form10ka_jan2009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K/A
(Amendment
No. 1)
þ
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2008.
|
|
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM ___
TO ___
|
Franklin Covey
Co.
(Exact
name of registrant as specified in its charter)
Utah
|
|
1-11107
|
|
87-0401551
|
(State
or other jurisdiction of incorporation or organization)
|
|
(Commission
File No.)
|
|
(IRS
Employer Identification
No.)
|
2200
West Parkway Boulevard
Salt
Lake City, Utah 84119-2331
(Address
of principal executive offices, including zip code)
Registrant's
telephone number, including area code: (801) 817-1776
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
|
Name
of Each Exchange on Which Registered
|
Common
Stock, $.05 Par Value
|
|
New
York Stock
Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
Series
A Preferred Stock, no par value
Title
of Class
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No
þ
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
|
o |
Accelerated
filer x
|
|
|
|
Non-accelerated
filer
|
o |
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
þ
As of
February 29, 2008, the aggregate market value of the Registrant's Common Stock
held by non-affiliates of the Registrant was approximately $124.1 million, which
was based upon the closing price of $7.72 per share as reported by the New York
Stock Exchange.
As of
November 3, 2008, the Registrant had 16,879,498 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of
the Registrant's Definitive Proxy Statement for the Annual Meeting of
Shareholders, which is scheduled to be held on January 16, 2009, are
incorporated by reference in Part III of this Form 10-K.
EXPLANATORY
NOTE
In the
Annual Report of Franklin Covey Co. on Form 10-K for the fiscal year ended
August 31, 2008 (the Initial Report), management provided a report that
concluded that our internal control over financial reporting (as defined by Rule
13a-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) and disclosure controls and procedures were effective as of August 31,
2008. We subsequently have determined that our controls at our Japan
subsidiary: i) to ensure the approval and appropriate accounting treatment of
non-standard shipping terms on product sales and ii) over the calculation of
inventory reserves were insufficient to prevent misstatements that could be
material. Accordingly, we have concluded that control deficiencies at
our Japan subsidiary represented material weaknesses in our internal control
over financial reporting at our Japan subsidiary at August 31,
2008.
These
material weaknesses lead to errors in our historical financial statements that
were discovered in the first quarter of fiscal 2009. We assessed the
materiality of the errors using the guidance found in Staff Accounting Bulletin
(SAB) No. 108 and determined that these errors were immaterial to previously
reported financial statements included in our Annual Report on Form
10-K. Therefore, these immaterial errors will be corrected through
the fiscal 2009 quarterly filings on Form 10-Q and in our Annual Report on Form
10-K for the fiscal year ended August 31, 2009.
We are
filing this Amendment No. 1 on Form 10-K/A (Amendment No. 1) for the fiscal year
ended August 31, 2008 to:
·
|
Restate
Management’s Report on Internal Control Over Financial Reporting, and
amend management’s assessment of the effectiveness of our disclosure
controls and procedures; and
|
·
|
File
a restated Report of Independent Registered Public Accounting Firm related
to internal control over financial
reporting.
|
Our
consolidated financial statements and the notes thereto, and the opinion of our
Independent Registered Public Accounting Firm on the consolidated financial
statements in Item 8 of this Amendment No. 1 are unchanged from the Initial
Report, and no other information contained in the Initial Report is amended or
updated by this Amendment No. 1.
Pursuant
to Rule 12b-15 under the Exchange Act, Item 8 Financial Statements and
Supplementary Data, and Item 9A, Controls and Procedures, of Part II of the
Initial Report are hereby deleted in their entirety and are replaced with the
Item 8 and Item 9A as included herein. Item 15 of Part IV of the
Initial Report is also hereby deleted in its entirety and replaced with the Item
15 included herein.
The
information contained in this Amendment No. 1 does not reflect events occurring
after the filing of the Initial Report and does not modify or update the
disclosures therein, except as specifically identified
above. Significant developments with respect to those disclosures, as
well as other changes in our business, have occurred and are described in
filings we have made with the Securities and Exchange Commission after filing
the Initial Report.
Part
II
Item
8. Financial Statements and Supplementary Data
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Franklin
Covey Co.:
We have
audited Franklin Covey Co.’s internal control over financial reporting as of
August 31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Franklin Covey Co.'s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting included in Item 9A(b). Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. Material
weaknesses related to product sales and inventory reserves have been identified
and included in management’s restated assessment. We also have
audited, in accordance with the standards of the Public Company
Accounting
Oversight
Board (United States), the consolidated balance sheets of Franklin Covey Co. and
subsidiaries as of August 31, 2008 and 2007, and the related consolidated
statements of income and comprehensive income, stockholders’ equity, and cash
flows for each of the years in the three year period ended August 31, 2008.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2008 consolidated financial
statements, and this report does not affect our opinion dated November 14, 2008,
which expressed an unqualified opinion on those consolidated financial
statements.
The
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting has been restated by FranklinCovey Co. management to
disclose the aforementioned material weaknesses.
In our
opinion, because of the effect of the aforementioned material weakness on the
achievement of the objectives of the control criteria, Franklin Covey Co. has
not maintained effective internal control over financial reporting as of August
31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/ KPMG
LLP
Salt Lake
City, Utah
November
14, 2008, except as to the restatement of the assessment of effectiveness of
internal control over financial reporting for the material weaknesses related to
product sales and inventory reserves, which is as of January 28,
2009
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Franklin
Covey Co.:
We have
audited the accompanying consolidated balance sheets of Franklin Covey Co.
and subsidiaries as of August 31, 2008 and 2007, and the related
consolidated statements of income and comprehensive income, stockholders’
equity, and cash flows for each of the years in the three-year period ended
August 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Covey Co. and
subsidiaries as of August 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 2008, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Franklin Covey Co.’s internal control over
financial reporting as of August 31, 2008, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated November 14, 2008 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG
LLP
Salt Lake
City, Utah
November
14, 2008
FRANKLIN
COVEY CO.
CONSOLIDATED
BALANCE SHEETS
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
In
thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
15,904 |
|
|
$ |
6,126 |
|
Accounts
receivable, less allowance for doubtful accounts of $1,066 and
$821
|
|
|
28,019 |
|
|
|
27,239 |
|
Inventories
|
|
|
8,742 |
|
|
|
24,033 |
|
Deferred
income taxes
|
|
|
2,472 |
|
|
|
3,635 |
|
Receivable
from equity method investee
|
|
|
7,672 |
|
|
|
- |
|
Prepaid
expenses and other assets
|
|
|
5,102 |
|
|
|
9,070 |
|
Total
current assets
|
|
|
67,911
|
|
|
|
70,103
|
|
Property
and equipment, net
|
|
|
26,928 |
|
|
|
36,063 |
|
Intangible
assets, net
|
|
|
72,320 |
|
|
|
75,923 |
|
Other
long-term assets
|
|
|
11,768 |
|
|
|
14,542 |
|
|
|
$ |
178,927 |
|
|
$ |
196,631 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt and financing obligation
|
|
$ |
670 |
|
|
$ |
629 |
|
Line
of credit
|
|
|
- |
|
|
|
15,999 |
|
Accounts
payable
|
|
|
8,713 |
|
|
|
12,190 |
|
Income
taxes payable
|
|
|
1,057 |
|
|
|
2,244 |
|
Tender
offer obligation
|
|
|
28,222 |
|
|
|
- |
|
Accrued
liabilities
|
|
|
23,419 |
|
|
|
30,101 |
|
Total
current liabilities
|
|
|
62,081
|
|
|
|
61,163
|
|
Long-term
debt and financing obligation, less current portion
|
|
|
32,291 |
|
|
|
32,965 |
|
Other
liabilities
|
|
|
1,229 |
|
|
|
1,019 |
|
Deferred
income tax liabilities
|
|
|
4,572 |
|
|
|
565 |
|
Total
liabilities
|
|
|
100,173 |
|
|
|
95,712 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 1, 8, 9, and 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.05 par value; 40,000 shares authorized, 27,056 shares
issued
|
|
|
1,353 |
|
|
|
1,353 |
|
Additional
paid-in capital
|
|
|
184,313 |
|
|
|
185,890 |
|
Common
stock warrants
|
|
|
7,597 |
|
|
|
7,602 |
|
Retained
earnings
|
|
|
25,337 |
|
|
|
19,489 |
|
Accumulated
other comprehensive income
|
|
|
1,058 |
|
|
|
970 |
|
Treasury
stock at cost, 10,203 shares and 7,296 shares
|
|
|
(140,904 |
) |
|
|
(114,385 |
) |
Total
shareholders’ equity
|
|
|
78,754 |
|
|
|
100,919 |
|
|
|
$ |
178,927 |
|
|
$ |
196,631 |
|
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR
ENDED AUGUST 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
In
thousands, except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Training and consulting
services
|
|
$ |
138,112 |
|
|
$ |
137,708 |
|
|
$ |
122,418 |
|
Products
|
|
|
121,980 |
|
|
|
146,417 |
|
|
|
156,205 |
|
|
|
|
260,092 |
|
|
|
284,125 |
|
|
|
278,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Training and consulting
services
|
|
|
44,738 |
|
|
|
43,132 |
|
|
|
40,722 |
|
Products
|
|
|
53,565 |
|
|
|
65,915 |
|
|
|
69,940 |
|
|
|
|
98,303 |
|
|
|
109,047 |
|
|
|
110,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
161,789 |
|
|
|
175,078 |
|
|
|
167,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
|
|
|
141,318 |
|
|
|
149,220 |
|
|
|
144,747 |
|
Gain
on sale of consumer solutions business unit
|
|
|
(9,131 |
) |
|
|
- |
|
|
|
- |
|
Gain
on sale of manufacturing facility
|
|
|
- |
|
|
|
(1,227 |
) |
|
|
- |
|
Restructuring
costs
|
|
|
2,064 |
|
|
|
- |
|
|
|
- |
|
Impairment
of assets
|
|
|
1,483 |
|
|
|
- |
|
|
|
- |
|
Depreciation
|
|
|
5,692 |
|
|
|
5,394 |
|
|
|
5,355 |
|
Amortization
|
|
|
3,603 |
|
|
|
3,607 |
|
|
|
3,813 |
|
Income from
operations
|
|
|
16,760 |
|
|
|
18,084 |
|
|
|
14,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
157 |
|
|
|
717 |
|
|
|
1,334 |
|
Interest
expense
|
|
|
(3,083 |
) |
|
|
(3,136 |
) |
|
|
(2,622 |
) |
Recovery
from legal settlement
|
|
|
- |
|
|
|
- |
|
|
|
873 |
|
Income before income
taxes
|
|
|
13,834 |
|
|
|
15,665 |
|
|
|
13,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (provision)
|
|
|
(7,986 |
) |
|
|
(8,036 |
) |
|
|
14,942 |
|
Net income
|
|
|
5,848 |
|
|
|
7,629 |
|
|
|
28,573 |
|
Preferred
stock dividends
|
|
|
- |
|
|
|
(2,215 |
) |
|
|
(4,385 |
) |
Net income available to common
shareholders
|
|
$ |
5,848 |
|
|
$ |
5,414 |
|
|
$ |
24,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.30 |
|
|
$ |
.28 |
|
|
$ |
1.20 |
|
Diluted
|
|
$ |
.29 |
|
|
$ |
.27 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,577 |
|
|
|
19,593 |
|
|
|
20,134 |
|
Diluted
|
|
|
19,922 |
|
|
|
19,888 |
|
|
|
20,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,848 |
|
|
$ |
7,629 |
|
|
$ |
28,573 |
|
Foreign
currency translation adjustments
|
|
|
88 |
|
|
|
458 |
|
|
|
97 |
|
Comprehensive
income
|
|
$ |
5,936 |
|
|
$ |
8,087 |
|
|
$ |
28,670 |
|
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEAR
ENDED AUGUST 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
In
thousands
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,848 |
|
|
$ |
7,629 |
|
|
$ |
28,573 |
|
Adjustments to reconcile net
income to net cash providedby operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
9,533 |
|
|
|
10,030 |
|
|
|
10,289 |
|
Gain on sale of consumer
solutions business unit assets
|
|
|
(9,131 |
) |
|
|
- |
|
|
|
- |
|
Deferred income
taxes
|
|
|
4,152 |
|
|
|
5,274 |
|
|
|
(15,435 |
) |
Share-based compensation cost
(benefit)
|
|
|
(259 |
) |
|
|
1,394 |
|
|
|
843 |
|
Loss (gain) on disposals of
assets
|
|
|
460 |
|
|
|
(1,247 |
) |
|
|
- |
|
Restructuring
charges
|
|
|
2,064 |
|
|
|
- |
|
|
|
- |
|
Impairment of
assets
|
|
|
1,483 |
|
|
|
- |
|
|
|
- |
|
Changes in assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable,
net
|
|
|
(7,204 |
) |
|
|
(3,574 |
) |
|
|
(1,919 |
) |
Decrease (increase) in
inventories
|
|
|
2,853 |
|
|
|
(2,427 |
) |
|
|
(845 |
) |
Increase in receivable from
equity method investee
|
|
|
(7,672 |
) |
|
|
- |
|
|
|
- |
|
Decrease in prepaid expenses and
other assets
|
|
|
7,109 |
|
|
|
514 |
|
|
|
1,458 |
|
Decrease in accounts payable and
accrued liabilities
|
|
|
(1,512 |
) |
|
|
(4,388 |
) |
|
|
(3,697 |
) |
Increase (decrease) in income
taxes payable
|
|
|
255 |
|
|
|
304 |
|
|
|
(2,081 |
) |
Increase (decrease) in other
long-term liabilities
|
|
|
(151 |
) |
|
|
(151 |
) |
|
|
(177 |
) |
Net cash provided by operating
activities
|
|
|
7,828 |
|
|
|
13,358 |
|
|
|
17,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of
consumer solutions business unit assets, net
|
|
|
28,241 |
|
|
|
- |
|
|
|
- |
|
Purchases of property and
equipment
|
|
|
(4,164 |
) |
|
|
(9,138 |
) |
|
|
(4,350 |
) |
Capitalized curriculum
development costs
|
|
|
(4,042 |
) |
|
|
(5,088 |
) |
|
|
(4,010 |
) |
Investment in equity method
investee
|
|
|
(2,755 |
) |
|
|
- |
|
|
|
- |
|
Proceeds from disposal of
consolidated subsidiaries
|
|
|
1,180 |
|
|
|
150 |
|
|
|
- |
|
Proceeds from sales of property
and equipment, net
|
|
|
60 |
|
|
|
2,596 |
|
|
|
93 |
|
Net cash provided by (used for)
investing activities
|
|
|
18,520 |
|
|
|
(11,480 |
) |
|
|
(8,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
borrowing
|
|
|
69,708 |
|
|
|
50,951 |
|
|
|
- |
|
Payments on line of credit
borrowings
|
|
|
(85,707 |
) |
|
|
(34,952 |
) |
|
|
- |
|
Redemptions of Series A preferred
stock
|
|
|
- |
|
|
|
(37,345 |
) |
|
|
(20,000 |
) |
Change in restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
699 |
|
Principal payments on long-term
debt and financing obligation
|
|
|
(622 |
) |
|
|
(605 |
) |
|
|
(1,111 |
) |
Purchases of common stock for
treasury
|
|
|
- |
|
|
|
(2,625 |
) |
|
|
(5,167 |
) |
Proceeds from sales of common
stock from treasury
|
|
|
462 |
|
|
|
388 |
|
|
|
427 |
|
Proceeds from management stock
loan payments
|
|
|
- |
|
|
|
27 |
|
|
|
134 |
|
Payment of preferred stock
dividends
|
|
|
- |
|
|
|
(2,215 |
) |
|
|
(4,885 |
) |
Net cash used for financing
activities
|
|
|
(16,159 |
) |
|
|
(26,376 |
) |
|
|
(29,903 |
) |
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
(411 |
) |
|
|
37 |
|
|
|
58 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
9,778 |
|
|
|
(24,461 |
) |
|
|
(21,103 |
) |
Cash
and cash equivalents at beginning of the year
|
|
|
6,126 |
|
|
|
30,587 |
|
|
|
51,690 |
|
Cash
and cash equivalents at end of the year
|
|
$ |
15,904 |
|
|
$ |
6,126 |
|
|
$ |
30,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income
taxes
|
|
$ |
3,549 |
|
|
$ |
2,370 |
|
|
$ |
2,615 |
|
Cash paid for
interest
|
|
|
3,146 |
|
|
|
2,973 |
|
|
|
2,662 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of treasury stock
from tender offer through liabilities
|
|
$ |
28,222 |
|
|
$ |
- |
|
|
$ |
- |
|
Accrued preferred stock
dividends
|
|
|
- |
|
|
|
- |
|
|
|
934 |
|
Promissory notes received from
sales of consolidated subsidiaries
|
|
|
- |
|
|
|
