FRANKLIN COVEY CO
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark One)
|
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended November 28, 2009
|
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from __________ to __________
Commission
file no. 1-11107
FRANKLIN
COVEY CO.
(Exact
name of registrant as specified in its charter)
|
Utah
(State
of incorporation)
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87-0401551
(I.R.S.
employer identification number)
|
|
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2200
West Parkway Boulevard
Salt
Lake City, Utah
(Address
of principal executive offices)
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84119-2099
(Zip
Code)
|
|
|
Registrant’s
telephone number,
Including
area code
|
(801)
817-1776
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such, shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past
90
days. Yes
T
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
£
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
|
Large
accelerated filer
|
£
|
Accelerated
filer
|
T
|
Non-accelerated
filer
|
£
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
£
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
£
No
T
Indicate
the number of shares outstanding of each of the issuer’s classes of Common Stock
as of the latest practicable date:
16,888,727
shares of Common Stock as of January 2, 2010
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in
thousands, except per share amounts)
|
November
28,
2009
|
August
31,
2009
|
|||||||
|
(unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,148 | $ | 1,688 | ||||
|
Accounts
receivable, less allowance for doubtful accounts of $900 and
$879
|
24,503 | 22,877 | ||||||
|
Inventories
|
6,595 | 6,770 | ||||||
|
Deferred
income taxes
|
2,617 | 2,551 | ||||||
|
Income
taxes receivable
|
246 | 508 | ||||||
|
Prepaid
expenses and other assets
|
8,581 | 5,748 | ||||||
|
Total
current assets
|
43,690 | 40,142 | ||||||
|
Property
and equipment, net
|
21,857 | 22,629 | ||||||
|
Intangible
assets, net
|
68,037 | 68,994 | ||||||
|
Goodwill
|
505 | 505 | ||||||
|
Other
assets
|
10,587 | 11,608 | ||||||
| $ | 144,676 | $ | 143,878 | |||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of financing obligation
|
$ | 648 | $ | 621 | ||||
|
Line
of credit
|
11,162 | 12,949 | ||||||
|
Accounts
payable
|
8,656 | 8,758 | ||||||
|
Accrued
liabilities
|
22,606 | 20,976 | ||||||
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Total
current liabilities
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43,072 | 43,304 | ||||||
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Financing
obligation, less current portion
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30,922 | 31,098 | ||||||
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Other
liabilities
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545 | 472 | ||||||
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Total
liabilities
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74,539 | 74,874 | ||||||
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Shareholders’
equity:
|
||||||||
|
Common stock – $0.05 par value;
40,000 shares authorized, 27,056 shares issued and
outstanding
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1,353 | 1,353 | ||||||
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Additional paid-in
capital
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183,436 | 183,436 | ||||||
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Common stock
warrants
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7,597 | 7,597 | ||||||
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Retained earnings
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14,228 | 13,980 | ||||||
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Accumulated other comprehensive
income
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2,660 | 1,961 | ||||||
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Treasury stock at cost, 10,065
and 10,080 shares
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(139,137 | ) | (139,323 | ) | ||||
|
Total shareholders’
equity
|
70,137 | 69,004 | ||||||
| $ | 144,676 | $ | 143,878 | |||||
See notes
to condensed consolidated financial statements.
2
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
Quarter
Ended
|
||||||||
|
November
28,
2009
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November
29,
2008
|
|||||||
|
(unaudited)
|
||||||||
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Net
sales:
|
||||||||
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Training and consulting
services
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$ | 30,257 | $ | 30,481 | ||||
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Products
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2,846 | 3,681 | ||||||
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Leasing
|
798 | 919 | ||||||
| 33,901 | 35,081 | |||||||
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Cost
of sales:
|
||||||||
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Training and consulting
services
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10,381 | 11,023 | ||||||
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Products
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1,612 | 1,886 | ||||||
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Leasing
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394 | 475 | ||||||
| 12,387 | 13,384 | |||||||
|
Gross profit
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21,514 | 21,697 | ||||||
|
Selling,
general, and administrative
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17,694 | 20,610 | ||||||
|
Depreciation
|
974 | 903 | ||||||
|
Amortization
|
962 | 902 | ||||||
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Income (loss) from
operations
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1,884 | (718 | ) | |||||
|
Interest
income
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3 | 53 | ||||||
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Interest
expense
|
(718 | ) | (828 | ) | ||||
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Income (loss) before income
taxes
|
1,169 | (1,493 | ) | |||||
|
Income
tax benefit (provision)
|
(921 | ) | 924 | |||||
|
Net income
(loss)
|
$ | 248 | $ | (569 | ) | |||
|
Net
income (loss) per share:
|
||||||||
|
Basic
|
$ | .01 | $ | (.04 | ) | |||
|
Diluted
|
$ | .01 | $ | (.04 | ) | |||
|
Weighted
average number of common shares:
|
||||||||
|
Basic
|
16,958 | 13,378 | ||||||
|
Diluted
|
17,050 | 13,378 | ||||||
See notes
to condensed consolidated financial statements.
3
FRANKLIN COVEY
CO.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Quarter
Ended
|
||||||||
|
November
28,
2009
|
November
29,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income (loss)
|
$ | 248 | $ | (569 | ) | |||
|
Adjustments to reconcile net
income (loss) to net cash provided by (used for) operating
activities:
|
||||||||
|
Depreciation
and amortization
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1,936 | 1,813 | ||||||
|
Amortization
of capitalized curriculum costs
|
585 | 593 | ||||||
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Deferred
income taxes
|
493 | (499 | ) | |||||
|
Share-based
compensation expense
|
135 | 70 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Decrease
(increase) in accounts receivable, net
|
(1,302 | ) | 944 | |||||
|
Decrease
in inventories
|
463 | 670 | ||||||
|
Decrease
(increase) in other assets
|
(2,582 | ) | 1,347 | |||||
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Increase
(decrease) in accounts payable and accrued liabilities
|
1,325 | (3,975 | ) | |||||
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Increase
(decrease) in other long-term liabilities
|
61 | (191 | ) | |||||
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Increase
(decrease) in income taxes payable/receivable
|
261 | (1,885 | ) | |||||
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Net
cash provided by (used for) operating activities
|
1,623 | (1,682 | ) | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of property and equipment
|
(129 | ) | (585 | ) | ||||
|
Curriculum
development costs
|
(86 | ) | (412 | ) | ||||
|
Net
cash used for investing activities
|
(215 | ) | (997 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from line of credit borrowing
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13,066 | 33,337 | ||||||
|
Payments
on line of credit borrowing
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(14,853 | ) | (14,562 | ) | ||||
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Principal
payments on financing obligation
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(157 | ) | (165 | ) | ||||
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Proceeds
from sales of common stock from treasury
|
62 | 115 | ||||||
|
Purchase
of treasury shares
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(10 | ) | (28,222 | ) | ||||
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Net
cash used for financing activities
|
(1,892 | ) | (9,497 | ) | ||||
|
Effect
of foreign exchange rates on cash and cash equivalents
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(56 | ) | (238 | ) | ||||
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Net
decrease in cash and cash equivalents
|
(540 | ) | (12,414 | ) | ||||
|
Cash
and cash equivalents at beginning of the period
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1,688 | 15,904 | ||||||
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Cash
and cash equivalents at end of the period
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$ | 1,148 | $ | 3,490 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$ | 710 | $ | 784 | ||||
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Cash
paid for income taxes, net of cash received
|
168 | 1,559 | ||||||
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Non-cash
investing and financing activities:
|
||||||||
|
Acquisition
of property and equipment through accounts payable
|
$ | 99 | $ | 759 | ||||
See notes
to condensed consolidated financial statements.
