x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Utah
(State
of incorporation)
|
87-0401551
(I.R.S.
employer identification number)
|
|
2200
West Parkway Boulevard
Salt
Lake City, Utah
(Address
of principal executive offices)
|
84119-2099
(Zip
Code)
|
|
Registrant’s
telephone number,
Including
area code
|
(801) 817-1776 |
Large
accelerated filer
|
o
|
Accelerated
filer
|
x
|
Non-accelerated
filer
|
o
|
Part
I.
|
Financial
Information
|
||
Item
1.
|
Financial
Statements
|
||
Note
1.
|
Basis
of Presentation
|
||
Note
2.
|
Inventories
|
||
Note
3.
|
Canadian
Line of Credit
|
||
Note
4.
|
Shareholders’
Equity
|
||
Note
5.
|
Sale
of Manufacturing Facility
|
||
Note
6.
|
Income
Taxes
|
||
Note
7.
|
Comprehensive
Income
|
||
Note
8.
|
Earnings
Per Share
|
||
Note
9.
|
Segment
Information
|
||
Note
10.
|
Subsequent
Events
|
||
Item
2.
|
Management’s
Discussion & Analysis of Financial Condition and Results of
Operations
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
||
Item
4.
|
Controls
and Procedures
|
||
Part
II.
|
Other
Information
|
||
Item
1A.
|
Risk
Factors
|
||
Item
2.
|
Unregistered
Sales of Equity Securities & Use of Proceeds
|
||
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
||
Item
6.
|
Exhibits
|
||
Signatures
|
March
3,
2007
|
August
31,
2006
|
||||||
(unaudited)
|
|||||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
28,620
|
$
|
30,587
|
|||
Accounts
receivable, less allowance for doubtful accounts
of $656 and $979
|
24,678
|
24,254
|
|||||
Inventories
|
23,402
|
21,790
|
|||||
Deferred
income taxes
|
3,884
|
4,130
|
|||||
Other
current assets
|
6,387
|
6,359
|
|||||
Total
current assets
|
86,971
|
87,120
|
|||||
Property
and equipment, net
|
35,054
|
33,318
|
|||||
Intangible
assets, net
|
77,725
|
79,532
|
|||||
Deferred
income taxes
|
364
|
4,340
|
|||||
Other
assets
|
13,965
|
12,249
|
|||||
$
|
214,079
|
$
|
216,559
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Current
portion of long-term debt and financing obligation
|
$
|
598
|
$
|
585
|
|||
Accounts
payable
|
10,211
|
13,769
|
|||||
Income
taxes payable
|
2,659
|
1,924
|
|||||
Accrued
liabilities
|
30,538
|
32,170
|
|||||
Total
current liabilities
|
44,006
|
48,448
|
|||||
Long-term
debt and financing obligation, less current portion
|
33,209
|
33,559
|
|||||
Other
liabilities
|
1,017
|
1,203
|
|||||
Total
liabilities
|
78,232
|
83,210
|
|||||
Shareholders’
equity:
|
|||||||
Preferred
stock - Series A, no par value; 4,000 shares authorized, 1,494
shares issued and outstanding; liquidation preference totaling
$38,278
|
37,345
|
37,345
|
|||||
Common
stock - $0.05 par value; 40,000 shares authorized, 27,056
shares issued and outstanding
|
1,353
|
1,353
|
|||||
Additional
paid-in capital
|
186,288
|
185,691
|
|||||
Common
stock warrants
|
7,611
|
7,611
|
|||||
Retained
earnings
|
18,337
|
14,075
|
|||||
Accumulated
other comprehensive income
|
669
|
653
|
|||||
Treasury
stock at cost, 7,386 and 7,083 shares
|
(115,756
|
)
|
(113,379
|
)
|
|||
Total
shareholders’ equity
|
135,847
|
133,349
|
|||||
$
|
214,079
|
$
|
216,559
|
||||
Quarter
Ended
|
Two
Quarters Ended
|
||||||||||||
March
3,
2007
|
February
25,
2006
|
March
3,
2007
|
February
25,
2006
|
||||||||||
(unaudited)
|
(unaudited)
|
||||||||||||
Net
sales:
|
|||||||||||||
Products
|
$
|
45,283
|
$
|
50,841
|
$
|
87,391
|
$
|
94,244
|
|||||
Training
and consulting services
|
31,593
|
27,492
|
65,014
|
56,440
|
|||||||||
76,876
|
78,333
|
152,405
|
150,684
|
||||||||||
Cost
of sales:
|
|||||||||||||
Products
|
19,436
|
22,288
|
37,910
|
40,952
|
|||||||||
Training
and consulting services
|
10,251
|
7,872
|
20,909
|
17,152
|
|||||||||
29,687
|
30,160
|
58,819
|
58,104
|
||||||||||
Gross
profit
|
47,189
|
48,173
|
93,586
|
92,580
|
|||||||||
Selling,
general, and administrative
|
36,666
|
35,488
|
77,514
|
73,255
|
|||||||||
Gain
on sale of manufacturing facility
|
(1,227
|
)
|
-
|
(1,227
|
)
|
-
|
|||||||
Depreciation
|
1,366
|
1,221
|
2,403
|
2,629
|
|||||||||
Amortization
|
900
|
908
|
1,802
|
2,003
|
|||||||||
Income
from operations
|
9,484
|
10,556
|
13,094
|