1,513 |
|
|
|
- |
|
Purchases of property and
equipment financed by accounts payable
|
|
|
314 |
|
|
|
895 |
|
|
|
- |
|
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Series
A Preferred Stock Shares
|
|
|
Series
A Preferred Stock Amount
|
|
|
Common
Stock Shares
|
|
|
Common
Stock Amount
|
|
|
Additional
Paid-In Capital
|
|
|
Common
Stock Warrants
|
|
|
Retained
Earnings (Accumulated Deficit)
|
|
|
Deferred
Compensa-tion
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
Treasury
Stock Shares
|
|
|
Treasury
Stock Amount
|
|
In
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 31, 2005
|
|
|
2,294 |
|
|
$ |
57,345 |
|
|
|
27,056 |
|
|
$ |
1,353 |
|
|
$ |
190,760 |
|
|
$ |
7,611 |
|
|
$ |
(14,498 |
) |
|
$ |
(1,055 |
) |
|
$ |
556 |
|
|
|
(6,465 |
) |
|
$ |
(109,246 |
) |
Preferred
stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock redemptions
|
|
|
(800 |
) |
|
|
(20,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock from treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
743 |
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(690 |
) |
|
|
(5,167 |
) |
Unvested
share award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
458 |
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of deferred compensation upon adoption of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,055 |
) |
|
|
|
|
|
|
|
|
|
|
1,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipt
of common stock as consideration for payment on management common stock
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
(167 |
) |
Cumulative
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 31, 2006
|
|
|
1,494 |
|
|
$ |
37,345 |
|
|
|
27,056 |
|
|
$ |
1,353 |
|
|
$ |
185,691 |
|
|
$ |
7,611 |
|
|
$ |
14,075 |
|
|
$ |
- |
|
|
$ |
653 |
|
|
|
(7,083 |
) |
|
$ |
(113,379 |
) |
Preferred
stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock redemptions
|
|
|
(1,494 |
) |
|
|
(37,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock from treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
1,096 |
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345 |
) |
|
|
(2,603 |
) |
Unvested
share award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
501 |
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on management common stock loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458 |
|
|
|
|
|
|
|
|
|
Common
stock warrant activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of Brazil subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141 |
) |
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 31, 2007
|
|
|
- |
|
|
$ |
- |
|
|
|
27,056 |
|
|
$ |
1,353 |
|
|
$ |
185,890 |
|
|
$ |
7,602 |
|
|
$ |
19,489 |
|
|
$ |
- |
|
|
$ |
970 |
|
|
|
(7,296 |
) |
|
$ |
(114,385 |
) |
Issuance
of common stock from treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
1,234 |
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
(103 |
) |
Treasury
shares acquired through tender offer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,027 |
) |
|
|
(28,222 |
) |
Unvested
share award
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
572 |
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
Common
stock warrant activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 31, 2008
|
|
|
- |
|
|
$ |
- |
|
|
|
27,056 |
|
|
$ |
1,353 |
|
|
$ |
184,313 |
|
|
$ |
7,597 |
|
|
$ |
25,337 |
|
|
$ |
- |
|
|
$ |
1,058 |
|
|
|
(10,203 |
) |
|
$ |
(140,904 |
) |
See
accompanying notes to consolidated financial statements.
FRANKLIN
COVEY CO.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Franklin
Covey Co. (hereafter referred to as us, we, our, or the Company) believes that
great organizations consist of great people who form great teams that produce
great results. To enable organizations and individuals to achieve
great results, we provide integrated consulting, training, and performance
solutions focused on leadership, strategy execution, productivity, sales force
effectiveness, effective communication, and other areas. Our services
and products have historically been available through professional consulting
services, public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com
and our best-known offerings in the marketplace have included the FranklinCovey
Planner™, and a suite of individual-effectiveness and leadership-development
training products based on the best-selling book, The 7 Habits of Highly Effective
People.
During
the fourth quarter of fiscal 2008, we completed the sale of substantially all of
the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed
entity, Franklin Covey Products, LLC (Note 2). The CSBU was primarily
responsible for the sale of our products, including the FranklinCovey Planner™,
to consumers through retail stores, catalogs, and our Internet
site. Following the sale of the CSBU, our business primarily consists
of training, consulting, and assessment services and products to help
organizations achieve superior results by focusing on and executing on top
priorities, building the capability of knowledge workers, and aligning business
processes. Our training, consulting, and assessment offerings include
services based upon the popular workshop The 7 Habits of Highly Effective
PeopleÒ; Leadership: Great
Leaders—Great Teams—Great Results™; The 4 Disciplines of
Execution™; FOCUS:
Achieving Your Highest Priorities; The 8 Habits of a Successful
Marriage; Building
Business Acumen;
Championing Diversity;
Leading at the Speed of Trust; Writing Advantage, and Presentation
Advantage. During fiscal 2008, we introduced a new suite of
services designed to help our clients improve their sales through increased
customer loyalty. We also consistently seek to create, develop, and
introduce new services and products that will help our clients achieve
greatness.
Fiscal
Year
The
Company utilizes a modified 52/53-week fiscal year that ends on August 31 of
each year. Corresponding quarterly periods generally consist of
13-week periods that ended on December 1, 2007, March 1, 2008, and May 31, 2008
during fiscal 2008. Unless otherwise noted, references to fiscal
years apply to the 12 months ended August 31 of the specified year.
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the
Company and our subsidiaries, which consisted of Franklin Covey Printing,
Franklin Development Corp., and our wholly-owned operations in Canada, Japan,
the United Kingdom, Australia, and Mexico (product sales) during fiscal
2008. Intercompany balances and transactions are eliminated in
consolidation.
Pervasiveness
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
Reclassifications
Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation. These reclassifications included
a change in the classification of building depreciation costs related to
subleased office space from product cost of sales to depreciation
expense. The depreciation expense reclassified from product cost of
sales totaled $0.7 million and $0.6 million for the fiscal years ended August
31, 2007 and 2006, respectively.
Cash
and Cash Equivalents
We
consider highly liquid investments with insignificant interest rate risk and
original maturities to the Company of three months or less to be cash
equivalents. We did not hold a significant amount of investments that
would be considered cash equivalent instruments at August 31, 2008 or
2007.
As of
August 31, 2008, we had demand deposits at various banks in excess of the
$250,000 limit for insurance by the Federal Deposit Insurance Corporation
(FDIC). Subsequent to August 31, 2008 we utilized substantially all
of our available cash to pay the $28.2 million tender offer
obligation.
Trade
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best
estimate of the amount of probable credit losses in the existing accounts
receivable balance. We determine the allowance for doubtful accounts
based upon historical write-off experience and current economic conditions and
review the adequacy of the allowance for doubtful accounts on a regular
basis. Receivable balances past due over 90 days, which exceed a
specified dollar amount, are reviewed individually for
collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. We do not have any off-balance
sheet credit exposure related to our customers.
Inventories
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method. Elements of cost in inventories generally
include raw materials, direct labor, and overhead. Cash flows from
the sales of inventory are included in cash flows provided by operating
activities in our consolidated cash flows statements. Following the
sale of our Consumer Solutions Business Unit in the fourth quarter of fiscal
2008, our inventories are comprised primarily of training materials, books, and
related accessories and were comprised of the following (in
thousands):
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
Finished
goods
|
|
$ |
8,329 |
|
|
$ |
20,268 |
|
Work
in process
|
|
|
- |
|
|
|
743 |
|
Raw
materials
|
|
|
413 |
|
|
|
3,022 |
|
|
|
$ |
8,742 |
|
|
$ |
24,033 |
|
Provision
is made to reduce excess and obsolete inventories to their estimated net
realizable value. At August 31, 2008 and 2007, our reserves for
excess and obsolete inventories totaled $1.1 million and $4.3
million. In assessing the realization of inventories, we make
judgments regarding future demand requirements and compare these estimates with
current and committed inventory levels. Inventory requirements may
change based on projected customer demand, training curriculum life-cycle
changes, longer- or shorter-than-expected usage periods, and other factors that
could affect the valuation of our inventories.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation expense, which
includes depreciation on our corporate campus that is accounted for as a
financing obligation (Note 3) and the amortization of assets recorded under
capital lease obligations, is calculated using the straight-line method over the
expected useful life of the asset. The Company generally uses the
following depreciable lives for our major classifications of property and
equipment:
Description
|
Useful
Lives
|
Buildings
|
15-39
years
|
Machinery
and equipment
|
3-7
years
|
Computer
hardware and software
|
3
years
|
Furniture,
fixtures, and leasehold improvements
|
5-8
years
|
Leasehold
improvements are amortized over the lesser of the useful economic life of the
asset or the contracted lease period. We expense costs for repairs
and maintenance as incurred. Gains and losses resulting from the sale
of property and equipment are recorded in current operations.
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 (Note 4) 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 and work sessions, international licensee sales, and related
products. No impairment charge to the Covey trade name was recorded
during the fiscal years ended August 31, 2008, 2007, or 2006.
Capitalized
Curriculum Development Costs and Impairment of Assets
During
the normal course of business, we develop training courses and related materials
that we sell to our customers. Capitalized curriculum development
costs include certain expenditures to develop course materials such as video
segments, course manuals, and other related materials. Generally,
curriculum costs are capitalized when a new offering is developed or when there
is a major revision to an existing course that requires a significant re-write
of the course materials or curriculum. Costs incurred to maintain
existing offerings are expensed when incurred. In addition,
development costs incurred in the research and development of new curriculum and
software products to be sold, leased, or otherwise marketed are expensed as
incurred until technological feasibility has been established in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, and Emerging Issues
Task Force (EITF) Issue 96-6, Accounting for the Film and Software
Costs Associated with Developing Entertainment and Educational Software
Products.
During
fiscal 2008, we capitalized certain costs incurred for the development of a new
customer loyalty offering, leadership offerings, including The Speed of Trust and The Leader in Me, as well as
other courses. Capitalized development costs are generally amortized
over a five-year life, which is based on numerous factors, including expected
cycles of major changes to curriculum. Capitalized curriculum
development costs are reported as a component of other long-term assets in our
consolidated balance sheets and totaled $6.8 million and $8.6 million at August
31, 2008 and 2007. Amortization of capitalized curriculum development
costs is reported as a component of cost of sales.
In fiscal
2008 we analyzed the expected future revenues and corresponding cash flows
expected to be generated from our The 7 Habits of Highly Effective
People interactive program and concluded that the expected future
revenues, less direct selling and maintenance costs, were insufficient to cover
the
carrying
value of the corresponding capitalized development
costs. Accordingly, we recorded a $1.5 million impairment charge in
the fourth quarter of fiscal 2008 to write the carrying value of this program
down to its net realizable value.
Restricted
Investments
The
Company’s restricted investments consist of insurance contracts and investments
in mutual funds that are held in a “rabbi trust” and are restricted for payment
to the participants of our deferred compensation plan (Note 16). We
account for our restricted investments in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. As required by SFAS No. 115,
the Company determines the proper classification of its investments at the time
of purchase and reassesses such designations at each balance sheet
date. For the periods presented in this report, our restricted
investments were classified as trading securities and consisted of insurance
contracts and mutual funds. The fair value of these restricted
investments totaled $0.5 million and $0.7 million at August 31, 2008 and 2007,
and were recorded as components of other long-term assets in the accompanying
consolidated balance sheets.
In
accordance with SFAS No. 115, our unrealized losses on restricted investments,
which were immaterial during fiscal years 2008, 2007, and 2006, were recognized
in the accompanying consolidated income statements as a component of selling,
general, and administrative expense.
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.
Accrued
Liabilities
Significant
components of our accrued liabilities were as follows (in
thousands):
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
Unearned
revenue
|
|
$ |
4,564 |
|
|
$ |
4,709 |
|
Outsourcing
contract costs payable
|
|
|
4,446 |
|
|
|
4,357 |
|
Accrued
compensation
|
|
|
4,152 |
|
|
|
6,807 |
|
Customer
credits
|
|
|
2,191 |
|
|
|
2,570 |
|
Restructuring
costs
|
|
|
2,055 |
|
|
|
- |
|
Other
accrued liabilities
|
|
|
6,011 |
|
|
|
11,658 |
|
|
|
$ |
23,419 |
|
|
$ |
30,101 |
|
Restructuring
Costs
Following
the sale of our CSBU in the fourth quarter of fiscal 2008, we initiated a
restructuring plan that reduces the number of our domestic regional sales
offices, decentralizes certain sales support functions, and significantly
changes the operations of our Canadian subsidiary. The restructuring
plan is intended to strengthen the remaining domestic sales offices and reduce
our overall operating costs. During fiscal 2008 we expensed $2.1
million for anticipated severance costs necessary to complete the
restructuring
plan, of
which $2.1 million was recorded as a component of accrued liabilities at August
31, 2008. The composition and utilization of the accrued
restructuring charge was as follows at August 31, 2008 (in
thousands):
Description
|
|
Accrued
Restructuring Costs
|
|
Balance
at August 31, 2007
|
|
$ |
- |
|
Restructuring
charges
|
|
|
2,064 |
|
Amounts
utilized – employee severance
|
|
|
(9 |
) |
Balance
at August 31, 2008
|
|
$ |
2,055 |
|
We intend
to complete the majority of the restructuring plan activities during the year
ending August 31, 2009.