4
FRANKLIN COVEY
CO.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Franklin
Covey Co. (hereafter referred to as us, we, our, or the Company) is a leading
global provider of execution, leadership, and personal-effectiveness
training. We operate globally with one common brand and business
model designed to enable us to provide clients around the world with the same
high level of service. To achieve this level of service, we operate
four regional sales offices in the United States; wholly owned subsidiaries in
Australia, Japan, and the United Kingdom; and contract with licensee partners
who deliver our curriculum and provide services in over 150 other countries and
territories around the world. Our business-to-business service builds
on our expertise in training, consulting, and technology that is designed to
help our clients define great performance and execute at the highest
levels. We also help clients accelerate great performance through
education in management skills, relationship skills, and individual
effectiveness, and can provide personal-effectiveness literature and electronic
educational solutions to our clients as needed. Our services and
products are available through professional consulting services, public
workshops, and the Internet at
www.franklincovey.com
,
and our best-known offerings in the marketplace include a suite of
individual-effectiveness and leadership-development training products based on
the best-selling book,
The 7
Habits of Highly Effective People
.
The
accompanying unaudited condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position and results of
operations of the Company as of the dates and for the periods
indicated. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules
and regulations. The information included in this quarterly report on
Form 10-Q should be read in conjunction with the consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the
fiscal year ended August 31, 2009.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
The
Company utilizes a modified 52/53-week fiscal year that ends on August 31 of
each year. Corresponding quarterly periods generally consist of
13-week periods that will end on November 28, 2009, February 27, 2010, and May
29, 2010 during fiscal 2010. Under the modified 52/53-week fiscal
year, the quarter ended November 28, 2009 had one less business day than the
quarter ended November 29, 2008. Unless otherwise noted, references
to fiscal years apply to the 12 months ended August 31 of the specified
year.
The
results of operations for the quarter ended November 28, 2009 are not
necessarily indicative of results expected for the entire fiscal year ending
August 31, 2010, or for any future periods.
Subsequent
events have been evaluated through January 7, 2010, the date of issuance of our
unaudited condensed consolidated financial statements.
5
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method, and were comprised of the following (in
thousands):
|
November
28,
2009
|
August
31,
2009
|
|||||||
|
Finished
goods
|
$ | 6,301 | $ | 6,542 | ||||
|
Raw
materials
|
294 | 228 | ||||||
| $ | 6,595 | $ | 6,770 | |||||
Line
of Credit
We have a
revolving line of credit facility, as amended, that provides $13.5 million of
available borrowing capacity (the Line of Credit). The Line of Credit
expires on March 14, 2010, and we may draw on the credit facility, repay, and
draw again, on a revolving basis, up to the maximum loan amount available so
long as no event of default has occurred and is continuing. We may
use the Line of Credit for general corporate purposes as well as for other
transactions, unless specifically prohibited by the terms of the Line of
Credit. The Line of Credit also contains customary representations
and guarantees as well as provisions for repayment and liens. We are
currently in negotiations with our lender on the Line of Credit to renew or
extend the Line of Credit. We believe that we will be successful in
obtaining a new or extended line of credit from our current lender during our
second quarter of fiscal 2010.
In
addition to customary non-financial terms and conditions, our line of credit
requires us to be in compliance with specified financial covenants, including:
(i) a funded debt-to-earnings ratio; (ii) a fixed charge coverage ratio; (iii) a
limitation on annual capital expenditures; and (iv) a defined amount of minimum
net worth. In the event of noncompliance with these financial
covenants and other defined events of default, the lenders are entitled to
certain remedies, including acceleration of the repayment of amounts outstanding
on the line of credit. Based on our forecasts for fiscal 2010, we
identified the risk of non-compliance with certain of the financial covenants
required by our line of credit facility for the quarterly measurement periods
ending November 28, 2009 and February 27, 2010. In order to address
the risk of non-compliance, we obtained a modification to the Line of Credit
(the Third Modification Agreement) in November 2009. The Third
Modification Agreement relaxed the funded debt to earnings ratio and fixed
charge coverage ratio and increased the effective interest rate from LIBOR plus
2.0 percent to LIBOR plus 3.5 percent (3.7 percent at November 28,
2009). We believe that we were in compliance with the financial
covenants of the line of credit for the quarter ended November 28,
2009.
Liquidity
At
November 28, 2009 our line of credit has a remaining maturity of less than one
year and is therefore classified as a current obligation on our consolidated
balance sheet. We are currently in negotiations to renew the line of
credit to ensure the future availability of liquidity through this
facility. We believe that we will be successful in obtaining a new or
extended line of credit from our lender. Additional potential sources
of liquidity include factoring receivables, issuance of additional equity, or
issuance of debt from public or private sources. However, no
assurance can be provided that we will obtain a new or extended line of credit
or obtain additional financing from other sources on terms that would be
acceptable to us. If necessary, we will evaluate all of these options
and select one or more of them depending on overall capital needs and the
associated cost of capital. If we are unsuccessful in obtaining a
renewal or extension of our line of credit, or additional financing, we believe
that cash flows from operations combined with a number of initiatives we would
implement in the months preceding the due date will create sufficient liquidity
to pay down the required outstanding balance on the line of
credit. These initiatives include deferral of
6
capital
purchases for externally developed curriculum and uncommitted capital
expenditures; deferral of executive team compensation; deferral of certain
related party contractual royalties and earnout payments; substantial reduction
of associate salaries; reduction of operating expenses, including non-critical
travel; and deferral of payments to other vendors in order to generate
sufficient cash.
According
to the terms of the agreements associated with the sale of the Consumer
Solutions Business Unit assets that closed in the fourth quarter of fiscal 2008,
we assigned the benefits and obligations relating to the leases of most of our
retail stores to Franklin Covey Products, an entity in which we own
approximately 19 percent. However, we are still required to fulfill
the obligations contained in the lease agreements, including making lease
payments, if Franklin Covey Products is unable to fulfill its obligations
pursuant to the terms of the lease agreements. Any default by
Franklin Covey Products in its lease payment obligations could provide us with
certain remedies against Franklin Covey Products, including potentially allowing
us to terminate the Master License Agreement. If Franklin Covey
Products is unable to satisfy the obligations contained in the lease agreements
and we are unable to obtain adequate remedies, our results of operations and
cash flows may be adversely affected.
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. The compensation cost of our share-based compensation plans
was included in selling, general, and administrative expenses in the
accompanying condensed consolidated statements of operations and no
share-based compensation was capitalized during the quarter ended November 28,
2009. We generally issue shares of common stock for our share-based
compensation plans from shares held in treasury. The following is a
description of recent developments in our share-based compensation
plans.
Unvested
Stock Awards
The fair
value of our unvested stock awards is calculated based on the number of shares
issued and the closing market price of our common stock on the date of the
grant. The corresponding compensation cost of unvested stock awards
is amortized to selling, general, and administrative expense on a straight-line
basis over the vesting period of the award, which generally ranges from one to
three years.
We have a
non-employee directors’ stock incentive plan (the Directors’ Plan) that is
designed to provide our non-employee directors, 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 provides an annual whole-share grant equal
to $40,000 with one year vesting terms. The grant date of these
awards is generally the date of each Annual Shareholders’
Meeting. The 2010 Annual Shareholders’ Meeting is scheduled during
the quarter ending February 27, 2010.
