the corresponding
period of fiscal 2004. The improvement in our training and services gross margin
was primarily due to a shift in training sales mix toward higher-margin
7
Habits courses,
reduced costs for training materials, such as participant manuals and related
items, and overall lower costs associated with training sales.
Operating
Expenses
Selling,
General and Administrative - Our SG&A
expenses decreased $5.0 million, or six percent, compared to the prior year.
Total SG&A expenses as a percent of sales decreased to 49.1 percent compared
to 51.7 percent in the first two quarters of fiscal 2004. Declining SG&A
expenses were the direct result of initiatives specifically designed to reduce
our overall operating costs and is consistent with operating expense trends
during the previous two fiscal years. Our cost-reduction efforts have included
retail store closures, headcount reductions, consolidation of corporate office
space, and other measures designed to focus our resources on critical activities
and projects. These efforts were partially offset by SG&A expenses in our
quarter ended February 26, 2005 resulting from expenses related to changes in
the CEO’s compensation, additional costs associated with the preferred stock
recapitalization, and increased commission expenses related to increased
training sales. The primary effects of our cost-cutting initiatives were
reflected in associate expense reductions totaling $2.2 million, reduced rent
and utilities expenses of $1.5 million, reduced computer and office supply
charges totaling $0.7 million, and reductions in other SG&A expenses, such
as outsourcing and development costs, that totaled $0.3 million compared to the
prior year. In addition, we will record $1.2 million of expense related to the
severance agreement with a former executive officer during the quarter ended May
28, 2005.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future profitability. During
this assessment process, judgments are made as to whether under-performing or
unprofitable stores should be closed. As a result of this evaluation process, we
closed 14 stores during the two quarters ended February 26, 2005, have closed 7
more stores subsequent to February 26, 2005, and currently plan to close 8
additional retail locations during the remainder fiscal 2005. The costs
associated with closing retail stores are typically comprised of charges related
to vacating the premises, which may include a provision for the remaining term
on the lease, and severance and other personnel costs. These store closure costs
totaled $0.6 million for the two quarters ended February 26, 2005 and were
included as a component of SG&A expenses. Based upon our continuing analyses
of retail store performance, we may close additional retail stores and will
continue to incur costs associated with closing these stores in future
periods.
Restructuring
Cost Reversal - During
fiscal 1999, our Board of Directors approved a plan to restructure our
operations, which included an initiative to formally exit leased office space
located in Provo, Utah. We recorded a $16.3 million restructuring charge during
fiscal 1999 to record the expected costs of this restructuring plan, which was
substantially completed during fiscal 2000. Subsequent to fiscal 2000, the
remaining accrued restructuring costs were primarily comprised of the estimated
remaining costs necessary to exit the leased office space. During the quarter
ended November 27, 2004, we exercised an option, available under our master
lease agreement, to purchase, and simultaneously sell, the office facility to
the current tenant, an unrelated party. The negotiated purchase price with the
landlord, a partnership in which the majority of the interests were owned by a
Vice-Chairman of the Board of Directors and certain other employees and former
employees of the Company, was $14.0 million and the tenant agreed to purchase
the property for $12.5 million. These prices were within the range of estimated
fair values of the buildings as determined by an independent appraisal obtained
by the Company. We paid the difference between the sale and purchase prices,
plus other closing costs, which were included as a component of the
restructuring plan accrual. After accounting for the sale transaction, the
remaining fiscal 1999 restructuring costs, which totaled $0.3 million, were
credited to operating expenses in the Company’s condensed consolidated statement
of operations.
Depreciation
and Amortization - Depreciation
expense decreased $2.3 million, or 34 percent, compared to fiscal 2004 primarily
due to the full depreciation or disposal of certain property and equipment
balances and the effects of significantly reduced capital expenditures during
preceding fiscal years. Based upon these events and current capital spending
trends, we expect that depreciation expense will continue to decline compared to
prior periods during the remainder of fiscal 2005.
Amortization
expense on definite-lived intangible assets totaled $2.1 million for the two
quarters ended February 26, 2005 and February 28, 2004. We currently expect
intangible asset amortization expense to total $4.2 million in fiscal
2005.
Income
Taxes
The
provision for income taxes was $1.8 million for each of the two quarters ended
February 26, 2005 and February 28, 2004. Our income tax provision during these
periods was primarily due to taxable income in certain foreign tax jurisdictions
for which we were unable to offset the tax liabilities in these jurisdictions
with our domestic operating loss. At February 26, 2005, given our history
of significant operating losses, we had provided a valuation allowance against
substantially all of our domestic deferred income tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Historically,
our primary sources of capital have been net cash provided by operating
activities, line-of-credit financing, long-term borrowings, asset sales, and the
issuance of preferred and common stock. We currently rely primarily upon cash
flows from operating activities and cash on hand to maintain adequate liquidity
and working capital levels. Following the completion of our seasonally strong
second fiscal quarter, at February 26, 2005 we had $47.3 million of cash, cash
equivalents, and short-term investments compared to $41.9 million at August 31,
2004. Our net working capital (current assets less current liabilities) was
$43.9 million at February 26, 2005 compared to $33.8 million at August 31, 2004.
The following discussion is a description of the primary factors affecting our
cash flows and their effects upon our liquidity and capital resources during the
two quarters ended February 26, 2005.