Foreign
Currency Translation and Transactions
The
functional currencies of the Company’s foreign operations are the reported local
currencies. Translation adjustments result from translating our
foreign subsidiaries’ financial statements into United States
dollars. The balance sheet accounts of our foreign subsidiaries are
translated into United States dollars using the exchange rate in effect at the
balance sheet date. Revenues and expenses are translated using
average exchange rates for each month during the fiscal year. The
resulting translation gains or losses were recorded as a component of
accumulated other comprehensive income in shareholders’
equity. Foreign currency transaction losses totaled $0.1 million
during each of the fiscal years ended August 31, 2008, 2007, and 2006, and were
reported as a component of our selling, general, and administrative
expenses.
Derivative
Instruments
Derivative
instruments are accounted for in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as modified by SFAS No. 138, Accounting for Certain Derivative
and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. During the
normal course of business, we are exposed to risks associated with foreign
currency exchange rate and interest rate fluctuations. Foreign
currency exchange rate exposures result from the Company’s operating results,
assets, and liabilities that are denominated in currencies other than the United
States dollar. In order to limit our exposure to these elements, we
have made limited use of derivative instruments. Each derivative
instrument that is designated as a hedge instrument is recorded on the balance
sheet at its fair value. Changes in the fair value of derivative
instruments that qualify for hedge accounting are recorded in accumulated other
comprehensive income, which is a component of shareholders’
equity. Changes in the fair value of derivative instruments that are
not designated as hedge instruments are immediately recognized as a component of
selling, general, and administrative expense in our consolidated income
statements. At August 31, 2008 we were not party to any financial
instruments that qualified for hedge accounting.
Sales
Taxes
We
collect sales tax on qualifying transactions with customers based upon
applicable sales tax rates in various jurisdictions. The Company
accounts for its sales taxes collected using the net method as defined by EITF
Issue No. 06-03, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
and accordingly, we do not include sales taxes in net sales reported in
our consolidated financial statements.
Revenue
Recognition
We
recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in
Financial Statements, as amended by SAB No. 104, Revenue
Recognition. Accordingly,
we
recognize revenue when: 1) persuasive evidence of an agreement exists, 2)
delivery of product has occurred or services have been rendered, 3) the price to
the customer is fixed or determinable, and 4) collectibility is reasonably
assured. For training and service sales, these conditions are
generally met upon presentation of the training seminar or delivery of the
consulting services. For product sales, these conditions are
generally met upon shipment of the product to the customer or by completion of
the sales transaction in a retail store.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. For
transactions that contain more than one element, we recognize revenue in
accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. When fair value exists for all
contracted elements, the overall contract consideration is allocated among the
separate units of accounting based upon their relative fair
values. Revenue for these units is recognized in accordance with our
general revenue policies once it has been determined that the delivered items
have standalone value to the customer. If fair value does not exist
for all contracted elements, revenue for the delivered items is recognized using
the residual method, which generally means that revenue recognition is postponed
until the point is reached when the delivered items have standalone value and
fair value exists for the undelivered items. Under the residual
method, the amount of revenue considered for recognition under our general
revenue policies is the total contract amount, less the aggregate fair value of
the undelivered items. Fair value of the undelivered items is based
upon the normal pricing practices for our existing training programs, consulting
services, and other products, which are generally the prices of the items when
sold separately.
Our
international strategy includes the use of licensees in countries where we do
not have a wholly-owned operation. Licensee companies are unrelated
entities that have been granted a license to translate our content and
curriculum, adapt the content and curriculum to the local culture, and sell our
training seminars and products in a specific country or
region. Licensees are required to pay us royalties based upon a
percentage of their sales to clients. We recognize royalty income
each period based upon the sales information reported to us from our
licensees. Licensee royalty revenues are included as a component of
training sales and totaled $10.1 million, $7.6 million, and $6.1 million, for
the fiscal years ended August 31, 2008, 2007, and 2006.
Revenue
is recognized on software sales in accordance with Statement of Position (SOP)
97-2, Software Revenue
Recognition as amended by SOP 98-09. Statement 97-2, as
amended, generally requires revenue earned on software arrangements involving
multiple elements such as software products and support to be allocated to each
element based on the relative fair value of the elements based on vendor
specific objective evidence (VSOE). Nearly all of the Company’s
software sales consist of ready to use “off-the-shelf” software products that
have multiple elements, including a license and post contract customer support
(PCS). Currently we do not have VSOE for either the license or
support elements of our software sales. Accordingly, revenue is
deferred until the only undelivered element is PCS and the total arrangement fee
is recognized over the support period. During fiscal 2008, 2007, and
2006, we had software sales totaling $2.5 million, $3.2 million, and $3.3
million, which are included as a component of product sales in our consolidated
income statements.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Share-Based
Compensation
We
account for our share-based compensation costs according to the provisions of
SFAS No. 123 (Revised 2004) Share-Based Payment (SFAS No.
123R), which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. In general, SFAS No. 123R requires all share
based-payments to employees and non-employees, including grants of stock options
and the compensatory elements of employee stock purchase plans, to be recognized
in the income statement based upon their fair values.
For more
information on our share-based compensation plans, refer to Note
13.
Shipping
and Handling Fees and Costs
All
shipping and handling fees billed to customers are recorded as a component of
net sales. All costs incurred related to the shipping and handling of
products are recorded in cost of sales.
Advertising
Costs
Costs for
newspaper, television, radio, and other advertising are expensed as incurred or
recognized over the period of expected benefit for direct response and catalog
advertising. Direct response advertising costs, which consist
primarily of printing and mailing costs for catalogs and seminar mailers, are
charged to expense over the period of projected benefit, which ranges from three
to 12 months. Advertising costs included in selling, general, and
administrative expenses totaled $15.5 million, $15.9 million, and $16.0 million,
for the fiscal years ended August 31, 2008, 2007, and 2006. Our
direct response advertising costs reported in other current assets totaled $0.5
million and $2.2 million at August 31, 2008 and 2007.
Research
and Development Costs
We
expense research and development costs as incurred. During the fiscal
years ended August 31, 2008, 2007, and 2006, we expensed $4.6 million, $3.3
million, and $2.3 million of research and development costs that were recorded
as components of cost of sales and selling, general, and administrative expenses
in our consolidated income statements.
Income
Taxes
Our
income tax provision has been determined using the asset and liability approach
of accounting for income taxes. Under this approach, deferred income
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The income
tax provision represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred income taxes
result from differences between the financial and tax bases of our assets and
liabilities and are adjusted for tax rates and tax laws when changes are
enacted. A valuation allowance is provided against deferred income
tax assets when it is more likely than not that all or some portion of the
deferred income tax assets will not be realized. We adopted the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), on
September 1, 2007. Following the adoption of FIN 48, interest and
penalties related to uncertain tax positions are recognized as components of
income tax expense.
The
Company provides for income taxes, net of applicable foreign tax credits, on
temporary differences in our investment in foreign subsidiaries, which consist
primarily of unrepatriated earnings.
Comprehensive
Income
Comprehensive
income includes changes to equity accounts that were not the result of
transactions with shareholders. Comprehensive income is comprised of
net income or loss and other comprehensive income and loss items. Our
comprehensive income and losses generally consist of changes in the cumulative
foreign currency translation adjustment.
Accounting
Pronouncements Issued Not Yet Adopted
Fair Value
Measures – In September 2006, the FASB issued SFAS No. 157, Fair Value
Measures. This statement establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value, and
requires additional disclosures about fair-value
measurements. Statement No. 157 only applies to fair-value
measurements that are already required or permitted by other accounting
standards except for measurements of share-based payments and measurements that
are similar to, but not intended to be, fair value. This statement is
effective for the specified fair value measures for financial
statements
issued
for fiscal years beginning after November 15, 2007, and will thus be effective
for the Company in fiscal 2009. We have not yet completed our
analysis of the impact of SFAS No. 157 on our financial statements.
Fair Value Option
for Financial Assets and Financial Liabilities – In February 2007, the
FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities including an
Amendment of FASB Statement No. 115. Statement No.159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. The provisions of SFAS No. 159 will become effective
for the Company in fiscal 2009 and we have not yet completed our analysis of the
impact of SFAS No. 159 on our financial statements.
Business
Combinations – In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. These standards aim to
improve, simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The provisions of SFAS No. 141R and SFAS No.
160 are effective for our fiscal year beginning September 1, 2009. We
do not currently anticipate that these statements will have a material impact
upon our financial condition or results of operations.
Derivatives
Disclosures – In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. Statement No. 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. The provisions of SFAS No. 161 are
effective for our third quarter of fiscal 2009. The Company is
currently evaluating the impact of the provisions of SFAS No. 161, but due to
our limited use of derivative instruments we do not currently anticipate that
the provisions of SFAS No. 161 will have a material impact on our financial
statements.
2.
|
SALE
OF THE CONSUMER SOLUTIONS BUSINESS
UNIT
|
During
fiscal 2008, we joined with Peterson Partners to create a new company, Franklin
Covey Products, LLC (Franklin Covey Products). This new company
purchased substantially all of the assets of our Consumer Solutions Business
Unit (CSBU) with the objective of expanding the worldwide sales of Franklin
Covey products as governed by a comprehensive license agreement between us and
Franklin Covey Products. The CSBU was primarily responsible for sales
of our products to both domestic and international consumers through a variety
of channels, including retail stores, a call center, and the Internet (Note
19). Franklin Covey Products, which is controlled by Peterson
Partners, purchased the CSBU assets for $32.0 million in cash plus a $1.2
million adjustment for working capital delivered on the closing date of the
sale, which was effective July 6, 2008. We also incurred $3.7 million
of direct costs related to the sale of the CSBU assets, a portion of which is
reimbursable from Franklin Covey Products. At August 31, 2008, we
have a $3.5 million note receivable for these reimbursable transaction costs and
excess working capital that is due in January 2009. The note
receivable bears interest at Franklin Covey Products’ effective borrowing rate,
which was approximately 6.0 percent at August 31, 2008.
On the
date of the sale closing, the Company invested approximately $1.8 million to
purchase a 19.5 percent voting interest in Franklin Covey Products, made a $1.0
million priority capital contribution with a 10 percent return, and will have
the opportunity to earn contingent license fees if Franklin Covey Products
achieves specified performance objectives. We recognized a gain of
$9.1 million on the sale of the CSBU assets and according to guidance found in
EITF Issue No. 01-2, Interpretations of APB Opinion No.
29, we deferred a portion of the gain equal to our investment in Franklin
Covey Products. We will recognize the deferred gain over the life of
the long-term assets acquired by Franklin Covey Products or when cash is
received for payment of the priority contribution.
The
carrying amounts of the assets and liabilities of the CSBU that were sold to
Franklin Covey Products were as follows (in thousands):
Description
|
|
|
|
Cash
and cash equivalents
|
|
$ |
38 |
|
Accounts
receivable, net
|
|
|
6,675 |
|
Inventories
|
|
|
12,665 |
|
Other
current assets
|
|
|
2,291 |
|
Property
and equipment, net
|
|
|
8,435 |
|
Other
assets
|
|
|
158 |
|
Total
assets sold
|
|
$ |
30,262 |
|
|
|
|
|
|
Accounts
payable
|
|
$ |
3,589 |
|
Accrued
liabilities
|
|
|
6,748 |
|
Total
liabilities sold
|
|
$ |
10,337 |
|
Based
upon the guidance found in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, EITF Issue No. 03-13, Applying the Conditions in Paragraph
42 of FASB Statement No. 144 in Determining Whether to Report Discontinued
Operations, and SAB 103, Topic 5Z4, Disposal of Operation with
Significant Interest Retained, we determined that the operations of CSBU
should not be reported as discontinued operations because we will continue to
have significant influence over the operations of Franklin Covey Products and
may participate in future cash flows. As a result of this
determination, we have not presented the financial results of the CSBU as
discontinued operations in the accompanying consolidated financial statements
and we do not anticipate discontinued operations presentation in future interim
and annual reporting periods.
As a
result of Franklin Covey Products’ structure as a limited liability company with
separate owner capital accounts and the guidance found in EITF Issue No. 03-16,
Accounting for Investments in
Limited Liability Companies and SOP 78-9, Accounting for Investments in Real
Estate Ventures, we determined that the Company’s investment in Franklin
Covey Products is more than minor and that we are required to account for our
investment in Franklin Covey Products using the equity method of
accounting. We record our share of Franklin Covey Products’ profit
and loss based upon specified allocations as defined in the associated operating
agreement. Our ownership interest may be diluted in future periods if
ownership shares of Franklin Covey Products granted to certain members of its
management vest.
The
following unaudited summary financial information for Franklin Covey Products is
presented as of and for the two months ending August 31, 2008 (in
thousands):
Balance
Sheet
|
|
|
|
Total
assets
|
|
$ |
45,588 |
|
Total
liabilities
|
|
|
37,013 |
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
Sales
|
|
|
13,149 |
|
Net
loss
|
|
|
(1,437 |
) |
Following
the sale of the CSBU assets, we do not have any obligation to fund the losses of
Franklin Covey Products and therefore our portion of the net loss in fiscal 2008
was not recorded in our consolidated income statement. Under the
terms of the agreements associated with the sale of the CSBU assets, we are
entitled to receive reimbursement for certain operating costs, such as
warehousing and distribution costs, which are billed to the Company by third
party providers. At August 31, 2008 we had a $7.7 million receivable
from Franklin Covey Products, which consisted of $3.5 million of reimbursable
costs associated with the sale transaction as described above, and $4.2 million
of reimbursable operating costs.
3.
|
PROPERTY
AND EQUIPMENT
|
Our
property and equipment were comprised of the following (in
thousands):
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
Land
and improvements
|
|
$ |
1,626 |
|
|
$ |
1,639 |
|
Buildings
|
|
|
34,573 |
|
|
|
34,536 |
|
Machinery
and equipment
|
|
|
2,969 |
|
|
|
29,026 |
|
Computer
hardware and software
|
|
|
20,010 |
|
|
|
45,623 |
|
Furniture,
fixtures, and leasehold improvements
|
|
|
9,640 |
|
|
|
32,579 |
|
|
|
|
68,818 |
|
|
|
143,403 |
|
Less
accumulated depreciation
|
|
|
(41,890 |
) |
|
|
(107,340 |
) |
|
|
$ |
26,928 |
|
|
$ |
36,063 |
|
In
addition to the CSBU property and equipment that was sold to Franklin Covey
Products during the fourth quarter of fiscal 2008, we disposed of certain
computer hardware and software that was replaced or rendered obsolete during the
year. Substantially all of this computer hardware and software was
fully depreciated at the time of disposal. In addition, we also
transferred ownership of fully depreciated warehouse equipment to a third party
warehouse services provider (Note 9) as required by the outsourcing
contract.