The
following information applies to our unvested stock awards at November 28,
2009:
|
Number
of Shares
|
Weighted-Average
Grant-Date Fair Value Per Share
|
|||||||
|
Unvested
stock awards at August 31, 2009
|
133,612 | $ | 6.28 | |||||
|
Granted
|
- | - | ||||||
|
Forfeited
|
- | - | ||||||
|
Vested
|
- | - | ||||||
|
Unvested
stock awards at November 28, 2009
|
133,612 | $ | 6.28 | |||||
Employee
Stock Purchase Plan
We have
an employee stock purchase plan that offers qualified employees the opportunity
to purchase shares of our common stock at a price equal to 85 percent of the
average fair market value of our common stock on the last trading day of the
calendar month in each fiscal quarter. During the quarter ended
November 28, 2009, a total of 12,710 shares were issued to participants in the
ESPP.
7
Stock
Options
We have
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 our common stock on the date of grant. The term, not
to exceed ten years, and exercise period of each incentive stock option awarded
under the plan are determined by the Compensation Committee of our Board of
Directors. Information related to our stock option activity during
the quarter ended November 28, 2009 is presented below:
|
Number
of Stock Options
|
Weighted
Avg. Exercise Price Per Share
|
|||||||
|
Outstanding
at August 31, 2009
|
1,762,000 | $ | 13.37 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Forfeited
|
(25,000 | ) | 7.75 | |||||
|
Outstanding
at
November 28, 2009
|
1,737,000 | $ | 13.45 | |||||
|
Options
vested and exercisable at November 28, 2009
|
1,737,000 | $ | 13.45 | |||||
In order
to determine our quarterly provision for income taxes, we use an estimated
annual effective tax rate, which is based on expected annual income and
statutory tax rates in the various jurisdictions in which we
operate. Certain significant or unusual items are separately
recognized in the quarter during which they occur and can be a source of
variability in the effective tax rates from quarter to quarter.
Our
effective tax rate for the quarter ended November 28, 2009 of approximately 79
percent was significantly higher than statutory combined rates primarily due to
foreign withholding taxes for which we cannot utilize a foreign tax credit, the
accrual of taxable interest income on the management stock loan program, and
deemed dividends from foreign subsidiaries for which we also cannot utilize
foreign tax credits. We anticipate that these items will add
approximately $2.0 million to our income tax provision during fiscal
2010. However, due to the utilization of net operating loss
carryforwards, our income tax expense is not indicative of the cash paid for
income taxes.
As a
result of the lapse of applicable statutes of limitations, during the next 12
months we expect a decrease of approximately $0.5 million in unrecognized tax
benefits primarily related to international transactions.
Comprehensive
income (loss) is based on net income (loss) and includes charges and credits to
equity accounts that are not the result of transactions with
shareholders. Our comprehensive income (loss) was calculated as
follows for the periods indicated (in thousands):
8
|
Quarter
Ended
|
||||||||
|
November
28,
2009
|
November
29,
2008
|
|||||||
|
Net
income (loss)
|
$ | 248 | $ | (569 | ) | |||
|
Other
comprehensive income items net of tax:
|
||||||||
|
Foreign
currency translation adjustments
|
699 | 95 | ||||||
|
Comprehensive
income (loss)
|
$ | 947 | $ | (474 | ) | |||
Basic
earnings per common share (EPS) is calculated by dividing net income (loss) by
the weighted-average number of common shares outstanding for the
period. Diluted EPS is calculated by dividing net income (loss) by
the weighted-average number of common shares outstanding plus the assumed
exercise of all dilutive securities using the treasury stock method or the “as
converted” method, as appropriate. Due to modifications to our
management stock loan program, we determined that the shares of management stock
loan participants that were placed in the escrow account are participating
securities 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. Our unvested share
awards also participate in common stock dividends on the same basis as
outstanding shares of common stock. However, the impact of these
shares was immaterial on the calculation of our EPS for the quarter ended
November 28, 2009 and was not considered during the prior year because of the
reported net loss for that period since these awards do not participate in our
losses.
The
following table presents the computation of our EPS for the periods indicated
(in thousands, except per share amounts):
|
Quarter
Ended
|
||||||||
|
November
28,
2009
|
November
29,
2008
|
|||||||
|
Numerator
for basic and diluted earnings per share:
|
||||||||
|
Net
income (loss)
|
$ | 248 | $ | (569 | ) | |||
|
Denominator
for basic and diluted earnings per share:
|
||||||||
|
Basic
weighted average shares outstanding
(1)
|
16,958 | 13,378 | ||||||
|
Effect
of dilutive securities:
|
||||||||
|
Stock
options and other share-based awards
|
92 | - | ||||||
|
Common
stock warrants
(2)
|
- | - | ||||||
|
Diluted
weighted average shares outstanding
|
17,050 | 13,378 | ||||||
|
Basic
and diluted EPS:
|
||||||||
|
Basic
EPS
|
$ | .01 | $ | (.04 | ) | |||
|
Diluted
EPS
|
$ | .01 | $ | (.04 | ) | |||
|
|
(1)
|
Since
we recognized net income for the quarter ended November 28, 2009, basic
weighted average shares for that period includes 3.5 million shares of
common stock held by management stock loan participants that were placed
in escrow. These shares were excluded from basic
weighted-average shares for the quarter ended November 29,
2008.
|
|
|
(2)
|
For
the quarters ended November 28, 2009 and November 29, 2008, the conversion
of 6.2 million common stock warrants is not assumed because such
conversion would be anti-dilutive.
|
9
At
November 28, 2009 and November 29, 2008, we had approximately 1.7 million and
2.0 million stock options outstanding, which were not included in the
computation of diluted EPS because the options’ exercise prices were greater
than the average market price of our common shares for the respective
periods. Although these shares were not included in our calculation
of diluted EPS, these stock options and our common stock warrants may have a
dilutive effect on our EPS calculation in future periods if the price of our
common stock increases.
Our sales
are primarily comprised of training and consulting sales and related
products. Based on the consistent nature of our services and products
and the types of customers for these services, we function as a single operating
segment. However, to improve comparability with previous periods,
operating information for our domestic, international, and corporate services
divisions is presented below. Our domestic operations are responsible
for the sale and delivery of our training and consulting services in the United
States and Canada. Our international sales group includes the
financial results of our directly owned foreign offices and royalty revenues
from licensees. Our corporate services information includes leasing
income and certain corporate operating expenses.
The
Company’s chief operating decision maker is the Chief Executive Officer (CEO),
and the primary measurement tool used in business unit performance analysis is
earnings before interest, taxes, depreciation, and amortization (EBITDA), which
may not be calculated as similarly titled amounts calculated by other
companies. For segment reporting purposes, our consolidated EBITDA
can be calculated as our income from operations excluding depreciation and
amortization charges.
In the
normal course of business, we may make structural and cost allocation revisions
to our segment information to reflect new reporting responsibilities within the
organization. There were no significant organizational or structural
changes during the quarter ended November 28, 2009, and 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 condensed consolidated financial
statements.