Cash
Flows From Operating Activities
During
the two quarters ended February 26, 2005, our net cash provided by operating
activities increased to $11.0 million compared to $3.3 million for the same
period of the prior year. Our primary source of cash from operating activities
was the sale of goods and services to our customers in the normal course of
business. As previously mentioned, our second fiscal quarter has historically
realized seasonally strong sales as many of our clients renew their planners on
a calendar basis and purchase gift items during the holiday season. Our primary
uses of cash for operating activities are 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. During
the two quarters ended February 26, 2005, one of our significant uses of cash
for operating activities consisted of payments made to vendors and suppliers
related to inventory purchases for our seasonally busy months of November,
December, and January, which was reflected by a significant reduction in our
accounts payable balance. Our overall cash flows from operating activities
improved due to increased sales, improved margins on sales, and lower operating
costs than in the previous year.
Our third
fiscal quarter, which consists of March, April, and May has historically had
reduced sales and correspondingly decreased cash provided by operating
activities, compared to our first and second quarters of our fiscal year. We
believe that efforts to optimize working capital balances combined with existing
and planned cost-cutting initiatives, and sales stabilization efforts, including
sales of new products and services, will improve our cash flows from operating
activities in future periods. However, the success of these efforts is dependent
upon numerous factors, many of which are not within our control.
Cash
Flows From Investing Activities and Capital
Expenditures
Net cash
used for investing activities totaled $2.8 million for the two quarters ended
February 26, 2005. Our primary uses of cash for investing activities were the
purchase of short-term investments totaling $1.7 million and the purchase of
property and equipment, which consisted primarily of computer hardware,
software, and leasehold improvements in retail stores.
During
the quarter ended February 26, 2005, we entered into a
preliminary agreement to sell and leaseback our corporate headquarters
facility, located in Salt Lake City, Utah. In connection with the sale, we will
enter into a 20-year master lease agreement with the purchaser, a non-related
private investment group. Under the preliminary terms of the agreement, we will
have six five-year options to renew the master lease agreement and we could
therefore maintain our operations at the current location for the next 50 years.
We currently expect that our net proceeds from the sale, after transaction
costs, will be approximately $32 million. A corresponding financing obligation
will be recognized in our consolidated financial statements for the sale price
of the headquarters facility. The completion of the sale is subject to customary
conditions, including a due diligence review, survey, and other related closing
conditions.
Cash
Flows From Financing Activities
Net cash
used for financing activities during the quarter ended February 26, 2005 totaled
$4.4 million. Our primary use of cash for financing activities was the payment
of accrued Series A preferred stock dividends, which totaled $4.4 million during
fiscal 2005.
Contractual
Obligations
The
Company has not structured any special purpose or variable interest entities, or
participated in any commodity trading activities, which would expose us to
potential undisclosed liabilities or create adverse consequences to our
liquidity. Required contractual payments primarily consist of payments to EDS
for outsourcing services related to information systems, warehousing and
distribution, and call center operations; minimum rent payments for retail store
and sales office space; cash payments for Series A preferred stock dividends;
monitoring fees paid to a Series A preferred stock investor; and mortgage
payments on certain buildings and property. There have been no significant
changes to our expected required contractual obligations from those disclosed at
August 31, 2004. However, if the Company completes the expected sale of
its corporate headquarters facility, it would incur a substantial ongoing lease
obligation.
Other
Items
Management
Common Stock Loan Program - The
Company is the creditor for a loan program that provided the capital to allow
certain management personnel the opportunity to purchase shares of our common
stock. In May 2004, our Board of Directors approved modifications to the terms
of the management stock loans. While these changes had significant implications
for most management stock loan program participants, the Company did not
formally amend or modify the stock loan program notes. Rather, the Company is
foregoing certain of its rights under the terms of the loans in order to
potentially improve the participant’s ability to pay, and the Company’s ability
to collect, the outstanding balances of the loans. Based upon guidance found in
EITF Issue 00-23, Issues
Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44, and
EITF Issue 95-16, Accounting
for Stock Compensation Agreements with Employer Loan Features under APB Opinion
No. 25, we
determined that the management common stock loans should be accounted for as
non-recourse stock compensation instruments due to the modifications approved in
May 2004 and their effects to the Company and the loan participants. While this
accounting treatment does not alter the legal rights associated with the loans
to the employees, the modifications to the terms of the loans were deemed
significant enough to adopt the non-recourse accounting model as described in
EITF 00-23. As a result of 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.
We
currently account for the management common stock loans as variable stock option
arrangements. Compensation expense will be recognized when the fair value of the
common stock held by the loan participants exceeds the contractual principal and
accrued interest on the loans (approximately $47.5 million at February 26, 2005)
or the Company takes action on the loans that in effect constitutes a repricing
of an option. This accounting treatment also precludes the Company from
reversing the amounts expensed as additions to the loan loss reserve, totaling
$29.7 million, which were recognized in prior periods. As a result of these loan
program modifications, the Company hopes to increase the total value received
from loan participants; however, the inability of the Company to collect all, or
a portion, of these receivables could have an adverse impact upon its financial
position and future cash flows compared to full collection of the loans.
Subsequent to February 26, 2005, the Company collected $0.8 million, which
represented payment in full, from an officer and members of the Board of
Directors that were required to repay their loans on March 30, 2005. The
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
described above.
Availability
of Future Capital Resources - Going
forward,
we will continue to incur costs necessary for the operation of the business. We
anticipate using cash on hand, cash provided by operating activities, on the
condition that we can continue to generate positive cash flows from operations,
and other financing alternatives, if necessary, for these expenditures. We
anticipate that our existing capital resources will be adequate to enable us to
maintain our operations for at least the upcoming twelve months. Our ability to
maintain adequate capital for future operations is dependent upon a number of
factors, including sales trends, our ability to contain costs, levels of capital
expenditures, collection of accounts receivable, and other factors. Some of the
factors that influence our operations are not within our control, such as
economic conditions and the introduction of new technology and products by our
competitors. We will continue to monitor our liquidity position and may pursue
additional financing alternatives, if required, to maintain sufficient resources
for future operating and capital requirements. However, there can be no
assurance such financing alternatives will be available to us on acceptable
terms.