During
fiscal 2007, we completed a project to reconfigure our printing operations to
improve our printing services’ efficiency, reduce operating costs, and improve
our printing services’ flexibility in order to increase external printing
service sales. Our reconfiguration plan included moving our printing
operations a short distance from its existing location to our corporate
headquarters campus and the sale of the manufacturing facility and certain
printing presses. We completed the sale of the manufacturing facility
during the second quarter of fiscal 2007. The sale price was $2.5
million and, after deducting customary closing costs, the net proceeds to the
Company from the sale totaled $2.3 million in cash. The carrying
value of the manufacturing facility at the date of sale was $1.1 million and
accordingly, we recognized a $1.2 million gain on the sale of the manufacturing
facility. The manufacturing facility assets sold were primarily
reported as a component of corporate assets for segment reporting
purposes. Due to a lower-than-expected sale price on one of the
printing presses to be sold, we recorded an impairment charge totaling $0.3
million to reduce the carrying value of the printing press to its anticipated
sale price. The impairment charge was included as a component of
depreciation expense in our consolidated income statement for the fiscal year
ended August 31, 2007.
In
connection with the fiscal 2005 sale of our corporate headquarters facility, we
entered into a 20-year master lease agreement with the purchaser, an unrelated
private investment group. The master lease agreement contains six
five-year renewal options, which will allow us to maintain our operations at our
current location for up to 50 years. Although the corporate
headquarters facility was formally sold and the Company has no legal ownership
of the property, SFAS No. 98, Accounting for Leases,
precluded us from recording the transaction as a sale since we have subleased
more than a minor portion of the property. Pursuant to this
accounting guidance, we have accounted for the sale as a financing transaction,
which required us to continue reporting the corporate headquarters facility as
an asset and to depreciate the property over the life of the master lease
agreement. We also recorded a financing obligation to the purchaser
(Note 7) for the sale price. At August 31, 2008, the carrying value
of the corporate headquarters facility was $19.1 million.
Certain
land and buildings are collateral for mortgage debt obligations (Note
7).
Our
intangible assets were comprised of the following (in thousands):
AUGUST
31, 2008
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Definite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
License
rights
|
|
$ |
27,000 |
|
|
$ |
(9,292 |
) |
|
$ |
17,708 |
|
Curriculum
|
|
|
58,237 |
|
|
|
(29,896 |
) |
|
|
28,341 |
|
Customer
lists
|
|
|
14,684 |
|
|
|
(11,413 |
) |
|
|
3,271 |
|
Trade
names
|
|
|
377 |
|
|
|
(377 |
) |
|
|
- |
|
|
|
|
100,298 |
|
|
|
(50,978 |
) |
|
|
49,320 |
|
Indefinite-lived
intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
Covey
trade name
|
|
|
23,000 |
|
|
|
- |
|
|
|
23,000 |
|
|
|
$ |
123,298 |
|
|
$ |
(50,978 |
) |
|
$ |
72,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUGUST
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
License
rights
|
|
$ |
27,000 |
|
|
$ |
(8,355 |
) |
|
$ |
18,645 |
|
Curriculum
|
|
|
58,230 |
|
|
|
(28,361 |
) |
|
|
29,869 |
|
Customer
lists
|
|
|
18,124 |
|
|
|
(13,715 |
) |
|
|
4,409 |
|
Trade
names
|
|
|
1,277 |
|
|
|
(1,277 |
) |
|
|
- |
|
|
|
|
104,631 |
|
|
|
(51,708 |
) |
|
|
52,923 |
|
Indefinite-lived
intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
Covey
trade name
|
|
|
23,000 |
|
|
|
- |
|
|
|
23,000 |
|
|
|
$ |
127,631 |
|
|
$ |
(51,708 |
) |
|
$ |
75,923 |
|
Our
intangible assets are amortized on a straight-line basis over the estimated
useful life of the asset. The range of remaining estimated useful
lives and weighted-average amortization period over which we are amortizing the
major categories of definite-lived intangible assets at August 31, 2008 were as
follows:
Category
of Intangible Asset
|
|
Range
of Remaining Estimated Useful Lives
|
|
Weighted
Average Amortization Period
|
|
|
|
|
|
License
rights
|
|
18
years
|
|
30
years
|
Curriculum
|
|
11
to 18 years
|
|
26
years
|
Customer
lists
|
|
3
years
|
|
14
years
|
Our
aggregate amortization expense from definite-lived intangible assets totaled
$3.6 million, $3.6 million, and $3.8 million, for fiscal years 2008, 2007, and
2006. Amortization expense for our intangible assets over the next
five years is expected to be as follows (in thousands):
YEAR
ENDING
AUGUST
31,
|
|
|
2009
|
$ |
3,601 |
|
2010
|
|
3,598 |
|
2011
|
|
3,456 |
|
2012
|
|
2,458 |
|
2013
|
|
2,449 |
|
5. TENDER
OFFER OBLIGATION
During
the fourth quarter of fiscal 2008, we conducted a modified “Dutch Auction”
tender offer to purchase up to $28.0 million of shares of our common stock at a
specified range of prices (Note 10).
The
tender offer closed on August 27, 2008 as intended and we announced the
preliminary results of the tender offer on August 28, 2008. The final
results of the tender offer were announced on September 5, 2008 and we completed
the payment process for the shares of common stock shortly
thereafter. Based upon guidance found in SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, we
believe that an obligation to purchase the tender offer shares had been created
prior to August 31, 2008. As a result of this determination, at
August 31, 2008 we recorded a $28.2 million liability in current liabilities for
the tender offer obligation, which includes $0.2 million of customary
transaction costs for broker fees, legal services, and printing services,
etc. We recorded a corresponding increase to treasury stock for the
shares acquired in the tender offer in our shareholders’ equity section of our
consolidated balance sheet.
6.
|
CURRENT
LINES OF CREDIT
|
During
fiscal 2007, we entered into secured revolving line-of-credit agreements with
JPMorgan Chase Bank N.A. and Zions First National Bank that provided a combined
total of $25.0 million of borrowing capacity to the Company. In
connection with the sale of the CSBU assets (Note 2), during the fourth quarter
of fiscal 2008, the credit agreements with these lenders were modified (the
Modified Credit Agreement). The Modified Credit Agreement removed
Zions First National Bank as a lender, but continues to provide a total of $25.0
million of borrowing capacity until June 30, 2009, when the borrowing capacity
will be reduced to $15.0 million. In addition, the interest rate on
the credit facility increased from LIBOR plus 1.10 percent to LIBOR plus 1.50
percent, effective on the date of the modification agreement (weighted average
rate of 4.0 percent and 6.6 percent at August 31, 2008 and 2007,
respectively). The Modified Credit Agreement expires on March 14,
2010 (no change) and we may draw on the credit facilities, repay, and draw
again, on a revolving basis, up to the maximum loan amount of $25.0 million so
long as no event of default has occurred and is continuing. The
Company may use the Credit Agreements for general corporate purposes as well as
for other transactions, unless prohibited by the terms of the Modified Credit
Agreement. The fiscal 2007 line of credit obligation was classified
as a component of current liabilities primarily due to our intention to repay
amounts outstanding before the agreement expires.
We
accounted for the Modified Credit Agreement using the guidance found in EITF
96-19, Debtor’s Accounting for
a Modification or Exchange of Debt Instruments and EITF 98-14, Debtor’s Accounting for Changes in
Line-of-Credit or Revolving Debt Arrangements and expensed unamortized
debt issuance costs in accordance with these pronouncements. The
additional expense was recorded as a component of interest expense in the fourth
quarter of fiscal 2008 and was immaterial to the Company’s consolidated
financial statements.
In
addition to customary non-financial terms and conditions, the Modified Credit
Agreement requires us to be in compliance with specified financial covenants,
which did not change for the original credit agreements, including: (i) a funded
debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a limitation
on annual capital expenditures; and (iv) a defined amount of minimum net
worth. In the event of noncompliance with these financial covenants
and other defined events of default, the lender is entitled to certain remedies,
including acceleration of the repayment of amounts outstanding on the Modified
Credit Agreement. The Modified Credit Agreement also contains
customary representations and guarantees as well as provisions for repayment and
liens. We believe that we were in compliance with the terms and
covenants of the Modified Credit Agreement at August 31, 2008.
In
connection with the original credit agreements, the Company entered into a
promissory note, a security agreement, repayment guaranty agreements, and a
pledge and security agreement. These agreements remain in place with
the remaining lender and pledge substantially all of the Company’s assets
located in the United States and a certain foreign location to the lender in the
Modified Credit Agreement.
In
addition to the line of credit described above, we obtained a CDN $500,000
(approximately $471,000) revolving line of credit with a Canadian Bank through
our wholly-owned Canadian subsidiary (the Canadian Line of Credit) during fiscal
2007. The Canadian Line of Credit bears interest at the
Canadian
prime
rate and is a revolving line of credit that may be repeatedly borrowed against
and repaid during the life of the agreement. The Canadian Line of
Credit may be used for general corporate purposes and requires our Canadian
subsidiary to maintain a specified financial covenant for minimum debt service
coverage or the payment of the loan may be accelerated. As of August
31, 2008 we had not yet drawn upon the Canadian Line of Credit.
7.
|
LONG-TERM
DEBT AND FINANCING OBLIGATION
|
Our
long-term debt and financing obligation were comprised of the following (in
thousands):
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
Financing
obligation on corporate campus, payable in monthly installments of $254
for the first five years with two percent annual increases thereafter
(imputed interest at 7.7%), through June 2025
|
|
$ |
32,283 |
|
|
$ |
32,807 |
|
Mortgage
payable in monthly installments of $9 CDN ($9 USD at August 31, 2008),
plus interest at the CDN prime rate (4.8% at August 31, 2008) through
January 2015, secured by real estate
|
|
|
678 |
|
|
|
787 |
|
|
|
|
32,961 |
|
|
|
33,594 |
|
Less
current portion
|
|
|
(670 |
) |
|
|
(629 |
) |
Total
long-term debt and financing obligation, less current
portion
|
|
$ |
32,291 |
|
|
$ |
32,965 |
|
The
mortgage loan on our Canadian facility requires the Company to maintain certain
financial ratios at our wholly-owned Canadian operation.
Future
principal maturities of our long-term debt and financing obligation were as
follows at August 31, 2008 (in thousands):
YEAR
ENDING
AUGUST
31,
|
|
|
2009
|
$ |
670 |
|
2010
|
|
726 |
|
2011
|
|
839 |
|
2012
|
|
963 |
|
2013
|
|
1,097 |
|
Thereafter
|
|
28,666 |
|
|
$ |
32,961 |
|
In
connection with the sale and leaseback of our corporate headquarters facility,
located in Salt Lake City, Utah, we entered into a 20-year master lease
agreement with the purchaser, an unrelated private investment
group. The 20-year master lease agreement also contains six five-year
renewal options that will allow us to maintain our operations at the current
location for up to 50 years. Although the corporate headquarters
facility was sold and the Company has no legal ownership of the property, SFAS
No. 98, Accounting for
Leases, precluded us from recording the transaction as a sale since we
have subleased a significant portion of the property that was
sold. Accordingly, we accounted for the sale as a financing
transaction, which required us to continue reporting the corporate headquarters
facility as an asset (Note 3) and to record a financing obligation for the sale
price. The future minimum payments under the financing obligation for
the initial 20 year lease term are as follows (in thousands):
YEAR
ENDING
AUGUST
31,
|
|
|
2009
|
$ |
3,045 |
|
2010
|
|
3,055 |
|
2011
|
|
3,116 |
|
2012
|
|
3,178 |
|
2013
|
|
3,242 |
|
Thereafter
|
|
43,537 |
|
Total
future minimum financing obligation payments
|
|
59,173 |
|
Less
interest
|
|
(28,202 |
) |
Present
value of future minimum financing obligation payments
|
$ |
30,971 |
|
The
difference between the carrying value of the financing obligation and the
present value of the future minimum financing obligation payments represents the
carrying value of the land sold in the financing transaction, which is not
depreciated. At the conclusion of the master lease agreement, the
remaining financing obligation and carrying value of the land will be written
off of our financial statements.
Lease
Expense
In the
normal course of business, we lease office space and warehouse and distribution
facilities under non-cancelable operating lease agreements. We rent
office space, primarily for international and domestic regional sales
administration offices, in commercial office complexes that are conducive to
sales and administrative operations. We also rent warehousing and
distribution facilities that are designed to provide secure storage and
efficient distribution of our products. These operating lease
agreements generally contain renewal options that may be exercised at our
discretion after the completion of the base rental term. In addition,
many of the rental agreements provide for regular increases to the base rental
rate at specified intervals, which usually occur on an annual
basis. At August 31, 2008, we had operating leases that have
remaining terms ranging from less than one year to approximately 8
years. Following the sale of our CSBU assets (Note 2), we no longer
lease retail store space and Franklin Covey Products is contractually obligated
to pay a portion of our minimum rental payments on certain warehouse and
distribution facilities. The following table summarizes our future
minimum lease payments under operating lease agreements and the lease amounts
receivable from Franklin Covey Products at August 31, 2008 (in
thousands):
YEAR
ENDING
AUGUST
31,
|
|
Required
Minimum Lease Payments
|
|
|
Receivable
from Franklin Covey Products
|
|
|
Net
Required Minimum Lease Payments
|
|
2009
|
|
$ |
1,671 |
|
|
$ |
(390 |
) |
|
$ |
1,281 |
|
2010
|
|
|
1,620 |
|
|
|
(404 |
) |
|
|
1,216 |
|
2011
|
|
|
1,608 |
|
|
|
(422 |
) |
|
|
1,186 |
|
2012
|
|
|
1,517 |
|
|
|
(475 |
) |
|
|
1,042 |
|
2013
|
|
|
1,178 |
|
|
|
(529 |
) |
|
|
649 |
|
Thereafter
|
|
|
3,427 |
|
|
|
(1,751 |
) |
|
|
1,676 |
|
|
|
$ |
11,021 |
|
|
$ |
(3,971 |
) |
|
$ |
7,050 |
|
We
recognize lease expense on a straight-line basis over the life of the lease
agreement. Contingent rent expense is recognized as it is
incurred. Total rent expense recorded in selling, general, and
administrative expense from operating lease agreements was $8.7 million, $10.8
million, and $11.2 million for the years ended August 31, 2008, 2007, and
2006. Additionally, certain retail store leases contained terms that
require additional, or contingent, rental payments based upon the realization of
certain sales thresholds. Our contingent rental payments under these
arrangements were insignificant during the fiscal years ended August 31, 2008,
2007, and 2006.
Lease
Income
We have
subleased a significant portion of our corporate headquarters office space
located in Salt Lake City, Utah to multiple, unrelated tenants as well as to
Franklin Covey Products. The cost basis of the office space available
for lease was $33.2 million and had a carrying value of $17.7 million at August
31,
2008. During
fiscal 2008, we also had sublease agreements on two retail store locations that
we have exited, but still have a remaining lease obligation. However,
this obligation, and future sublease income, was assumed by Franklin Covey
Products. Future minimum lease payments due to us from our sublease
agreements at August 31, 2008, are as follows (in thousands):
YEAR
ENDING
AUGUST
31,
|
|
|
|
2009
|
|
$ |
3,585 |
|
2010
|
|
|
2,897 |
|
2011
|
|
|
2,020 |
|
2012
|
|
|
2,085 |
|
2013
|
|
|
1,837 |
|
Thereafter
|
|
|
15,361 |
|
|
|
$ |
27,785 |
|
Sublease
payments made to the Company totaled $2.7 million, $2.4 million, and $2.0
million, during the fiscal years ended August 31, 2008, 2007, and 2006 of which
$0.2 million, $0.3 million, and $0.3 million was recorded as a reduction of rent
expense associated with underlying lease agreements in our selling, general, and
administrative expense in fiscal 2008, 2007, and 2006. Sublease
income from the leases at our corporate headquarters was reported as a component
of product sales in our consolidated income statements and in other Consumer
Solutions Business Unit sales in our segment reporting (Note 19).