ENTERPRISE
INFORMATION
|
(in
thousands)
|
||||||||||||||||||||
|
Quarter
Ended
November
28, 2009
|
Sales
to External Customers
|
Gross
Profit
|
EBITDA
|
Depreciation
|
Amortization
|
|||||||||||||||
|
Domestic
|
$ | 21,775 | $ | 13,010 | $ | 1,878 | $ | 458 | $ | 958 | ||||||||||
|
International
|
11,328 | 8,101 | 3,559 | 96 | 4 | |||||||||||||||
|
Total
|
33,103 | 21,111 | 5,437 | 554 | 962 | |||||||||||||||
|
Corporate
and eliminations
|
798 | 403 | (1,617 | ) | 420 | - | ||||||||||||||
|
Consolidated
|
$ | 33,901 | $ | 21,514 | $ | 3,820 | $ | 974 | $ | 962 | ||||||||||
|
Quarter
Ended
November
29, 2008
|
||||||||||||||||||||
|
Domestic
|
$ | 20,726 | $ | 11,754 | $ | (2,081 | ) | $ | 291 | $ | 899 | |||||||||
|
International
|
13,436 | 9,499 | 4,407 | 96 | 3 | |||||||||||||||
|
Total
|
34,162 | 21,253 | 2,326 | 387 | 902 | |||||||||||||||
|
Corporate
and eliminations
|
919 | 444 | (1,239 | ) | 516 | - | ||||||||||||||
|
Consolidated
|
$ | 35,081 | $ | 21,697 | $ | 1,087 | $ | 903 | $ | 902 | ||||||||||
10
A
reconciliation of our domestic and international EBITDA to consolidated income
(loss) before taxes is provided below (in thousands):
|
Quarter
Ended
|
||||||||
|
November
28,
2009
|
November
29,
2008
|
|||||||
|
Domestic
and international EBITDA
|
$ | 5,437 | $ | 2,326 | ||||
|
Corporate
expenses
|
(1,617 | ) | (1,239 | ) | ||||
|
Consolidated
EBITDA
|
3,820 | 1,087 | ||||||
|
Depreciation
|
(974 | ) | (903 | ) | ||||
|
Amortization
|
(962 | ) | (902 | ) | ||||
|
Income
(loss) from operations
|
1,884 | (718 | ) | |||||
|
Interest
income
|
3 | 53 | ||||||
|
Interest
expense
|
(718 | ) | (828 | ) | ||||
|
Income
(loss) before taxes
|
$ | 1,169 | $ | (1,493 | ) | |||
Subsequent
to November 28, 2009, we obtained an unsecured, short-term loan from a bank in
Japan for 100 million yen (approximately $1.1 million at December 31,
2009). The loan is due on May 31, 2010 and bears interest at 2.5
percent for the duration of the loan. The loan proceeds are available
for general corporate purposes and the loan does not contain any financial
covenants.
11
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Management’s
discussion and analysis contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These
statements are based upon management’s current expectations and are subject to
various uncertainties and changes in circumstances. Important factors
that could cause actual results to differ materially from those described in
forward-looking statements are set forth below under the heading “Safe Harbor
Statement Under the Private Securities Litigation Reform Act of
1995.”
We
suggest that the following discussion and analysis be read in conjunction with
the Consolidated Financial Statements and Management’s Discussion and Analysis
of Financial Condition and Results of Operations included in our Annual Report
on Form 10-K for the year ended August 31, 2009.
RESULTS
OF OPERATIONS
Overview
Our first
fiscal quarter includes the months of September, October, and
November. Primarily due to improved domestic sales and significant
reductions in our selling, general, and administrative expenses, we realized
significant improvements in our operating results during the first quarter of
fiscal 2010 compared to the same period of fiscal 2009. For our first
quarter of fiscal 2010, which ended on November 28, 2009, we recognized income
from operations totaling $1.9 million compared to a loss of $0.7 million in the
first quarter of fiscal 2009. Our pre-tax income also improved to
$1.2 million compared to a loss of $1.5 million in the prior
year. Our net income was $0.2 million compared to a net loss of $0.6
million in the first quarter of fiscal 2009.
The
primary factors that influenced our operating results for the quarter ended
November 28, 2009 were as follows:
|
·
|
Sales
–
Our consolidated
sales declined $1.2 million to $33.9 million compared to $35.1 million in
the first quarter of fiscal 2009. Although our consolidated
sales decreased during the period, we were encouraged by sales growth
through our domestic delivery channels and practices during the
quarter. The decrease in our consolidated sales was
attributable to decreased international sales, which were primarily due to
decreased sales in Japan, and royalties from our international
licensees. We believe that the international decreases were
reflective of continued difficult economic conditions in Japan and other
countries throughout the world.
|
|
·
|
Gross
Profit
– Our gross profit totaled $21.5 million compared to $21.7
million in fiscal 2009 and declined primarily due to decreased sales in
fiscal 2010 compared to the prior year. However, our
consolidated gross margin, which is gross profit in terms of a percentage
of sales, improved to 63.5 percent of sales compared to 61.8 percent in
fiscal 2009. The fluctuation in our gross margin was primarily
due to the overall change in the mix of training and consulting programs
sold during the quarter.
|
|
·
|
Operating
Expenses
– Our operating expenses decreased by $2.8 million
compared to the prior year, which was primarily due to a $2.9 million
decrease in selling, general, and administrative
expenses. Decreased selling, general and administrative
expenses were partially offset by increased depreciation and amortization
expense.
|
12
|
·
|
Income
Taxes
– For the quarter ended November 28, 2009, we recognized a
tax provision of $0.9 million compared to an income tax benefit of $0.9
million in the first quarter of fiscal 2009. Our effective tax
rate for the first quarter of fiscal 2010 of approximately 79 percent was
higher than statutory combined rates primarily due to foreign withholding
taxes for which we cannot utilize a foreign tax credit, the accrual of
taxable interest income on the management stock loan program, and deemed
dividends from foreign subsidiaries for which we also cannot utilize
foreign tax credits. These items are expected to add
approximately $2.0 million to our income tax expense during fiscal
2010. However, due to the use of our net operating loss
carryforwards, our income tax expense is not indicative of our expected
cash payments for income taxes.
|
Further
details regarding these factors and their impact on our operating results and
liquidity are provided throughout the following management’s discussion and
analysis.
Quarter Ended November 28,
2009 Compared to the Quarter Ended November 29, 2008
Sales
The
following table sets forth sales data by category and by region (in
thousands):
|
Quarter
Ended
|
||||||||||||
|
November
28, 2009
|
November
29, 2008
|
Percent
Change
|
||||||||||
|
Sales by Category:
|
||||||||||||
|
Training
and consulting services
|
$ | 30,257 | $ | 30,481 | (1 | ) | ||||||
|
Products
|
2,846 | 3,681 | (23 | ) | ||||||||
|
Leasing
|
798 | 919 | (13 | ) | ||||||||
| $ | 33,901 | $ | 35,081 | (3 | ) | |||||||
|
Sales by Region:
|
||||||||||||
|
Domestic
|
$ | 21,775 | $ | 20,726 | 5 | |||||||
|
International
|
11,328 | 13,436 | (16 | ) | ||||||||
| 33,103 | 34,162 | (3 | ) | |||||||||
|
Leasing
|
798 | 919 | (13 | ) | ||||||||
| $ | 33,901 | $ | 35,081 | (3 | ) | |||||||
We offer
a variety of training courses, training related products, and consulting
services focused on leadership, productivity, strategy execution, sales force
performance, and effective communications that are provided both domestically
and internationally. Our consolidated sales decreased by $1.2 million
compared to the first quarter of fiscal 2009. The decrease was
primarily due to a decrease in international sales that was partially offset by
increased domestic sales. The following is a description of sales
activity in our domestic and international operations.
|
·
|
Domestic
–
Our domestic training, consulting, and related sales increased by
$1.0 million compared to fiscal 2009. The increase in domestic
sales was primarily due to: 1) improved sales performance curriculum
revenues; 2) improved sales of our education and government related
programs; and 3) increased sales of
Speed of Trust
related
revenues (we acquired this business during the second quarter of fiscal
2009). Increased sales from these sources were partially offset
by reduced public seminar sales resulting from a decision to reduce the
number of events that were scheduled during the quarter and a decrease in
the number of on-site held events during the quarter. However,
our revenue per training day increased compared to the prior
year.
|
Although
we believe that sluggish economic conditions in the United States during the
quarter ended November 28, 2009 continued to weigh on a number of our clients,
we were encouraged by the results of our domestic operations and continuing
improvements in the number of scheduled training days and the amount of revenue
generated per training day. We continue to believe that our training
and consulting offerings enable our clients to enhance the productivity and
leadership
13
of their
employees, develop customer loyalty, and improve the effectiveness of their
sales forces; and believe that these services are especially relevant to our
clients in the current economic environment.