USE OF ESTIMATES AND CRITICAL ACCOUNTING
POLICIES
Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America. The significant
accounting polices that we used to prepare our consolidated financial statements
are outlined in Note 1 to the consolidated financial statements, which are
presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
year ended August 31, 2004. Some of those accounting policies require us to make
estimates and assumptions that affect the amounts reported in our consolidated
financial statements. Management regularly evaluates its estimates and
assumptions and bases those estimates and assumptions on historical experience,
factors that are believed to be reasonable under the circumstances, and
requirements under accounting principles generally accepted in the United States
of America. Actual results may differ from these estimates under different
assumptions or conditions, including changes in economic conditions and other
circumstances that are not in our control, but which may have an impact on these
estimates and our actual financial results.
The
following items require the most significant judgment and often involve complex
estimates:
Revenue
Recognition
We derive
revenues primarily from the following sources:
| · |
Products -
We sell planners, binders, planner accessories, handheld electronic
devices, and other technology related products that are primarily sold
through our CSBU channels. |
| · |
Training
and Services -
We provide training and consulting services to both organizations and
individuals in strategic execution, leadership, productivity, goal
alignment, sales force performance, and communication effectiveness
skills. These training programs and services are primarily sold through
our OSBU channels. |
The
Company recognizes revenue when: 1) persuasive evidence of an agreement exists,
2) delivery of product has occurred or services have been rendered, 3) the price
to the customer is fixed and determinable, and 4) collectibility is reasonably
assured. For product sales, these conditions are generally met upon shipment of
the product to the customer or by completion of the sale transaction in a retail
store. For training and service sales, these conditions are generally met upon
presentation of the training seminar or delivery of the consulting
services.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. In accordance with EITF
Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables, sales
arrangements with multiple deliverables are divided into separate units of
accounting if the deliverables in the sales contract meet the following
criteria: 1) the delivered training or product has value to the client on a
standalone basis; 2) there is objective and reliable evidence of the fair value
of undelivered items; and 3) delivery of any undelivered item is probable. The
overall contract consideration is allocated among the separate units of
accounting based upon their fair values. If the fair value of all
undelivered elements exits, but fair value does not exist for one or more
delivered elements, the residual method is used. Under the residual method, the
amount of consideration allocated to the delivered items equals the total
contract consideration less the aggregate fair value of the undelivered items.
Fair value of the undelivered items is based upon the normal pricing practices
for the Company’s existing training programs, consulting services, and other
products, which are generally the prices of the items when sold
separately.
Revenue
is recognized on software sales in accordance with Statement of Position (SOP)
97-2, Software
Revenue Recognition as
amended by SOP 98-09. SOP 97-2, as amended, generally requires revenue earned on
software arrangements involving multiple elements such as software products and
support to be allocated to each element based the relative fair value of the
elements based on vendor specific objective evidence (VSOE). The majority of the
Company’s software sales have multiple elements, including a license and post
contract customer support (PCS). Currently the Company does not have VSOE for
either the license or support elements of its software sales. Accordingly,
revenue is deferred until the only undelivered element is PCS and the total
arrangement fee is recognized ratably over the support period.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Accounts
Receivable Valuation
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best estimate of
the amount of probable credit losses in the existing accounts receivable
balance. We determine the allowance for doubtful accounts based upon historical
write-off experience and current economic conditions and we review the adequacy
of our allowance for doubtful accounts on a regular basis. Receivable balances
past due over 90 days, which exceed a specified dollar amount, are reviewed
individually for collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the probability
for recovery is considered remote. We do not have any off-balance sheet credit
exposure related to our customers.
Inventory
Valuation
Inventories
are stated at the lower of cost or market with cost determined using the
first-in, first-out method. Our inventories are comprised primarily of dated
calendar products and other non-dated products such as binders, handheld
electronic devices, stationery, training products, and other accessories.
Provision is made to reduce excess and obsolete inventories to their estimated
net realizable value. In assessing the realization of inventories, we make
judgments regarding future demand requirements and compare these assessments
with current and committed inventory levels. Inventory requirements may change
based on projected customer demand, technological and product life cycle
changes, longer or shorter than expected usage periods, and other factors that
could affect the valuation of our inventories.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized, but rather
are tested for impairment on an annual basis, or more often if events or
circumstances indicate that a potential impairment exists. The Covey trade name
intangible asset has been deemed to have an indefinite life. This intangible
asset is assigned to the Organizational Solutions Business Unit and is tested
for impairment using the present value of estimated royalties on trade name
related revenues, which consist primarily of training seminars, international
licensee royalties, and related products. If forecasts and assumptions used to
support the realizability of our indefinite-lived intangible asset change in the
future, significant impairment charges could result that would adversely affect
our results of operations and financial condition.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an estimate of
undiscounted future net cash flows of the assets over the remaining useful lives
in determining whether the carrying value of the assets is recoverable. If the
carrying values of the assets exceed the anticipated future cash flows of the
assets, we recognize an impairment loss equal to the difference between the
carrying values of the assets and their estimated fair values. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent from other groups of assets. The
evaluation of long-lived assets requires us to use estimates of future cash
flows. If forecasts and assumptions used to support the realizability of our
long-lived tangible and definite-lived intangible assets change in the future,
significant impairment charges could result that would adversely affect our
results of operations and financial condition.