9.
|
COMMITMENTS
AND CONTINGENCIES
|
EDS
Outsourcing Contract
The
Company has an outsourcing contract with Electronic Data Systems (EDS) to
provide information technology system support and product warehousing and
distribution services. Subsequent to August 31, 2008, and primarily
as a result of the sale of CSBU assets, we amended the terms of the outsourcing
contract with EDS. Under terms of the amended outsourcing contract
with EDS: 1) the outsourcing contract and its addendums will continue to expire
on June 30, 2016; 2) Franklin Covey and Franklin Covey Products will have
separate information systems services support contracts; 3) we will no longer be
required to purchase specified levels of computer hardware technology; and 4)
our warehouse and distribution costs will consist of an annual fixed charge,
which is partially reimbursable by Franklin Covey Products, plus variable
charges for actual activity levels. The warehouse and distribution
fixed charge contains an annual escalation clause based upon changes in the
Employment Cost Index. The following schedule summarizes our
estimated minimum information systems support and fixed warehouse and
distribution charges, without the effect of estimated escalation charges, to EDS
for services over the remaining life of the outsourcing contract (in
thousands):
YEAR
ENDING
AUGUST
31,
|
|
Estimated
Gross Minimum and Fixed Charges
|
|
|
Receivable
from Franklin Covey Products
|
|
|
Estimated
Net Minimum and Fixed Charges
|
|
2009
|
|
$ |
4,138 |
|
|
$ |
(2,159 |
) |
|
$ |
1,979 |
|
2010
|
|
|
4,138 |
|
|
|
(2,159 |
) |
|
|
1,979 |
|
2011
|
|
|
4,138 |
|
|
|
(2,159 |
) |
|
|
1,979 |
|
2012
|
|
|
4,138 |
|
|
|
(2,159 |
) |
|
|
1,979 |
|
2013
|
|
|
4,138 |
|
|
|
(2,159 |
) |
|
|
1,979 |
|
Thereafter
|
|
|
11,246 |
|
|
|
(6,114 |
) |
|
|
5,132 |
|
|
|
$ |
31,936 |
|
|
$ |
(16,909 |
) |
|
$ |
15,027 |
|
Our
actual payments to EDS include a variable charge for certain warehousing and
distribution activities and may fluctuate in future periods based upon actual
sales and activity levels.
During
fiscal years 2008, 2007, and 2006, we expensed $26.7 million, $30.1 million, and
$30.6 million for services provided under terms of the EDS outsourcing
contract. The total amount expensed each year
under the
EDS contract includes freight charges, which are billed to the Company based
upon activity, that totaled $8.8 million, $9.6 million, and $9.8 million during
the years ended August 31, 2008, 2007, and 2006, respectively.
The
outsourcing contracts contain early termination provisions that the Company may
exercise under certain conditions. However, in order to exercise the
early termination provisions, we would have to pay specified penalties to EDS
depending upon the circumstances of the contract termination.
Purchase
Commitments
During
the normal course of business, we issue purchase orders to various external
vendors for products and services. At August 31, 2008, we had
purchase commitments totaling $4.6 million for products and services to be
delivered primarily in fiscal 2009. Other purchase commitments for
materials, supplies, and other items incident to the ordinary conduct of
business were immaterial, both individually and in aggregate, to the Company’s
operations at August 31, 2008.
Legal
Matters
In August
2005, EpicRealm Licensing (EpicRealm) filed an action in the United States
District Court for the Eastern District of Texas against the Company for patent
infringement. The action alleged that the Company infringed upon two
of EpicRealm’s patents directed to managing dynamic web page requests from
clients to a web server that in turn uses a page server to generate a dynamic
web page from content retrieved from a data source. The Company
denied liability in the patent infringement and filed counter-claims related to
the case subsequent to the filing of the action in District
Court. However, during the fiscal year ended August 31, 2008, the
Company paid EpicRealm a one-time license fee of $1.0 million for a
non-exclusive, irrevocable, perpetual, and royalty-free license to use any
product, system, or invention covered by the disputed patents. In
connection with the purchase of the license, EpicRealm and the Company agreed to
dismiss their claims with prejudice and the Company was released from further
action regarding these patents.
The
Company is also the subject of certain legal actions, which we consider routine
to our business activities. At August 31, 2008, we believe that,
after consultation with legal counsel, any potential liability to the Company
under such actions will not materially affect our financial position, liquidity,
or results of operations.
Preferred
Stock
Series
A – In accordance
with the terms and provisions of the preferred stock recapitalization approved
in fiscal 2005, we redeemed all remaining outstanding shares of Series A
preferred stock during the third quarter of fiscal 2007 at the liquidation
preference of $25 per share plus accrued dividends. In accordance
with the terms and provisions of the recapitalization, we redeemed the
outstanding shares of Series A preferred stock as shown below (in
thousands):
Fiscal
Year
|
|
Shares
of Preferred Stock Redeemed
|
|
|
Carrying
Value of Redeemed Preferred Shares
|
|
2007
|
|
|
1,494 |
|
|
$ |
37,345 |
|
2006
|
|
|
800 |
|
|
|
20,000 |
|
2005
|
|
|
1,200 |
|
|
|
30,000 |
|
|
|
|
3,494 |
|
|
$ |
87,345 |
|
Series
B – The preferred
stock recapitalization completed in fiscal 2005 significantly changed the rights
and preferences of our Series B preferred stock. New shares of Series
A preferred stock would have automatically converted to shares of Series B
preferred stock if the holder of the original Series A
preferred
stock sold, or transferred, the preferred stock to another
party. Series B preferred stock does not have common-equivalent
voting rights, but retains substantially all other characteristics of the new
Series A preferred stock. At August 31, 2008, there were 4.0 million
shares of Series B preferred stock authorized, but no shares
outstanding.
Common
Stock Warrants
Pursuant
to the terms of the preferred stock recapitalization plan, in fiscal 2005 we
completed a one-to-four forward split of the existing Series A preferred stock
and then bifurcated each share of Series A preferred stock into a new share of
Series A preferred stock that is no longer convertible into common stock, and a
warrant to purchase shares of common stock. Accordingly, we issued
6.2 million common stock warrants with an exercise price of $8.00 per share
(subject to customary anti-dilution and exercise features), which will be
exercisable over an eight-year term that expires in March 2013. These
common stock warrants were recorded at fair value on the date of the
recapitalization, as determined by a Black-Scholes valuation methodology, which
totaled $7.6 million. During the fiscal years ended August 31, 2008
and 2007, our common stock warrant activity was insignificant.
Treasury
Stock
Following
the completion of the sale of CSBU assets (Note 2), we used substantially all of
the net proceeds from the sale to conduct a modified “Dutch Auction” tender
offer (the Tender Offer) to purchase up to $28.0 million of our common stock at
a price not less than $9.00 per share or greater than $10.50 per
share. The Tender Offer closed fully subscribed on August 27, 2008
and we were able to purchase 3,027,027 shares of our common stock at $9.25 per
share plus normal transaction costs that were added to the cost basis of the
shares. We recorded a $28.2 million current liability at August 31,
2008 for these shares (Note 5) with a corresponding increase in treasury
stock.
During
fiscal 2006, our Board of Directors authorized the purchase of up to $10.0
million of our currently outstanding common stock and canceled all previously
approved common stock purchase plans. Common stock purchases under
this approved plan are made at our discretion for prevailing market prices and
are subject to customary regulatory requirements and
considerations. The Company does not have a timetable for the
purchase of these common shares and the authorization by the Board of Directors
does not have an expiration date. During the fiscal years ended
August 31, 2007 and 2006 we purchased 328,000 and 681,300 shares of our common
stock under the terms of the fiscal 2006 plan for $2.5 million and $5.1 million,
respectively. We did not purchase any shares of our common stock
under this purchase plan during fiscal 2008 and at August 31, 2008, we had $2.4
million remaining for future purchases under the terms of this approved
plan. We also purchased 7,900 common shares for $0.1 million during
fiscal 2006 for exclusive distribution to participants in our employee stock
purchase plan.
We have
issued shares of treasury stock to participants in our employee stock purchase
plan (ESPP) and for stock options and warrants as shown below (in thousands,
except for share amounts):
Fiscal
Year
|
|
Shares
Issued to ESPP Participants
|
|
|
Shares
Issued from the Exercise of Stock Options and Warrants
|
|
|
Total
Treasury Shares Issued for Stock Options, Warrants and
ESPP
|
|
|
Cash
Proceeds Received from the Issuance of Treasury Shares
|
|
2008
|
|
|
68,702 |
|
|
|
15,371 |
|
|
|
84,073 |
|
|
$ |
462 |
|
2007
|
|
|
55,513 |
|
|
|
37,500 |
|
|
|
93,013 |
|
|
|
321 |
|
2006
|
|
|
32,993 |
|
|
|
38,821 |
|
|
|
71,814 |
|
|
|
424 |
|
In
addition to the treasury shares shown above, we issued 36,000; 31,500; and
27,000 shares of our common stock held in treasury in connection with unvested
and fully-vested stock awards during fiscal years 2008, 2007, and 2006 (Note
13).
11. MANAGEMENT
COMMON STOCK LOAN PROGRAM
During
fiscal 2000, certain of our management personnel borrowed funds from an external
lender, on a full-recourse basis, to acquire shares of our common
stock. The loan program closed during fiscal 2001 with 3.825 million
shares of common stock purchased by the loan participants for a total cost of
$33.6 million, which was the market value of the shares acquired and distributed
to loan participants. The Company initially participated on these
management common stock loans as a guarantor to the lending
institution. However, in connection with a new credit facility
obtained during fiscal 2001, we acquired the loans from the external lender at
fair value and are now the creditor for these loans. The loans in the
management stock loan program initially accrued interest at 9.4 percent
(compounded quarterly), are full-recourse to the participants, and were
originally due in March 2005. Although interest continues to accrue
on the outstanding balance over the life of the loans to the participants, the
Company ceased recording interest receivable (and related interest income)
related to these loans during the third quarter of fiscal 2002.
In May
2004, our Board of Directors approved modifications to the terms of the
management stock loans. While these changes had significant
implications for most management stock loan program participants, the Company
did not formally amend or modify the stock loan program
notes. Rather, the Company chose to forego certain of its rights
under the terms of the loans and granted participants the modifications
described below in order to potentially improve their ability to pay, and the
Company’s ability to collect, the outstanding balances of the
loans. These modifications to the management stock loan terms applied
to all current and former employees whose loans do not fall under the provisions
of the Sarbanes-Oxley Act of 2002. Loans to the Company’s officers
and directors (as defined by the Sarbanes-Oxley Act of 2002) were not affected
by the approved modifications and loans held by those persons, which totaled
$0.8 million, were repaid on the original due date of March 30,
2005.
The May
2004 modifications to the management stock loan terms included the
following:
Waiver of Right
to Collect – The
Company waived its right to collect the outstanding balance of the loans prior
to the earlier of (a) March 30, 2008, or (b) the date after March 30, 2005 on
which the closing price of the Company’s stock multiplied by the number of
shares purchased equals the outstanding principal and accrued interest on the
management stock loans (the Breakeven Date).
Lower Interest
Rate – Effective
May 7, 2004, the Company prospectively waived collection of all interest on the
loans in excess of 3.16 percent per annum, which was the “Mid-Term Applicable
Federal Rate” for May 2004.
Use of the
Company’s Common Stock to Pay Loan Balances – The Company may consider
receiving shares of our common stock as payment on the loans, which were
previously only payable in cash.
Elimination of
the Prepayment Penalty –
The Company will waive its right to charge or collect any prepayment
penalty on the management common stock loans.
These
modifications, including the reduction of the loan program interest rate, were
not applied retroactively and participants remain obligated to pay interest
previously accrued using the original interest rate. Also during
fiscal 2005, our Board of Directors approved loan modifications for a former
executive officer and a former director substantially similar to loan
modifications previously granted to other loan participants in the management
stock loan program as described above.
Prior to
the May 2004 modifications, the Company accounted for the loans and the
corresponding shares using a loan-based accounting model that included guidance
found in SAB 102, Selected
Loan Loss Allowance Methodology and Documentation Issues; SFAS No. 114,
Accounting by Creditors for
Impairment of A Loan - an Amendment of FASB Statements No. 5 and 15; and
SFAS No. 5, Accounting
for
Contingencies. However, due to the nature of the May 2004
modifications, the Company reevaluated its accounting for the management stock
loan program. Based upon guidance found in EITF Issue 00-23, Issues Related to the Accounting for
Stock Compensation under APB Opinion No. 25 and FASB Interpretation No.
44, and EITF Issue 95-16, Accounting for Stock Compensation
Agreements with Employer Loan Features under APB Opinion No. 25, we
determined that the management common stock loans should be accounted for as
non-recourse stock compensation instruments. While this accounting
treatment does not alter the legal rights associated with the loans to the
employees as described above, the modifications to the terms of the loans were
deemed significant enough to adopt the non-recourse accounting model as
described in EITF 00-23. As a result of this accounting treatment,
the remaining carrying value of the notes and interest receivable related to
financing common stock purchases by related parties, which totaled $7.6 million
prior to the loan term modifications, was reduced to zero with a corresponding
reduction in additional paid-in capital. Since the Company was unable
to control the underlying management common stock loan shares, the loan program
shares continued to be included in Basic earnings per share (EPS) following the
May 2004 modifications.
We
currently account for the management common stock loans as equity-classified
stock option arrangements. Under the provisions of SFAS No. 123R,
which we adopted on September 1, 2005, additional compensation expense will be
recognized only if the Company takes action that constitutes a modification
which increases the fair value of the arrangements. This accounting
treatment also precludes us from reversing the amounts expensed as additions to
the loan loss reserve, totaling $29.7 million, which were recorded in prior
periods.
During
fiscal 2006, the Company offered participants in the management common stock
loan program the opportunity to formally modify the terms of their loans in
exchange for placing their shares of common stock purchased through the loan
program in an escrow account that allows the Company to have a security interest
in the loan program shares. The key modifications to the management
common stock loans for the participants accepting the fiscal 2006 offer were as
follows:
Modification of
Promissory Note – The management stock loan due date was changed to be
the earlier of (a) March 30, 2013, or (b) the Breakeven Date as defined by the
May 2004 modifications. The interest rate on the loans increased from
3.16 percent compounded annually to 4.72 percent compounded
annually.