14,693
|
|||||||||
Interest
income
|
357
|
316
|
557
|
645
|
|||||||||
Interest
expense
|
(675
|
)
|
(660
|
)
|
(1,336
|
)
|
(1,303
|
)
|
|||||
Legal
settlement
|
-
|
873
|
-
|
873
|
|||||||||
Income
before provision for income taxes
|
9,166
|
11,085
|
12,315
|
14,908
|
|||||||||
Provision
for income taxes
|
(4,452
|
)
|
(1,872
|
)
|
(6,186
|
)
|
(2,462
|
)
|
|||||
Net
income
|
4,714
|
9,213
|
6,129
|
12,446
|
|||||||||
Preferred
stock dividends
|
(934
|
)
|
(1,139
|
)
|
(1,867
|
)
|
(2,518
|
)
|
|||||
Net
income available to common shareholders
|
$
|
3,780
|
$
|
8,074
|
$
|
4,262
|
$
|
9,928
|
|||||
Net
income available to common
shareholders
per share:
|
|||||||||||||
Basic
|
$
|
.19
|
$
|
.40
|
$
|
.22
|
$
|
.49
|
|||||
Diluted
|
$
|
.19
|
$
|
.39
|
$
|
.21
|
$
|
.48
|
|||||
Weighted
average number of common shares:
|
|||||||||||||
Basic
|
19,589
|
20,311
|
19,750
|
20,321
|
|||||||||
Diluted
|
20,026
|
20,634
|
20,109
|
20,638
|
Two
Quarters Ended
|
|||||||
March
3,
2007
|
February
25,
2006
|
||||||
(unaudited)
|
|||||||
Cash
flows from operating activities:
|
|||||||
Net
income
|
$
|
6,129
|
$
|
12,446
|
|||
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|||||||
Depreciation
and amortization
|
4,977
|
5,571
|
|||||
Deferred
income taxes
|
4,218
|
-
|
|||||
Gain
on disposals of property and equipment
|
(1,210
|
)
|
-
|
||||
Share-based
compensation expense
|
622
|
235
|
|||||
Changes
in assets and liabilities:
|
|||||||
Increase
in accounts receivable, net
|
(433
|
)
|
(774
|
)
|
|||
Increase
in inventories
|
(1,616
|
)
|
(1,974
|
)
|
|||
Decrease
(increase) in other assets
|
728
|
(134
|
)
|
||||
Decrease
in accounts payable and accrued liabilities
|
(5,196
|
)
|
(5,569
|
)
|
|||
Decrease
in other long-term liabilities
|
(175
|
)
|
(102
|
)
|
|||
Increase
in income taxes payable
|
743
|
1,526
|
|||||
Net
cash provided by operating activities
|
8,787
|
11,225
|
|||||
Cash
flows from investing activities:
|
|||||||
Purchases
of property and equipment
|
(5,377
|
)
|
(2,422
|
)
|
|||
Curriculum
development costs
|
(3,163
|
)
|
(961
|
)
|
|||
Proceeds
from sales of property and equipment
|
2,258
|
-
|
|||||
Net
cash used for investing activities
|
(6,282
|
)
|
(3,383
|
)
|
|||
Cash
flows from financing activities:
|
|||||||
Principal
payments on long-term debt and financing obligation
|
(297
|
)
|
(822
|
)
|
|||
Change
in restricted cash
|
-
|
699
|
|||||
Proceeds
from sales of common stock from treasury
|
137
|
173
|
|||||
Proceeds
from management stock loan payments
|
-
|
134
|
|||||
Redemption
of preferred stock
|
-
|
(20,000
|
)
|
||||
Purchases
of treasury shares
|
(2,539
|
)
|
(224
|
)
|
|||
Payment
of preferred stock dividends
|
(1,867
|
)
|
(3,018
|
)
|
|||
Net
cash used for financing activities
|
(4,566
|
)
|
(23,058
|
)
|
|||
Effect
of foreign exchange rates on cash and cash equivalents
|
94
|
(120
|
)
|
||||
Net
decrease in cash and cash equivalents
|
(1,967
|
)
|
(15,336
|
)
|
|||
Cash
and cash equivalents at beginning of the period
|
30,587
|
51,690
|
|||||
Cash
and cash equivalents at end of the period
|
$
|
28,620
|
$
|
36,354
|
|||
Supplemental
disclosure of cash flow information:
|
|||||||
Cash
paid for interest
|
$
|
1,324
|
$
|
1,337
|
|||
Cash
paid for income taxes
|
$
|
1,270
|
$
|
1,093
|
|||
Non-cash
investing and financing activities:
|
|||||||
Accrued
preferred stock dividends
|
$
|
934
|
$
|
934
|
|||
Capital
lease financing of property and equipment purchases
|
-
|
109
|
NOTE 1 - | BASIS OF PRESENTATION |
NOTE 2 - |
INVENTORIES
|
March
3,
2007
|
August
31,
2006
|
||||||
Finished
goods
|
$
|
19,994
|
$
|
18,464
|
|||
Work
in process
|
523
|
706
|
|||||
Raw
materials
|
2,885
|
2,620
|
|||||
$
|
23,402
|
$
|
21,790
|
NOTE 3 - | CANADIAN LINE OF CREDIT |
NOTE 4 - |
SHAREHOLDERS’
EQUITY
|
NOTE 5 - |
SALE
OF MANUFACTURING FACILITY
|
NOTE 6 - | INCOME TAXES |
NOTE 7 - |
COMPREHENSIVE
INCOME
|
Quarter
Ended
|
Two
Quarters Ended
|
||||||||||||
March
3,
2007
|
February
25,
2006
|
March
3,
2007
|
February
25,
2006
|
||||||||||
Net
income
|
$
|
4,714
|
$
|
9,213
|
$
|
6,129
|
$
|
12,446
|