Income
Taxes
The
calculation of our income tax provision or benefit, as applicable, requires
estimates of future taxable income or losses. During the course of the fiscal
year, these estimates are compared to actual financial results and adjustments
may be made to our tax provision or benefit to reflect these revised
estimates.
Our history
of significant operating losses precludes us from demonstrating that it is more
likely than not that the related benefits from deferred income tax deductions
and foreign tax carryforwards will be realized. Accordingly, we recorded
valuation allowances on our deferred income tax assets. These valuation
allowances are based on estimates of future taxable income or losses that may or
may not be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In
December 2004, the Financial Accounting Standards Board (FASB) approved
Statement No. 123R, Share-Based
Payment.
Statement 123R sets accounting requirements for “share-based” compensation to
employees, including employee stock purchase plans, and requires companies to
recognize in the income statement the grant-date fair value of stock options and
other equity-based compensation. The Company currently accounts for its
stock-based compensation using the intrinsic method as defined in Accounting
Principles Board (APB) Opinion No. 25 and accordingly, we have not recognized
any expense for our stock option plans or employee stock purchase plan in our
consolidated financial statements. Currently, we provide disclosures about the
pro forma compensation expense from stock based awards, which is based upon a
Black-Scholes option pricing model. Although Statement 123R does not express a
preference for a type of valuation model, we intend to reexamine our valuation
methodology and the corresponding support for the assumptions that underlie the
valuation of stock-based awards prior to our adoption of Statement 123R. This
statement is effective for interim or annual periods beginning after June 15,
2005, and will thus be effective for our first quarter of fiscal 2006. Upon
adoption, we intend to use the modified prospective transition method. Under
this method, awards that are granted, modified, or settled after the date of
adoption will be measured and accounted for in accordance with Statement 123R.
Unvested equity-classified awards that were granted prior to the effective date
will continue to be accounted for in accordance with Statement 123, except that
compensation expense amounts will be recognized in the income statement. We are
currently in the process of further analyzing this new pronouncement and have
not yet determined the impact on our financial statements.
In
November 2004, the FASB approved Statement No. 151, Inventory Costs an
Amendment of ARB No. 43, Chapter 4. Statement No. 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) and requires that those items be
recognized as a current period expense regardless of whether they meet the
criteria of “so abnormal.” This statement is effective for interim or annual
periods beginning after June 15, 2005 and will thus be effective for our first
quarter of fiscal 2006. We are currently in the process of analyzing the
accounting requirements under this new pronouncement and have not yet determined
its impact on our financial statements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK OF FINANCIAL INSTRUMENTS
The
primary financial instrument risks to which the Company is exposed are
fluctuations in foreign currency exchange rates and interest rates. To manage
risks associated with foreign currency exchange and interest rates, we make
limited use of derivative financial instruments. Derivatives are financial
instruments that derive their value from one or more underlying financial
instruments. As a matter of policy, our derivative instruments are entered into
for periods consistent with the related underlying exposures and do not
constitute positions that are independent of those exposures. In addition, we do
not enter into derivative contracts for trading or speculative purposes, nor are
we party to any leveraged derivative instrument. The notional amounts of
derivatives do not represent actual amounts exchanged by the parties to the
instrument, and, thus, are not a measure of exposure to us through our use of
derivatives. Additionally, we enter into derivative agreements only with highly
rated counterparties and we do not expect to incur any losses resulting from
non-performance by other parties.
Foreign
Currency Sensitivity
Due to
the global nature of the Company’s operations, we are subject to risks
associated with transactions that are denominated in currencies other than the
United States dollar, which creates exposure to foreign currency exchange risk.
The objective of our foreign currency risk management activities is to reduce
foreign currency risk in the consolidated financial statements. In order to
manage foreign currency risks, we make limited use of foreign currency forward
contracts and other foreign currency related derivative instruments. Although we
cannot eliminate all aspects of our foreign currency risk, we believe that our
strategy, which includes the use of derivative instruments, can reduce the
impacts of foreign currency related issues on our consolidated financial
statements.
During
the quarter and two quarters ended February 26, 2005, we utilized foreign
currency forward contracts to manage the volatility of certain intercompany
financing transactions and other transactions that are denominated in foreign
currencies. Because these contracts do not meet specific hedge accounting
requirements, gains and losses on these contracts, which expire on a quarterly
basis, are recognized currently and are used to offset a portion of the gains or
losses of the related accounts. The gains and losses on these contracts were
recorded as a component of SG&A expense in the Company’s consolidated
statements of operations and resulted in the following net losses for the
periods indicated (in thousands):
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
Losses
on foreign exchange contracts |
$ |
(58 |
) |
$ |
(148 |
) |
$ |
(353 |
) |
$ |
(539 |
) | |
|
Gains
on foreign exchange contracts |
3 |
-
|
3 |
24 |
|||||||||
|
Net
loss on foreign exchange contracts |
$ |
(55 |
) |
$ |
(148 |
) |
$ |
(350 |
) |
$ |
(515 |
) | |
At
February 26, 2005, the fair value of these contracts, which was determined using
the estimated amount at which contracts could be settled based upon forward
market exchange rates, was insignificant. The notional amounts of our foreign
currency sell contracts that did not qualify for hedge accounting were as
follows at February 26, 2005 (in thousands):
|
Contract
Description |
Notional
Amount in Foreign Currency |
Notional
Amount in U.S. Dollars |
|||||
|
Australian
Dollars |
1,760 |
$ |
1,366 |
||||
|
Mexican
Pesos |
9,200 |
812 |
|||||
|
Japanese
Yen |
40,000 |
391 |
|||||
During
the quarter and two quarters ended February 26, 2005, we also entered into
foreign currency forward contracts that were designed to manage foreign currency
risks related to the value of our net investment in foreign operations located
in Canada, Japan, and the United Kingdom. These three offices comprise the
majority of our net investment in foreign operations. These foreign currency
forward instruments, which expire on a monthly basis, qualified for hedge
accounting and corresponding gains and losses were recorded as a component of
other comprehensive income in the Company’s consolidated balance sheet. The
gains and losses on these contracts were as follows for the periods presented
(in thousands):
|
Quarter
Ended |
Two
Quarters Ended |
||||||||||||
|
February
26,
2005 |
February
28,
2004 |
February
26,
2005 |
February
28,
2004 |
||||||||||
|
Losses
on net investment hedge contracts |
$ |
(72 |
) |
$ |
-
|
$ |
(384 |
) |
$ |
-
|
|||
|
Gains
on net investment hedge contracts |
46 |
-
|
66 |
-
|
|||||||||
|
Net
loss on net investment hedge contracts |
$ |
(26 |
) |
$ |
-
|
$ |
(318 |
) |
$ |
-
|
|||
As of
February 26, 2005, the Company had settled its net investment hedge contracts
and has no further exposure related to these contracts. However, the Company may
utilize net investment hedge contracts in future periods as a component of its
overall foreign currency risk strategy.