Redemption of
Management Loan Program Shares – The Company has the right to redeem the
shares on the due date in satisfaction of the promissory notes as
follows:
·
|
On
the Breakeven Date, the Company has the right to purchase and redeem from
the loan participants the number of loan program shares necessary to
satisfy the participant’s obligation under the promissory
note. The redemption price for each such loan program share
will be equal to the closing price of the Company’s common stock on the
Breakeven Date.
|
·
|
If
the Company’s stock has not closed at or above the breakeven price on or
before March 30, 2013, the Company has the right to purchase and redeem
from the participants all of their loan program shares at the closing
price on that date as partial payment on the participant’s
obligation.
|
The
fiscal 2006 modifications were intended to give the Company a measure of control
of the outstanding loan program shares and to facilitate payment of the loans
should the market value of the Company’s stock equal the principal and accrued
interest on the management stock loans. If a loan participant
declines the offer to modify their management stock loan, their loan will
continue to have the same terms and conditions that were previously approved in
May 2004 by the Company’s Board of Directors and their loans will be due at the
earlier of March 30, 2008 or the Breakeven Date. Consistent with the
May 2004 modifications, stock loan participants will be unable to realize a gain
on the loan program shares unless they pay cash to satisfy the promissory note
obligation prior to the due date. As of the closing date of the
extension offer, which was substantially completed in June 2006, management
stock loan participants holding approximately 3.5 million shares, or 94 percent
of the remaining loan
shares,
elected to accept the extension offer and placed their management stock loan
shares into the escrow account. The Company is currently in the
process of collecting amounts due from participants that declined to place their
shares in the escrow account during fiscal 2006.
As a
result of this modification, the Company reevaluated its accounting treatment
regarding the loan shares and their inclusion in Basic EPS. Since the
management stock loan shares held in the escrow account continue to have the
same income participation rights as other common shareholders, the Company has
determined that the escrowed loan shares are participating securities as defined
by EITF 03-06, Participating
Securities and the Two-Class Method under FASB Statement No.
128. As a result, the management loan shares are included in
the calculation of Basic EPS in periods of net income and excluded from Basic
EPS in periods of net loss beginning in the fourth quarter of fiscal 2006, which
was the completion of the escrow agreement modification.
During
fiscal 2008, the effective interest rate on the management stock loans was
reduced to 2.87 percent, compounded annually, which was the “Mid-Term Applicable
Federal Rate” on the date of the interest rate change.
The
inability of the Company to collect all, or a portion, of these receivables
could have an adverse impact upon our financial position and future cash flows
compared to full collection of the loans.
12.
|
FINANCIAL
INSTRUMENTS
|
Fair
Value of Financial Instruments
The book
value of our financial instruments at August 31, 2008 and 2007 approximates
their fair values. The assessment of the fair values of our financial
instruments is based on a variety of factors and
assumptions. Accordingly, the fair values may not represent the
actual values of the financial instruments that could have been realized at
August 31, 2008 or 2007, or that will be realized in the future, and do not
include expenses that could be incurred in an actual sale or
settlement. The following methods and assumptions were used to
determine the fair values of our financial instruments, none of which were held
for trading or speculative purposes:
Cash and Cash
Equivalents – The
carrying amounts of cash and cash equivalents approximate their fair values due
to the liquidity and short-term maturity of these instruments.
Accounts
Receivable – The
carrying value of accounts receivable approximate their fair value due to the
short-term maturity and expected collection of these instruments.
Other
Assets – Our
other assets, including notes receivable, were recorded at the net realizable
value of estimated future cash flows from these instruments.
Debt
Obligations – At
August 31, 2008, our debt obligations consisted of a variable-rate line of
credit, a tender offer obligation, and a variable-rate mortgage on our Canadian
facility. Further information regarding the fair value of these
liability instruments is provided below.
Variable-Rate Line of Credit
– The interest rate on our line of credit obtained in fiscal 2007 is variable
and is adjusted to reflect current market interest rates that would be available
to us for a similar instrument. As a result, the carrying value of
the outstanding balance on the line of credit approximates its fair
value.
Tender Offer Obligation – Due
to the very short-term nature of the tender offer obligation, which was paid in
September 2008, the carrying value of the obligation approximates its fair value
at August 31, 2008.
Variable-Rate Debt – The
carrying value of our variable-rate mortgage in Canada approximated its fair
value since the prevailing interest rate is adjusted to reflect market rates
that would be available to us for a similar debt instrument with a corresponding
remaining maturity.
Derivative
Instruments
During
the normal course of business, we are exposed to fluctuations in foreign
currency exchange rates due to our international operations and interest
rates. To manage risks associated with foreign currency exchange and
interest rates, we make limited use of derivative financial
instruments. Derivatives are financial instruments that derive their
value from one or more underlying financial instruments. As a matter
of policy, our derivative instruments are entered into for periods that do not
exceed the related underlying exposures and do not constitute positions that are
independent of those exposures. In addition, we do not enter into
derivative contracts for trading or speculative purposes, nor 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 the Company through its
use of derivatives. Additionally, we enter into derivative agreements
only with highly rated counterparties.
Foreign Currency
Exposure – Due to the global nature of our operations, we are subject to
risks associated with transactions that are denominated in currencies other than
the United States dollar, as well as the effects of translating amounts
denominated in foreign currencies to United States dollars as a normal part of
the reporting process. The objective of our foreign currency risk
management activities is to reduce foreign currency risk in the consolidated
financial statements. In order to manage foreign currency risks, we
make limited use of foreign currency forward contracts and other foreign
currency related derivative instruments. Although we cannot eliminate
all aspects of our foreign currency risk, we believe that our strategy, which
includes the use of derivative instruments, can reduce the impacts of foreign
currency related issues on our consolidated financial statements.
During
the fiscal years ended August 31, 2008, 2007, and 2006, 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 selling, general, and
administrative expense in our consolidated income statements and had the
following impact on the periods indicated (in thousands):
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Losses
on foreign exchange contracts
|
|
$ |
(487 |
) |
|
$ |
(249 |
) |
|
$ |
(346 |
) |
Gains
on foreign exchange contracts
|
|
|
36 |
|
|
|
119 |
|
|
|
415 |
|
Net
gain (loss) on foreign exchange contracts
|
|
$ |
(451 |
) |
|
$ |
(130 |
) |
|
$ |
69 |
|
At August
31, 2008, 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, approximated the notional amounts of the contracts due to the
proximity of the end of the contract to our fiscal year end on August 31,
2008. The notional amounts of our foreign currency sell contracts
that did not qualify for hedge accounting were as follows at August 31, 2008 (in
thousands):
Contract
Description
|
|
Notional
Amount in Foreign Currency
|
|
|
Notional
Amount in U.S. Dollars
|
|
|
|
|
|
|
|
|
British
Pounds
|
|
|
450 |
|
|
$ |
809 |
|
Japanese
Yen
|
|
|
27,000 |
|
|
|
254 |
|
Australian
Dollars
|
|
|
125 |
|
|
|
117 |
|
Interest Rate
Risk Management –
Due to the limited nature of our interest rate risk, we do not make regular use
of interest rate derivatives and we were not a party to any interest rate
derivative instruments during the fiscal years ended August 31, 2008, 2007, and
2006.
13. SHARE-BASED
COMPENSATION PLANS
Overview
We
utilize various share-based compensation plans as integral components of our
overall compensation and associate retention strategy. Our
shareholders have approved various stock incentive plans that permit us to grant
performance awards, unvested stock awards, employee stock purchase plan (ESPP)
shares, and stock options. In addition, our Board of Directors and
shareholders may, from time to time, approve fully vested stock
awards. At August 31, 2008, our stock option incentive plan, which
permits the granting of performance awards, unvested stock awards to employees,
and incentive stock options had approximately 1,944,000 shares available for
granting (including the impact of the cancellation of all long-term performance
awards as of August 31, 2008) and our 2004 ESPP plan had approximately 832,000
shares authorized for purchase by plan participants. The total cost
of our share-based compensation plans for the fiscal years ended August 31,
2008, 2007, and 2006 were as follows (in thousands):
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Performance
awards
|
|
$ |
(1,338 |
) |
|
$ |
835 |
|
|
$ |
503 |
|
Unvested
share awards
|
|
|
969 |
|
|
|
481 |
|
|
|
296 |
|
Compensation
cost of the ESPP
|
|
|
79 |
|
|
|
75 |
|
|
|
37 |
|
Stock
options
|
|
|
31 |
|
|
|
3 |
|
|
|
7 |
|
|
|
$ |
(259 |
) |
|
$ |
1,394 |
|
|
$ |
843 |
|
The
compensation cost of our share-based compensation plans was included in selling,
general, and administrative expenses in the accompanying consolidated income
statements and no share-based compensation was capitalized during fiscal years
2008, 2007 or 2006. The Company generally issues shares of common
stock for its share-based compensation plans from shares held in
treasury. The following is a description of our share-based
compensation plans.
Performance-Based
Awards
During
fiscal 2006, our shareholders approved a share-based long-term incentive plan
(the LTIP) that permits an annual grant of performance-based share awards to
certain executive and managerial personnel as directed by the Compensation
Committee of the Board of Directors. The LTIP performance awards
cliff vest, and are exchanged for shares of our common stock, on August 31
following the completion of a three-year measurement period. For
example, performance awards granted in fiscal 2007 may have vested on August 31,
2009. Each fiscal year LTIP award provides for a target number of
shares to be awarded if specified financial goals based on a combination of
sales growth and cumulative operating income are achieved. However,
the number of shares that are finally awarded to LTIP participants is variable
and may range from zero shares, if a minimum level of performance is
not
achieved,
to 200 percent of the target award, if the specifically defined performance
criteria is exceeded during the three-year performance period.
The LTIP
performance awards are valued at the closing price of our common stock on the
grant date. The corresponding compensation cost of each LTIP award is
expensed ratably over the measurement period of the award, which is
approximately three years. Since the number of shares that may be
issued under the LTIP is variable, we reevaluate the LTIP awards on a quarterly
basis and adjust the number of shares expected to be awarded based upon
financial results of the Company as compared to the performance goals set for
the award. Adjustments to the number of shares awarded, and to the
corresponding compensation expense, are made on a cumulative basis at the date
of adjustment based upon the estimated probable number of shares to be
awarded.
As we
completed our evaluations of the LTIP awards during fiscal 2008, we reduced the
number of shares expected to be awarded under the fiscal 2007 and fiscal 2006
LTIP grants based on current financial performance and expected future financial
performance. As a result of these evaluations, we determined that no
shares of common stock were expected to be awarded under any LTIP grant and all
previously recognized share-based compensation expense, which totaled $1.3
million, was reversed during fiscal 2008. On August 31, 2008, the
fiscal 2006 LTIP award expired with no shares granted to participants and we do
not expect any shares to vest under the fiscal 2007 LTIP
award. Adjustments to decrease share-based compensation resulting
from the regular evaluation of LTIP awards totaled $0.4 million in fiscal 2007
and $0.1 million in fiscal 2006 and all previously recognized tax benefits,
which totaled $0.3 million and $0.2 million for the fiscal years ended August
31, 2007 and 2006, were reversed in fiscal 2008. There were no awards
granted under the terms of the LTIP during the fiscal year ended August 31,
2008.
Unvested
Stock Awards
The fair
value of our unvested stock awards is calculated by multiplying the number of
shares awarded by the closing market price of our common stock on the date of
the grant. The corresponding compensation cost of unvested stock
awards is amortized to selling, general, and administrative expense on a
straight-line basis over the vesting period of the award, which generally ranges
from three to five years. The following is a description of our
unvested stock awards granted to certain members of our Board of Directors and
to our employees.
Board of Director
Awards – The non-employee directors’ stock incentive plan (the Directors’
Plan) is designed to provide non-employee directors of the Company, who are
ineligible to participate in our employee stock incentive plan, an opportunity
to acquire an interest in the Company through the acquisition of shares of
common stock. The Directors’ plan, as approved by our shareholders,
allows for an annual unvested stock grant of 4,500 shares of common stock to
each eligible member of our Board of Directors.
Under the
provisions of the Directors’ Plan, we issued 36,000 shares, 31,500 shares, and
27,000 shares of our common stock to eligible members of the Board of Directors
during the fiscal years ended August 31, 2008, 2007, and 2006. The
fair value of the shares awarded under the Directors’ Plan was $0.3 million,
$0.2 million, and $0.2 million during fiscal 2008, 2007, and 2006, and was
calculated on the grant date with the corresponding compensation cost being
recognized over the vesting period of the awards, which is three
years. The cost of the common stock issued from treasury stock for
these awards was $0.6 million, $0.5 million, and $0.4 million in fiscal years
2008, 2007, and 2006.
Employee
Awards – During
fiscal 2005 and in prior periods, we granted unvested stock awards to certain
employees as long-term incentives. These unvested stock awards
originally cliff vested five years from the grant date or on an accelerated
basis if we achieved specified earnings levels. The compensation cost
of these unvested stock awards was based on the fair value of our common shares
on the grant date and was expensed on a straight-line basis over the vesting
(service) period of the awards. The recognition of compensation cost
was accelerated when we believed that it was probable that we would achieve the
specified earnings thresholds and the shares would vest.
In the
fourth quarter of fiscal 2008, our Board of Directors accelerated the vesting of
all remaining outstanding unvested share awards previously granted to
employees. Based upon guidance in SFAS No. 123R, we determined that
the accelerated vesting of these awards constituted modifications to the awards
that required separate analysis for awards granted to CSBU employees and for
awards granted to Organizational Solutions Business Unit (OSBU) and corporate
employees. Since the unvested share awards granted to CSBU employees
would not have vested under the original terms of the award (due to the sale of
CSBU assets), the CSBU awards were revalued on the date of the
modification. The fair value of our common stock was higher on the
modification date than on the grant date, which resulted in $0.4 million of
additional share-based compensation expense in the fourth quarter of fiscal
2008. We determined that OSBU and corporate awards would have vested
under the original award terms and based upon SFAS No. 123R, we accelerated the
remaining unrecognized compensation cost, which increased share-based
compensation by $0.2 million during the fourth quarter of fiscal
2008. Following the accelerated vesting of these awards, we do not
have any remaining unrecognized compensation cost for unvested share awards
granted to employees.
During
the fourth quarter of fiscal 2007, the financial performance goals were reached
for certain employees and one-half of their awards were
accelerated. Other awards were vested during fiscal 2007 in
connection with the termination of certain management employees. The
accelerated vesting of these awards were accounted for as modifications under
the provisions of SFAS No. 123R during fiscal 2007. The additional
share-based compensation expense resulting from these modifications totaled $0.1
million.
The
following information applies to our unvested stock awards for the fiscal year
ended August 31, 2008:
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|
Unvested
stock awards at August 31, 2007
|
|
|
410,670 |
|
|
$ |
3.80 |
|
Granted
|
|
|
36,000 |
|
|
|
7.50 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Vested
|
|
|
(352,170 |
) |
|
|
3.13 |
|
Unvested
stock awards at August 31, 2008
|
|
|
94,500 |
|
|
$ |
7.73 |
|
At August
31, 2008, there was $0.4 million of total unrecognized compensation cost related
to unvested stock awards granted to our Board of Directors, which is expected to
be recognized over the weighted-average vesting period of approximately two
years. Compensation expense related to our unvested stock awards
totaled $1.0 million, $0.5 million, and $0.3 million, in fiscal years 2008,
2007, and 2006, and the total recognized tax benefit from unvested stock awards
totaled $0.4 million, $0.2 million, and $0.1 million for the fiscal years ended
August 31, 2008, 2007, and 2006, respectively. The intrinsic value of
our unvested stock awards at August 31, 2008 was $0.8 million.