|||||
Other
comprehensive income (loss) items, net of tax:
|
|||||||||||||
Foreign
currency translation adjustments
|
(80
|
)
|
145
|
16
|
(220
|
)
|
|||||||
Comprehensive
income
|
$
|
4,634
|
$
|
9,358
|
$
|
6,145
|
$
|
12,226
|
NOTE 8 - |
EARNINGS
PER SHARE
|
Quarter
Ended
|
Two
Quarters Ended
|
||||||||||||
March
3,
2007
|
February
25,
2006
|
March
3,
2007
|
February
25,
2006
|
||||||||||
Numerator
for basic and diluted earnings per share:
|
|||||||||||||
Net
income
|
$
|
4,714
|
$
|
9,213
|
$
|
6,129
|
$
|
12,446
|
|||||
Preferred
stock dividends
|
(934
|
)
|
(1,139
|
)
|
(1,867
|
)
|
(2,518
|
)
|
|||||
Net
income available to common shareholders
|
$
|
3,780
|
$
|
8,074
|
$
|
4,262
|
$
|
9,928
|
|||||
Denominator
for basic and diluted earnings per share:
|
|||||||||||||
Basic
weighted average shares outstanding(1)
|
19,589
|
20,311
|
19,750
|
20,321
|
|||||||||
Effect
of dilutive securities:
|
|||||||||||||
Stock
options
|
24
|
45
|
29
|
46
|
|||||||||
Unvested
stock awards
|
257
|
272
|
252
|
268
|
|||||||||
Performance
awards
|
156
|
6
|
78
|
3
|
|||||||||
Common
stock warrants(2)
|
-
|
-
|
-
|
-
|
|||||||||
Diluted
weighted average shares outstanding
|
20,026
|
20,634
|
20,109
|
20,638
|
|||||||||
Basic
and diluted EPS:
|
|||||||||||||
Basic
EPS
|
$
|
.19
|
$
|
.40
|
$
|
.22
|
$
|
.49
|
|||||
Diluted
EPS
|
$
|
.19
|
$
|
.39
|
$
|
.21
|
$
|
.48
|
(1) | Since the Company recognized net income for the quarter and two quarters ended March 3, 2007, basic weighted average shares for those periods include 3.5 million shares of common stock held by management stock loan participants that were placed in escrow. | |
(2) |
For
the quarter and two quarters ended March 3, 2007, the conversion
of 6.2
million common stock warrants is not assumed because such conversion
would
be anti-dilutive.
|
NOTE 9 - |
SEGMENT
INFORMATION
|
Consumer
Solutions Business Unit - This
business unit is primarily focused on sales to individual customers
and
small business organizations and includes the results of our domestic
retail stores, consumer direct operations (primarily catalog, eCommerce,
and public seminar programs), 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 include the financial
results
of our paper planner manufacturing operations. Although CSBU sales
primarily consist of products such as planners, binders, software,
totes,
and related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may be purchased through
our CSBU channels.
|
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 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.
|
|
||||||||||||||||
Quarter
Ended
March
3, 2007
|
Sales
to External Customers
|
|
|
Gross
Profit
|
|
|
EBITDA
|
|
|
Depreciation
|
|
|
Amortization
|
|||
Consumer
Solutions Business Unit:
|
||||||||||||||||
Retail
|
$
|
19,265
|
$
|
11,861
|
$
|
4,635
|
$
|
186
|
$
|
-
|
||||||
Consumer
direct
|
17,062
|
9,940
|
7,645
|
54
|
-
|
|||||||||||
Wholesale
|
3,581
|
1,932
|
1,747
|
-
|
-
|
|||||||||||
CSBU
International
|
2,643
|
1,608
|
709
|
-
|
-
|
|||||||||||
Other
CSBU
|
1,583
|
410
|
(6,447
|
)
|
533
|
-
|
||||||||||
Total
CSBU
|
44,134
|
25,751
|
8,289
|
773
|
-
|
|||||||||||
Organizational
Solutions Business Unit:
|
||||||||||||||||
Domestic
|
19,313
|
12,320
|
1,730
|
151
|
900
|
|||||||||||
International
|
13,429
|
9,118
|
3,030
|
204
|
-
|
|||||||||||
Total
OSBU
|
32,742
|
21,438
|
4,760
|
355
|
900
|
|||||||||||
Total
operating segments
|
76,876
|
47,189
|
13,049
|
1,128
|
900
|
|||||||||||
Corporate
and eliminations
|
-
|
-
|
(2,526
|
)
|
238
|
-
|
||||||||||
Consolidated
|
$
|
76,876
|
$
|
47,189
|
$
|
10,523
|
$
|
1,366
|
$
|
900
|
||||||
Quarter
Ended
February
25, 2006
|
||||||||||||||||
Consumer
Solutions Business Unit:
|
||||||||||||||||
Retail
|
$
|
23,781
|
$
|
14,306
|
$
|
5,593
|
$
|
337
|
$
|
-
|
||||||
Consumer
direct
|
19,613
|
11,621
|
9,353
|
15
|
-
|
|||||||||||
Wholesale
|
3,138
|
1,675
|
1,523
|
-
|
-
|
|||||||||||
CSBU
International
|
2,681
|
1,663
|
776
|
-
|
-
|
|||||||||||
Other
CSBU
|
1,291
|
133
|
(7,267
|
)
|
309
|
-
|
||||||||||
Total
CSBU
|
50,504