Interest
Rate Sensitivity
The
Company is exposed to fluctuations in U.S. interest rates primarily as a result
of the cash and cash equivalents that we hold. Following payment and termination
of our line of credit facility during fiscal 2002, our remaining debt balances
consist primarily of long-term mortgages on certain of our buildings and
property. As such, the Company does not have significant exposure or additional
liability due to interest rate sensitivity and we were not party to any interest
rate swap or other interest related derivative instrument during the quarter or
two quarters ended February 26, 2005 or February 28, 2004.
ITEM 4. CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and
reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
As
required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the
foregoing, it was determined that our internal controls over revenue recognition
for certain complex, multiple-element contracts in our OSBU were improving, but
still deficient.
This
deficiency in our internal controls related to improper recognition of revenue
from certain complex multiple element contracts and included ineffective
controls to monitor compliance with existing policies and procedures and
insufficient training of accounting personnel on complex accounting standards
related to multiple element contracts in the OSBU. The improper revenue
recognition was detected in the review process and correcting adjustments were
recorded to properly state our revenues. We are in the process of improving our
internal controls over financial reporting regarding these contracts in an
effort to remediate this deficiency including implementing personnel changes,
providing additional training on complex revenue recognition principles for our
accounting staff, and establishing additional policies and procedures related to
revenue recognition. Additional work is needed to fully remedy this deficiency
and we intend to continue our efforts to improve and strengthen our control
processes and procedures. The deficiency was disclosed to the Audit Committee
and to our auditors.
Other
than continued control improvements on the deficiency noted above, there has
been no change in our internal control over financial reporting during the
fiscal quarter ended February 26, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. In addition, other than as described above, since the most recent
evaluation date, there have been no significant changes in our internal control
structure, policies, and procedures or in other areas that could significantly
affect our internal control over financial reporting.
On March
2, 2005, the SEC extended the compliance dates for non-accelerated filers and
foreign private issuers pursuant to Section 404 of the Sarbanes-Oxley Act. Under
this extension, a company that is not required to file its annual and quarterly
reports on an accelerated basis (non-accelerated filer), must begin to comply
with the internal control over financial reporting requirements for its first
fiscal year ending on or after July 15, 2006. This action constitutes a one-year
extension from the previously established July 15, 2005 compliance date. We are
currently in the process of documenting our internal control structure and we
intend to use the additional time to improve the quality of our documentation
and testing.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Certain
written and oral statements made by the Company or our representatives in this
report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, Internet webcasts, or otherwise, are
“forward-looking statements” within the meaning of the Private Securities
Litigation reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain words such as “believe,” “anticipate,” “expect,”
“estimate,” “project,” or words or phrases of similar meaning. Forward-looking
statements are subject to certain risks and uncertainties that may cause actual
results to differ materially from the forward-looking statements. These risks
and uncertainties are disclosed from time to time in reports filed by us with
the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and
uncertainties include, but are not limited to, the matters discussed under
Business Environment and Risk in our annual report on Form 10-K for the fiscal
year ended August 31, 2004. In addition, such risks and uncertainties may
include unanticipated developments in any one or more of the following areas:
continuing demand for our products and services, which depends to some extent on
general economic conditions, so that we can avoid future declines in revenues;
the ability of our products and services to successfully compete with
alternative solutions and the products and services offered by others;
unanticipated costs or capital expenditures; cost savings from the outsourcing
of our information systems and controls, including without limitation, the
systems related to demand and supply planning, inventory control, and order
fulfillment; delays or unanticipated outcomes relating to the Company’s
strategic plans; dependence on existing products or services; the rate and
consumer acceptance of new product introductions; the number and nature of
customers and their product orders, including changes in the timing or mix of
product or training orders; pricing of our products and services and those of
competitors; adverse publicity; and other factors which may adversely affect our
business.
The risks
included here are not exhaustive. Other sections of this report may include
additional factors that could adversely affect our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors may emerge and it is not possible for our
management to predict all such risk factors, nor can we assess the impact of all
such risk factors on our business or the extent to which any single factor, or
combination of factors, may cause actual results to differ materially from those
contained in forward-looking statements. Given these risks and uncertainties,
investors should not rely on forward-looking statements as a prediction of
actual results.