|
·
|
International
–
International sales decreased by $2.1 million compared to the first
quarter of fiscal 2009. The decrease was primarily due to a
$1.6 million decrease in sales from Japan and a $0.4 million decrease in
licensee royalty revenues. Decreased sales in Japan affected
both our training and consulting service sales and product
sales. We believe that the decrease was primarily attributable
to poor economic conditions in Japan, which have reduced corporate and
consumer spending. Licensee royalty revenues totaled $2.4
million compared to $2.8 million in the first quarter of fiscal
2009. The translation of foreign sales to United States dollars
had a net $0.8 million favorable impact on our consolidated sales during
the quarter ended November 28,
2009.
|
Leasing
revenues are primarily derived from various sub-lease arrangements for office
space at our corporate campus located in Salt Lake City, Utah. The
corresponding cost of sales on these leases represents certain costs associated
with the operation of the leased space and does not include any lease expense on
the underlying corporate campus since we account for that lease as a financing
arrangement. Our leasing sales decreased as certain lease contracts
at our corporate facilities expired.
Gross
Profit
Gross
profit consists of net sales less the cost of services provided or the cost of
products sold. For the quarter ended November 28, 2009, our
consolidated gross profit decreased to $21.5 million compared to $21.7 million
in the first quarter of fiscal 2009. The decrease in gross profit was
primarily attributable to decreased sales as previously
described. Our consolidated gross margin, which is gross profit
stated in terms of a percentage of sales, increased to 63.5 percent of sales
compared to 61.8 percent in fiscal 2009. The slight increase was
primarily due to a shift in our mix of sales to programs and arrangements that
had improved margins, which was partially offset by decreased international
royalty revenues.
Operating
Expenses
Selling, General
and Administrative
–
Our selling, general, and administrative (SG&A) expenses decreased
$2.9 million compared to the prior year. The decrease in SG&A
expenses was primarily due to our cost savings initiatives that were started in
prior years and affected nearly every aspect of our spending. These
initiatives included a restructuring plan that reduced the number of our
domestic regional sales offices, decentralized certain sales support functions,
reduced our headcount, and made significant changes in the operation of our
Canadian subsidiary. The restructuring plan and other initiatives had
the following significant impacts on our SG&A expenses during the quarter:
1) our associate expenses decreased $0.8 million primarily due to headcount
reductions resulting from our restructuring activities; 2) the decision to
reduce the number of public programs held and reductions in our overall
marketing initiatives reduced our advertising and promotion expenses by $0.8
million; 3) foreign currency translation expense decreased by $0.5 million
primarily due to fluctuations in foreign exchange rates during the quarter; 4)
our travel related expenses decreased by $0.2 million; and 5) our computer and
office supplies spending also decreased $0.2 million. Focused cost
savings efforts also reduced our SG&A spending in various other areas of
operations during the first quarter of fiscal 2010. We anticipate
that these cost savings initiatives will continue to provide improvements in our
operating results compared to the prior year throughout fiscal
2010.
Depreciation and
Amortization
–
Depreciation expense increased $0.1 million compared to the same quarter
of fiscal 2009 primarily due to the addition of new assets during the third and
fourth quarters of fiscal 2009. Based upon anticipated fixed asset
activity in fiscal 2010, we expect depreciation expense to total approximately
$4.1 million during fiscal 2010.
14
Amortization
expense from definite-lived intangible assets increased by $0.1 million compared
to the prior year due to the acquisition of CoveyLink Worldwide,
LLC. This acquisition was completed in the second quarter of fiscal
2009. We expect that intangible asset amortization expense will total
$3.8 million in fiscal 2010.
LIQUIDITY
AND CAPITAL RESOURCES
At
November 28, 2009 we had $1.1 million of cash and cash equivalents compared to
$1.7 million at August 31, 2009 and our net working capital (current assets less
current liabilities) totaled $0.6 million at November 28, 2009 compared to a
deficit of $3.2 million at August 31, 2009. During the first quarter
of fiscal 2010, we used the majority of our available cash to make payments on
the outstanding obligation from our line of credit facility, which was
contractually reduced to $13.5 million at November 30, 2009.
Our
primary sources of liquidity are cash flows from the sale of services and
products in the normal course of business and proceeds from our revolving line
of credit facility. We may use the line of credit facility for
general corporate purposes as well as for other transactions, unless prohibited
by the terms of the line of credit agreement. The line of credit also
contains customary representations and guarantees as well as provisions for
repayment and liens. Our line of credit agreement expires in March
2010 and is therefore classified as a current obligation on our condensed
consolidated balance sheet at November 28, 2009. We are currently in
negotiations with our lender to renew the line of credit as described below in
“Sources of Liquidity.” At November 28, 2009, we had $11.2 million
outstanding on the line of credit.
In
addition to customary non-financial terms and conditions, our line of credit
requires us to be in compliance with specified financial covenants, including:
(i) a funded debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a
limitation on annual capital expenditures; and (iv) a defined amount of minimum
net worth. In the event of noncompliance with these financial
covenants and other defined events of default, the lenders are entitled to
certain remedies, including acceleration of the repayment of amounts outstanding
on the line of credit.
Based on
our forecasts for fiscal 2010, we identified the risk of non-compliance with
certain of the financial covenants required by our line of credit facility for
the quarterly measurement periods ending November 28, 2009 and February 27,
2010. In order to address the risk of non-compliance, we obtained a
modification to the line of credit agreement (the Third Modification Agreement)
in November 2009. The Third Modification Agreement relaxed the funded
debt-to-earnings ratio and fixed charge coverage ratio, and increased the
effective interest rate from LIBOR plus 2.0 percent to LIBOR plus 3.5 percent
(effective rate of 3.7 percent at November 28, 2009). We believe that
we were in compliance with the financial covenants as defined in the Third
Modification Agreement for the quarter ended November 28, 2009.
In
addition to our $13.5 million line of credit facility, we have a long-term lease
on our corporate campus that is accounted for as a long-term financing
obligation.
The
following discussion is a description of the primary factors affecting our cash
flows and their effects upon our liquidity and capital resources during the
quarter ended November 28, 2009.
Cash
Flows From Operating Activities
Our cash
provided by operating activities totaled $1.6 million for the quarter ended
November 28, 2009 compared to $1.7 million used for operating activities during
the quarter ended November 29, 2008. The improvement was primarily
due to improved operating income in the first quarter of fiscal 2010 compared to
the first quarter of fiscal 2009. Our primary source of cash from
operating activities was the sale of goods and services to our customers in the
normal course of business. The primary uses of cash
for
15
operating
activities were payments for direct costs necessary to conduct training
programs, payments for selling, general, and administrative expenses, and
payments to suppliers for materials used in products sold. We believe
that our continued efforts to optimize working capital balances, combined with
existing and planned sales growth programs and cost-cutting initiatives, will
improve our cash flows from operating activities in future
periods. However, the success of these efforts, and their eventual
contribution to our cash flows, is dependent upon numerous factors, many of
which are not within our control.
Cash
Flows From Investing Activities and Capital Expenditures
We used
$0.2 million of cash for investing activities during the quarter ended November
28, 2009. Our primary uses of cash for investing activities were the
purchase of property and equipment and additional spending on curriculum
development. Our purchases of property and equipment, which totaled
$0.1 million, consisted primarily of computer software and
hardware. During the first quarter of fiscal 2010, we spent $0.1
million for further investment in curriculum development
activities.