|
29,398
|
9,978
|
661
|
-
|
|||||||||||
Organizational
Solutions Business Unit:
|
||||||||||||||||
Domestic
|
15,347
|
10,362
|
1,471
|
88
|
907
|
|||||||||||
International
|
12,482
|
8,413
|
3,181
|
320
|
1
|
|||||||||||
Total
OSBU
|
27,829
|
18,775
|
4,652
|
408
|
908
|
|||||||||||
Total
operating segments
|
78,333
|
48,173
|
14,630
|
1,069
|
908
|
|||||||||||
Corporate
and eliminations
|
-
|
-
|
(1,945
|
)
|
152
|
-
|
||||||||||
Consolidated
|
$
|
78,333
|
$
|
48,173
|
$
|
12,685
|
$
|
1,221
|
$
|
908
|
||||||
Two
Quarters Ended
March
3, 2007
|
||||||||||||||||
Consumer
Solutions Business Unit:
|
||||||||||||||||
Retail
|
$
|
33,392
|
$
|
20,260
|
$
|
5,834
|
$
|
377
|
$
|
-
|
||||||
Consumer
direct
|
36,998
|
22,218
|
17,637
|
78
|
-
|
|||||||||||
Wholesale
|
8,158
|
4,710
|
4,409
|
-
|
-
|
|||||||||||
CSBU
International
|
5,029
|
3,093
|
1,195
|
-
|
-
|
|||||||||||
Other
CSBU
|
2,877
|
154
|
(15,907
|
)
|
792
|
-
|
||||||||||
Total
CSBU
|
86,454
|
50,435
|
13,168
|
1,247
|
-
|
|||||||||||
Organizational
Solutions Business Unit:
|
||||||||||||||||
Domestic
|
37,034
|
23,741
|
2,089
|
261
|
1,802
|
|||||||||||
International
|
28,917
|
19,410
|
6,217
|
409
|
-
|
|||||||||||
Total
OSBU
|
65,951
|
43,151
|
8,306
|
670
|
1,802
|
|||||||||||
Total
operating segments
|
152,405
|
93,586
|
21,474
|
1,917
|
1,802
|
|||||||||||
Corporate
and eliminations
|
-
|
-
|
(5,402
|
)
|
486
|
-
|
||||||||||
Consolidated
|
$
|
152,405
|
$
|
93,586
|
$
|
16,072
|
$
|
2,403
|
$
|
1,802
|
||||||
Two
Quarters Ended
February
25, 2006
|
||||||||||||||||
Consumer
Solutions Business Unit:
|
||||||||||||||||
Retail
|
$
|
38,424
|
$
|
22,983
|
$
|
5,967
|
$
|
773
|
$
|
-
|
||||||
Consumer
direct
|
38,789
|
23,299
|
18,890
|
26
|
-
|
|||||||||||
Wholesale
|
9,250
|
4,476
|
4,180
|
-
|
-
|
|||||||||||
CSBU
International
|
5,325
|
3,404
|
1,655
|
-
|
-
|
|||||||||||
Other
CSBU
|
2,454
|
512
|
(15,654
|
)
|
657
|
57
|
||||||||||
Total
CSBU
|
94,242
|
54,674
|
15,038
|
1,456
|
57
|
|||||||||||
Organizational
Solutions Business Unit:
|
||||||||||||||||
Domestic
|
31,677
|
20,931
|
1,908
|
173
|
1,943
|
|||||||||||
International
|
24,765
|
16,975
|
6,250
|
651
|
3
|
|||||||||||
Total
OSBU
|
56,442
|
37,906
|
8,158
|
824
|
1,946
|
|||||||||||
Total
operating segments
|
150,684
|
92,580
|
23,196
|
2,280
|
2,003
|
|||||||||||
Corporate
and eliminations
|
-
|
-
|
(3,871
|
)
|
349
|
-
|
||||||||||
Consolidated
|
$
|
150,684
|
$
|
92,580
|
$
|
19,325
|
$
|
2,629
|
$
|
2,003
|
||||||
Quarter
Ended
|
Two
Quarters Ended
|
||||||||||||
March
3,
2007
|
February
25,
2006
|
March
3,
2007
|
February
25,
2006
|
||||||||||
Reportable
segment EBITDA
|
$
|
13,049
|
$
|
14,630
|
$
|
21,474
|
$
|
23,196
|
|||||
Corporate
expenses
|
(2,526
|
)
|
(1,945
|
)
|
(5,402
|
)
|
(3,871
|
)
|
|||||
Consolidated
EBITDA
|
10,523
|
12,685
|
16,072
|
19,325
|
|||||||||
Gain
on sale of manufacturing facility
|
1,227
|
-
|
1,227
|
-
|
|||||||||
Depreciation
|
(1,366
|
)
|
(1,221
|
)
|
(2,403
|
)
|
(2,629
|
)
|
|||||
Amortization
|
(900
|
)
|
(908
|
)
|
(1,802
|
)
|
(2,003
|
)
|
|||||
Income
from operations
|
9,484
|
10,556
|
13,094
|
14,693
|
|||||||||
Interest
income
|
357
|
316
|
557
|
645
|
|||||||||
Interest
expense
|
(675
|
)
|
(660
|
)
|
(1,336
|
)
|
(1,303
|
)
|
|||||
Legal
settlement
|
-
|
873
|
-
|
873
|
|||||||||
Income
before provision for income taxes
|
$
|
9,166
|
$
|
11,085
|
$
|
12,315
|
$
|
14,908
|
NOTE 10 - |
SUBSEQUENT
EVENTS
|
·
|
Sales
- Consolidated
training and consulting services sales increased $4.1
million primarily due to increased sales of our new leadership program
based upon the principles found in The
7 Habits of Highly Effective People,
improved sales effectiveness training sales, increased strategy execution
sales, and increased international sales. Product sales declined
$5.6
million primarily due to reduced retail sales resulting from 10 fewer
retail stores being open during the quarter compared to the prior
year,
reduced sales through our consumer direct channels, and the effects
of our
modified 52/53 week fiscal calendar as discussed above.