The
market price of our common stock has been and may remain volatile. Factors such
as quarter-to-quarter variations in revenues and earnings or losses or our
failure to meet expectations could have a significant impact on the market price
of our common stock. In addition, the price of our common stock can change for
reasons unrelated to our performance. Due to our low market capitalization and
share price, the price of our common stock may also be affected by conditions
such as a lack of analyst coverage and fewer potential investors.
Forward-looking
statements are based on management’s expectations as of the date made, and the
Company does not undertake any responsibility to update any of these statements
in the future. 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.
PART II. OTHER INFORMATION
Item
1. Legal
Proceedings:
During
fiscal 2002, the Company received a subpoena from the Securities and Exchange
Commission (SEC) seeking documents and information relating to the Company’s
management stock loan program and previously announced, and withdrawn, tender
offer. The Company has provided the documents and information requested by the
SEC, including the testimonies of its Chief Executive Officer, Chief Financial
Officer, and other key employees. The Company has cooperated, and will continue
to fully cooperate, in providing requested information to the SEC. The SEC and
the Company are currently engaged in discussions with respect to a potential
resolution of this matter.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds:
The
Company did not purchase any shares of its common stock during the quarter ended
February 26, 2005.
In
previous fiscal years, the Company’s Board of Directors had approved various
plans for the purchase of up to 8,000,000 shares of our common stock. As of
November 25, 2000, the Company had purchased 7,705,000 shares of common stock
under these board-authorized purchase plans. On December 1, 2000, the Board of
Directors approved an additional plan to acquire up to $8.0 million of our
common stock. To date, we have purchased $7.1 million of our common stock under
the terms of the December 2000 Board approved purchase plan. The maximum number
of shares that may yet be purchased under the plans, which totaled approximately
654,000, was calculated for the December 2000 plan by dividing the remaining
approved dollars by $2.55, which was the closing price of the Company’s common
stock on February 25, 2005 (last trading day of fiscal quarter). These shares
were added to the remaining shares from the Company’s other Board-approved plans
to arrive at an approximate maximum number of shares that may be purchased as of
February 26, 2005. No shares of the Company’s common stock were purchased during
the fiscal quarter ended February 26, 2005 under terms of any Board authorized
purchase plan.
Item
4. Submission
of Matters to a Vote of Security Holders
We held
our Annual Meeting of Shareholders on March 4, 2005. The following represents a
summary of each mater voted upon and the corresponding voting results for each
item considered at the Annual Meeting. Further information regarding each item
can be found in the Company’s definitive Proxy Statement dated January 26,
2005.
1. Election
of Directors - Four
directors were elected for three-year terms that expire at the Annual Meeting of
Shareholders to be held following the end of fiscal 2007, or until their
successors are elected and qualified. The number of shares voting in favor of
each director was as follows:
|
Clayton
Christensen |
23,622,084 | |
|
Robert
H. Daines |
22,423,788 | |
|
E.J.
“Jake” Garn |
22,078,996 | |
|
Donald
J. McNamara |
22,374,740 |
At the
request of Mr. Smith, Hyrum W. Smith did not stand for re-election and his
service on the Board of Directors was concluded as of March 4,
2005.
2. Adoption
of the 2004 Employee Stock Purchase Plan - In March 1992, we adopted an
Employee Stock Purchase Plan (ESPP), which was subsequently amended until its
expiration date on August 31, 2004. The 2004 ESPP, like its predecessor plan,
allows employees to purchase shares of the Company’s common stock at a price
equal to 85 percent of the fair market value of those shares at the close of
each fiscal quarter. The maximum number of shares that can be issued under the
2004 ESPP is 1.0 million shares. The number of shares that voted in favor of
adopting the 2004 ESPP was 15,083,682, with 1,932,634 shares against, and 8,960
shares that abstained from voting.
3. 2004 Non-Employee Directors’ Stock
Incentive Plan - The purpose of this plan is to allow non-employee
members of the Board of Directors to participate in a stock incentive program,
including restricted stock awards, stock options, and other forms of stock
grants. On March 31 of each year, the Company will grant each eligible
non-employee director restricted stock having a fair market value of $27,500 on
the date of grant. The vesting period on these shares is a minimum of three
years. The maximum number of shares that may be granted under this plan, which
expires on March 31, 2015, is 300,000. The number of shares that voted in favor
of the 2004 Non-Employee Directors’ Stock Incentive Plan was 13,390,517, with
3,623,091 shares voting against it, and 10,110 shares that abstained from
voting.
4. Approve
the Ratification of the Independent Auditors - The
shareholders also ratified the appointment of KPMG LLP as independent auditors
for the fiscal year ending August 31, 2005. The number of shares that voted in
favor of KPMG was 25,279,346, with 443,071 shares against, and 3,086 shares that
abstained from voting.