Cash
Flows From Financing Activities
Net cash
used for financing activities during the quarter ended November 28, 2009 totaled
$1.9 million. We used $1.8 million of cash to reduce our line of
credit balance and $0.2 million for principal payments on our financing
obligation. These uses were partially offset by $0.1 million of cash
received from participants in the employee stock purchase plan to purchase
shares of our common stock.
Sources
of Liquidity
Going
forward, we will continue to incur costs necessary for the operation and
potential growth of the business. We anticipate using cash on hand,
cash provided by the sale of goods and services to our clients on the condition
that we can continue to generate positive cash flows from operating activities,
proceeds from our line of credit, and other financing alternatives, if
necessary, for these expenditures. We are continuing negotiations to
renew the line of credit to ensure the future availability of liquidity through
this facility. We believe that we will be successful in obtaining a
new or extended line of credit from our current lender during our second quarter
of fiscal 2010. Additional potential sources of liquidity include
factoring receivables, issuance of additional equity, or issuance of debt from
public or private sources. However, no assurance can be provided that
we will obtain a new or extended line of credit or obtain additional financing
from other sources on terms that would be acceptable to us. If
necessary, we will evaluate all of these options and select one or more of them
depending on overall capital needs and the associated cost of
capital. If we are unsuccessful in obtaining a renewal or extension
of our line of credit, or additional financing, we believe that cash flows from
operations combined with a number of initiatives we would implement in the
months preceding the due date will create sufficient liquidity to pay down the
required outstanding balance on the line of credit. These initiatives
include deferral of capital purchases for externally developed curriculum and
uncommitted capital expenditures; deferral of executive team compensation;
deferral of certain related party contractual royalties and earnout payments;
substantial reduction of associate salaries; reduction of operating expenses,
including non-critical travel; and deferral of payments to other vendors in
order to generate sufficient cash.
Considering
the foregoing, we anticipate that our existing capital resources should be
adequate to enable us to maintain our operations for at least the upcoming
twelve months. However, our ability to maintain adequate capital for
our operations in the future is dependent upon a number of factors, including
sales trends, our ability to contain costs, levels of capital expenditures,
collection of accounts receivable, and other factors. Some of the
factors that influence our operations are not within our control, such as
economic conditions and the introduction of new technology and products by our
competitors. We will continue to monitor our liquidity position and
may pursue additional financing alternatives, as described above, to maintain
sufficient resources for future growth and capital
requirements. However, there can be no assurance such financing
alternatives will be available to us on acceptable terms, or at
all.
16
Contractual
Obligations
The
Company has not structured any special purpose or variable interest entities, or
participated in any commodity trading activities, which would expose us to
potential undisclosed liabilities or create adverse consequences to our
liquidity. Required contractual payments primarily consist of 1)
lease payments resulting from the sale of our corporate campus (financing
obligation); 2) payments to EDS for outsourcing services related to information
systems, warehousing, and distribution services; 3) minimum rent payments for
office and warehouse space; 4) the repayment of our line of credit obligation;
and 5) short-term purchase obligations for inventory items and other products
and services used in the ordinary course of business. There
have been no significant changes to our expected required contractual
obligations from those disclosed at August 31, 2009.
According
to the terms of the agreements associated with the sale of the Consumer
Solutions Business Unit assets that closed in the fourth quarter of fiscal 2008,
we assigned the benefits and obligations relating to the leases of most of our
retail stores to Franklin Covey Products, an entity in which we own
approximately 19 percent. However, we are still required to fulfill
the obligations contained in the lease agreements, including making lease
payments, if Franklin Covey Products is unable to fulfill its obligations
pursuant to the terms of the lease agreements. Any default by
Franklin Covey Products in its lease payment obligations could provide us with
certain remedies against Franklin Covey Products, including potentially allowing
us to terminate the Master License Agreement. If Franklin Covey
Products is unable to satisfy the obligations contained in the lease agreements
and we are unable to obtain adequate remedies, our results of operations and
cash flows may be adversely affected.
Other
Items
The
Company is the creditor for a loan program that provided the capital to allow
certain management personnel the opportunity to purchase shares of our common
stock. For further information regarding our management common stock
loan program, refer to Note 12 to our consolidated financial statements on Form
10-K for the fiscal year ended August 31, 2009. The inability of the
Company to collect all, or a portion, of these receivables could have an adverse
impact upon our financial position and future cash flows compared to full
collection of the loans.
USE
OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America. The
significant accounting polices used to prepare our consolidated financial
statements are outlined in Note 1 of the consolidated financial statements
presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
year ended August 31, 2009. Some of those accounting policies require
us to make estimates and assumptions that affect the amounts reported in our
consolidated financial statements. We regularly evaluate our
estimates and assumptions and base those estimates and assumptions on historical
experience, factors that are believed to be reasonable under the circumstances,
and requirements under accounting principles generally accepted in the United
States of America. Actual results may differ from these estimates
under different assumptions or conditions, including changes in economic
conditions and other circumstances that are not within our control, but which
may have an impact on these estimates and our actual financial
results.
The
following items require significant judgment and often involve complex
estimates:
17
Revenue
Recognition
We derive
revenues primarily from the following sources:
|
·
|
Training and Consulting
Services
– We provide training and consulting services to both
organizations and individuals in leadership, productivity, strategic
execution, goal alignment, sales force performance, and communication
effectiveness skills.
|
|
·
|
Products
– We sell
planners, binders, planner accessories, and other related products
primarily in Japan.
|
We
recognize revenue in accordance with SAB No. 101,
Revenue Recognition in Financial
Statements
, as amended by SAB No. 104,
Revenue
Recognition.
Accordingly, we recognize revenue when: 1)
persuasive evidence of an agreement exists, 2) delivery of product has occurred
or services have been rendered, 3) the price to the customer is fixed or
determinable, and 4) collectibility is reasonably assured. For
training and service sales, these conditions are generally met upon presentation
of the training seminar or delivery of the consulting services. For
product sales, these conditions are generally met upon shipment of the product
to the customer or by completion of the sales transaction in a retail
store.
Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services. For
transactions that contain more than one element, we recognize revenue in
accordance with FASC 605-25, which addresses multiple element arrangements.
When fair value exists
for all contracted elements, the overall contract consideration is allocated
among the separate units of accounting based upon their relative fair
values. Revenue for these units is recognized in accordance with our
general revenue policies once it has been determined that the delivered items
have standalone value to the customer. If fair value does not exist
for all contracted elements, revenue for the delivered items is recognized using
the residual method, which generally means that revenue recognition is postponed
until the point is reached when the delivered items have standalone value and
fair value exists for the undelivered items. Under the residual
method, the amount of revenue considered for recognition under our general
revenue policies is the total contract amount, less the aggregate fair value of
the undelivered items. Fair value of the undelivered items is based
upon the normal pricing practices for our existing training programs, consulting
services, and other products, which are generally the prices of the items when
sold separately.
Our
international strategy includes the use of licensees in countries where we do
not have a wholly-owned operation. Licensee companies are unrelated
entities that have been granted a license to translate our content and
curriculum, adapt the content and curriculum to the local culture, and sell our
training seminars and products in a specific country or region. Each
licensee is required to pay us royalties based upon a percentage of the
licensee’s sales. We recognize royalty income each period based upon
the sales information reported to the Company from the
licensee. Royalty revenue is reported as a component of training and
consulting service sales in our consolidated statements of
operations.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Accounts
Receivable Valuation
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best
estimate of the amount of probable credit losses in the existing accounts
receivable balance. We determine the allowance for doubtful accounts
based upon historical write-off experience and current economic conditions and
we review the adequacy of our allowance for doubtful accounts on a regular
basis. Receivable balances over 90 days past due, which exceed a
specified dollar amount, are reviewed individually for
collectibility. Account balances are charged off against
the
18
allowance
after all means of collection have been exhausted and the probability for
recovery is considered remote. We do not have any off-balance sheet
credit exposure related to our customers.