|
·
|
Gross
Profit
-
Our consolidated gross profit totaled $47.2
million for the quarter ended March 3, 2007 compared to $48.2
million in the prior year. Our consolidated gross margin, which is
gross
profit in terms of a percentage of sales, remained consistent at
61.4
percent of sales in the second quarter of fiscal 2007 compared to
61.5
percent of sales in fiscal 2006. Although product sales declined
compared
to the prior year, our training and consulting service sales, which
typically have higher gross margins than the majority of our product
sales, increased as a percent of total sales when compared to fiscal
2006.
The shift toward increased training and consulting service sales
had a
favorable impact on our gross profit and gross margin during the
quarter
ended March 3, 2007.
|
·
|
Operating
Costs
-
Our
operating costs increased by $1.3
million compared to the prior year, which was the result of increased
selling, general, and administrative expenses totaling $1.2
million and a $0.1
million increase in depreciation expense. Amortization expense from
our
definite-lived intangible assets remained consistent with the prior
year.
|
·
|
Gain
on the Sale of Manufacturing Facility - During
the quarter ended March 3, 2007, we completed the sale of our printing
manufacturing facility and recognized a $1.2
million gain from the sale.
|
·
|
Income
Tax Provision
-
Our income tax provision for the quarter ended March 3, 2007 increased
to
$4.5
million compared to $1.9
million in the corresponding quarter of fiscal 2006. During the fourth
quarter of fiscal 2006, we determined that it was appropriate to
reverse
substantially all of the valuation allowances on our deferred income
tax
assets. Prior to the reversal of these valuation allowances, our
income
tax provisions were affected by reductions in our deferred income
tax
valuation allowance as we utilized net operating loss carryforwards.
Our
effective tax rate for the two quarters ended March 3, 2007 of
approximately 50 percent was higher than statutory combined rates
primarily due to the accrual of taxable interest income on the management
stock loan program and withholding taxes on royalty income from foreign
licensees.
|
·
|
Redemption
of Preferred Stock -
Subsequent to March 3, 2007, we redeemed all remaining shares of
Series A
Preferred Stock, which totaled $37.3
million. Although we obtained a line of credit to finance a portion
of the
preferred stock redemption and will incur interest charges on amounts
borrowed, the redemption of the remaining preferred stock will reduce
our
required cash outflows for dividends by $3.7
million per year.
|
Quarter
Ended
|
Two
Quarters Ended
|
||||||||||||||||||
March
3,
2007
|
February
25,
2006
|
Percent
Change
|
March
3,
2007
|
February
25,
2006
|
Percent
Change
|
||||||||||||||
Sales
by Category:
|
|||||||||||||||||||
Products
|
$
|
45,283
|
$
|
50,841
|
(11)
|
|
$
|
87,391
|
$
|
94,244
|
(7)
|
|
|||||||
Training
and consulting services
|
31,593
|
27,492
|
15
|
65,014
|
56,440
|
15
|
|||||||||||||
$
|
76,876
|
$
|
78,333
|
(2)
|
|
$
|
152,405
|
$
|
150,684
|
1
|
|||||||||
Consumer
Solutions Business Unit:
|
|||||||||||||||||||
Retail
Stores
|
$
|
19,265
|
$
|
23,781
|
(19)
|
|
$
|
33,392
|
$
|
38,424
|
(13)
|
|
|||||||
Consumer
Direct
|
17,062
|
19,613
|
(13)
|
|
36,998
|
38,789
|
(5)
|
|
|||||||||||
Wholesale
|
3,581
|
3,138
|
14
|
8,158
|
9,250
|
(12)
|
|
||||||||||||
CSBU
International
|
2,643
|
2,681
|
(1)
|
|
5,029
|
5,325
|
(6)
|
|
|||||||||||
Other
CSBU
|
1,583
|
1,291
|
23
|
2,877
|
2,454
|
17
|
|||||||||||||
44,134
|
50,504
|
(13)
|
|
86,454
|
94,242
|
(8)
|
|
||||||||||||
Organizational
Solutions Business Unit:
|
|||||||||||||||||||
Domestic
|
19,313
|
15,347
|
26
|
37,034
|
31,677
|
17
|
|||||||||||||
International
|
13,429
|
12,482
|
8
|
28,917
|
24,765
|
17
|
|||||||||||||
32,742
|
27,829
|
18
|
65,951
|
56,442
|
17
|
||||||||||||||
Total
Sales
|
$
|
76,876
|
$
|
78,333
|
(2)
|
|
$
|
152,405
|
$
|
150,684
|
1
|
·
|
Retail
Stores
-
The decline in retail sales was primarily due to fewer stores, which
had a
$2.4
million impact on sales, reduced demand for technology and related
products, which declined $1.0
million, and decreased traffic in our retail locations. Reduced traffic
in
our stores contributed to decreased sales of “core” products (e.g.
planners, binders, forms, and totes) during the quarter. These factors
combined to produce a 10
percent decrease in comparable store (stores which were open during
the
comparable periods) sales compared to the prior year. When calculated
on
prior year comparable weeks, our comparable store sales declined
6
percent from fiscal 2006. At March 3, 2007, we were operating 87
retail stores compared to 97
stores at February 25, 2006. We closed two store locations during
the
quarter ended March 3, 2007, and based upon our continuing analyses
of
retail store performance, we may close additional retail store locations
and continue to recognize decreases in sales resulting from closed
stores
in future periods.
|
·
|
Consumer
Direct
-
Sales through our consumer direct channels (primarily catalog, eCommerce,
and public seminars) decreased $2.6
million, or 13
percent, primarily due to decreased traffic through our internet
and
catalog channels and decreased public seminar sales. Although traffic
through our eCommerce and catalog sites was unfavorably affected
by the
timing of certain shopping days during the quarter, overall traffic
in
these channels declined compared to the prior year. Public program
sales
decreased $0.5
million primarily due to a reduced number of seminars held during
the
quarter. In addition, sales through government depots decreased due
to a
decision by the government to discontinue sales of dated paper products
through these stores.
|
·
|
Wholesale
-
Sales through our wholesale channel, which includes sales to office
superstores and other retail chains, increased $0.4
million primarily due to the timing of product sales to these
entities.
|
·
|
CSBU
International -
This channel includes the product sales of our directly owned
international offices in Canada, the United Kingdom, Mexico, and
Australia. Sales performance for the quarter through these channels
remained relatively
consistent
with the prior year. We separated the product sales operations from
the
Organizational Solutions Business Unit in these international locations
during the quarter ended December 2, 2006 to utilize existing product
sales and marketing expertise in an effort to improve overall product
sales performance at these offices.
|
·
|
Other
CSBU
-
Other CSBU sales consist primarily of domestic printing and publishing
sales and building sublease revenues. The increase in other CSBU
sales was
primarily due to increased external printing sales compared to the
prior
year.
|
·
|
Domestic - Our domestic training sales increased by $4.0 million, or 26 percent, primarily due to increased sales of our new leadership program based upon principles found in The Seven Habits of Highly Effective People, increased training effectiveness sales, and increased strategy execution sales. Sales performance improved in nearly all of our domestic regions as our booked days delivered increased 19 percent and our customer facilitated training sales increased 18 percent over the prior year. Our current outlook for the remainder of fiscal 2007 continues to be strong and current training days booked have increased compared to the prior year. We believe that the introduction of new programs and refreshed existing programs will continue to have a favorable impact on training and consulting service sales in future periods. |
·
|
International
-
International sales increased $0.9
million, or 8
percent, compared to the prior year. Sales increased over the prior
year
at our directly owned foreign offices located in Brazil, Japan, Canada,
and Australia, as well as from licensee royalty revenues. Sales increases
in these offices were partially offset by decreased sales at our
offices
located in Mexico and the United Kingdom. The translation of foreign
sales
to United States dollars resulted in a $0.1
million favorable impact to our consolidated sales as certain foreign
currencies strengthened against the United States dollar during the
quarter ended March 3, 2007.
|
·
|
Retail
Stores - The decline in retail sales was primarily due to fewer
stores, which had a $4.0 million impact on sales, reduced demand
for
technology and related products, which declined $1.3 million, and
decreased traffic in our retail locations. Partially offsetting these
factors was increased sales of “core” products during the first two
quarters of fiscal 2007. These factors combined to produce a 3 percent
decrease in comparable store (stores which were open during the comparable
periods) sales, including the four additional business days in fiscal
2007, when compared to fiscal 2006.
|
·
|
Consumer
Direct - Sales through our consumer direct channels decreased
$1.8 million, or 5 percent, primarily due to decreased traffic through
our
internet and catalog channels in the fiscal quarter ended March 3,
2007.
Public seminar sales were flat compared to the prior year. In addition,
sales through government depots decreased due to a decision by the
government to discontinue sales of dated paper products through these
stores.
|
·
|
Wholesale
- Sales through our wholesale channel, which includes sales
to
office superstores and other retail chains, decreased $1.1 million
primarily due to reduced demand for our products from one of our
wholesale
customers.
|
·
|
CSBU
International - This channel includes the product sales of our
directly owned international offices in Canada, the United Kingdom,
Mexico, and Australia. Sales performance through these channels decreased
$0.3 million compared with the prior year due to reduced demand for
products in these countries.
|
·
|
Other
CSBU - The increase in other CSBU sales was primarily due to
increased external printing sales compared to the prior
year.
|
·
|
Domestic
- Our
domestic training sales increased by $5.4
million, or 17
percent, primarily due to increased sales of our new leadership program
based upon principles found in The
Seven Habits of Highly Effective People, increased
training effectiveness sales, and increased strategy execution sales.
Our
current outlook for the remainder of fiscal 2007 continues to be
strong
and current training days booked has increased compared to the prior
year.
|
·
|
International
-
International sales increased $4.2
million, or 17
percent, compared to the prior year. Sales increased over the prior
year
at all of our directly owned foreign offices except Mexico, as well
as
from licensee royalty revenues. The translation of foreign sales
to United
States dollars produced a $0.2
million favorable impact to our consolidated sales as certain foreign
currencies strengthened against the United States dollar during the
two
quarters ended March 3, 2007.
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||||
Contractual
Obligations
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
|||||||||||||||
Minimum
required payments to EDS for outsourcing services
|
$
|
17,217
|
$
|
15,901
|
$
|
15,927
|
$
|
15,577
|
$
|
15,298
|
$
|
73,233
|
$
|
153,153
|
||||||||
Required
payments on corporate campus financing obligation
|
3,045
|
3,045
|
3,045
|
3,055
|
3,115
|
49,957
|
65,262
|
|||||||||||||||
Minimum
operating lease payments
|
8,475
|
7,228
|
5,564
|
4,012
|
2,402
|
6,013
|
33,694
|
|||||||||||||||
Line
of credit payments(5)
|
391
|
937
|
937
|
15,112
|
-
|
-
|
17,377
|
|||||||||||||||
Preferred
stock dividend payments(1)
|
2,215
|
-
|
-
|
-
|
-
|
-
|
2,215
|
|||||||||||||||
Other
debt payments(2)
|
176
|
168
|
160
|
153
|
145
|
435
|
1,237
|
|||||||||||||||
Contractual
computer hardware purchases(3)
|
535
|
483
|
556
|
587
|
525
|
3,192
|
5,878
|
|||||||||||||||
Payments
for new printing services equipment(4)
|
3,137
|
-
|
-
|
-
|
-
|
-
|
3,137
|
|||||||||||||||
Purchase
obligations
|
10,523
|
-
|
-
|
-
|
-
|
-
|
10,523
|
|||||||||||||||
Monitoring
fees paid to a preferred stock investor(1)
|
97
|
-
|
-
|
-
|
-
|
-
|
97
|
|||||||||||||||
Total
expected contractual obligation
payments
|
$
|
45,811
|
$
|
27,762
|
$
|
26,189
|
$
|
38,496
|
$
|
21,485
|
$
|
132,830
|
$
|
292,573
|
(1) |
Amount
reflects the redemption of all remaining Series A Preferred Stock
subsequent to March 3, 2007.
|
(2) |
The
Company’s variable rate debt payments include interest payments at
7.0
percent,
which was the applicable interest rate at September 29,
2006.
|
(3) |
We
are contractually obligated by our EDS outsourcing agreement to purchase
the necessary computer hardware to keep such equipment up to current
specifications. Amounts shown are estimated capital purchases of
computer
hardware under terms of the EDS outsourcing agreement and its
amendments.
|
(4) |
In
August 2006, we signed contracts to purchase new printing equipment
for
$3.1
million in cash as part of a plan to reconfigure our printing services
operation. The payments are due at specified times during fiscal
2007 that
coincide with the installation and successful operation of the new
equipment.
|
(5) |
Interest
expense on the line of credit payments was calculated at 6.4
percent,
which was the approximate interest rate on the date of the preferred
stock
redemption, and assumes that only interest payments will be made
until the
line of credit agreement expires in March
2010.
|
·
|
Products
-
We sell planners, binders, planner accessories, totes, handheld electronic
devices, and other related products that are primarily sold through
our
CSBU channels.
|
·
|
Training
and Consulting Services
-
We provide training and consulting services to both organizations
and
individuals in strategic execution, leadership, productivity, goal
alignment, sales force performance, and communication effectiveness
skills. These training programs and services are primarily sold through
our OSBU channels.
|
Sales
Growth
|
Percent
of Target Shares Awarded
|
||||
30.0%
|
115%
|
135%
|
150%
|
175%
|
200%
|
22.5%
|
90%
|
110%
|
125%
|
150%
|
175%
|
15.0%
|
65%
|
85%
|
100%
|
125%
|
150%
|
11.8
%
|
50%
|
70%
|
85%
|
110%
|
135%
|
7.5%
|
30%
|
50%
|
65%
|
90%
|
115%
|
$36.20
|
$56.80
|
$72.30
|
$108.50
|
$144.60
|
|
Cumulative
Operating Income (millions)
|
Sales
Growth
|
Percent
of Target Shares Awarded
|
||||
40.0%
|
115%
|
135%
|
150%
|
175%
|
200%
|
30.0%
|
90%
|
110%
|
125%
|
150%
|
175%
|
20.0%
|
65%
|
85%
|
100%
|
125%
|
150%
|
15.7%
|
50%
|
70%
|
85%
|
110%
|
135%
|
10.0%
|
30%
|
50%
|
65%
|
90%
|
115%
|
$41.30
|
$64.90
|
$82.60
|
$123.90
|
$165.20
|
|
Cumulative
Operating Income (millions)
|
Quarter
Ended
|
Two
Quarters Ended
|
||||||||||||
March
3,
2007
|
February
25,
2006
|
March
3,
2007
|
February
25,
2006
|
||||||||||
Losses
on foreign exchange contracts
|
$
|
(64
|
)
|
$
|
(22
|
)
|
$
|
(73
|
)
|
$
|
(68
|
)
|
|
Gains
on foreign exchange contracts
|
15
|
5
|
33
|
222
|
|||||||||
Net
gain (loss) on foreign exchange contracts
|
$
|
(49
|
)
|
$
|
(17
|
)
|
$
|
(40
|
)
|
$
|
154
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
|||||
Mexican
Pesos
|
13,576
|
$
|
1,199
|
||||
Australian
Dollars
|
1,000
|
788
|
|||||
Japanese
Yen
|
88,404
|
770
|
·
|
In
general, the Company has established and communicated to vendors,
service
providers, and associates, new policies instructing that all vendor
invoices be sent directly to the Company’s accounts payable
department.
|
·
|
Upon
receipt of a vendor invoice, the accounts payable department records
the
vendor invoice into the accounts payable sub-ledger before the invoice
is
sent to the appropriate department for review and
approval.
|
·
|
At
each period end, all unapproved invoices in the accounts payable
sub-ledger are reviewed and investigated to determine whether an
accrual
is necessary for services provided during the
period.
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares That May Yet Be Purchased Under the Plans
or
Programs
(in
thousands)
|
|||||||||
Common
Shares:
|
|||||||||||||
December
3, 2006 to January 6, 2007
|
-
|
$
|
-
|
none
|
$
|
4,887
|
|||||||
January
7, 2007 to February 3, 2007
|
6,814(2
|
)
|
7.14
|
none
|
4,887
|
||||||||
February
4, 2007 to March 3, 2007
|
328,000(1
|
)
|
7.54
|
328,000
|
2,413(1
|
)
|
|||||||
Total
Common Shares
|
334,814
|
$
|
7.53
|
328,000
|
|||||||||
Total
Preferred Shares
|
none
|
none
|
(1) |
In
January 2006, our Board of Directors approved the purchase of up
to
$10.0
million of our outstanding common stock. All previous authorized
common
stock purchase plans were canceled. Following the approval of this
common
stock purchase plan, we have purchased a total of 1,009,300
shares of our common stock for $7.6
million through March 3, 2007.
|
(2) |
Amount
represents shares withheld for statutory taxes from a distribution
of
common shares in connection with the vesting of an unvested stock
award.
|
1.
|
Election
of Directors - Three
directors were elected for three-year terms that expire at the Annual
Meeting of Shareholders to be held following the end of fiscal 2009,
or
until their successors are elected and qualified. The number of votes
for
each nominee for director was as
follows:
|
Name
|
Votes
For
|
Votes
Withheld
|
||
Joel
C. Peterson
|
18,038,977
|
1,063,242
|
||
E.
Kay Stepp
|
18,005,232
|
1,096,987
|
||
Robert
A. Whitman
|
17,999,458
|
1,102,761
|
2.
|
Appointment
of Independent Auditors - The
shareholders ratified the appointment of KPMG LLP as the Company’s
independent auditors for the fiscal year ending August 31, 2007.
A total
of 18,370,014 shares voted in favor of this appointment, 730,587
shares
voted against, and 1,619 shares abstained from
voting.
|
(A)
|
Exhibits:
|
|
10.1
|
Revolving
Line of Credit Agreement ($18,000,000) by and between JPMorgan Chase
Bank,
N.A. and Franklin Covey Co. dated March 14, 2007 (attached as exhibit
10.1
to Current Report on Form 8-K as filed with the Securities and Exchange
Commission on March 19, 2007 and incorporated herein by
reference).
|
|
10.2
|
Secured
Promissory Note between JPMorgan Chase Bank, N.A. and Franklin Covey
Co.
dated March 14, 2007 (attached as exhibit 10.2 to Current Report
on Form
8-K as filed with the Securities and Exchange Commission on March
19, 2007
and incorporated herein by reference).
|
|
10.3
|
Security
Agreement between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin
Covey
Marketing, LTD., and JPMorgan Chase Bank, N.A. and Zions First National
Bank, dated March 14, 2007 (attached as exhibit 10.3 to Current Report
on
Form 8-K as filed with the Securities and Exchange Commission on
March 19,
2007 and incorporated herein by reference).
|
|
10.4
|
Repayment
Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin
Covey
Marketing, LTD., and JPMorgan Chase Bank N.A., dated March 14, 2007
(attached as exhibit 10.4 to Current Report on Form 8-K as filed
with the
Securities and Exchange Commission on March 19, 2007 and incorporated
herein by reference).
|
|
10.5
|
Pledge
and Security Agreement between Franklin Covey Co. and JPMorgan Chase
Bank,
N.A. and Zions First National Bank, dated March 14, 2007 (attached
as
exhibit 10.5 to Current Report on Form 8-K as filed with the Securities
and Exchange Commission on March 19, 2007 and incorporated herein
by
reference).
|
|
10.6
|
Revolving
Line of Credit Agreement ($7,000,000) by and between Zions First
National
Bank and Franklin Covey Co. dated March 14, 2007 (attached as exhibit
10.6
to Current Report on Form 8-K as filed with the Securities and Exchange
Commission on March 19, 2007 and incorporated herein by
reference).
|
|
10.7
|
Secured
Promissory Note between Zions First National Bank and Franklin Covey
Co.
dated March 14, 2007 (attached as exhibit 10.7 to Current Report
on Form
8-K as filed with the Securities and Exchange Commission on March
19, 2007
and incorporated herein by reference).
|
|
|
||
10.8
|
Repayment
Guaranty between Franklin Covey Co., Franklin Covey Printing, Inc.,
Franklin Development Corporation, Franklin Covey Travel, Inc., Franklin
Covey Catalog Sales, Inc., Franklin Covey Client Sales, Inc., Franklin
Covey Product Sales, Inc., Franklin Covey Services LLC, Franklin
Covey
Marketing, LTD., and Zions First National Bank, dated March 14, 2007
(attached as exhibit 10.8 to Current Report on Form 8-K as filed
with the
Securities and Exchange Commission on March 19, 2007 and incorporated
herein by reference).
|
|
10.9
|
Credit
Agreement between Franklin Covey Canada, Ltd. and Toronto-Dominion
Bank
dated February 19, 2007 (attached as exhibit 10.9 to Current Report
on
Form 8-K as filed with the Securities and Exchange Commission on
March 19,
2007 and incorporated herein by reference).
|
|
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
|
FRANKLIN COVEY CO. | ||||
Date:
|
April
12, 2007
|
By:
|
/s/
ROBERT A. WHITMAN
|
|
Robert
A. Whitman
|
||||
Chief
Executive Officer
|
||||
Date:
|
April
12, 2007
|
By:
|
/s/
STEPHEN D. YOUNG
|
|
Stephen
D. Young
|
||||
Chief
Financial Officer
|
||||