5. Preferred
Stock Recapitalization - For
certain components of the preferred stock recapitalization plan, the number of
votes cast was required to be counted by 1) common stock shares, 2) Series A
preferred stock shares (on an “as converted” basis), and 3) the combined number
of common shares and Series A preferred shares. Other recapitalization proposals
required vote counts by common stock and Series A preferred stock or by a
combination of both classes of equity. As such, each of the following
recapitalization proposals will include the required vote counts (as prescribed
by the Company’s bylaws) necessary to approve the respective proposal. The
components of the recapitalization plan were as follows:
| a. | To approve the amendment and restatement of the Articles of Incorporation of the Company to modify the rights, preferences, and limitations of the Series A preferred stock and the Series B preferred stock. The votes for, against, and abstaining from this proposal were as follows: |
|
Common
Stock Shares |
Series
A Preferred Stock Shares |
Combined
Common Stock and Series A Preferred Stock Shares |
||||||||
|
In
favor |
8,617,174 |
6,662,707 |
15,279,881 |
|||||||
|
Against |
1,726,880 |
754 |
1,727,634 |
|||||||
|
Abstained |
10,810 |
-
|
10,810 |
|||||||
| b. | To approve the issuance of warrants to all holders of Series A preferred stock to purchase shares of the Company’s common stock. The votes for, against, and abstaining from this proposal were as follows: |
|
Common
Stock Shares |
Series
A Preferred Stock Shares |
Combined
Common Stock and Series A Preferred Stock Shares |
||||||||
|
In
favor |
-
|
-
|
15,231,645 |
|||||||
|
Against |
-
|
-
|
1,812,270 |
|||||||
|
Abstained |
-
|
-
|
10,660 |
|||||||
| c. | To approve the amendment and restatement of the Articles of Incorporation of the Company to effect a one-to-four forward split of each outstanding share of Series A preferred stock. The votes for, against, and abstaining from this proposal were as follows: |
|
Common
Stock Shares |
Series
A Preferred Stock Shares |
Combined
Common Stock and Series A Preferred Stock Shares |
||||||||
|
In
favor |
-
|
6,663,357 |
15,280,572 |
|||||||
|
Against |
-
|
104 |
1,733,443 |
|||||||
|
Abstained |
-
|
-
|
10,560 |
|||||||
| d. | To approve the amendment and restatement of the Articles of Incorporation of the Company to increase the authorized shares of preferred stock from 4,000,000 to 14,000,000. The votes for, against, and abstaining from this proposal were as follows: |
|
Common
Stock Shares |
Series
A Preferred Stock Shares |
Combined
Common Stock and Series A Preferred Stock Shares |
||||||||
|
In
favor |
8,541,984 |
6,663,382 |
15,205,366 |
|||||||
|
Against |
1,811,670 |
79 |
1,811,749 |
|||||||
|
Abstained |
7,460 |
-
|
7,460 |
|||||||
| e. | To approve the amendment and restatement of the Articles of Incorporation of the Company to increase the number of shares of preferred stock designated as Series A preferred stock from 1,500,000 to 4,000,000 shares. The votes for, against, and abstaining from this proposal were as follows: |
|
Common
Stock Shares |
Series
A Preferred Stock Shares |
Combined
Common Stock and Series A Preferred Stock Shares |
||||||||
|
In
favor |
-
|
6,663,382 |
15,280,527 |
|||||||
|
Against |
-
|
79 |
1,796,618 |
|||||||
|
Abstained |
-
|
-
|
7,460 |
|||||||
| f. | To approve the amendment and restatement of the Articles of Incorporation of the Company to increase the number of shares of preferred stock designated as Series B preferred stock from 400,000 to 4,000,000 shares. The votes for, against, and abstaining from this proposal were as follows: |
|
Common
Stock Shares |
Series
A Preferred Stock Shares |
Combined
Common Stock and Series A Preferred Stock Shares |
||||||||
|
In
favor |
-
|
6,662,732 |
15,222,695 |
|||||||
|
Against |
-
|
729 |
1,793,920 |
|||||||
|
Abstained |
-
|
-
|
7,960 |
|||||||
The
ratification of the recapitalization plan required that all components be
approved. Therefore, the recapitalization plan was formally approved by our
shareholders.
6. Modification
of Articles of Incorporation - This
proposal sought to modify our Articles of Incorporation by eliminating or
modifying certain miscellaneous provisions. The number of shares that voted in
favor of this proposal was 15,193,105, with 1,695,908 shares voting against, and
7,960 shares that abstained from voting.
Item
5. Other
Information
On April
8, 2005, Brian A. Krisak, a director of the Company since 1999, became a
training consultant for the Company and resigned his position as director.
Effective March 31, 2005, Stephen D. Young, the Chief Financial Officer of the
Company, was appointed as Corporate Secretary of the Company to fill the vacancy
left by the resignation of Val J. Christensen.
|
(A) |
Exhibits: |
|
4.1 |
Articles
of Restatement dated March 4, 2005 amending and restating the Company’s
Articles of Incorporation (filed as Exhibit 99.6 in the Company’s Current
Report on Form 8-K filed with the Commission on March 10, 2005 and
incorporated herein by reference).
| |
|
31 |
Certification
of CEO and CFO under Section 302 of the Sarbanes-Oxley Act of
2002.
| |
|
32 |
Certification
of CEO and CFO under Section 906 of the Sarbanes-Oxley Act of
2002.
| |
|
10.1 |
Amended
and Restated Option Agreement, dated December 8, 2004, by and between the
Company and Robert A. Whitman (filed as Exhibit 99.1 in the Company’s
Current Report on Form 8-K filed with the Commission on December 14, 2005
and incorporated herein by reference).
| |
|
10.2 |
Agreement
for the Issuance of Restricted Shares, dated as of December 8, 2004, by
and between Robert A. Whitman (filed as Exhibit 99.2 in the Company’s
Current Report on Form 8-K filed with the Commission on December 14, 2005
and incorporated herein by reference).
| |
|
10.3 |
Letter
Agreement regarding the cancellation of Robert A. Whitman’s Employment
Agreement, dated December 8, 2004 (filed as Exhibit 99.3 in the Company’s
Current Report on Form 8-K filed with the Commission on December 14, 2005
and incorporated herein by reference).
| |
|
10.4 |
Restated
Shareholders Agreement, dated as of March 8, 2005, between the Company and
Knowledge Capital Investment Group (filed as Exhibit 99.1 in the Company’s
Current Report on Form 8-K filed with the Commission on March 10, 2005 and
incorporated herein by reference).
| |
|
10.5 |
Restated
Registration Rights Agreement, dated as of March 8, 2005, between the
Company and Knowledge Capital Investment Group (filed as Exhibit 99.2 in
the Company’s Current Report on Form 8-K filed with the Commission on
March 10, 2005 and incorporated herein by reference).
| |
|
10.6 |
Restated
Monitoring Agreement, dated as of March 8, 2005, between the Company and
Hampstead Interests, LP (filed as Exhibit 99.3 in the Company’s Current
Report on Form 8-K filed with the Commission on March 10, 2005 and
incorporated herein by reference).
| |
|
10.7 |
Warrant,
dated March 8, 2005, to purchase 5,913,402 shares of Common Stock issued
by the Company to Knowledge Capital Investment Group (filed as Exhibit
99.4 in the Company’s Current Report on Form 8-K filed with the Commission
on March 10, 2005 and incorporated herein by reference).
| |
|
10.8 |
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 (filed as Exhibit 99.5 in the Company’s Current Report on
Form 8-K filed with the Commission on March 10, 2005 and incorporated
herein by reference).
| |
|
10.9 |
Franklin
Covey Co. 2004 Non-Employee Directors’ Stock Incentive Plan (filed as
Exhibit 99.1 in the Company’s Current Report on Form 8-K filed with the
Commission on March 25, 2005 and incorporated herein by
reference).
| |
|
10.10 |
Form
of Option Agreement for the 2004 Non-Employee Directors Stock Incentive
Plan (filed as Exhibit 99.2 in the Company’s Current Report on Form 8-K
filed with the Commission on March 25, 2005 and incorporated herein by
reference).
| |
|
10.11 |
Form
of Restricted Stock Agreement for the 2004 Non-Employee Directors Stock
Incentive Plan (filed as Exhibit 99.3 in the Company’s Current Report on
Form 8-K filed with the Commission on March 25, 2005 and incorporated
herein by reference).
| |
|
10.12 |
Separation
Agreement between the Company and Val J. Christensen, dated March 29, 2005
(filed as Exhibit 99.1 in the Company’s Current Report on Form 8-K filed
with the Commission on April 4, 2005 and incorporated herein by
reference).
| |
|
10.13 |
Legal
Services Agreement between the Company and Val J. Christensen, dated March
29, 2005 (filed as Exhibit 99.2 in the Company’s Current Report on Form
8-K filed with the Commission on April 4, 2005 and incorporated herein by
reference).
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
||
| FRANKLIN COVEY CO. | ||
| |
|
|
| Date: April 12, 2005 | By: | /s/ ROBERT A. WHITMAN |
|
Robert A. Whitman | ||
| Chief Executive Officer | ||
| |
|
|
| Date: April 12, 2005 | By: | /s/ STEPHEN D. YOUNG |
|
Stephen D. Young | ||
| Chief Financial Officer | ||
Exhibit
31
CERTIFICATION
OF THE CHIEF EXECUTIVE OFFICER
Pursuant
to Rule 13a-14(a) of the Securities Exchange Act adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Robert
A. Whitman, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-Q of Franklin Covey Co.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report; |
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant
and have: |
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared; |
|
|
b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|
|
c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s third 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: April 12, 2005 | By: | /s/ ROBERT A. WHITMAN |
|
Robert A. Whitman | ||
| Chief Executive Officer | ||
CERTIFICATION
OF THE CHIEF FINANCIAL OFFICER
Pursuant
to Rule 13a-14(a) of the Securities Exchange Act adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I,
Stephen D. Young, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-Q of Franklin Covey Co.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report; |
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant
and have: |
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared; |
|
|
b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|
|
c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s third 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: April 12, 2005 | By: | /s/ STEPHEN D. YOUNG |
|
Stephen D. Young | ||
| Chief Financial Officer | ||
Exhibit
32
The
following certifications are being furnished solely to accompany the Report
pursuant to 18 U.S.C. § 1350 and in accordance with SEC Release No. 33-8238.
These certifications shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, whether made before or after
the date hereof, regardless of any general incorporation language in such
filing.
CERTIFICATION
OF
CHIEF
EXECUTIVE OFFICER
OF
FRANKLIN COVEY
PURSUANT
TO 18 U.S.C. § 1350
Pursuant
to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of
2002, the undersigned officer of Franklin Covey Co. (the “Company”), hereby
certifies, to his knowledge, that:
|
1.
|
the
accompanying annual report on Form 10-Q of the Company for the period
ended February 26, 2005 (the “Report”) fully complies with the
requirements of Section 13 (a) or Section 15 (d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
|
|
2.
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company. |
| |
|
|
| Date: April 12, 2005 | By: | /s/ ROBERT A. WHITMAN |
|
Robert A. Whitman | ||
| Chief Executive Officer | ||
CERTIFICATION
OF
CHIEF
FINANCIAL OFFICER
OF
FRANKLIN COVEY
PURSUANT
TO 18 U.S.C. § 1350
Pursuant
to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of
2002, the undersigned officer of Franklin Covey Co. (the “Company”), hereby
certifies, to his knowledge, that:
|
1.
|
the
accompanying annual report on Form 10-Q of the Company for the period
ended February 26, 2005 (the “Report”) fully complies with the
requirements of Section 13 (a) or Section 15 (d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
|
|
2.
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company. |
| |
|
|
| Date: April 12, 2005 | By: | /s/ STEPHEN D. YOUNG |
|
Stephen D. Young | ||
| Chief Financial Officer | ||