Employee
Stock Purchase Plan
We have
an employee stock purchase plan (Note 16) that offers qualified employees the
opportunity to purchase shares of our common stock at a price equal to 85
percent of the average fair market value of the Company’s common stock on the
last trading day of the calendar month in each fiscal quarter. Based
upon guidance in SFAS No. 123R, we determined that the discount offered to
employees under the ESPP is compensatory and the amount is therefore expensed at
each grant date. During the fiscal year ended August 31, 2008, a
total of 68,702 shares were issued to participants in the ESPP.
Stock
Options
The
Company has an incentive stock option plan whereby options to purchase shares of
our common stock are issued to key employees at an exercise price not less than
the fair market value of the
Company’s
common stock on the date of grant. The term, not to exceed ten years,
and exercise period of each incentive stock option awarded under the plan are
determined by a committee appointed by our Board of Directors.
Information
related to stock option activity during the fiscal year ended August 31, 2008 is
presented below:
|
|
Number
of Stock Options
|
|
|
Weighted
Avg. Exercise Price Per Share
|
|
|
Weighted
Avg. Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value (thousands)
|
|
Outstanding
at August 31, 2007
|
|
|
2,058,300 |
|
|
$ |
12.72 |
|
|
|
|
|
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
Exercised
|
|
|
(12,500 |
) |
|
|
1.70 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(18,000 |
) |
|
|
9.69 |
|
|
|
|
|
|
|
Outstanding
at August 31, 2008
|
|
|
2,027,800 |
|
|
$ |
12.82 |
|
|
|
1.8 |
|
|
$ |
439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at August 31, 2008
|
|
|
2,027,800 |
|
|
$ |
12.82 |
|
|
|
1.8 |
|
|
$ |
439 |
|
Company
policy generally allows terminated employees 90 days from the date of
termination to exercise vested stock options. However, in connection
with the sale of our CSBU (Note 2) during fiscal 2008, we granted extensions to
former CSBU employees, who had vested stock options, which allow the stock
options to be exercised up to the original expiration date. We
determined that these extensions were modifications to the stock options under
the guidance found in SFAS No. 123R. The incremental compensation
expense resulting from the modification of these stock options was calculated
through the use of a Black-Scholes valuation model and totaled approximately
$31,000, which was expensed during the fourth quarter of fiscal 2008 since the
modified stock options were fully vested prior to the modification
date.
The
Company did not grant any stock options during the fiscal years ended August 31,
2008, 2007 or 2006, and has no remaining unamortized service cost related to
granted stock options.
The
following additional information applies to our stock options outstanding at
August 31, 2008:
Range
of
Exercise
Prices
|
|
|
Number
Outstanding at August 31, 2008
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price
|
|
|
Options
Exercisable at August 31, 2008
|
|
|
Weighted
Average Exercise Price
|
|
$ |
2.78
– $8.19 |
|
|
|
226,300 |
|
|
|
1.6 |
|
|
$ |
7.01 |
|
|
|
226,300 |
|
|
$ |
7.01 |
|
$ |
9.69
– $9.69 |
|
|
|
194,500 |
|
|
|
0.7 |
|
|
|
9.69 |
|
|
|
194,500 |
|
|
|
9.69 |
|
$ |
14.00
– $14.00 |
|
|
|
1,602,000 |
|
|
|
2.0 |
|
|
|
14.00 |
|
|
|
1,602,000 |
|
|
|
14.00 |
|
$ |
17.69
– $17.69 |
|
|
|
5,000 |
|
|
|
0.3 |
|
|
|
17.69 |
|
|
|
5,000 |
|
|
|
17.69 |
|
|
|
|
|
|
2,027,800 |
|
|
|
|
|
|
|
|
|
|
|
2,027,800 |
|
|
|
|
|
The
Company received proceeds totaling approximately $21,000, $0.1 million, and $0.2
million in fiscal 2008, fiscal 2007, and fiscal 2006 from the exercise of common
stock options. The intrinsic value of stock options exercised was
$0.1 million, $0.3 million, and $0.1 million for the fiscal years ended August
31, 2008, 2007, and 2006 and the fair value of options that vested during those
periods totaled $9,375 each year.
14. SALE
OF OPERATIONS IN BRAZIL AND MEXICO
During
the fourth quarter of fiscal 2007 we completed the sales of our wholly-owned
subsidiary located in Brazil and the training operations of our wholly-owned
subsidiary in Mexico. These operations were
sold to
third-party entities that will continue to conduct business in Brazil and Mexico
as licensees and will be required to pay the Company royalties consistent with
other foreign licensees. Since we will continue to participate in the
cash flows of these subsidiaries through royalty payments, which are based
primarily upon the sales recorded by the licensees, and we expect to have
significant continuing involvement in the operations of the licensees, we
determined that the financial results of these subsidiaries should not be
reported as discontinued operations in our consolidated income statements in
accordance with guidance found in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The financial results of these
subsidiaries were previously reported in the international segment of the
Organizational Solutions Business Unit.
The sales
of the Brazil and Mexico subsidiaries were structured such that the net assets
of the subsidiaries were sold at their carrying values plus reimbursement of
severance costs paid in Mexico. The carrying amounts of the assets
and liabilities of our Brazil subsidiary and training operations of Mexico,
which were sold during the quarter ended August 31, 2007 were as follows (in
thousands):
Description
|
|
Brazil
|
|
|
Mexico
|
|
|
Total
|
|
Cash
|
|
$ |
95 |
|
|
$ |
- |
|
|
$ |
95 |
|
Accounts
receivable, net
|
|
|
374 |
|
|
|
210 |
|
|
|
584 |
|
Inventories
|
|
|
155 |
|
|
|
134 |
|
|
|
289 |
|
Other
current assets
|
|
|
220 |
|
|
|
28 |
|
|
|
248 |
|
Property
and equipment, net
|
|
|
365 |
|
|
|
43 |
|
|
|
408 |
|
Other
assets
|
|
|
51 |
|
|
|
375 |
|
|
|
426 |
|
Total
assets sold
|
|
$ |
1,260 |
|
|
$ |
790 |
|
|
$ |
2,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
127 |
|
|
$ |
- |
|
|
$ |
127 |
|
Accrued
liabilities
|
|
|
260 |
|
|
|
- |
|
|
|
260 |
|
Total
liabilities sold
|
|
$ |
387 |
|
|
$ |
- |
|
|
$ |
387 |
|
Certain
assets and liabilities that were previously held for sale in Mexico were
retained by the Company and were reclassified as assets to be held and used at
August 31, 2007. We received promissory notes for the sales prices
totaling $1.5 million, of which $1.2 million was due during fiscal 2008 and was
reported as a component of other current assets at August 31,
2007. Due to the disposition of these subsidiaries, we recorded a
$0.1 million benefit from the cumulative translation adjustment related to
assets and liabilities sold, which was offset by expenses necessary to complete
the transaction. The net costs to complete the sales transactions
resulted in an immaterial loss that was included in consolidated selling,
general and administrative expenses for the year ended August 31,
2007.
In fiscal
2002, we filed legal action against World Marketing Alliance, Inc., a Georgia
corporation (WMA), and World Financial Group, Inc., a Delaware corporation and
purchaser of substantially all assets of WMA, for breach of
contract. The case proceeded to trial and the jury rendered a verdict
in our favor and against WMA on November 1, 2004 for the entire unpaid contract
amount of approximately $1.1 million. In addition to the verdict, we
recovered legal fees totaling $0.3 million and pre- and post-judgment interest
of $0.3 million from WMA. During our fiscal quarter ended May 28,
2005, we received payment in cash from WMA for the total verdict amount,
including legal fees and interest. However, shortly after paying the
verdict amount, WMA appealed the jury decision to the 10th Circuit Court of
Appeals and we recorded receipt of the verdict amount plus legal fees and
interest with a corresponding increase to accrued liabilities and deferred the
gain until the case was finally resolved. On December 30, 2005, the
Company entered into a settlement agreement with WMA. Under the terms
of the settlement agreement, WMA agreed to dismiss its appeal. As a
result of this settlement agreement and dismissal of WMA’s appeal, we recorded a
$0.9 million gain from the legal settlement during fiscal 2006. We
also recorded a $0.3 million reduction in selling, general and, administrative
expenses during fiscal 2006 for recovered legal expenses.
16.
|
EMPLOYEE
BENEFIT PLANS
|
Profit
Sharing Plans
We have
defined contribution profit sharing plans for our employees that qualify under
Section 401(k) of the Internal Revenue Code. These plans provide
retirement benefits for employees meeting minimum age and service
requirements. Qualified participants may contribute up to 75 percent
of their gross wages, subject to certain limitations. These plans
also provide for matching contributions to the participants that are paid by the
Company. The matching contributions, which were expensed as incurred,
totaled $1.5 million, $1.5 million, and $1.3 million during the fiscal years
ended August 31, 2008, 2007, and 2006. The Company does not have any
defined benefit pension plans.
Employee
Stock Purchase Plan
The
Company has an employee stock purchase plan (ESPP) that offers qualified
employees the opportunity to purchase shares of our common stock at a price
equal to 85 percent of the average fair market value of our common stock on the
last trading day of each quarter. A total of 68,702; 55,513; and
32,993 shares were issued under the ESPP during the fiscal years ended August
31, 2008, 2007, and 2006, which had a corresponding cost basis of $0.9 million,
$0.5 million, and $0.2 million, respectively. The Company received
cash proceeds from the ESPP participants totaling $0.4 million, $0.3 million,
and $0.2 million, for fiscal years 2008, 2007, and 2006.
Deferred
Compensation Plan
We have a
non-qualified deferred compensation plan that provided certain key officers and
employees the ability to defer a portion of their compensation until a later
date. Deferred compensation amounts used to pay benefits are held in
a “rabbi trust,” which invests in insurance contracts, various mutual funds, and
shares of the Company’s common stock as directed by the plan
participants. The trust assets, which consist of the investments in
insurance contracts and mutual funds, are recorded in our consolidated balance
sheets because they are subject to the claims of our creditors. The
corresponding deferred compensation liability represents the amounts deferred by
plan participants plus or minus any earnings or losses on the trust
assets. The deferred compensation plan’s assets totaled $0.5 million
and $0.7 million at August 31, 2008 and 2007, while the plan’s liabilities
totaled $0.7 million and $0.9 million at August 31, 2008 and 2007. At
August 31, 2008, the rabbi trust also held shares of our common stock with a
cost basis of $0.5 million. The assets and liabilities of the
deferred compensation plan were recorded in other long-term assets, treasury
stock, additional paid-in capital, and long-term liabilities, as appropriate, in
the accompanying consolidated balance sheets.
We
expensed charges totaling $0.1 million during each of the fiscal years ended
August 31, 2008, 2007, and 2006 related to insurance premiums and external
administration costs for our deferred compensation plan.
Due to
legal changes resulting from the American Jobs Creation Act of 2004, the Company
determined to cease compensation deferrals to this deferred compensation plan
after December 31, 2004. Other than the cessation of compensation
deferrals and the requirement to distribute investments in Company stock with
shares of stock, the plan will continue to operate and make payments to
participants under the same rules as in prior periods.
The
benefit (provision) for income taxes consisted of the following (in
thousands):
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(39 |
) |
|
$ |
(350 |
) |
|
$ |
1,433 |
|
State
|
|
|
(248 |
) |
|
|
(135 |
) |
|
|
(23 |
) |
Foreign
|
|
|
(3,346 |
) |
|
|
(2,318 |
) |
|
|
(1,903 |
) |
|
|
|
(3,633 |
) |
|
|
(2,803 |
) |
|
|
(493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(4,276 |
) |
|
$ |
(4,880 |
) |
|
$ |
(4,380 |
) |
State
|
|
|
(205 |
) |
|
|
(433 |
) |
|
|
(376 |
) |
Foreign
|
|
|
12 |
|
|
|
49 |
|
|
|
(132 |
) |
Change
in valuation allowance
|
|
|
116 |
|
|
|
31 |
|
|
|
20,323 |
|
|
|
|
(4,353 |
) |
|
|
(5,223 |
) |
|
|
15,435 |
|
|
|
$ |
(7,986 |
) |
|
$ |
(8,036 |
) |
|
$ |
14,942 |
|
Income
from operations before income taxes consisted of the following (in
thousands):
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
United
States
|
|
$ |
8,857 |
|
|
$ |
11,914 |
|
|
$ |
10,881 |
|
Foreign
|
|
|
4,977 |
|
|
|
3,751 |
|
|
|
2,750 |
|
|
|
$ |
13,834 |
|
|
$ |
15,665 |
|
|
$ |
13,631 |
|
The
differences between income taxes at the statutory federal income tax rate and
income taxes reported in our consolidated income statements were as
follows:
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Federal
statutory income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State
income taxes, net of federal effect
|
|
|
3.3 |
|
|
|
3.6 |
|
|
|
2.9 |
|
Deferred
tax valuation allowance
|
|
|
- |
|
|
|
- |
|
|
|
(149.1 |
) |
Foreign
jurisdictions tax differential
|
|
|
3.8 |
|
|
|
1.6 |
|
|
|
2.2 |
|
Tax
differential on income subject to both U.S. and foreign
taxes
|
|
|
8.0 |
|
|
|
4.2 |
|
|
|
1.5 |
|
Uncertain
tax positions
|
|
|
(1.5 |
) |
|
|
(0.9 |
) |
|
|
(9.4 |
) |
Tax
on management stock loan interest
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
4.5 |
|
Non-deductible
executive compensation
|
|
|
2.1 |
|
|
|
- |
|
|
|
0.6 |
|
Other
|
|
|
2.0 |
|
|
|
2.8 |
|
|
|
2.2 |
|
|
|
|
57.7 |
% |
|
|
51.3 |
% |
|
|
(109.6 |
)% |
Due to
improved operating performance and the availability of expected future taxable
income, we have concluded that it is more likely than not that the benefits of
deferred income tax assets will be realized. Accordingly, we reversed
the valuation allowances on the majority of our net deferred income tax assets
during the fourth quarter of fiscal 2006 (see further discussion
below).
We paid
significant amounts of withholding tax on foreign royalties during fiscal years
2008, 2007, and 2006. However, no domestic foreign tax credits were
available to offset the foreign withholding taxes during those
years.
Various
uncertain tax positions were resolved during the fiscal years ended August 31,
2008, 2007, and 2006, which resulted in net tax benefits to the
Company. The tax benefit recognized in fiscal 2006 was partially
offset by an assessment paid in a foreign tax jurisdiction.
The
Company accrues taxable interest income on outstanding management common stock
loans (Note 11). Consistent with the accounting treatment for these
loans, the Company is not recognizing interest income for book purposes, thus
resulting in a permanent book versus tax difference.
The
significant components of our deferred tax assets and liabilities were comprised
of the following (in thousands):
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
Sale
and financing of corporate headquarters
|
|
$ |
11,912 |
|
|
$ |
12,078 |
|
Net
operating loss carryforward
|
|
|
7,815 |
|
|
|
9,818 |
|
Investment
in Franklin Covey Products
|
|
|
2,986 |
|
|
|
- |
|
Foreign
income tax credit carryforward
|
|
|
2,159 |
|
|
|
2,246 |
|
Impairment
of investment in Franklin Covey Coaching, LLC
|
|
|
1,701 |
|
|
|
2,249 |
|
Bonus
and other accruals
|
|
|
1,135 |
|
|
|
1,432 |
|
Alternative
minimum tax carryforward
|
|
|
881 |
|
|
|
863 |
|
Inventory
and bad debt reserves
|
|
|
832 |
|
|
|
1,515 |
|
Deferred
compensation
|
|
|
503 |
|
|
|
912 |
|
Sales
returns and contingencies
|
|
|
414 |
|
|
|
468 |
|
Other
|
|
|
559 |
|
|
|
810 |
|
Total
deferred income tax assets
|
|
|
30,897 |
|
|
|
32,391 |
|
Less:
valuation allowance
|
|
|
(2,475 |
) |
|
|
(2,591 |
) |
Net
deferred income tax assets
|
|
|
28,422 |
|
|
|
29,800 |
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
step-ups – definite lived
|
|
|
(11,863 |
) |
|
|
(12,821 |
) |
Intangibles
step-ups – indefinite lived
|
|
|
(8,647 |
) |
|
|
(8,633 |
) |
Property
and equipment depreciation
|
|
|
(7,294 |
) |
|
|
(3,574 |
) |
Intangible
asset impairment and amortization
|
|
|
(2,018 |
) |
|
|
(893 |
) |
Unremitted
earnings of foreign subsidiaries
|
|
|
(586 |
) |
|
|
(630 |
) |
Other
|
|
|
(85 |
) |
|
|
(78 |
) |
Total
deferred income tax liabilities
|
|
|
(30,493 |
) |
|
|
(26,629 |
) |
Net
deferred income taxes
|
|
$ |
(2,071 |
) |
|
$ |
3,171 |
|
Deferred
income tax amounts are recorded as follows in our consolidated balance sheets
(in thousands):
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
2,472 |
|
|
$ |
3,635 |
|
Long-term
assets
|
|
|
29 |
|
|
|
101 |
|
Long-term
liabilities
|
|
|
(4,572 |
) |
|
|
(565 |
) |
Net
deferred income tax asset (liability)
|
|
$ |
(2,071 |
) |
|
$ |
3,171 |
|
A federal
net operating loss of $33.3 million was generated in fiscal
2003. During fiscal years 2005 through 2008, a total of $30.2 million
of the fiscal 2003 loss carryforward was utilized, leaving a remaining loss
carryforward from fiscal 2003 of $3.1 million, which expires on August 31,
2023. The federal net operating loss carryforward generated in fiscal
2004 totaled $20.8 million and expires on August 31, 2024. The total
loss carryforward includes $1.3 million of deductions applicable to additional
paid-in capital that will be credited once all loss carryforward amounts are
utilized.
The state
net operating loss carryforward of $33.3 million generated in fiscal 2003 was
reduced by the utilization of $30.2 million during fiscal years 2005 through
2008 for a net carryforward amount of $3.1 million, which primarily expires
between August 31, 2008 and August 31, 2018. The state net operating
loss carryforward of $20.8 million generated in fiscal 2004 primarily expires
between August 31, 2008 and August 31, 2019.
The
amount of federal and state net operating loss carryforwards remaining at August
31, 2008 and deductible against future years’ taxable income are subject to
limitations imposed by Section 382 of the Internal Revenue Code and similar
state statutes. Under Section 382, we estimate that deductible losses
will be limited to $22.3 million for fiscal 2009 and $9.5 million per year in
subsequent years, not to exceed the remaining loss carryforward amounts as of
the beginning of each year.
Our
foreign income tax credit carryforward of $2.2 million that was generated during
fiscal 2002 expires on August 31, 2012.
Valuation
Allowance on Deferred Tax Assets
Our
deferred income tax asset valuation allowance decreased by $35.6 million during
fiscal 2006. In connection with the reduction in our valuation
allowance, we removed $15.2 million in deferred income tax assets and the
corresponding valuation allowance on the management common stock loans, given
the change in the accounting treatment of the management stock loan program
(Note 11). The remaining reduction in our deferred income tax asset
valuation allowance resulted in a tax benefit of $20.4 million in fiscal
2006. Because of the accounting treatment of the management stock
loans, if any tax benefit is eventually realized on these loans it will be
recorded as an increase to additional paid-in capital, rather than reducing our
income tax expense.
We
concluded that the realization of our U.S. domestic deferred tax assets, except
for foreign tax credit carryforwards, was more likely than not at August 31,
2006. Before August 31, 2006, we were precluded from reversing
valuation allowances on our deferred tax assets, because we had a cumulative
U.S. domestic pre-tax loss for the preceding three years. However, as
of August 31, 2006, we had positive cumulative U.S. pre-tax income for the
preceding three years, thus allowing us to consider reversing valuation
allowances on our deferred tax assets.
We
determined that projected future taxable income at the budget, more likely than
not, and probable levels would be more than adequate to allow for realization of
all U.S. domestic deferred tax assets, except for those related to foreign tax
credits. We considered sources of taxable income described in SFAS
No. 109, paragraph 21, including future reversals of taxable temporary
differences, future taxable income exclusive of reversing temporary differences
and carryforwards, and reasonable, practical tax-planning strategies to generate
additional taxable income. We also noted that the Company had nearly
met or had exceeded budgeted financial targets for the past two years and that
Company leaders had worked extensively and successfully on developing a formal
business model, allowing for more reliable budgeting, better fiscal discipline,
and more timely ability to identify and resolve problems.
Based on
the factors described above, we concluded that realization of our domestic
deferred tax assets, except for foreign tax credit carryforwards, was more
likely than not at August 31, 2006. Accordingly, we reversed
valuation allowances on the applicable deferred tax assets. Since
fiscal 2006, we have
continued
to be profitable, and we have utilized a significant portion of the deferred
income tax assets existing at August 31, 2006, particularly net operating loss
carryforwards.
To
realize the benefit of our deferred income tax assets, we must generate total
taxable income of approximately $77 million over the next 19
years. Taxable income of approximately $60 million results from the
reversal of temporary taxable differences. The remaining taxable
income of approximately $17 million must be generated by the operations of the
Company. The table below presents the pre-tax book income,
significant book versus tax differences, and taxable income for the years ended
August 31, 2008, 2007, and 2006 (in thousands).
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
pre-tax book income
|
|
$ |
8,857 |
|
|
$ |
11,914 |
|
|
$ |
10,881 |
|
Deferred
taxable loss on sale of assets to Franklin Covey Products
|
|
|
5,203 |
|
|
|
- |
|
|
|
- |
|
Deferred
gain for book purposes on sale of assets to Franklin Covey
Products
|
|
|
2,755 |
|
|
|
- |
|
|
|
- |
|
Interest
on management common stock loans
|
|
|
1,968 |
|
|
|
2,243 |
|
|
|
1,771 |
|
Property
and equipment depreciation and dispositions
|
|
|
(10,459 |
) |
|
|
1,170 |
|
|
|
(3,114 |
) |
Amortization/write-off
of intangible assets
|
|
|
(2,028 |
) |
|
|
(2,814 |
) |
|
|
(1,944 |
) |
Changes
in accrued liabilities
|
|
|
(2,373 |
) |
|
|
(1,217 |
) |
|
|
(4,096 |
) |
Share-based
compensation
|
|
|
(1,144 |
) |
|
|
933 |
|
|
|
599 |
|
Other
book versus tax differences
|
|
|
(541 |
) |
|
|
(468 |
) |
|
|
(1,297 |
) |
|
|
$ |
2,238 |
|
|
$ |
11,761 |
|
|
$ |
2,800 |
|
Adoption
of FIN 48
In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109. This
interpretation addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under the provisions of FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement. Interpretation No. 48 also
provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting for income taxes in interim periods, and requires
increased disclosure of various income tax items.
We
adopted the provisions of FIN 48 on September 1, 2007 and the implementation of
FIN 48 did not result in a material change to our previous liability for
unrecognized tax benefits. A reconciliation of the beginning and
ending amount of gross unrecognized tax benefits is as follows (in
thousands):
Description
|
|
|
|
Balance
at September 1, 2007
|
|
$ |
4,349 |
|
Additions
based on tax positions related to fiscal 2008
|
|
|
267 |
|
Additions
for tax positions in prior years
|
|
|
31 |
|
Reductions
for tax positions of prior years resulting from the lapse of applicable
statute of limitations
|
|
|
(292 |
) |
Other
reductions for tax positions of prior years
|
|
|
(123 |
) |
Balance
at August 31, 2008
|
|
$ |
4,232 |
|
The total
amount of unrecognized tax benefits that, if recognized, would affect the
effective tax rate is $3.0 million. Included in the ending balance of
gross unrecognized tax benefits is $3.1 million related to individual states’
net operating loss carryforwards. Interest and penalties related to
uncertain tax positions are recognized as components of income tax
expense. The net accruals and reversals of interest and penalties
reduced income tax expense by a total of $0.1 million during fiscal
2008. The balance of interest and penalties included on the balance
sheet at August 31, 2008 is $0.1 million. The Company does not expect
significant increases or decreases in unrecognized tax benefits during the next
12 months.
We file
United States federal income tax returns as well as income tax returns in
various states and foreign jurisdictions. The tax years that remain
subject to examinations for the Company’s major tax jurisdictions are shown
below. Additionally, any net operating losses that were generated in
prior years and utilized in these years may be subject to
examination.
2001-2008
|
Canada
|
2003-2008
|
Japan,
United Kingdom
|
2004-2008
|
United
States – state and local income tax
|
2005-2008
|
United
States – federal income tax
|
Basic
earnings or loss per 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. Due to modifications to our management stock loan
program (Note 11), we determined that the shares of management stock loan
participants that were placed in the escrow account are participating securities
as defined by EITF Issue No. 03-6, Participating Securities and the
Two-Class Method under FASB Statement No. 128, because they continue to
have equivalent common stock dividend rights. Accordingly, these
management stock loan shares are included in our basic EPS calculation during
periods of net income and excluded from the basic EPS calculation in periods of
net loss.
The
following table presents the computation of our EPS for the periods indicated
(in thousands, except per share amounts):
YEAR
ENDED
AUGUST
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$ |
5,848 |
|
|
$ |
7,629 |
|
|
$ |
28,573 |
|
Preferred
stock dividends
|
|
|
- |
|
|
|
(2,215 |
) |
|
|
(4,385 |
) |
Net
income available to common shareholders
|
|
$ |
5,848 |
|
|
$ |
5,414 |
|
|
$ |
24,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – Basic
|
|
|
19,577 |
|
|
|
19,593 |
|
|
|
20,134 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
10 |
|
|
|
29 |
|
|
|
52 |
|
Unvested
stock awards
|
|
|
213 |
|
|
|
266 |
|
|
|
281 |
|
Common
stock warrants(1)
|
|
|
122 |
|
|
|
- |
|
|
|
49 |
|
Weighted
average common shares outstanding – Diluted
|
|
|
19,922 |
|
|
|
19,888 |
|
|
|
20,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$ |
.30 |
|
|
$ |
.28 |
|
|
$ |
1.20 |
|
Diluted
EPS
|
|
$ |
.29 |
|
|
$ |
.27 |
|
|
$ |
1.18 |
|
|
(1)
|
For
the fiscal year ended August 31, 2007, the conversion of 6.2 million
common stock warrants is not assumed because such conversion would be
anti-dilutive.
|
At August
31, 2008, 2007, and 2006, we had 1.8 million, 1.9 million, and 2.0 million stock
options outstanding (Note 13) that were not included in the calculation of
diluted weighted average shares outstanding for those periods because the
options’ exercise prices were greater than the average market price of our
common stock. We also have 6.2 million common stock warrants
outstanding that have an exercise price of $8.00 per share (Note
10). These warrants, which expire in March 2013, and the
out-of-the-money stock options described above will have a more pronounced
dilutive impact on our EPS calculation in future periods if the market price of
our common stock increases.
Reportable
Segments
During
the majority of fiscal 2008 we had two segments: the Organizational
Solutions Business Unit (OSBU) and the Consumer Solutions Business Unit
(CSBU). However, during the fourth quarter of fiscal 2008, we
completed the sale of substantially all of the assets of the CSBU (Note 2),
which reduced amounts reported by that segment in fiscal 2008. The
following is a description of these segments, their primary operating
components, and their significant business activities during the periods
reported:
Organizational
Solutions Business Unit – The OSBU is primarily responsible for the
development, marketing, sale, and delivery of strategic execution, productivity,
leadership, sales force performance, and communication training and consulting
solutions directly to organizational clients, including other companies, the
government, and educational institutions. The OSBU includes the
financial results of our domestic sales force, public programs, and certain
international operations. The domestic sales force is responsible for
the sale and delivery of our training and consulting services in the United
States. Our international sales group includes the financial results
of our directly owned foreign offices and royalty revenues from
licensees.
Consumer
Solutions Business Unit – This business unit was primarily focused on
sales to individual customers and small business organizations and included the
results of our domestic retail stores, consumer direct operations (primarily
Internet sales and call center), wholesale operations, international product
channels in certain countries, and other related distribution channels,
including government product sales and domestic printing and publishing
sales. The CSBU results of operations also included the financial
results of our paper planner manufacturing operations. Although CSBU
sales primarily consisted of products such as planners, binders, software,
totes, and related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may have been purchased through
the CSBU channels.
The
Company’s chief operating decision maker is the Chief Executive Officer and the
primary measurement tool used in our business unit performance analysis is
earnings before interest, taxes, depreciation, and amortization (EBITDA), which
may not be calculated as similarly titled amounts calculated by other
companies. For segment reporting purposes, our consolidated EBITDA
can be calculated as income from operations excluding depreciation expense,
amortization expense, the gain from the sale of CSBU assets, and the gain from
the sale of our manufacturing facility in fiscal 2007. The fiscal
2008 restructuring charge, which totaled $2.1 million, was allocated $1.1
million to OSBU domestic and $1.0 million to OSBU international. The
$1.5 million asset impairment was attributed to OSBU domestic financial results
in the following segment information.
In the
normal course of business, the Company may make structural and cost allocation
revisions to our segment information to reflect new reporting responsibilities
within the organization. During fiscal 2008, we transferred our
public programs operations from CSBU to OSBU and made other less significant
organizational changes. All prior period segment information has been
revised to conform to the most recent classifications and organizational
changes. We account for our segment information on the same basis as
the accompanying consolidated financial statements.
SEGMENT
INFORMATION