Our
allowance for doubtful accounts calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding the
collectibility of customer accounts, which may be influenced by a number of
factors that are not within our control, such as the financial health of each
customer. We regularly review the collectibility assumptions of our
allowance for doubtful accounts calculation and compare them against historical
collections. Adjustments to the assumptions may either increase or
decrease our total allowance for doubtful accounts. For example, a 10
percent increase to our allowance for doubtful accounts at November 28, 2009
would decrease our reported income from operations by approximately $0.1
million.
Inventory
Valuation
Our
inventories are primarily comprised of training materials and related
accessories. Inventories are stated at the lower of cost or market
with cost determined using the first-in, first-out
method. Inventories are reduced to their fair market value through
the use of inventory loss reserves, which are recorded during the normal course
of business.
Our
inventory loss reserve calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding a number of
factors, including future inventory demand requirements and pricing
strategies. During the evaluation process we consider historical
sales patterns and current sales trends, but these may not be indicative of
future inventory losses. While we have not made material changes to
our inventory reserves methodology during the past three years, our inventory
requirements may change based on projected customer demand, technological and
product life cycle changes, longer or shorter than expected usage periods, and
other factors that could affect the valuation of our inventories. If
our estimates regarding consumer demand and other factors are inaccurate, we may
be exposed to losses that may have a materially adverse impact upon our
financial position and results of operations. For example, a 10
percent increase to our inventory reserves at November 28, 2009 would decrease
our reported income from operations by $0.1 million.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an
estimate of undiscounted future net cash flows of the assets over their
remaining useful lives in determining whether the carrying value of the assets
is recoverable. If the carrying values of the assets exceed the
anticipated future cash flows of the assets, we calculate an impairment
loss. The impairment loss calculation compares the carrying value of
the asset to the asset’s estimated fair value, which may be based upon
discounted cash flows over the estimated remaining useful life of the
asset. If we recognize an impairment loss, the adjusted carrying
amount of the asset becomes its new cost basis, which is then depreciated or
amortized over the remaining useful life of the asset. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent from other groups of
assets.
Our
impairment evaluation calculations contain uncertainties because they require us
to make assumptions and apply judgment in order to estimate future cash flows,
forecast the useful lives of the assets, and select a discount rate that
reflects the risk inherent in future cash flows. Based on these
criteria, we have projected positive cash flows over the remaining useful lives
of our principal assets, which is approximately 17 years. Although we
have not made material changes to our long-lived assets impairment assessment
methodology during the past three years, if forecasts and assumptions used to
support the carrying value of our long-lived tangible and definite-lived
intangible assets change in the future, significant impairment charges could
result that would adversely affect our results of operations and financial
condition.
19
Indefinite-Lived
Intangible Assets and Goodwill
Intangible
assets that are deemed to have an indefinite life and goodwill balances are not
amortized, but rather are tested for impairment on an annual basis, or more
often if events or circumstances indicate that a potential impairment
exists. Our goodwill balance at November 28, 2009 was generated by
the acquisition of CoveyLink during fiscal 2009. The Covey trade name
intangible asset was generated by the merger with the Covey Leadership Center
and has been deemed to have an indefinite life. This intangible asset
is tested for impairment using the present value of estimated royalties on trade
name related revenues, which consist primarily of training seminars and
international licensee royalties. If the carrying value of the Covey
trade name exceeds the fair value of its discounted estimated royalties on trade
name related revenues, an impairment loss is recognized for the
difference.
Our
impairment evaluation calculations for goodwill and the Covey trade name contain
uncertainties because they require us to make assumptions and apply judgment in
order to estimate future cash flows, to estimate an appropriate royalty rate,
and to select a discount rate that reflects the inherent risk of future cash
flows. Our valuation methodology for the Covey trade name has
remained unchanged during the past three years. However, if forecasts
and assumptions used to support the carrying value of our indefinite-lived
intangible asset change in future periods, significant impairment charges could
result that would have an adverse effect upon our results of operations and
financial condition. The valuation methodology is also dependent upon
our share price and corresponding market capitalization, which may differ from
estimated royalties used in our annual impairment testing. Based upon
the fiscal 2009 evaluation of the Covey trade name and goodwill, our trade-name
related revenues, licensee royalties, and overall sales levels would have to
suffer significant reductions before we would be required to impair
them. During the first quarter of fiscal 2010, we do not believe that
any triggering events have occurred that required impairment testing and
therefore, no additional impairment testing was performed. However,
future declines in our share price may trigger additional impairment testing and
may result in impairment charges.
Income
Taxes
We
regularly evaluate our United States federal and various state and foreign
jurisdiction income tax exposures. Based on authoritative
pronouncements, we may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained upon
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than 50 percent likelihood of being realized upon final
settlement. Taxes and penalties are components of our overall income
tax provision.
We record
previously unrecognized tax benefits in the financial statements when it becomes
more likely than not (greater than a 50 percent likelihood) that the tax
position will be sustained. To assess the probability of sustaining a
tax position, we consider all available evidence. In many instances,
sufficient positive evidence may not be available until the expiration of the
statute of limitations for audits by taxing jurisdictions, at which time the
entire benefit will be recognized as a discrete item in the applicable
period.
Our
unrecognized tax benefits result from uncertain tax positions about which we are
required to make assumptions and apply judgment to estimate the exposures
associated with our various tax filing positions. The calculation of
our income tax provision or benefit, as applicable, requires estimates of future
taxable income or losses. During the course of the fiscal year, these
estimates are compared to actual financial results and adjustments may be made
to our tax provision or benefit to reflect these revised
estimates. Our effective income tax rate is also affected by changes
in tax law and the results of tax audits by various
jurisdictions. Although we believe that our judgments and estimates
discussed herein are reasonable, actual results could differ, and we could be
exposed to losses or gains that could be material.
20
ACCOUNTING
PRONOUNCEMENTS ISSUED NOT YET ADOPTED
Revenue
Recognition
– In October 2009, the FASB issued EITF 08-1,
Revenue Recognition – Multiple
Element Arrangements
(FASC 650-25). This consensus amends
existing guidance on multiple element revenue arrangements to improve the
ability of entities to recognize revenue from the sale of delivered items that
are part of a multiple-element arrangement when other items have not yet been
delivered. One of the current requirements is that there must be
objective and reliable evidence of the standalone selling price of the
undelivered items, which must be supported by vendor-specific objective evidence
(VSOE) or third-party evidence (TPE). This amendment eliminates the
requirements that all undelivered elements have VSOE or TPE before an entity can
recognize the portion of an overall arrangement that is attributable to items
that have already been delivered. The “residual method” of allocating
revenue is thereby eliminated, and entities are required to allocate the
arrangement consideration at the inception of the arrangement to all
deliverables using the relative selling price method. The consensus
is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning after June 15, 2010 and early adoption is
permitted. We have not yet completed a formal analysis of the
provisions of EITF 08-1.
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain
written and oral statements made by the Company in this report are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934 as amended (the Exchange Act). Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate,
or imply future results, performance, or achievements, and may contain words
such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or
phrases of similar meaning. In our reports and filings we may make
forward looking statements regarding our expectations about future sales levels,
future training and consulting sales activity, anticipated expenses, the
adequacy of existing capital resources, the ability and timing of the Company to
obtain a renewal or extension of its line of credit agreement, projected cost
reduction and strategic initiatives, our expectations about our restructuring
plan, expected levels of depreciation and amortization expense, expectations
regarding tangible and intangible asset valuation expenses, expected
improvements in cash flows from operating activities, future compliance with the
terms and conditions of our line of credit, the ability to borrow on our line of
credit, estimated capital expenditures, estimates of the impact of certain
income tax items, and cash flow estimates used to determine the fair value of
long-lived assets. These, and other forward-looking statements, are
subject to certain risks and uncertainties that may cause actual results to
differ materially from the forward-looking statements. These risks
and uncertainties are disclosed from time to time in reports filed by us with
the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks
and uncertainties include, but are not limited to, the matters discussed in Item
1A of our report on Form 10-K for the fiscal year ended August 31, 2009,
entitled “Risk Factors.” In addition, such risks and uncertainties
may include unanticipated developments in any one or more of the following
areas: unanticipated costs or capital expenditures; difficulties
encountered by EDS in operating and maintaining our information systems and
controls, including without limitation, the systems related to demand and supply
planning, inventory control, and order fulfillment; delays or unanticipated
outcomes relating to our strategic plans; dependence on existing products or
services; the rate and consumer acceptance of new product introductions;
competition; the number and nature of customers and their product orders,
including changes in the timing or mix of product or training orders; pricing of
our products and services and those of competitors; adverse publicity; and other
factors which may adversely affect our business.
21
The risks
included here are not exhaustive. Other sections of this report may
include additional factors that could adversely affect our business and
financial performance. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors may emerge and it is
not possible for our management to predict all such risk factors, nor can we
assess the impact of all such risk factors on our business or the extent to
which any single factor, or combination of factors, may cause actual results to
differ materially from those contained in forward-looking
statements. Given these risks and uncertainties, investors should not
rely on forward-looking statements as a prediction of actual
results.
The
market price of our common stock has been and may remain volatile. In
addition, the stock markets in general have experienced increased
volatility. Factors such as quarter-to-quarter variations in revenues
and earnings or losses and our failure to meet expectations could have a
significant impact on the market price of our common stock. In
addition, the price of our common stock can change for reasons unrelated to our
performance. Due to our low market capitalization, the price of our
common stock may also be affected by conditions such as a lack of analyst
coverage and fewer potential investors.
Forward-looking
statements are based on management’s expectations as of the date made, and the
Company does not undertake any responsibility to update any of these statements
in the future except as required by law. Actual future performance
and results will differ and may differ materially from that contained in or
suggested by forward-looking statements as a result of the factors set forth in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in our filings with the SEC.
There
have been no material changes from the information previously reported under
Item 7A of our Annual Report on Form 10-K for the fiscal year ended August 31,
2009. During the quarter ended November 28, 2009, we did not utilize
any foreign currency or interest rate derivative instruments.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and the Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
We
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act, as of the end of the period covered by this
report. Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on
Form 10-Q.
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f)) during the most recently completed fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
22
We
may need additional capital in the future, and this capital may not be available
to us on favorable terms or at all.
We may
need to raise additional funds through public or private debt offerings or
equity financings in order to:
·
Develop
new services, programs, or offerings
·
Take
advantage of opportunities, including expansion of the business
·
Respond
to competitive pressures
We are
currently in negotiations to renew the line of credit to ensure the future
availability of liquidity through this facility. We believe that we
will be successful in obtaining a new or extended line of credit from our lender
during our second quarter of fiscal 2010. Additional potential
sources of liquidity include factoring receivables, issuance of additional
equity, or issuance of debt from public or private sources. However,
no assurance can be provided that we will obtain a new or extended line of
credit or obtain additional financing from other sources on terms that would be
acceptable to us. If necessary, we will evaluate all of these options
and select one or more of them depending on overall capital needs and the
associated cost of capital. If we are unsuccessful in obtaining a
renewal or extension of our line of credit, or additional financing, we believe
that cash flows from operations combined with a number of initiatives we would
implement in the months preceding the due date will create sufficient liquidity
to pay down the required outstanding balance on the line of
credit. These initiatives include deferral of capital purchases for
externally developed curriculum and uncommitted capital expenditures; deferral
of executive team compensation; deferral of certain related party contractual
royalties and earnout payments; substantial reduction of associate salaries;
reduction of operating expenses, including non-critical travel; and deferral of
payments to other vendors in order to generate sufficient cash.
Any
additional capital raised through the sale of equity could dilute current
shareholders’ ownership percentage in us. Furthermore, we may be
unable to obtain the necessary capital on terms or conditions that are favorable
to us, or at all.
Our results of operations and cash flows may be adversely affected if Franklin Covey Products is unable to pay its retail store leases.
According
to the terms of the agreements associated with the sale of the Consumer
Solutions Business Unit assets that closed in the fourth quarter of fiscal 2008,
we assigned the benefits and obligations relating to the leases of most of our
retail stores to Franklin Covey Products, an entity in which we own
approximately 19 percent. However, we are still required to fulfill
the obligations contained in the lease agreements, including making lease
payments, if Franklin Covey Products is unable to fulfill its obligations
pursuant to the terms of the lease agreements. Any default by
Franklin Covey Products in its lease payment obligations could provide us with
certain remedies against Franklin Covey Products, including potentially allowing
us to terminate the Master License Agreement. If Franklin Covey
Products is unable to satisfy the obligations contained in the lease agreements
and we are unable to obtain adequate remedies, our results of operations and
cash flows may be adversely affected.
For
further information regarding Risk Factors, please refer to Item 1A in our
Annual Report on Form 10-K for the fiscal year ended August 31,
2009.
23
The
Company acquired the following securities during the fiscal quarter ended
November 28, 2009:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Dollar Value of Shares That May Yet Be Purchased Under the Plans or
Programs
|
|||||||||
|
Common
Shares:
|
(in
thousands)
|
||||||||||||
|
September
1, 2009 to October 3, 2009
|
- | $ | - |
none
|
$ | 2,413 | |||||||
|
October
4, 2009 to October 31, 2009
|
- | - |
none
|
2,413 | |||||||||
|
November
1, 2009 to November 28, 2009
|
- | - |
none
|
2,413 | (1) | ||||||||
|
Total
Common Shares
|
- | $ | - |
none
|
|||||||||
|
|
(1)
|
In
January 2006, our Board of Directors approved the purchase of up to $10.0
million of our outstanding common stock. All previous
authorized common stock purchase plans were canceled. Pursuant
to the terms of this stock purchase plan, we have acquired 1,009,300
shares of our common stock for $7.6 million through November 28,
2009.
|
|
(A)
|
Exhibits:
|
|
|
10.1
|
Loan
Modification Agreement between Franklin Covey Co. and JPMorgan Chase Bank,
N.A. dated November 11, 2009 (Incorporated by reference to Report on Form
8-K filed with the Securities and Exchange Commission on November 16,
2009).
|
|
|
31.1
|
Rule
13a-14(a) Certifications of the Chief Executive
Officer.
|
|
|
31.2
|
Rule
13a-14(a) Certifications of the Chief Financial Officer.
|
|
|
32
|
Section
1350 Certifications.
|
24
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
FRANKLIN
COVEY CO.
|
||||
|
Date:
|
January
7, 2010
|
By:
|
/s/ Robert A. Whitman
|
|
|
Robert
A. Whitman
|
||||
|
Chief
Executive Officer
|
||||
|
Date:
|
January
7, 2010
|
By:
|
/s/ Stephen D. Young
|
|
|
Stephen
D. Young
|
||||
|
Chief
Financial Officer
|
||||
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Basis Of PresentationNote 2 InventoriesNote 3 Commitments and ContingenciesNote 4 Share-based CompensationNote 5 Income TaxesNote 6 Comprehensive Income (loss)Note 7 Earnings Per ShareNote 8 Segment InformationNote 9 Subsequent EventItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1A. Risk FactiorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits