| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, |
OR | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___ |
Franklin Covey Co.
(Exact name of registrant as specified in its charter)
| Utah | 1-11107 | 87-0401551 | ||
2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 817-1776
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, $.05 Par Value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | £ | Accelerated | þ |
| 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 o No þ
As of March 1, 2013,February 28, 2014, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $193.8$178.2 million, which was based upon the closing price of $13.91$20.95 per share as reported by the New York Stock Exchange.
As of October 31, 2013,2014, the Registrant had 16,675,477 16,874,683 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders, which is scheduled to be held on January 24, 2014,23, 2015, are incorporated by reference in Part III of this Form 10-K.
| FranklinCovey Co. | |||
TABLE OF CONTENTS | |||
| Business | 2 | ||
| Risk Factors | 12 | ||
| Unresolved Staff Comments | |||
| Properties | |||
| Legal Proceedings | |||
| Mine Safety Disclosures | |||
| Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities | |||
| Selected Financial Data | 26 | ||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | ||
| Quantitative and Qualitative Disclosures About Market Risk | 46 | ||
| Financial Statements and Supplementary Data | 47 | ||
| Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |||
| Controls and Procedures | |||
| Other Information | |||
| Directors, Executive Officers and Corporate Governance | |||
| Executive Compensation | |||
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||
| Certain Relationships and Related Transactions, and Director Independence | |||
| Principal Accountant Fees and Services | |||
| Exhibits and Financial Statement Schedules | |||
Disclosure Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, relating to our operations, results of operations, and other matters that are based on our current expectations, estimates, assumptions, and projections. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that might not prove to be accurate. Actual outcomes and results could differ materially from what is expressed or forecast in these forward-looking statements. Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to, the factors discussed under the section of this report entitled “Risk Factors.”
ITEM 1. BUSINESS
General
Franklin Covey Co. (we, us, our, the Company, or FranklinCovey) is a global company specializing in performance improvement. We help organizations achieve results that require a change in human behavior and our mission is to “enable greatness in people and organizations everywhere.” We believe that our results-driven principle-centered content is a competitive advantage in the marketplace. From the foundational work of Dr. Stephen R. Covey in leadership and Hyrum W. Smith in productivity, we have developed deep expertise that extends to helping organizations and individuals achieve lasting behavioral change is seven crucial areas: Leadership, Execution, Productivity, Trust, Sales Performance, Customer Loyalty, and Education. We have over 660825 employees worldwide delivering these principle-based curriculums and effectiveness tools to our customers. Our consolidated net sales for the fiscal year ended August 31, 20132014 totaled $190.9$205.2 million and our shares of common stock are traded on the New York Stock Exchange (NYSE) under the ticker symbol “FC.”
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; an office that specializes in sales to governmental entities; wholly owned subsidiaries in Australia, Japan, and the United Kingdom; and we contract with licensee partners who deliver our content and provide services in over 140165 other countries and territories around the world.
Our business-to-business service utilizes 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 provide clients with training in management skills, relationship skills, and individual effectiveness, and we can provide personal-effectiveness literature and electronic educational solutions to our clients as needed.
Our fiscal year ends on August 31 of each year. Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.
Services Overview
Our mission is to “enable greatness in people and organizations everywhere,” and we believe that we are experts at solving certain pervasive, intractable problems, each of which requires a change in human behavior. As we deliver our solutions to these problems, we believe there are four important characteristics that distinguish us from our competitors.
| 1. | World Class Content – Rather than rely on “flavor of the month” training fads, our content is principle centered and based on natural laws of human behavior and effectiveness. Our content is designed to build new skillsets, establish new mindsets, |
and provide enabling toolsets. The Company’sOur content is well researched, subjected to numerous field beta tests, and improved through a proven development process.
| 2. | Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including: on-site training, training led through certified facilitators, on-line learning, blended learning, intellectual property licenses, and organization-wide transformational processes, including consulting and coaching. |
| 3. | Global Capability – 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 content in over |
| 4. | Transformational Impact and Reach – We hold ourselves responsible for and measure ourselves by our clients’ achievement of transformational results. |
Our content, tools, and methodologies are organized into key practice areas, each offering targeted solutions that are designed to drive these four outcomes. We have divided our curriculums into the following seven major practices:
| 1. | Leadership |
| 2. | Execution |
| 3. | Productivity |
| 4. | Trust |
| 5. | Sales Performance |
| 6. | Customer Loyalty |
| 7. | Education |
Our practices are designed to provide world-class content and delivery, including best-selling books and audio, innovative and widely recognized thought leadership, multiple delivery and teaching methods, a practice-centric focused sales force, and practice-specific marketing support. These elements allow us to offer our clients training and consulting solutions that are designed to improve individual and organizational behaviors, deliver content that adapts to an organization’s unique needs, and provide meaningful improvements in our clients’ business performance.
The following description of our practices and associated content describes what our offerings are designed to provide to our clients. The description should not be viewed as a warranty or guarantee of results. Further information about our content and services can be found on our website at www.franklincovey.com. However, the information contained in, or that can be accessed through, our website does not constitute a part of this annual report.
| 1. | Leadership |
Dr. Stephen R. Covey, one of our co-founders, once said, “Leadership is communicating to people their worth and potential so clearly that they come to see it in themselves.” Leadership has a profound impact on performance, and is a key lever that mobilizes teams to produce results. We believe that in today’s fast-paced world, the most effective leaders address constant change with timeless principles of effectiveness and unwavering character. Leaders recognize that great leadership is not only about what they do, but about who they are. Franklin Covey’s Leadership practice develops leaders at three levels: personal, team, and organization-wide.
Franklin Covey’s Leadership practice is designed to develop leaders who achieve sustained superior performance, engage employees to achieve the most critical objectives, win the loyalty of customers and other stakeholders, and build a strategic advantage by identifying and making a distinctive contribution. Our leadership solutions are comprehensive and include the following:
The 7 Habits of Highly Effective People®—Signature Program 4.0
Based on the principles found in Dr. Stephen R. Covey’s best-selling business book, The 7 Habits of Highly Effective People, this program was re-created and released during fiscal 2014 with refreshed content and new award-winning video presentations. This program is designed to drive organizational successprovide training that helps organizations achieve sustained superior results by helping participants adopt the paradigmsindividuals and behaviors of effective people.leaders be measurably more effective. Participants gain hands-on experience, applying timeless principles that yield greater productivity, improved communication, strengthened relationships, increased influence, and laser-like focus on critical priorities.
The 7 Habits for Managers®
FranklinCovey’s The 7 Habits for Managers solution teaches the fundamentals of leading today’s mobile knowledge worker. Both new and experienced managers acquire a set of tools to help them meet today’s management challenges, including conflict resolution, prioritization, performance management, accountability and trust, execution, collaboration, and team and employee development.
The 7 Habits of Highly Effective People®: Introductory Workshop for Associates
This workshop for employees at all levels is designed to help employees become empowered with new knowledge, skills, and tools to confront issues, work as a team, increase accountability, and raise the bar on what they can achieve.
Leadership: Great Leaders, Great Teams, Great Results™
This comprehensive offering contains the entire core content of Franklin Covey’s Leadership practice. The workshop features videos that present the latest on our own research and thinking, along with the best thinking of other leadership experts.
Leadership Modular Series
Drawn from the content of our leadership-development program, the Leadership Modular Series comprises seven stand-alone modules that teach imperatives leaders can apply to create a work environment that addresses the needs of the knowledge worker three to four hours at a time.
Executive Coaching
We offer senior executives a coaching experience created in partnership with Columbia University, which includes methodologies approved by the International Coach Federation (ICF). In one-on-one or team sessions, we leverage content, methodology, and tools to guide leaders in discovering and unleashing the potential they already possess.
| 2. | Execution |
Execution remains one of the toughest challenges organizations face today. We believe that our Execution practice provides organizations with the paradigms, practices, and tools to address these challenges. We work directly with leadership teams to help them clarify the few “wildly important goals” that the execution of their strategy requires, identify the few key measures that lead to the achievement of these goals, create clear and compelling scoreboards, and build a culture and cadence of accountability so that the goals are achieved. Our key execution offerings include:
The 4 Disciplines of Execution®: Manager Certification
The purpose of manager certification includes helping managers not only develop specific skills, but to also create actual work plans. We help managers leave the session with clearly identified goals and measures, a draft scoreboard for their team, and an accountability plan to help everyone move forward on the goals.
My4DX.com
My4DX.com is designed to fully support the Company’s 4 Disciplines of Execution methodology. This versatile on-line service assists organizations in developing and tracking progress on “wildly important goals,” and provides a cadence of accountability to both organizations and individuals.
What the CEO Wants You to Know: Building Business Acumen™
This training supports the Execution practice disciplines by helping individuals and teams better understand the financial engine of their business and how they can positively affect it. The
material is based on the popular book What the CEO Wants You to Know, by leading CEO and executive coach Ram Charan.
| 3. | Productivity |
Another of Franklin Covey’s co-founders, Hyrum W. Smith, taught that adherence to specified natural laws of behavior would result in increased productivity and inner peace. In today’s fast-paced world of “doing more with less,” we believe that workforce productivity and engagement can be a competitive advantage. Today’s leaders and workers are required to make more decisions every day than ever before while their attention is under unprecedented attack. Franklin Covey’s Productivity practice equips individuals, teams, and organizations to consistently make intentional high-value decisions and execute on high-impact goals and projects with excellence in the midst of unlimited choices, demands, and distractions. Our Productivity practice offerings include the following curriculums:
The 5 Choices to Extraordinary Productivity™
This program is designed to provide the in-depth skills, knowledge, and attitudes that allow individual contributors, teams, and organizations to be able to identify, validate, and act on what’s most important. Instead of trying to get everything done, participants focus on how to get the right things done. This discernment enables them to make wiser decisions, harness technology to enhance workflow, and put their finest attention and energy on executing what matters most.
Project Management
Our project management workshop teaches a four-step process for skillfully managing projects large or small. This proven approach helps project managers and their teams craft and deliver high-quality projects on time and within budget.
Writing Advantage®
The FranklinCovey Writing Advantage program teaches participants how to set quality writing standards that help people increase productivity, resolve issues, avoid errors, and heighten credibility. Participants learn how to write faster with more clarity, and gain skills for revising and fine-tuning every style of document.
Presentation Advantage®
With our Presentation Advantage solution, participants learn how to craft presentations around essential objectives, present key concepts and ideas with power and enthusiasm, design and present effective visuals, and employ techniques for polishing and mastering presentation delivery.
| 4. | Trust |
We believe that trust is the hallmark of effective leaders, teams, and organizations. Trust-related problems like bureaucracy, fraud, and excessive turnover discourage productivity, divert resources, and chip away at a company’s brand. On the other hand, leaders who make building trust an explicit goal of their job gain strategic advantages—accelerating growth, enhancing innovation, improving collaboration and execution, and increasing shareholder value. Our Trust practice is built on The New York Times best-selling book, The Speed of Trust by Stephen M. R. Covey, and includes offerings to help leaders and team members develop the competencies to make trust a strategic advantage.
Leading at the Speed of Trust®
This program engages leaders at all levels in identifying and closing the trust gaps in their organization. Instead of paying “trust taxes,” organizations can begin to realize “trust dividends.” We believe that doing business at the “speed of trust” lowers costs, speeds up results, and increases profits and influence.
Working at the Speed of Trust®—For Associates
This workshop helps individual contributors identify and address “trust gaps” in their personal credibility and in their relationships at work. Using examples from their work and focusing on real-world issues, participants discover how to communicate transparently with peers and managers,
improve their track record of keeping commitments, focus on improving internal “customer service” with others who depend on their work, and much more.
| 5. | Sales Performance |
We believe that sales performance is about helping clients succeed. FranklinCovey provides an approach that delivers the “what to do” and “how to do” for mutual seller/buyer benefits. Through consulting, training, and coaching, our Sales Performance practice helps sales leaders and salespeople act as genuine trusted business advisors who create value and help clients succeed.
Helping Clients Succeed® is a mind-set, skill-set, and tool-set for becoming client-centered. It is a way of thinking, being, and behaving for sales professionals. We believe that it removes the stigmas that come with sales, and we believe that it removes the adversarial interplay between sellers and buyers. It is also a process for creating candid dialogue, fresh thinking, innovative collaboration, insightful decision making, and robust execution—with clients and within an organization. With our suite of consultative sales-training solutions, we believe clients can transform their salespeople into trusted business advisors who focus on helping their clients succeed, resulting in increased sales, shortened sales cycles, improved margins, and satisfied clients.
| 6. | Winning Customer Loyalty® |
Our Customer Loyalty practice helps leaders of multiunit organizations create a culture where employees are engaged and equipped to deliver great customer experiences. To do this, customer loyalty specialists draw from an array of offerings to craft a solution that works with each company’s culture, operating environment, and strategic vision. The Company hasWe have partnered with Frank Reichheld, creator of the Net Promoter SystemTM, to help organizations measure and improve customer and employee loyalty through accurate metrics and world-class training and development.
Our Customer Loyalty practice is designed to help organizations:
| · | Collect statistically valid feedback from a representative sample of customers and employees. |
| · | Increase the visibility of customer-service metrics so managers get |
| · | Apply an accountability process at frontline teams so they deliver exceptional customer service at a much higher percentage of the time. |
| · | Measure and improve employee engagement. |
| 7. | Education |
The FranklinCovey Education practice is dedicated to helping educational organizations build a culture that will produce great results. Our offerings address all grade levels and help faculty and students develop the critical leadership and effectiveness skills they will need to succeed in a knowledge-based, networked world.
Primary Education Solutions: The Leader in Me®
The Leader in Me process is designed to be integrated into a school’s core curriculum and everyday language. The methodology is designed to become part of the culture, gain momentum, and help to produce improved results year after year. We believe this methodology benefits schools and students in the following ways:
| · | Increases academic performance. |
| · | Improves school culture. |
| · | Decreases disciplinary issues. |
| · | Increases teacher engagement and parent involvement. |
Based on Dr. Stephen R. Covey’s best-selling book The 7 Habits of Highly Effective People, The Leader in Me is a whole-school transformation process that integrates principles of leadership and
effectiveness into school curriculum using every day, age-appropriate language. At August 31, 20132014 there were over 1,5001,900 schools worldwide participating in The Leader in Me program.program and we believe that the positive results experienced by schools around the world are a major reason why the Education practice is one of the fastest growing practices at Franklin Covey Co.
Secondary Education Solutions: The 7 Habits of Highly Effective Teens®
The Introduction to The 7 Habits of Highly Effective Teens® workshop from FranklinCovey, based on the best-selling book of the same name by Sean Covey and the No. 1 best-selling business book The 7 Habits of Highly Effective People, gives young people a set of tools to deal with life’s challenges. The training is a means for educators, administrators, and superintendents to help improve student performance; reduce conflicts, disciplinary problems, and truancy; and enhance cooperation and teamwork among parents, teens, and teachers.
Delivery Methods
We have multiple methods to deliver our world-class content to our clients that are designed to provide our customers with a learning environment that suits their needs. Our primary delivery methods include the following:
| · | Onsite Presentations |
| · | Client Facilitators |
| · | International Licensees |
| · | E-Learning |
| · | Public Workshops |
| · | Custom Solutions |
| · | Intellectual Property Licenses |
| · | Media Publishing |
Onsite Presentations
We employ highly-talented consultants and presenters to deliver our curriculums in person at client locations. Based around the world, our consultants represent diverse, global industry experience and can tailor their delivery to meet a client’s precise needs. Whether the need is for consulting, training, or customized keynote speeches, our consultants can deliver our curriculums to any level of an organization, from the C-suite to a team or department. We believe that our delivery consultants provide high-quality services and are a competitive advantage in the marketplace.
Client Facilitators
For organizations seeking cost-effective ways to implement solutions involving large populations of managers and frontline workers, FranklinCovey certifies on-site client facilitators to teach our content and adapt it to our client’s organizational needs. We have thousands of client facilitators around the world who are certified to teach in different content areas. In order to become a client facilitator, an individual must become certified to teach our curriculums through a two-step process that is designed to ensure that these trained personnel can deliver our content in a professional and meaningful manner.
International Licensees
In foreign countries where we do not have an office, our content is delivered through independent licensees, who, under strict guidelines, may translate and adapt our curriculums to local preferences and customs, if necessary. Our licensee partners deliver our curriculums and provide services in over 140165 other countries and territories around the world. These licensee partners allow us to deliver the same high quality content to clients that have multinational operations or in countries that have specific cultural requirements. Our licensee partners pay us a royalty based on the programs and content delivered.
| E-Learning |
Our E-Learning capabilities bring FranklinCovey to clients in innovative ways that transcend traditional E-learning solutions. Franklin Covey’s online curriculums allow participants to save travel time and expenses as well as providing the opportunity to view our curriculums in smaller time increments.
Public Workshops
Each year, we offer a number of training events, primarily in the United States and Canada, which are open to the public. Prior to the event, we advertise in the geographic region where the event will be held and participants may register for the events in advance. Interested persons may also search for upcoming workshops based on the desired curriculum and register for these workshops through our website at www.franklincovey.com. In addition, our content is also taught by certain professional training firms that also offer events to the public.
| Custom Solutions |
Whether clients need a program customized, or require a new product developed for their organization, our custom solutions department has the process to build the solution. Customization builds upon our existing content and clients’ unique content by using a specific process to deliver results. Our five-step process (diagnose, design, develop, deliver, and learn) lowers development costs and strives to improve our clients’ return on investment.
Intellectual Property Licenses
For clients that want to utilize our content in their internal training environments, we offer intellectual property licenses to allow further customization of our content to specific client needs.
| Media Publishing |
Our Media Publishing department extends our influence into both traditional publishing and new media channels. FranklinCovey Media Publishing offers books, e-books, audio products, downloadable and paper-based tools, and content-rich software applications for smart phones and other handheld devices to consumer and corporate markets.
Industry Information
According to the Training magazine 20132014 Training Industry Survey, the total size of the U.S. training industry is estimated to be $55.4$61.8 billion, which is a one12 percent decline fromincrease over the prior year. One of our competitive advantages in this highly fragmented industry stems from our fully integrated principle-centered training curriculums, measurement methodologies, and implementation tools to help organizations and individuals measurably improve their effectiveness. This advantage allows us to deliver not only training to both corporations and individuals, but also to implement the training through the use of powerful behavior-changing tools with the capability to then measure the impact of the delivered content and solutions.
Over our history, we have provided content, services, and products to 97 of the Fortune 100 companies and more than 75 percent of the Fortune 500 companies. We also provide content and services to a number of U.S. and foreign governmental agencies, as well as numerous educational institutions. In addition, we provide training curricula, measurement services, and implementation tools internationally, either through directly operated offices, or through independent licensed providers.
Enterprise Information
Our sales are primarily comprised of training and content 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 U.S./Canada, international, and corporate services operations is
YEAR ENDED AUGUST 31, | 2013 | Percent change | 2012 | Percent change | 2011 | |||||||||||||||
| U.S./Canada | $ | 142,616 | 14 | $ | 125,183 | 6 | $ | 118,420 | ||||||||||||
| International | 44,154 | 5 | 42,052 | 5 | 40,011 | |||||||||||||||
| Total | 186,770 | 12 | 167,235 | 6 | 158,431 | |||||||||||||||
| Corporate services | 4,154 | 29 | 3,221 | 36 | 2,373 | |||||||||||||||
| Consolidated | $ | 190,924 | 12 | $ | 170,456 | 6 | $ | 160,804 | ||||||||||||
function as a single operating segment. Additional enterprise financial information, including geographical information, can be found in the notes to our consolidated financial statements (Note 17)15).
Clients
We have a relatively broad base of organizational and individual clients. In our direct offices that serve the United States, Canada, Japan, Australia, and the United Kingdom, we have more than 4,2004,300 organizational clients consisting of corporations, governmental agencies, educational institutions, and other organizations. We have thousands of additional organizational clients throughout the world, which are served through our global licensee partner network, and we believe that our content, in all its forms, delivers results that encourage strong client loyalty. Employees in each of our domestic and international distribution channels focus on helping our clients achieve measurably positive results from utilizing our content. Due to the nature of our business, we do not have a significant backlog of firm orders.
During fiscal 2011, we recognized $16.8 millionthe periods presented in sales from our contracts with a division of the United States federal government, which was more than ten percent of our consolidated revenues for the year. During fiscal years 2013 and 2012,this report, none of our clients were responsible for more than ten percent of our consolidated revenues.
Competition
We operate in a highly competitive and rapidly changing global marketplace and compete with a variety of organizations that offer services comparable with those that we offer. The nature of the competition in the performance improvement industry, however, is highly fragmented with few large competitors. Based upon our fiscal 20132014 consolidated sales of $190.9$205.2 million, we believe that we are a leading competitor in the performance skills and education market. Other significant comparative companies in the performance improvement market are Development Dimensions International, CRA International, Inc., Learning Tree International Inc., GP Strategies Corp., American Management Association, Wilson Learning, Forum Corporation, Corporate Executive Board Co., and the Center for Creative Leadership.
We derive our revenues from a variety of companies with a broad range of sales volumes, governments, educational institutions, and other entities. We believe that the principal competitive factors in the industry in which we compete include the following:
| · | Quality of services and solutions |
| · | Skills and capabilities of people |
| · | Innovative training and consulting services combined with effective products |
| · | Ability to add value to client operations |
| · | Reputation and client references |
| · | Price |
| · | Availability of appropriate resources |
| · | Global reach and scale |
Given the relative ease of entry into the training market, the number of our competitors could increase, many of whom may imitate existing methods of distribution, or could offer similar content and programs at lower prices. Some of these competitors may have greater financial and other resources than we do. However, we believe that we have several areas of competitive differentiation in our industry. We believe that our competitive advantages include: (1) the quality of our content, as indicated by our strong gross margins, branded content, and best-selling books; (2) the breadth of delivery options we are able to offer to customers for utilizing our content, including live presentations by our own training consultants, live presentations though Company certified client-employed facilitators, web-based presentations, and film-based presentations; (3) our global reach, which allows truly multinational clients to scale our content uniformly across the globe, through our mix of direct offices and our global licensee network; and (4) the significant impact which our solutions can have on our clients’ results. Moreover, we believe that we are a market leader in the U.S. in leadership, execution, productivity, and individual effectiveness content. Increased competition from existing and future competitors could, however, have a material adverse effect on our sales and profitability.
Seasonality
Our quarterly resultsfourth quarter of operations reflect minoreach fiscal year has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education practice (when school administrators and faculty have professional development days) and to increased facilitator sales that typically occur during that quarter resulting from year-end incentive programs. Overall, training sales are moderately seasonal trends primarily because of the timing of corporate training, which is not typically scheduled as heavily during holiday and certain vacation periods. Our fourth fiscal quarter generally has higher sales and income from operations than other fiscal quarters primarily due to increased sales in our Education practice, because both school administration and faculty members are often out of school and available to be trained, and to our relatively strong facilitator sales that typically occur during the quarter.
Quarterly fluctuations may also be affected by other factors including the introduction of new offerings, business acquisitions, the addition of new organizational customers, and the elimination of underperforming offerings.
Manufacturing and Distribution
We do not manufacture any of our products. We purchase our training materials and related products from various vendors and suppliers located both domestically and internationally, and we are not dependent upon any one vendor for the production of our training and related materials as the raw materials for these products are readily available. We currently believe that we have good relationships with our suppliers and contractors.
During fiscal 2001, we entered into a long-term contract with HP Enterprise Services (HP) to provide warehousing and distribution services for our training products and related accessories. Our materials are primarily warehoused and distributed from an HP facility located in Des Moines, Iowa.
Trademarks, Copyrights, and Intellectual Property
Our success has resulted in part from our proprietary content, methodologies, and other intellectual property rights. We seek to protect our intellectual property through a combination of trademarks, copyrights, and confidentiality agreements. We claim rights for over 440510 trademarks in the United States and foreign countries, and we have obtained registration in the United States and manynumerous foreign countries for many of our trademarks including FranklinCovey, The 7 Habits of Highly Effective People, The 4 Disciplines of Execution, and The 7 Habits. We consider our trademarks and other proprietary rights to be important and material to our business.
We own sole or joint copyrights on our books, manuals, text and other printed information provided in our training programs, and other electronic media products, including audio and video tapes. We may license, rather than sell, facilitator workbooks and other seminar and training materials in order to protect our intellectual property rights therein. We place trademark and copyright notices on our instructional, marketing, and advertising materials. In order to maintain the proprietary nature of our product information, we enter into written confidentiality agreements with certain executives, product developers, sales professionals, training consultants, other employees, and licensees. Although we believe the protective measures with respect to our
proprietary rights are important, there can be no assurance that such measures will provide significant protection from competitors.
Employees
One of our most important assets is our people. The diverse and global makeup of our workforce allows us to serve a variety of clients on a worldwide basis. We are committed to attracting, developing, and retaining quality personnel and actively strive to reinforce our employees’ commitment to our clients, and to our mission, vision, culture, and values through the creation of a motivational and rewarding work environment.
At August 31, 2013,2014, we had approximately 660825 associates located in the United States of America, Canada, Japan, the United Kingdom, and Australia. During fiscal 2001, we outsourced a significant portion of our information technology services, customer service, distribution and warehousing operations to HP. A number of our former employees involved in these operations are
now employed by HP to provide those services to FranklinCovey. None of our associates isare represented by a union or other collective bargaining group. Management believes that its relations with its associates are good and we do not currently foresee a shortage in qualified personnel needed to operate and grow our business.
Available Information
Our principal executive offices are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, and our telephone number is (801) 817-1776.
We regularly file reports with the Securities Exchange Commission (SEC). These reports include, but are not limited to, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and security transaction reports on Forms 3, 4, or 5. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company’s reports, proxy and information statements, and other information that the Company files with the SEC on its website at www.sec.gov.
The Company makes our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and other reports filed or furnished with the SEC available to the public, free of charge, through our website at www.franklincovey.com. These reports are provided through our website as soon as is reasonably practicable after we file or furnish these reports with the SEC.
ITEM 1A.1A. RISK FACTORS
Our business environment, current domestic and international economic conditions, and other specific risks may affect our future business decisions and financial performance. The matters discussed below may cause our future results to differ from past results or those described in forward-looking statements and could have a material adverse effect on our business, financial condition, liquidity, results of operations, and stock price, and should be considered in evaluating our Company.
The risks included here are not exhaustive. Other sections of this report may include additional risk factors which could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing global environment. New risk factors emerge from time to time and it is not possible for 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 factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while Franklin Covey does, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we do not confirm financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such reports are not the responsibility of Franklin Covey Co.
We operate in an intensely competitive industry and our competitors may develop courses that adversely affect our ability to sell our offerings.
The training and consulting services industry is intensely competitive with relatively easy entry. Competitors continually introduce new programs and services that may compete directly with our offerings or that may make our offerings uncompetitive or obsolete. Larger and better capitalized competitors may have superior abilities to compete for clients and skilled professionals, reducing our ability to deliver quality work to our clients. In addition, one or more of our competitors may develop and implement training courses or methodologies that may adversely affect our ability to sell our curriculums and products to new clients. Any one of these circumstances could have an adverse effect on our ability to obtain new business and successfully deliver our services.
Our results of operations could be adversely affected by economic and political conditions and the effects of these conditions on our clients’ businesses and their levels of business activity.
Global economic and political conditions affect our clients’ businesses and the markets in which they operate. Our financial results are somewhat dependent on the amount that current and prospective clients budget for training. A serious and/or prolonged economic downturn (or continued slowdrawn-out recovery) combined with a negative or uncertain political climate could adversely affect our clients’ financial condition and the amount budgeted for training by our clients. These conditions may reduce the demand for our services or depress the pricing of those services and have an adverse impact on our results of operations. Changes in global economic conditions may also shift demand to services for which we do not have competitive advantages, and this could negatively affect the amount of business that we are able to obtain. Such economic, political, and client spending
able to obtain. Such economic, political, and client spending conditions are influenced by a wide range of factors that are beyond our control and that we have no comparative advantage in forecasting. If we are unable to successfully anticipate these changing conditions, we may be unable to effectively plan for and respond to those changes, and our business could be adversely affected.
Our business success also depends in part upon continued growth in the use of training and consulting services and the renewal of existing contracts by our clients. In challenging economic environments, our clients may reduce or defer their spending on new services and consulting solutions in order to focus on other priorities. At the same time, many companies have already invested substantial resources in their current means of conducting their business and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel and/or processes. If the growth in the general use of training and consulting services in business or our clients’ spending on these items declines, or if we cannot convince our clients or potential clients to embrace new services and solutions, our results of operations could be adversely affected.
In addition, our business tends to lag behind economic cycles and, consequently, the benefits of an economic recovery following a period of economic downturn may take longer for us to realize than other segments of the economy.
Our results of operations may be negatively affected if we cannot expand and develop our services and solutions in response to client demand or if newly developed or acquired services have increased costs.
Our success depends upon our ability to develop and deliver services and solutions that respond to rapid and continuing changes in client needs. We may not be successful in anticipating or responding to these developments on a timely basis, and our offerings may not be successful in the marketplace. The implementation, acquisition, and introduction of new programs and solutions may reduce sales of our other existing programs and services and may entail more risk than supplying existing offerings to our clients. Newly developed or acquired solutions may also require increased royalty payments or carry significant development costs that must be expensed. Any one of these circumstances may have an adverse impact upon our business and results of operations.
Our results of operations and cash flows may be adversely affected if FC Organizational Products LLC is unable to pay the working capital settlement, reimbursable acquisition costs, or reimbursable operating expenses.
In the fourth quarter of fiscal 2008 we sold our planning products operations to FC Organizational Products, LLC (FCOP), an entity in which we own a 19.5 percent interest. According to the terms of the agreements associated with the sale, of our consumer solutions business unit assets to FC Organizational Products, LLC (FCOP) that closed in the fourth quarter of fiscal 2008, and an entity in which we own 19.5 percent, we were entitled to receive a $1.2 million payment for working capital delivered on the closing date of the sale and to receive $2.3 million as reimbursement for specified costs necessary to complete the transaction. Payment for these costs was originally due in January 2009, but we extended the due date of the payment at FC Organizational Products’ request and obtained a promissory note from FCOP for the amount owed, plus accrued interest. At the time we received the promissory note from FCOP, we believed that we could obtain payment for the amounts owed, based on prior year performance and forecasted financial performance in 2009. However, the financial position of FCOP deteriorated significantly late in fiscal 2009 and the deterioration accelerated throughout fiscal 2010. As a result of its deteriorating financial position, we reassessed the collectability of the promissory note. Based on revised expected cash flows and other operational issues, we recorded a $3.6 million impaired asset charge against these receivables.
We also receive reimbursement from FCOP for certain operating costs, such as warehousing and distribution costs, which are billed to us by third party providers,rent, and, although not required by governing documents or our ownership interest, we have provided working capital and other advances to FCOP. At August 31, 20132014 and 20122013 we had $7.8$5.1 million and $7.1$7.8 million receivable from FCOP, which are recorded as assets on our consolidated balance sheets. Although the receivable from FCOP has increased in recent years, we believe that we will obtain payment from FCOP for these receivables. However,receivables, the valuation of amounts receivable from FCOP is dependent upon the estimated future earnings and cash flows of FCOP. If FCOP’s estimated future earnings and cash flows decline, or if FCOP fails to reimburse us for these costs,pay amounts receivable and we fail to obtain payment on the previously impaired promissory note, our future cash flows and results of operations willmay be adversely affected.
Our work with governmental clients exposes us to additional risks that are inherent in the government contracting process.
Our clients include national, provincial, state, and local governmental entities, and our work with these governmental entities has various risks inherent in the governmental contracting process. These risks include, but are not limited to, the following:
| · | Governmental entities typically fund projects through appropriated monies. While these projects are often planned and executed as multi-year projects, the governmental entities usually reserve the right to change the scope of, or terminate, these projects for lack of approved funding and |
| · | Governmental entities often reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and investigations of our business practices with respect to our government contracts. If the governmental entity finds that the costs are not reimbursable, then we will not be allowed to bill for those costs or the cost must be refunded to the client if it has already been paid to us. Findings from an audit also may result in our being required to prospectively adjust previously agreed upon rates for our work, which may affect our future margins. |
| · | If a governmental client discovers improper activities in the course of audits or investigations, we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government. The inherent limitations of internal controls may not prevent or detect all improper or illegal activities, regardless of their adequacy. |
| · | Political and economic factors such as pending elections, revisions to governmental tax policies, sequestration, debt ceiling negotiations, and reduced tax revenues can affect the number and terms of new governmental contracts signed. |
The occurrences or conditions described above could affect not only our business with the particular governmental agency involved, but also our business with other agencies of the same or other governmental entities. Additionally, because of their visibility and political nature, governmental contracts may present a heightened risk to our reputation. Any of these factors could have an adverse effect on our business or our results of operations.
If we are unable to attract, retain, and motivate high-quality employees, including training consultants and other key training representatives, we may not be able to grow our business as projected or may not be able to compete effectively.
Our success and ability to grow are dependent, in part, on our ability to hire, retain, and motivate sufficient numbers of talented people with the increasingly diverse skills needed to serve our clients and grow our business. Competition for skilled personnel is intense at all levels of experience and seniority. There is a risk that we will find it difficult to hire and retain a sufficient number of employees with the skills or backgrounds we require, or that it will prove difficult to retain them in a competitive labor market. If we are unable to hire and retain talented sales and delivery employees with the skills, and in the locations, we require, we might not be able to grow our business at projected levels or may not be able to effectively deliver our content and services. If we need to hire additional personnel to maintain a specified number of sales personnel or are required to re-assign personnel from other geographic areas, it could increase our costs and adversely affect our profit margins. In addition, the inability of newly hired sales personnel to achieve projected sales levels may inhibit our ability to attain anticipated growth.
In order to retain key personnel, we continue to offer a variable component of compensation, the payment of which is dependent upon our sales performance and profitability. We adjust our compensation levels and have adopted different methods of compensation in order to attract and retain appropriate numbers of employees with the necessary skills to serve our clients and grow our business. We may also use share-based performance incentives as a component of our executives’ compensation, which may affect amounts of cash compensation. Variations in any of these areas of compensation may adversely impact our operating performance.
Our global operations pose complex management, foreign currency, legal, tax, and economic risks, which we may not adequately address.
We have offices in Australia, Japan, and the United Kingdom. We also have licensed operations in numerous other foreign countries. As a result of these foreign operations and their impact upon our results of operations, we are subject to a number of risks, including:
| · | Restrictions on the movement of cash |
| · | Burdens of complying with a wide variety of national and local laws |
| · | The absence in some jurisdictions of effective laws to protect our intellectual property rights |
| · | Political instability |
| · | Currency exchange rate fluctuations |
| · | Longer payment cycles |
| · | Price controls or restrictions on exchange of foreign currencies |
We may experience foreign currency gains and losses.
Our sales outside of the United States totaled $52.3$51.2 million, or 27approximately 25 percent of consolidated sales, for the fiscal year ended August 31, 2013.2014. If our international operations grow and become a larger component of our overall financial results, our revenues and operating results may be significantly adversely affected when the dollar strengthens relative to other currencies and may be favorably affected when the dollar weakens. In order to manage a portion of our foreign currency risk, we may make limited use of foreign currency derivative contracts to hedge certain transactions and translation exposure. However, there can be no guarantee that our foreign currency risk management strategy
will be effective in reducing the risks associated with foreign currency transactions and translation.
Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and violation of these regulations could harm our business.
Because we provide services to clients in many countries, we are subject to numerous, and sometimes conflicting, regulations on matters as diverse as import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, government affairs, internal and disclosure control obligations, data privacy, and labor relations. Violations of these regulations in the conduct of our business could result in fines, criminal sanctions against us or our officers, prohibitions on doing business, and damage to our reputation. Violations of these regulations in connection with the performance of our obligations to our clients also could result in liability for monetary damages, fines, unfavorable publicity, and allegations by our clients that we have not performed our contractual obligations. Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws may be insufficient to protect our rights.
In many parts of the world, including countries in which we operate, practices in the local business community might not conform to international business standards and could violate anticorruption regulations, including the United States Foreign Corrupt Practices Act, which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have policies and procedures to ensure legal and regulatory compliance, our employees, licensee operators, and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil
enforcement actions, including fines and suspension or disqualification from United States federal procurement contracting, any of which could have an adverse effect on our business.
We could have liability or our reputation could be damaged if we do not protect client data or if our information systems are breached.
We are dependent on information technology networks and systems to process, transmit, and store electronic information and to communicate amongbetween our locations around the world and with our clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information. We are also required at times to manage, utilize, and store sensitive or confidential client or employee data. As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state laws governing the protection of individually identifiable information. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines, and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud, or misappropriation could damage our reputation and cause us to lose clients.
Our business could be adversely affected if our clients are not satisfied with our services.
The success of our business model depends significantly on our ability to attract new work from our base of existing clients, as well as new work from prospective clients. Our business model also depends on the relationships our senior executives and sales personnel develop with our clients so that we can understand our clients’ needs and deliver services and solutions that are specifically tailored to address those needs. If a client is not satisfied
with the quality of work performed by us, or with the type of services or solutions delivered, then we may incur additional costs to remediate the situation, the profitability of that work might be decreased, and the client’s dissatisfaction with our services could damage our ability to obtain additional work from that client. In particular, clients that are not satisfied might seek to terminate existing contracts prior to their scheduled expiration date and could direct future business to our competitors. In addition, negative publicity related to our client relationships, regardless of its accuracy, may further damage our business by affecting our ability to compete for new contracts with current and prospective clients.
We may fail to meet analyst expectations, which could cause the price of our stock to decline.
Our common stock is publicly traded on the New York Stock Exchange, and at any given time various securities analysts follow our financial results and issue reports on us. These periodic reports include information about our historical financial results as well as the analysts’ estimates of our future performance. The analysts’ estimates are based on their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. If our stock price is volatile, we may become involved in securities litigation following a decline in prices. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.
Our future quarterly operating results are subject to factors that can cause fluctuations in our stock price.
Historically, our stock price has experienced significant volatility. We expect that our stock price may continue to experience volatility in the future due to a variety of potential factors that may include the following:
| · | Fluctuations in our quarterly results of operations and cash flows |
| · | Increased overall market volatility |
| · | Variations between our actual financial results and market expectations |
| · | Changes in our key balances, such as cash and cash equivalents |
| · | Currency exchange rate fluctuations |
| · | Unexpected asset impairment charges |
| · |
The sale of a large number of common shares by Knowledge Capital could depress the market price of our common stock.
Knowledge Capital Investment Group (Knowledge Capital), a related party primarily controlled by a member of our Board of Directors, held a warrant to purchase 5.9 million shares of our common stock. Knowledge Capital exercised its warrant at various times on a net share basis and received 2.2 million shares of our common stock. TheyKnowledge Capital currently hold 3.3holds 3.2 million shares, or approximately 2019 percent, of our outstanding common shares. Approximately 1.1 million of these shares are currently available for resale, subject to the requirements of U.S. securities laws. The sale or prospect of the sale of a substantial number of these shares couldmay have an adverse effect on the market price of our common stock.
Our profitability could suffer if we are unable to control our operating costs.
Our future success and profitability depend in part on our ability to achieve an appropriate cost structure and to improve our efficiency in the highly competitive services industry in which we compete. We regularly monitor our operating costs and develop initiatives and business models that are designed to improve our profitability. Our recent initiatives have included revisions to existing processes and procedures, asset sales, exiting non-core businesses, and other internal initiatives designed to reduce our operating costs. If we are unable to achieve targeted business model cost levels, our competitiveness and profitability may decrease.
Our profitability will suffer if we are not able to maintain our pricing and utilization rates.
The profit margin on our services is largely a function of the rates we are able to recover for our services and the utilization, or chargeability, of our trainers, client partners, and consultants. Accordingly, if we are unable to maintain sufficient pricing for our services or an appropriate utilization rate for our training professionals without corresponding cost reductions, our profit margin and overall profitability will suffer. The rates that we are able to recover for our services are affected by a number of factors that we may be unable to control, including:
| · | Our clients’ perceptions of our ability to add value through our programs and content |
| · | Competition |
| · | General economic conditions |
| · | Introduction of new programs or services by us or our competitors |
| · | Our ability to accurately estimate, attain, and sustain engagement sales, margins, and cash flows over longer contract periods |
Our utilization rates are also affected by a number of factors, including:
| · | Seasonal trends, primarily as a result of scheduled training |
| · | Our ability to forecast demand for our products and services and thereby maintain an appropriate headcount in our employee base |
| · | Our ability to manage attrition |
During recently completed periods we have maintained favorable utilization rates. However, there can be no assurance that we will be able to maintain favorable utilization rates in future periods. Additionally, we may not achieve a utilization rate that is optimal for us. If our utilization rate is too high, it could have an adverse effect on employee engagement and attrition. If our utilization rate is too low, our profit margin and profitability may suffer.
We depend on key personnel, the loss of whom could harm our business.
Our future success will depend, in part, on the continued service of key executive officers and personnel. The loss of the services of any key individuals could harm our business. Our future success also depends on our ability to identify, attract, and retain additional qualified senior personnel. Competition for such individuals in our industry is intense, and we may not be successful in attracting and retaining such personnel.
We have only a limited ability to protect our intellectual property rights, which are important to our success.
Our financial success depends, in part, upon our ability to protect our proprietary curriculums and other intellectual property. The existing laws of some countries in which we provide services might offer only limited protection of our intellectual property rights. To protect our intellectual property, we rely upon a combination of confidentiality policies, nondisclosure and other contractual arrangements, as well as patent, copyright, and trademark laws. The steps we take in this regard may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights, especially in foreign jurisdictions.
The loss of proprietary content or the unauthorized use of our intellectual property may create greater competition, loss of revenue, adverse publicity, and may limit our ability to reuse that intellectual property for other clients. Any limitation on our ability to provide a service or solution could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future engagements.
If we are unable to collect our accounts receivable on a timely basis, our results of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for services performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against our receivables and unbilled services that we believe are adequate to reserve for potentially uncollectible amounts. However, actual losses on client balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. In addition, there is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic conditions could also result in financial difficulties for our clients, and as a result could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or not pay their obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments and bill and collect our invoiced revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows may be adversely affected.
The Company’s use of accounting estimates involves judgment and could impact our financial results.
Our most critical accounting estimates are described in Management’s Discussion and Analysis found in Item 7 of this report under the section entitled “Use of Estimates and Critical Accounting Policies.” In addition, as discussed in various footnotes to our financial statements as found in Item 8, we make certain estimates for loss contingencies, including decisions related to legal proceedings and reserves. Because, by definition, these estimates and assumptions involve the use of judgment, our actual financial results may differ from these estimates.
We have significant intangible asset, goodwill, and long-term asset balances that may be impaired if cash flows from related activities decline.
At August 31, 20132014 we had $60.7$57.2 million of intangible assets, which were primarily generated from the fiscal 1997 merger with the Covey Leadership Center, and $16.1$19.6 million
of goodwill. Our intangible assets are evaluated for impairment based qualitative factors or upon cash flows (definite-lived intangible assets) and estimated royalties from revenue streams (indefinite-lived intangible assets) if necessary. Our goodwill is evaluated through qualitative factors and by comparing the fair value of the reporting unit to the carrying value of the goodwill balance if necessary. Our intangible assets, goodwill, and other long-term assets may become impaired if the corresponding cash flows associated with these assets declines in future periods or if our market capitalization declines significantly in future periods. Although our current sales, cash flows, and market capitalization are
sufficient to support the carrying basis of these long-lived assets, if our sales, cash flows, or common stock price decline, we may be faced with significant asset impairment charges that would have an adverse impact upon our results of operations.
Failure to comply with the terms and conditions of our credit facility may have an adverse effect upon our business and operations.
Our line of credit facility requires us to be in compliance with customary non-financial terms and conditions as well as specified financial ratios. Failure to comply with these terms and conditions or maintain adequate financial performance to comply with specific financial ratios entitles the lender to certain remedies, including the right to immediately call due any amounts outstanding on the line of credit or term loan. Such events would have an adverse effect upon our business and operations as there can be no assurance that we may be able to obtain other forms of financing or raise additional capital on terms that would be acceptable to us.
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 |
Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit facility and other financing alternatives, if necessary, for these expenditures. Our existing lending arrangement expires in March 2016 and we expect to renew our lending agreement to maintain the availability of this credit facility. Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources. 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.
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.
We may have exposure to additional tax liabilities.
As a multinational company, we are subject to income taxes as well as non-income based taxes in both the United States and various foreign tax jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and other tax
liabilities. In the normal course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. As a result, we are routinely subject to audits by various taxing authorities. Although we believe that our tax estimates are reasonable, we cannot guarantee that the final determination of these tax audits will not be different from what is reflected in our historical income tax provisions and accruals.
We are also subject to non-income taxes such as payroll, sales, use, value-added, and property taxes in both the United States and various foreign jurisdictions. We are routinely audited by tax authorities with respect to these non-income taxes and may have exposure from additional non-income tax liabilities.
International hostilities, terrorist activities, and natural disasters may prevent us from effectively serving our clients and thus adversely affect our operating results.
Acts of terrorist violence, armed regional and international hostilities, and international responses to these hostilities, natural disasters, global health risks or pandemics, or the threat of or perceived potential for these events, could have a negative impact on our directly owned or licensee operations. These events could adversely affect our clients’ levels of business activity and precipitate sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our people and to physical facilities and operations around the world, whether the facilities are ours or those of our alliance partners or clients. By disrupting communications and travel and increasing the difficulty of obtaining and retaining highly skilled and qualified personnel, these events could make it difficult or impossible for us or our licensee partners to deliver services to clients. Extended disruptions of electricity, other public utilities, or network services at our facilities, as well as system failures at, or security breaches in, our facilities or systems, could also adversely affect our ability to serve our clients. While we plan and prepare to defend against each of these occurrences, we might be unable to protect our people, facilities, and systems against all such occurrences. In addition, our information systems’ disaster recovery plan may be insufficient to maintain our business at acceptable levels. We generally do not have insurance for losses and interruptions caused by terrorist attacks, conflicts, and wars. If these disruptions prevent us from effectively serving our clients or maintaining our other operations, our operating results could be adversely affected.
Ineffective internal controls could impact our business and operating results.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results may be harmed and we could fail to meet our financial reporting obligations.
New or more stringent governmental regulations could adversely affect our business.
Increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change may result in increased compliance costs and other financial obligations for us. We rely on the ability of our consultants and salespeople to travel to client destinations using automobiles and jet aircraft, which use fossil fuels. Legislation, regulation, or additional taxes affecting the cost of these inputs could adversely affect our profitability.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located in Salt Lake City, Utah and as of August 31, 2013,2014, all of the facilities used in our operations are leased. Our leased facilities primarily consist of sales and administrative offices both in the United States and various countries around the world. We also lease warehouse and distribution space at independent facilities in certain foreign countries. Our corporate headquarters lease is accounted for as a financing arrangement and all other facility lease agreements are accounted for as operating leases that expire at various dates through the year 2025.
Corporate Facilities
Corporate Headquarters and Administrative Offices:
Salt Lake City, Utah (7 buildings)
U.S./Canada Sales Offices
Regional Sales Offices:
United States (5 locations)
International Facilities
International Administrative/Sales Offices:
Australia (3 locations)
England (1 location)
Japan (1 location)
International Distribution Facilities:
Australia (1 location)
England (1 location)
Japan (1 location)
During fiscal 2013,2014, there were no significant changes to the properties used for our operations. We consider our existing facilities to be in good condition and suitable for our current and anticipated level of operations in the upcoming fiscal year and in future periods.
A significant portion of our corporate headquarters campus located in Salt Lake City, Utah is subleased to multiple unrelated entities.
ITEM 3. LEGAL PROCEEDINGSPROCEEDINGS
counsel, any potential liability to the Company under these other actions will not materially affect our financial position, liquidity, or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART IIII
| MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed and traded on the New York Stock Exchange (NYSE) under the symbol “FC.” The following table sets forth the high and low sale prices per share for our common stock, as reported by the NYSE, for the fiscal years ended August 31, 20132014 and 2012.2013.
| High | Low | |||||||||||||||
| Fiscal Year Ended August 31, 2014: | ||||||||||||||||
Fourth Quarter | $ | 22.75 | $ | 18.68 | ||||||||||||
Third Quarter | 22.50 | 18.29 | ||||||||||||||
Second Quarter | 21.41 | 17.95 | ||||||||||||||
First Quarter | 20.85 | 15.76 | ||||||||||||||
| High | Low | |||||||||||||||
| Fiscal Year Ended August 31, 2013: | ||||||||||||||||
Fourth Quarter | $ | 16.70 | $ | 13.07 | $ | 16.70 | $ | 13.07 | ||||||||
Third Quarter | 14.60 | 13.09 | 14.60 | 13.09 | ||||||||||||
Second Quarter | 14.50 | 11.73 | 14.50 | 11.73 | ||||||||||||
First Quarter | 13.88 | 10.34 | 13.88 | 10.34 | ||||||||||||
| Fiscal Year Ended August 31, 2012: | ||||||||||||||||
Fourth Quarter | $ | 10.79 | $ | 8.92 | ||||||||||||
Third Quarter | 9.85 | 8.07 | ||||||||||||||
Second Quarter | 9.97 | 8.02 | ||||||||||||||
First Quarter | 10.00 | 6.25 | ||||||||||||||
We did not pay or declare dividends on our common stock during the fiscal years ended August 31, 20132014 or 2012.2013. We currently anticipate that we will retain all available funds to repay our obligations, finance future growth and business opportunities, and to repurchase outstanding shares of our common stock.
As of October 31, 2013, the Company2014, we had 16,675,47716,874,683 shares of common stock outstanding, which were held by 649633 shareholders of record.
Purchases of Common Stock
The following table summarizes the purchases of our common stock by monthly fiscal periods during the quarter ended August 31, 2013:2014:
| 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 (in thousands) | |||||||||
| June 2, 2013 to July 6, 2013 | - | $ | - | none | $ | 9,225 | |||||||
| July 7, 2013 to August 3, 2013 | - | - | none | 9,225 | |||||||||
| August 4, 2013 to August 31, 2013 | 54 | 16.03 | none | 9,225 | (1) | ||||||||
Total Common Shares | 54 | (2) | $ | 16.03 | none | ||||||||
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 (in thousands) | |||||||||
| June 1, 2014 to July 5, 2014 | - | $ | - | none | $ | 9,225 | |||||||
| July 6, 2014 to August 2, 2014 | - | - | none | 9,225 | |||||||||
| August 3, 2014 to August 31, 2014 | - | - | none | 9,225 | (1) | ||||||||
| Total Common Shares | - | $ | - | none | |||||||||
| (1) | On March 26, 2012, our Board of Directors approved a plan to repurchase up to $10.0 million of the Company’s outstanding common stock. We intend to use available cash in excess of $10.0 million to make the purchases, provided that we have a zero balance on our line of credit facility. All previously existing common stock repurchase plans were canceled and this common share repurchase plan does not have an expiration date. Through August 31, |
Performance Graph
The following graph demonstrates a five-year comparison of cumulative total returns for Franklin Covey Co. common stock, the S&P SmallCap 600 Index, and the S&P 600 Commercial & Professional Services Index. The graph assumes an investment of $100 on August 31, 20082009 in each of our common stock, the stocks comprising the S&P SmallCap 600 Index, and the stocks comprising the S&P 600 Commercial & Professional Services Index. Each of the indices assumes that all dividends were reinvested.
The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make nor endorse any predictions as to our future stock performance.
The performance graph above is being furnished solely to accompany this report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
ITEM 66. . SELECTED FINANCIAL DATA
The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related footnotes as found in Item 8 of this report on Form 10-K.
In the fourth quarter of fiscal 2010, we sold the product sales component of our wholly owned subsidiary in Japan to an unrelated Japan-based paper products company. We determined that the operating results of the Japan product sales component qualified for discontinued operations presentation and we have presented the operating results of the Japan product sales component as discontinued operations for all periods prior to fiscal 2011 that are presented in this report and have adjusted the financial statement information presented below to be consistent with the discontinued operations presentation.
| August 31, | 2013 | 2012 | 2011 | 2010 | 2009 | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||
| In thousands, except per-share data | ||||||||||||||||||||||||||||||||||||||||
| Income Statement Data: | ||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 190,924 | $ | 170,456 | $ | 160,804 | $ | 136,874 | $ | 123,134 | $ | 205,165 | $ | 190,924 | $ | 170,456 | $ | 160,804 | $ | 136,874 | ||||||||||||||||||||
| Income (loss) from operations | 21,614 | 17,580 | 11,112 | 4,038 | (11,840 | ) | ||||||||||||||||||||||||||||||||||
| Net income (loss) from continuing operations before income taxes | 19,398 | 13,747 | 8,446 | 1,180 | (14,862 | ) | ||||||||||||||||||||||||||||||||||
| Income tax benefit (provision) | (5,079 | ) | (5,906 | ) | (3,639 | ) | (2,484 | ) | 3,814 | |||||||||||||||||||||||||||||||
| Income from operations | 24,765 | 21,614 | 17,580 | 11,112 | 4,038 | |||||||||||||||||||||||||||||||||||
| Income from continuing operations before income taxes | 21,759 | 19,398 | 13,747 | 8,446 | 1,180 | |||||||||||||||||||||||||||||||||||
| Income tax provision | 3,692 | 5,079 | 5,906 | 3,639 | 2,484 | |||||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations | 14,319 | 7,841 | 4,807 | (1,304 | ) | (11,048 | ) | 18,067 | 14,319 | 7,841 | 4,807 | (1,304 | ) | |||||||||||||||||||||||||||
| Income from discontinued operations, net of tax | - | - | - | 548 | 216 | - | - | - | - | 548 | ||||||||||||||||||||||||||||||
| Gain on sale of discontinued operations, net of tax | - | - | - | 238 | - | - | - | - | - | 238 | ||||||||||||||||||||||||||||||
| Net income (loss) | 14,319 | 7,841 | 4,807 | (518 | ) | (10,832 | ) | 18,067 | 14,319 | 7,841 | 4,807 | (518 | ) | |||||||||||||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||||||||||||||||||||||||||
| Basic | $ | .83 | $ | .44 | $ | .28 | $ | (.04 | ) | $ | (.81 | ) | $ | 1.08 | $ | .83 | $ | .44 | $ | .28 | $ | (.04 | ) | |||||||||||||||||
| Diluted | .80 | .43 | .27 | (.04 | ) | (.81 | ) | 1.07 | .80 | .43 | .27 | (.04 | ) | |||||||||||||||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||||
| Total current assets | $ | 81,108 | $ | 64,195 | $ | 52,056 | $ | 50,278 | $ | 40,142 | $ | 93,016 | $ | 81,108 | $ | 64,195 | $ | 52,056 | $ | 50,278 | ||||||||||||||||||||
| Other long-term assets | 9,875 | 9,534 | 9,353 | 9,396 | 11,608 | 14,785 | 9,875 | 9,534 | 9,353 | 9,396 | ||||||||||||||||||||||||||||||
| Total assets | 189,405 | 164,080 | 151,427 | 149,005 | 143,878 | 205,186 | 189,405 | 164,080 | 151,427 | 149,005 | ||||||||||||||||||||||||||||||
| Long-term obligations | 41,100 | 40,368 | 39,859 | 32,988 | 32,191 | 36,885 | 41,100 | 40,368 | 39,859 | 32,988 | ||||||||||||||||||||||||||||||
| Total liabilities | 82,899 | 73,525 | 72,111 | 77,970 | 74,874 | 78,472 | 82,899 | 73,525 | 72,111 | 77,970 | ||||||||||||||||||||||||||||||
| Shareholders’ equity | 106,506 | 90,555 | 79,316 | 71,035 | 69,004 | 126,714 | 106,506 | 90,555 | 79,316 | 71,035 | ||||||||||||||||||||||||||||||
ITEM 7. 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis is intended to provide a summary of the principal factors affecting the results of operations, liquidity and capital resources, contractual obligations, and the critical accounting policies of Franklin Covey Co. (also referred to as we, us, our, the Company, and FranklinCovey) and subsidiaries. This discussion and analysis should be read together with our consolidated financial statements and related notes, which contain additional information regarding the accounting policies and estimates underlying our financial statements. Our consolidated financial statements and related notes are presented in Item 8 of this report on Form 10-K.
EXECUTIVE SUMMARY
Franklin Covey Co. is a global company focused on individual and organizational performance improvement. Our mission is to “enable greatness in people and organizations everywhere,” and our 660825 employees worldwide are organized to help individuals and organizations achieve sustained superior performance through changes in human behavior. Our expertise extends to seven crucial areas: Leadership, Execution, Productivity, Trust, Sales Performance, Customer Loyalty, and Educational improvement. We believe that our clients are able to utilize our content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.
In the training and consulting marketplace, we believe there are four important characteristics that distinguish us from our competitors.
| 1. | World Class Content – Our content is principle centered and based on natural laws of human behavior and effectiveness. Our content is designed to build new skillsets, establish new mindsets, and provide enabling toolsets. We believe that our content is based on timeless principles, natural laws of human and organizational effectiveness, and research-proven applications. |
| 2. | Transformational Impact and Reach – We hold ourselves responsible for and measure ourselves by our clients’ achievement of transformational results. Our commitment to achieving lasting impact extends to all of our clients—from CEOs to elementary school students, and from senior management to front-line workers in corporations, governmental, and educational environments. |
| 3. | Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including: on-site training, training led through certified facilitators, on-line learning, blended learning, intellectual property licenses, and organization-wide transformational processes, including consulting and coaching. |
| 4. | Global Capability – 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 |
We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, and The 4 Disciplines of Execution, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, and Education. Our offerings are described in further detail at www.franklincovey.com. The information contained in, or that can be accessed through, our website does not constitute a part of this annual report. Thesereport, and the descriptions found therein should not be viewed as a warranty or guarantee of results.
Our financial results for the fiscal year ended August 31, 20132014 reflect continued growth and building momentumthe sixth consecutive year of increased sales for our current business (subsequent to the sales of our products division in the marketplace as we experienced increased sales,fiscal 2008), improved operating results, increased cash flows from operating activities, and strengthened oura strong financial position during the fiscal year.position. Our net sales in fiscal 20132014 increased to $190.9$205.2 million, compared with $190.9 million in fiscal 2013, and $170.5 million in fiscal 2012 and $160.8 million in fiscal 2011.2012. Our fiscal 20132014 sales represent 12seven percent growth compared with fiscal 2012 and 192013, which grew 12 percent growth compared with fiscal 2011.2012. Consolidated fiscal 2014 sales increased 20 percent compared with fiscal 2012 sales levels. Our fiscal 20132014 fourth-quarter sales totaled $61.6$68.1 million, which is a 21an 11 percent increase over the fourth quarter of fiscal 2012the prior year and represents the strongest quarterly sales performance ever underfor our current business model. Salesbusiness. Our sales growth during fiscal 2014 was generally broad-based across our primary delivery channelsprimarily driven by increased national account practice sales, especially in the Education practice, and course offerings duringby the year.launch of the re-created The 7 Habits of Highly Effective People – Signature Program (The 7 Habits Signature Program) late in the second quarter. The following table sets forth consolidated sales data by category and by our primary delivery channels (in thousands):
YEAR ENDED AUGUST 31, | 2013 | Percent change | 2012 | Percent change | 2011 | 2014 | Percent change | 2013 | Percent change | 2012 | ||||||||||||||||||||||||||||||
| Sales by Category: | ||||||||||||||||||||||||||||||||||||||||
| Training and consulting services | $ | 178,656 | 13 | $ | 158,779 | 5 | $ | 150,976 | $ | 193,720 | 8 | $ | 178,656 | 13 | $ | 158,779 | ||||||||||||||||||||||||
| Products | 8,114 | (4 | ) | 8,456 | 13 | 7,455 | 7,518 | (7 | ) | 8,114 | (4 | ) | 8,456 | |||||||||||||||||||||||||||
| Leasing | 4,154 | 29 | 3,221 | 36 | 2,373 | 3,927 | (5 | ) | 4,154 | 29 | 3,221 | |||||||||||||||||||||||||||||
| $ | 190,924 | 12 | $ | 170,456 | 6 | $ | 160,804 | $ | 205,165 | 7 | $ | 190,924 | 12 | $ | 170,456 | |||||||||||||||||||||||||
| Sales by Channel: | ||||||||||||||||||||||||||||||||||||||||
| U.S./Canada direct | $ | 96,899 | 12 | $ | 86,698 | 2 | $ | 85,397 | $ | 99,128 | 2 | $ | 96,899 | 12 | $ | 86,698 | ||||||||||||||||||||||||
| International direct | 29,558 | 3 | 28,773 | 5 | 27,464 | 28,588 | (3 | ) | 29,558 | 3 | 28,773 | |||||||||||||||||||||||||||||
| International licensees | 15,452 | 8 | 14,301 | 14 | 12,590 | 17,065 | 10 | 15,452 | 8 | 14,301 | ||||||||||||||||||||||||||||||
| National account practices | 37,042 | 35 | 27,367 | 20 | 22,780 | 48,645 | 31 | 37,042 | 35 | 27,367 | ||||||||||||||||||||||||||||||
| Self-funded marketing | 5,866 | (30 | ) | 8,368 | (7 | ) | 9,013 | 5,938 | 1 | 5,866 | (30 | ) | 8,368 | |||||||||||||||||||||||||||
| Other | 6,107 | 23 | 4,949 | 39 | 3,560 | 5,801 | (5 | ) | 6,107 | 23 | 4,949 | |||||||||||||||||||||||||||||
| $ | 190,924 | 12 | $ | 170,456 | 6 | $ | 160,804 | $ | 205,165 | 7 | $ | 190,924 | 12 | $ | 170,456 | |||||||||||||||||||||||||
Our gross profit for fiscal 20132014 increased seven percent to $129.0$138.3 million, compared with $112.7$129.0 million in fiscal 2012the prior year, primarily due to increased sales. Our gross margin, which is gross profit as a percent of sales, increased to 67.6was essentially unchanged at 67.4 percent compared with 66.167.6 percent in fiscal 2012 primarily due to increased facilitator and intellectual property sales, and increased international licensee royalty revenues.2013.
Our operating expenses in fiscal 2013 increased $12.3$6.1 million compared with fiscal 20122013 primarily due to an $11.7a $5.0 million increase in selling, general, and administrative expenses, and a $0.7$0.8 million increase in amortization expense, that were partially offset byand a $0.1$0.4 million decreaseincrease in depreciation expense. The increase in selling, general, and administrative expenses was primarily driven byrelated to the addition of new sales-related personnel, increased commissions and bonuses on higher sales, duringmarketing, and additional expenses resulting from the acquisition of NinetyFive 5 LLC (NinetyFive 5) in fiscal 2013, and investmentswhich was included in new sales and sales-support personnel.our operations for the full year in fiscal 2014 compared with only a partial year in fiscal 2013.
Increased sales and improvedfavorable operating margins combined to increase our fiscal 20132014 income from operations by 2315 percent to $21.6$24.8 million, compared with $17.6$21.6 million in fiscal 2012.the prior year. Including the benefit of foreign tax credits, which reduced our effective income tax rate to approximately 2617 percent in fiscal 2013,2014, our net income increased 8326 percent to $18.1 million, or $1.07 per diluted share, compared with $14.3 million, or $.80 per diluted share, in fiscal 2013 compared with $7.8 million, or $.43 per diluted share, in fiscal 2012.2013.
Further details regarding these items can be found in the comparative analysis of fiscal 20132014 with fiscal 20122013 as discussed within this management’s discussion and analysis.
Our liquidity position remained strong during fiscal 2014 and we had $10.5 million of cash and cash equivalents at August 31, 2014 compared with $12.3 million at August 31, 2013. Our net working capital (current assets minus current liabilities) increased to $50.1 million at August 31, 2014 compared with $38.2 million at the end of fiscal 2012.2013. For further information regarding our cash flows and liquidity refer to the Liquidity and Capital Resources discussion found later in this management’s discussion and analysis.
Business Overview
We believe that the combination of: (1) creating best-in-class content and solutions in each of our practice areas, and continuing to invest in the refinement and expansion of each of our content categories; and (2) significantly increasing the size and capabilities of our various sales and content-delivery channels are the foundation of our long-term strategic growth plan. Each year we make significant investments in the development and enhancement of our existing content, and to developthe development of new services, features, and products.products that help individuals and organizations achieve their own great purposes. We expect to continue the introduction of new or refreshed content and delivery methods and consider them key to our long-term success. At the same time, we continue to make substantial investments each year to expand the size and capabilities of our sales and delivery forces to take our solutions to market in a way which attracts and retains client organizations.
One of our key strategic objectives is to consistently deliver quality results to our clients. This initiative is focused on ensuring that our content and offerings are best-in-class, and that they have a measurable, lasting impact on our clients’ results. We believe that measurable improvement in our clients’ organizations is key to retaining current clients and to obtaining new sales opportunities.
During the third quarter of fiscal 20132014 we acquired substantially all of the assets of NinetyFive 5, LLC (NinetyFive 5). NinetyFive 5Red Tree, Inc. (Red Tree), a company that provides sales success training, services thatconsulting, and coaching designed to help organizations effectively manage and engage the “Millennial Generation” in their workforces. We believe the acquired curriculum will complement our existing sales performance content.training curriculums and provide opportunities for growth in future periods.
We also invested significant capital during fiscal 2014 for the re-creation of our best-selling program, The 7 Habits of Highly Effective People – Signature Edition. The re-creation of this program includes updated video segments that improve our ability to use content internationally, refreshed content, and new implementation tools, including an app that is available for most portable electronic devices. We believe that our commitment to the acquisitiondevelopment and improvement of NinetyFive 5 and its integration into our Sales Performance practice will be highly synergistic for our clients and we expect NinetyFive 5 to becomecore offerings is a key component ofto our Sale Performance practice in future periods.growth.
Other key factors that influence our operating results include: the size and productivity of our sales force; the number and productivity of our international licensee operations; the number of organizations that are active customers; the number of people trained within those organizations; the continuation or renewal of existing services contracts; the availability of budgeted training spending at our clients and prospective clients, which, in certain content categories, can be significantly influenced by general economic conditions; and our ability to manage operating costs necessary to develop and provide meaningful training and related services and products to our clients. For a further discussion of risk factors that may influence our results of operations and financial position, refer to Item 1A - Business Risks as contained in this report on Form 10-K.
Our fiscal year ends on August 31, and unless otherwise indicated, fiscal 2014, fiscal 2013, and fiscal 2012 and fiscal 2011 refer to the twelve-month periods ended August 31, 2014, 2013, 2012, 2011, and so forth.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage of total sales represented by the line items through income before income taxes in our consolidated income statements. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements:statements.
YEAR ENDED AUGUST 31, | 2014 | 2013 | 2012 | |||||||||
| Sales: | ||||||||||||
| Training and consulting services | 94.4 | % | 93.6 | % | 93.1 | % | ||||||
| Products | 3.7 | 4.2 | 5.0 | |||||||||
| Leasing | 1.9 | 2.2 | 1.9 | |||||||||
| Total sales | 100.0 | 100.0 | 100.0 | |||||||||
| Cost of sales: | ||||||||||||
| Training and consulting services | 30.0 | 29.8 | 30.6 | |||||||||
| Products | 1.7 | 1.6 | 2.3 | |||||||||
| Leasing | 0.9 | 1.0 | 1.0 | |||||||||
| Total cost of sales | 32.6 | 32.4 | 33.9 | |||||||||
| Gross profit | 67.4 | 67.6 | 66.1 | |||||||||
| Selling, general, and administrative | 51.7 | 53.0 | 52.5 | |||||||||
| Depreciation | 1.7 | 1.6 | 1.8 | |||||||||
| Amortization | 1.9 | 1.7 | 1.5 | |||||||||
| Total operating expenses | 55.3 | 56.3 | 55.8 | |||||||||
| Income from operations | 12.1 | 11.3 | 10.3 | |||||||||
| Interest income | 0.2 | 0.3 | 0.0 | |||||||||
| Interest expense | (1.1 | ) | (1.2 | ) | (1.4 | ) | ||||||
| Discount on related party receivable | (0.6 | ) | (0.2 | ) | (0.8 | ) | ||||||
| Other income, net | - | 0.0 | - | |||||||||
| Income before income taxes | 10.6 | % | 10.2 | % | 8.1 | % | ||||||
FISCAL 2014 COMPARED WITH FISCAL 2013
Sales
We offer a variety of training courses, consulting services, and training-related products that are focused on solving organizational problems which require a change in human behavior. Our training and consulting solutions are provided both domestically and internationally through our sales force, client facilitators, international licensees, and the internet on various web-based delivery platforms. The following sales analysis for the fiscal year ended August 31, 2014 is based on activity through our primary delivery channels as shown in the preceding comparative sales table.
U.S./Canada Direct – This channel includes our four regional sales offices that serve clients in the United States and Canada, and our government services group. Increased sales at each of our regional sales offices during fiscal 2014 was partially offset by decreased government services sales. Excluding the government services group, sales increased at our regional sales offices by $7.3 million, or 9 percent, compared with the prior year. The increase over the prior year at our regional sales offices was primarily due to the launch of the re-created The 7 Habits Signature Program during the second half of fiscal 2014 and increased Execution practice sales. Execution practice revenues continue to improve compared with the prior year primarily due to increased demand and new contracts for this offering. During fiscal 2014, government services revenues decreased $5.1 million, primarily due to the timing of renewals for a large government contract throughout the year. We anticipated a renewal of this contract during our fourth quarter of fiscal 2014; however, the renewal timeframe was slightly longer than we anticipated and we were awarded a renewal of this contract in the first week of September 2014 for services to be delivered over the next nine months.
At August 31, 2014, our corporate pipeline of booked days and awarded revenue remains strong, and our current outlook for growth in fiscal 2015 and future periods is encouraging for this channel. In addition to building our pipeline of prospective business, we believe continued growth in this channel
YEAR ENDED AUGUST 31, | 2013 | 2012 | 2011 | |||||||||
| Sales: | ||||||||||||
| Training and consulting services | 93.6 | % | 93.1 | % | 93.9 | % | ||||||
| Products | 4.2 | 5.0 | 4.6 | |||||||||
| Leasing | 2.2 | 1.9 | 1.5 | |||||||||
| Total sales | 100.0 | 100.0 | 100.0 | |||||||||
| Cost of sales: | ||||||||||||
| Training and consulting services | 29.8 | 30.6 | 32.3 | |||||||||
| Products | 1.6 | 2.3 | 2.3 | |||||||||
| Leasing | 1.0 | 1.0 | 1.1 | |||||||||
| Total cost of sales | 32.4 | 33.9 | 35.7 | |||||||||
| Gross profit | 67.6 | 66.1 | 64.3 | |||||||||
| Selling, general, and administrative | 53.0 | 52.5 | 53.0 | |||||||||
| Depreciation | 1.6 | 1.8 | 2.2 | |||||||||
| Amortization | 1.7 | 1.5 | 2.2 | |||||||||
| Total operating expenses | 56.3 | 55.8 | 57.4 | |||||||||
| Income from operations | 11.3 | 10.3 | 6.9 | |||||||||
| Interest income | 0.3 | 0.0 | 0.0 | |||||||||
| Interest expense | (1.2 | ) | (1.4 | ) | (1.6 | ) | ||||||
| Discount on related party receivable | (0.2 | ) | (0.8 | ) | - | |||||||
| Other income, net | 0.0 | - | - | |||||||||
| Income before income taxes | 10.2 | % | 8.1 | % | 5.3 | % | ||||||
30
is also dependent on our ability to hire and train additional qualified sales professionals. As these additional sales professionals are hired and “ramp up” to expected sales levels in subsequent years, we believe that we will generate significant incremental revenues. However, there can be no guarantee that we will be able to hire sufficient numbers of qualified sales people, and that they will be able to achieve expected sales performance goals.
International Direct – Our directly owned international offices are located in Australia, Japan, and the United Kingdom. For the fiscal year ended August 31, 2014, increased sales at our offices in the United Kingdom, Australia, and South Korea were offset by decreased sales at our office in Japan. The launch of the re-created The 7 Habits Signature Program, which was released in North America, Australia, and the United Kingdom during the second quarter of fiscal 2014, had a favorable effect on Australia and the United Kingdom as our office in the United Kingdom had its strongest fiscal year ever (subsequent to the sale of its product division) and increased its sales 27 percent compared with the prior year. Our office in Australia also had good sales performance, experienced its strongest fourth quarter ever, and overcame decreased sales in prior quarters of fiscal 2014. For the fiscal year ended August 31, 2014 Australia increased its sales by $0.1 million compared with the prior year. During fiscal 2014 we opened a direct office in South Korea, which had sales totaling $0.5 million during the fiscal year. We sold the direct office operations in South Korea to one of our existing international licensees in August 2014, and we will only recognize royalty revenues from South Korea in future periods.
For fiscal 2014, our sales in Japan decreased $2.9 million compared with the prior year. Sales in Japan were adversely impacted by exchange rates, particularly during the first half of fiscal 2014, and by decreased publishing sales. Foreign exchange rates had a $1.8 million adverse impact on our sales in Japan during fiscal 2014. Publishing sales, which are primarily dependent upon the release of new publications in Japanese, decreased by $0.7 million compared with fiscal 2013. During fiscal 2014 we did not release any significant new publications in Japanese. However, we believe that the fourth quarter launch of the re-created The 7 Habits Signature Program in Japanese will have a favorable impact on training sales at our Japan office during fiscal 2015.
International Licensees – In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees, which may translate and adapt our curriculum to local preferences and customs, if necessary. During fiscal 2014, certain of our foreign licensees, led by our Singapore/China licensee, had increased training sales, which resulted in a 10 percent increase in international licensee revenues compared to the prior year. We believe that our continued efforts to support the licensees through additional program training, international branding, and the introduction of new products, such as The 7 Habits Signature Program in multiple languages, will have a favorable impact on licensee sales in fiscal 2015 and beyond.
National Account Practices – Our national account practices offer and sell content solutions that are not typically offered in our U.S/Canada direct geographic sales offices. These offerings include, in the Education practice, The Leader In Me program designed for students primarily in K-6 elementary schools; Helping Clients Succeed from our Sales Performance practice; and Winning Customer Loyalty from our Customer Loyalty practice. During fiscal 2014, sales increased in all three of our national account practices, which included a $6.2 million increase from our Education practice, a $3.7 million increase from our Sales Performance practice, and a $1.7 million increase from our Customer Loyalty practice. We continue to see increased demand for The Leader in Me program in many school districts in the United States and in international locations, which contributed to a 27 percent increase in Education Practice revenues compared with fiscal 2013. At August 31, 2014, over 1,900 elementary-level schools were using The Leader in Me curriculum. We continue to make substantial investments in new sales personnel for our Education practice and expect that Education practice sales will continue to grow compared with prior periods. The growth from our Sales Performance Practice was primarily due to the acquisition of NinetyFive 5, which occurred in the third quarter of fiscal 2013. Our Customer Loyalty practice revenues grew on the strength of increased demand and new contracts for this offering during the fiscal year.
Self-Funded Marketing – This group includes our public programs, book and audio sales, and speeches. Our self-funded marketing sales were essentially flat compared with the prior year. Future growth in this channel is primarily dependent on the successful launch and acceptance of new publications and their acceptance in the marketplace.
Other – Our other sales are comprised primarily of leasing and shipping and handling revenues. The decrease in other sales was primarily due to decreased leasing revenues on our corporate campus resulting from the expiration of a significant lease contract during August 2013. During November 2013, we obtained a new lease contract for the vacant space with an unrelated tenant. At August 31, 2014 our corporate campus was essentially fully leased.
Gross Profit
Gross profit consists of net sales less the cost of services provided or the cost of goods sold. Our cost of sales includes the direct costs of delivering content onsite at client locations, including presenter costs, materials used in the production of training products and related assessments, assembly and manufacturing labor costs, freight, and certain other overhead costs. Gross profit may be affected by, among other things, the mix of practice solutions sold to clients, prices of materials, labor rates, changes in product discount levels, and freight costs.
Our consolidated gross profit for the fiscal year ended August 31, 2014 increased to $138.3 million compared with $129.0 million in fiscal 2013. The increase was primarily due to increased sales for the fiscal year ended August 31, 2014 compared with the prior year. Our consolidated gross margin remained essentially unchanged at 67.4 percent of sales in fiscal 2014 compared with 67.6 percent in the prior year. The impact of increased intellectual property sales, facilitator sales, and international licensee sales (all of which have higher gross margins than the majority of our other services) was offset by increased coaching sales in our Education practice and increased capitalized curriculum amortization costs, primarily resulting from costs to re-create The 7 Habits Signature Program.
Operating Expenses
Our operating expenses consisted of the following for the periods indicated (in thousands):
| YEAR ENDED AUGUST 31, | 2014 | 2013 | $ Change | % Change | ||||||||||||
| Selling, general, and administrative | $ | 106,164 | $ | 101,176 | $ | 4,988 | 5 | |||||||||
| Depreciation | 3,383 | 3,008 | 375 | 12 | ||||||||||||
| Amortization | 3,954 | 3,191 | 763 | 24 | ||||||||||||
| $ | 113,501 | $ | 107,375 | $ | 6,126 | 6 | ||||||||||
Selling, General and Administrative (SG&A) – The increase in SG&A expenses over the prior year was primarily due to 1) a $3.8 million increase related to the addition of new sales-related personnel, increased commissions on higher sales, marketing, and other advertising and promotional costs related to strategic sales initiatives; 2) a $2.2 million increase in Sales Performance practice expenses resulting from the acquisition of NinetyFive 5 in the third quarter of fiscal 2013; 3) a $0.4 million impairment of long-term receivables from FC Organizational Products (FCOP, and refer to discussion below); and 4) a $0.4 million increase in software contract costs and for professional services. The impact of these increased expenses was partially offset by a $1.6 million reduction in the fair value of estimated contingent earn out payments from the acquisition of NinetyFive 5 and by decreased short-term incentive plan bonus expense as certain annual financial targets were not met at August 31, 2014.
The acquisition of NinetyFive 5 requires us to reassess the fair value of the contingent earn out payments each reporting period. Changes to the fair value of the expected amount of contingent consideration to
be paid are required to be classified as an operating expense. The change in the fair value of expected payments may significantly increase or decrease our SG&A expenses in future periods.
Depreciation – Depreciation expense for fiscal 2014 increased compared with fiscal 2013 primarily due to the addition of computer software and hardware, and leasehold improvements at our corporate campus during fiscal 2014. Based on capital asset acquisitions in fiscal 2014 and expected purchases during fiscal 2015, we anticipate depreciation expense will total approximately $4.3 million in fiscal 2015.
Amortization – Amortization expense from definite-lived intangible assets increased over the prior year due to the acquisitions of NinetyFive 5 during fiscal 2013 and Red Tree, Inc. in fiscal 2014. Based on current carrying amounts of intangible assets and remaining estimated useful lives, we anticipate amortization expense from intangible assets will total $3.8 million in fiscal 2015.
Discount on Related Party Receivable
We record receivables from FCOP for reimbursement of certain operating costs, office space rent, and for working capital and other advances that we make, even though we are not contractually required to make advances or absorb the losses of FCOP. Based on expected payment, some of these receivables are recorded as long-term receivables and are required to be recorded at net present value. We discounted the long-term portion of the FCOP receivable based on forecasted repayments at a discount rate of 15 percent, which was the estimated risk-adjusted borrowing rate of FCOP.
Throughout fiscal 2014 we were optimistic about FCOP’s financial performance, as they improved their cash flows and did not request working capital advances during calendar 2014. However, subsequent to August 31, 2014, we received new projected earnings and cash flow information that reflected weaker sales of certain accessory products, which have a significant adverse impact on expected earnings and cash flows in future periods. Accordingly, we determined that an additional $0.6 million discount and a corresponding $0.4 million impairment charge were needed to reduce the long-term receivable from FCOP to its net realizable value and net present value. As a result of lower estimated future cash flows at FCOP, we may not be able to recognize lease revenue from FCOP in future periods.
Income Taxes
Our effective income tax rate for the fiscal year ended August 31, 2014 was approximately 17 percent, compared with approximately 26 percent in fiscal 2013. Our effective tax rate decreased primarily due to the benefit of foreign tax credits we plan to claim for fiscal 2008 through fiscal 2010. During those years we either generated or used net operating loss carryforwards and were unable to utilize foreign tax credits and therefore took foreign tax deductions. At August 31, 2014 we have no remaining U.S. federal net operating loss carryforwards. Additionally, overall taxable income and foreign source income in fiscal 2014 were sufficient to utilize all of the foreign tax credits generated during the fiscal year, plus additional credits generated in prior years. Based on these factors and our projected taxable income and foreign source income, we decided to amend our U.S. federal income tax returns from fiscal 2008 through fiscal 2010 to claim foreign tax credits instead of foreign tax deductions. The net tax benefit recognized, resulting from the decision to claim these additional foreign tax credits, totaled $4.2 million in fiscal 2014. After we file the amended federal returns for fiscal 2008 through fiscal 2010, we will have no remaining tax returns that we can decide to amend to claim foreign tax credits instead of tax deductions. We therefore expect our effective income tax rate to be closer to statutory tax rates for fiscal 2015 and future years.
We paid $6.3 million in cash for income taxes during fiscal 2014, primarily for payment on our income tax liabilities at August 31, 2013, and an unusually large estimated tax payment in a foreign jurisdiction resulting from a six-day change to their fiscal calendar. We believe that we will recover any amounts paid in excess of our tax liability after we file our income tax return in that jurisdiction in fiscal 2015. We anticipate that our cash paid for income taxes will be less than our income tax provision in fiscal 2015
and fiscal 2016 as we utilize foreign tax credit carryforwards and other deferred income tax assets. After utilization of our existing foreign tax credit carryforwards, which we currently expect to be fully used by the end of fiscal 2016, we expect that our cash paid for income taxes will increase and approximate our income tax provision.
FISCAL 2013 COMPARED WITH FISCAL 2012
Sales
U.S./Canada Direct Offices – This channel includes our four regional field offices that serve clients in the United States and Canada and our government services group. During fiscal 2013, sales through our regional offices increased by $12.3 million, or 18 percent, compared with the prior year. Increased sales through our regional sales offices were generally broad-based across our content and practice areas and were favorably impacted by increased facilitator and intellectual property license sales when compared with fiscal 2012. During fiscal 2013 we held additional marketing events and increased the number of sales and sales support personnel. We believe that the additional events and sales personnel were key drivers of increased sales at our regional sales offices during the year. Partially offsetting increased regional office sales was a $2.1 million decline in government services sales. Our government services revenues were adversely affected by government sequestration, and the contracting timeframe for a large government contract. Previous annual renewals of this contract have occurred during our third fiscal quarter. During fiscal 2013, the contract renewal process was postponed and occurred during our first quarter of fiscal 2014. Subsequent to August 31, 2013 we won a renewal of the contract for a portion of fiscal 2014 and, later in fiscal 2014, we hope to obtain an extended renewal of this large contract for the remainder of fiscal 2014 and beyond. We will continue our efforts to win additional renewals of this contract in the future, but we cannot guarantee a successful outcome, as many of the aspects of renewal are not within our control, including factors such as the partial government shutdown that occurred during the fall of 2013.
International Direct Offices – Our three international direct offices are located in Australia, Japan, andFor the United Kingdom. During fiscal year ended August 31, 2013, sales increased at all of our international direct offices, which were led by a $0.5 million improvement at our office in Australia. Sales increased by $0.2 million at our office in Japan and by $0.1 million in the United Kingdom. However, the translation of international sales into U.S. dollars had a $3.4 million adverse impact on reported sales as the U.S. dollar strengthened during fiscal 2013, particularly against the Japanese Yen. In fiscal 2013, sales at our Japan office (denominated in Yen) increased by 17 percent compared with fiscal 2012. We anticipate that foreign exchange rates (primarily the Japanese Yen) will continue to have an adverse effect on our reported sales through December 2014 when compared to the prior year.
International Licensees – In countries or foreign locations where we do not have a direct office, our training and content offerings and services are delivered through independent licensees, who, subject to strict standards, may translate and adapt our content to match local preferences and customs. In fiscal 2013, international licensee royalties increased $1.2 million compared with the prior year as many of our licensees reported strengthening sales in their countries during the year. We believe that our increased efforts to support our licensees through additional program training, international branding, and the introduction of new offerings has had a favorable impact on their sales growth in fiscal 2013. We are continuing our efforts to improve licensee performance and expect continued growth from our international licensee partners during future periods.
National Account Practices – Our national account practices offer and sell content solutions that are not typically offered in our U.S/Canada Direct offices. These offerings include, in the Education practice, The Leader In Me program designed for students primarily in K-6 elementary schools; Helping Clients Succeed from our Sales Performance practice; and Winning Customer Loyalty from our Customer Loyalty practice. The increase in revenue from our national account practices was due to increased sales in our Education and Sales Performance Practices. We continue to seeDuring fiscal 2013, we experienced increased demand for The Leader in Me program in many school districts in the United States as well asand in some international locations, which contributed to a $9.0 million, or 64 percent, increase in Education practice revenues compared with fiscal 2012. At August 31, 2013, over 1,500 elementary level schools were using The Leader in Me program, and we anticipate continued growth in future periods.program. We completed the acquisition of NinetyFive 5 during the third quarter of fiscal 2013, which was added as a component of the Sales Performance practice. Primarily as a result of this acquisition, our Sales Performance practice sales increased by $1.0 million compared with the prior year. These increases were partially offset by a $0.3 million decrease in Customer Loyalty practice sales.sales during fiscal 2013.
Self-Funded Marketing – This group includes our book and audio sales, public programs, and speeches through our speakers’ bureau. The decrease in self-funded marketing sales was mainly due to book and audio distribution royalties received in the first and third quarters of fiscal 2012 that did not repeat in fiscal 2013. We expect to continue to release new publications in future periods and
Other – Our other sales are comprised primarily of leasing sales and shipping and handling revenues. The increase in other sales was primarily due to increased leasing revenues resulting from new lease contracts at our corporate headquarters. However, during August 2013 one of our significant lease contracts expired and we are actively seeking new tenants for this available space.expired. Our lease revenues will bewere adversely impacted in fiscal 2014 compared to prior periods until this available space iswas leased.
Gross profit consists of net sales less the cost of services provided or the cost of goods sold. Our cost of sales includes the direct costs of delivering content onsite at client locations, including presenter costs, materials used in the production of training products and related assessments, assembly and manufacturing labor costs, freight, and certain other overhead costs. Gross profit may be affected by, among other things, the mix of practice solutions sold to clients, prices of materials, labor rates, changes in product discount levels, and freight costs.Profit
Our consolidated gross profit for the fiscal year ended August 31, 2013 increased to $129.0 million compared with $112.7 million in the prior fiscal year. The increase was primarily due to improved sales for the fiscal year ended August 31, 2013 compared with fiscal 2012, and to improved margin on our sales. Our consolidated gross margin increased to 67.6 percent of sales in fiscal 2013 compared with 66.1 percent in the prior year. The improvement in gross margin was primarily due to increased intellectual property license sales, increased facilitator sales, and increased international licensee royalties, all of which have higher gross margins than the majority of our other programs and services.
Operating Expenses
Our operating expenses consisted of the following for the periods indicated (in thousands):
| YEAR ENDED AUGUST 31, | 2013 | 2012 | $ Change | % Change | ||||||||||||
| Selling, general, and administrative | $ | 101,176 | $ | 89,462 | $ | 11,714 | 13 | |||||||||
| Depreciation | 3,008 | 3,142 | (134 | ) | (4 | ) | ||||||||||
| Amortization | 3,191 | 2,499 | 692 | 28 | ||||||||||||
| $ | 107,375 | $ | 95,103 | $ | 12,272 | 13 | ||||||||||
Selling, General and Administrative (SG&A)– Our SG&A expenses increased $11.7 million, or 13 percent, compared with the prior year. As a percent of sales, our SG&A expenses increased to 53.0 percent compared with 52.5 percent in fiscal 2012. The increase in SG&A expenses during fiscal 2013 was primarily due to 1) an $8.6 million increase in associate costs primarily related to additional commissions and bonuses on significantly higher sales in fiscal 2013 and investments in new sales-related personnel; 2) a $1.7 million increase in advertising and promotional costs that were primarily related to strategic initiatives which we believe had a favorable impact on our fiscal year’s sales; 3) a $1.2 million increase in travel expenses related primarily to marketing activities and increased training sales activity during the fiscal year; and 4) a $0.4 million increase in legal expenses that was due to the fiscal 2012 reimbursement of certain legal fees by FC Organization Products (FCOP)FCOP and which did not repeat in fiscal 2013. These increases were partially offset by a $0.2 million decrease in non-cash share-based compensation.
Depreciation – Depreciation expense for fiscal 2013 decreased by $0.1 million compared with fiscal 2012 primarily due to certain assets becoming fully depreciated. Based on capital asset acquisitions in fiscal 2013 and expected purchases during fiscal 2014, we anticipate depreciation expense will total approximately $3.3 million in fiscal 2014.
Amortization – Amortization expense from definite-lived intangible assets increased $0.7 million compared with the prior year due to the acquisition of NinetyFive 5 during fiscal 2013. Based on current carrying amounts of intangible assets and remaining estimated useful lives, we anticipate amortization expense will total $3.9 million in fiscal 2014.
Interest Income
The increase in interest income was attributable to the accretion of interest on previously discounted long-term receivables from FCOP. Interest income is computed using the effective interest method using a rate of 15 percent, which was the discount rate at which these receivables were marked to estimated net present value (refer to discussion below).
Income Taxes
Our effective tax rate for the fiscal year ended August 31, 2013 was approximately 26 percent compared with 43 percent in fiscal 2012. Our effective tax rate decreased primarily due to the benefit of foreign tax credits that as of August 31, 2013 we planplanned to claim for fiscal 2003 through fiscal 2007. During those years we either generated or used net operating loss carryforwards and were unable to utilize foreign tax credits and instead took foreign tax deductions. As of August 31, 2013 we havehad no remaining U.S. federal net operating loss carryforwards. Additionally, overall taxable income and foreign source income in fiscal 2013 were sufficient to utilize all of the foreign tax credits generated during the fiscal year, plus additional credits generated in prior years. Based on these factors and our projected taxable income and
foreign source income, we decided to amend our U.S. federal income tax returns from fiscal 2003 through fiscal 2007 to claim foreign tax credits instead of foreign tax deductions. The net tax benefit from claiming these additional foreign tax credits totaled $2.4 million in fiscal 2013.
ENTERPRISE INFORMATION
Our sales are primarily comprised of training and content sales and related products such as books, audio, and training accessories. 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, operatingAdditional enterprise financial information, for our U.S./Canada, international, and corporate services operations is presented below. Our U.S./Canada operations are responsible for the sale and delivery of our training and content offeringsincluding geographical information, can be found in the United States and Canada. Our international sales group includes the financial results of our wholly owned foreign direct offices and royalty revenues from licensees. Our corporate services information includes leasing income and certain corporate operating expenses.
YEAR ENDED AUGUST 31, | 2013 | Percent change | 2012 | Percent change | 2011 | |||||||||||||||
| U.S./Canada | $ | 142,616 | 14 | $ | 125,183 | 6 | $ | 118,420 | ||||||||||||
| International | 44,154 | 5 | 42,052 | 5 | 40,011 | |||||||||||||||
| Total | 186,770 | 12 | 167,235 | 6 | 158,431 | |||||||||||||||
| Corporate and eliminations | 4,154 | 29 | 3,221 | 36 | 2,373 | |||||||||||||||
| Consolidated | $ | 190,924 | 12 | $ | 170,456 | 6 | $ | 160,804 | ||||||||||||
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated financial data for the fiscal years ended August 31, 20132014 and 2012.2013. The quarterly consolidated financial data reflects, in the opinion of management, all adjustments necessary to fairly present the results of operations for such periods. We utilize a modified 52/53-week fiscal year that ends on August 31 of each year. Corresponding quarterly periods generally consist of 13-week periods during the fiscal year. Results of any one or more quarters are not necessarily indicative of continuing trends (in thousands, except for per-share amounts).
| YEAR ENDED AUGUST 31, 2014 (unaudited) | ||||||||||||||||||||||||||||||||
| November 30 | March 1 | May 31 | August 31 | |||||||||||||||||||||||||||||
| Net sales | $ | 43,418 | $ | 46,506 | $ | 47,131 | $ | 68,109 | ||||||||||||||||||||||||
| Gross profit | 30,031 | 31,411 | 29,884 | 46,940 | ||||||||||||||||||||||||||||
| Selling, general, and administrative | 24,752 | 25,707 | 25,017 | 30,686 | ||||||||||||||||||||||||||||
| Depreciation | 784 | 816 | 866 | 917 | ||||||||||||||||||||||||||||
| Amortization | 989 | 989 | 983 | 993 | ||||||||||||||||||||||||||||
| Income from operations | 3,506 | 3,899 | 3,018 | 14,344 | ||||||||||||||||||||||||||||
| Income before income taxes | 2,947 | 3,307 | 2,394 | 13,112 | ||||||||||||||||||||||||||||
| Net income | 1,719 | 1,971 | 1,922 | 12,456 | ||||||||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | .10 | $ | .12 | $ | .11 | $ | .74 | ||||||||||||||||||||||||
| Diluted | .10 | .12 | .11 | .73 | ||||||||||||||||||||||||||||
| YEAR ENDED AUGUST 31, 2013 (unaudited) | ||||||||||||||||||||||||||||||||
| December 1 | March 2 | June 1 | August 31 | December 1 | March 2 | June 1 | August 31 | |||||||||||||||||||||||||
| Net sales | $ | 44,061 | $ | 40,430 | $ | 44,859 | $ | 61,574 | $ | 44,061 | $ | 40,430 | $ | 44,859 | $ | 61,574 | ||||||||||||||||
| Gross profit | 29,559 | 27,284 | 29,435 | 42,712 | 29,559 | 27,284 | 29,435 | 42,712 | ||||||||||||||||||||||||
| Selling, general, and administrative | 22,943 | 22,691 | 23,661 | 31,880 | 22,943 | 22,691 | 23,661 | 31,880 | ||||||||||||||||||||||||
| Depreciation | 702 | 722 | 752 | 833 | 702 | 722 | 752 | 833 | ||||||||||||||||||||||||
| Amortization | 622 | 619 | 960 | 990 | 622 | 619 | 960 | 990 | ||||||||||||||||||||||||
| Income from operations | 5,292 | 3,252 | 4,062 | 9,009 | 5,292 | 3,252 | 4,062 | 9,009 | ||||||||||||||||||||||||
| Discount on related party receivable | (147 | ) | (135 | ) | (135 | ) | (102 | ) | ||||||||||||||||||||||||
| Income before income taxes | 4,693 | 2,669 | 3,527 | 8,509 | 4,693 | 2,669 | 3,527 | 8,509 | ||||||||||||||||||||||||
| Net income | 2,897 | 1,592 | 2,111 | 7,719 | 2,897 | 1,592 | 2,111 | 7,719 | ||||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | .16 | $ | .09 | $ | .13 | $ | .47 | $ | .16 | $ | .09 | $ | .13 | $ | .47 | ||||||||||||||||
| Diluted | .15 | .08 | .13 | .47 | .15 | .08 | .13 | .47 | ||||||||||||||||||||||||
| YEAR ENDED AUGUST 31, 2012 (unaudited) | ||||||||||||||||||||||||||||||||
| November 26 | February 25 | May 26 | August 31 | |||||||||||||||||||||||||||||
| Net sales | $ | 39,540 | $ | 38,627 | $ | 41,274 | $ | 51,015 | ||||||||||||||||||||||||
| Gross profit | 26,542 | 24,981 | 26,144 | 35,016 | ||||||||||||||||||||||||||||
| Selling, general, and administrative | 21,373 | 20,714 | 21,448 | 25,927 | ||||||||||||||||||||||||||||
| Depreciation | 834 | 860 | 680 | 768 | ||||||||||||||||||||||||||||
| Amortization | 631 | 626 | 622 | 620 | ||||||||||||||||||||||||||||
| Income from operations | 3,704 | 2,781 | 3,394 | 7,701 | ||||||||||||||||||||||||||||
| Discount on related party receivable | - | - | - | (1,369 | ) | |||||||||||||||||||||||||||
| Income before income taxes | 3,074 | 2,159 | 2,783 | 5,732 | ||||||||||||||||||||||||||||
| Net income | 1,662 | 1,162 | 1,617 | 3,399 | ||||||||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | .09 | $ | .07 | $ | .09 | $ | .19 | ||||||||||||||||||||||||
| Diluted | .09 | .06 | .09 | .18 | ||||||||||||||||||||||||||||
In the fourth quarters of fiscal quarter generally has higher sales2014 and 2013, we decided to amend previous years’ income from operationstax returns to claim foreign tax credits rather than other fiscal quarters primarily due to increased revenues inforeign tax deductions. For further information regarding our Education practice (when school administrators and faculty are not conducting classes) and to increased facilitator sales that typically occur during that quarter. Quarterly fluctuations
income taxes refer to the notes to our consolidated financial statements as found in Item 8 of this report, and in the comparative discussions for our results of operations as found in this management’s discussion and analysis.
For more information on our quarterly results of operations, refer to our quarterly reports filed on Form 10-Q as filed with the SEC. Our quarterly reports for the periods indicated are available free of charge at www.sec.gov.
LIQUIDITY AND CAPITAL RESOURCES
Summary
We may use our line of credit facility for general corporate purposes as well as for other transactions, unless specifically prohibited by the terms of the line of credit agreement. The Restated Credit Agreement and subsequent modifications also contain customary representations and guarantees as well as provisions for repayment and liens. 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 EBITDAR ratio requirement of less than 3.00 to 1.00; (ii) a fixed charge coverage ratio requirement in excess of 1.5 to 1.0; and (iii) an $8.0 million limitation on capital expenditures, excluding capitalized curriculum development. At August 31, 2013,2014, we believe that we were in compliance with the terms and financial covenants applicable to the Restated Credit Agreement and its subsequent modifications.
In addition to potential obligations from our Restated Credit Facility, we have a long-term lease on our corporate campus that expires in 2025 and is accounted for as a long-term financing obligation.
The following table summarizes our cash flows from operating, investing, and financing activities for the past three years (in thousands):
| YEAR ENDED AUGUST 31, | 2013 | 2012 | 2011 | |||||||||
| Total cash provided by (used for): | ||||||||||||
| Operating activities | $ | 15,528 | $ | 15,562 | $ | 15,643 | ||||||
| Investing activities | (9,583 | ) | (4,392 | ) | (10,834 | ) | ||||||
| Financing activities | (3,834 | ) | (3,192 | ) | (5,095 | ) | ||||||
| Effect of exchange rates on cash | (831 | ) | 17 | (182 | ) | |||||||
| Increase (decrease) in cash and cash equivalents | $ | 1,280 | $ | 7,995 | $ | (468 | ) | |||||
| YEAR ENDED AUGUST 31, | 2014 | 2013 | 2012 | |||||||||
| Total cash provided by (used for): | ||||||||||||
| Operating activities | $ | 18,124 | $ | 15,528 | $ | 15,562 | ||||||
| Investing activities | (17,424 | ) | (9,583 | ) | (4,392 | ) | ||||||
| Financing activities | (2,445 | ) | (3,834 | ) | (3,192 | ) | ||||||
| Effect of exchange rates on cash | (63 | ) | (831 | ) | 17 | |||||||
| Increase (decrease) in cash and cash equivalents | $ | (1,808 | ) | $ | 1,280 | $ | 7,995 | |||||
Cash Flows from Operating Activities
Our cash provided by operating activities declined slightly compared with the prior year and totaled $15.5increased to $18.1 million for the fiscal year ended August 31, 20132014 compared with $15.6$15.5 million in fiscal 2012.2013. The slight decreaseincrease in our cash flows from operating activities was primarily due to improved operating results for the fiscal year, which were partially offset by increased cash used to support investments in working capital, including a significant increase in accounts receivable primarily resulting from increased sales during the fourth quarter of fiscal 2013. The use of cash for working capital investment was partially offset by improved operating results during fiscal 2013 compared with the prior year.2014 sales, increased inventories, and an income tax payment in Japan that we expect to recover when our income taxes are filed in that jurisdiction. Our primary source of cash from operating activities induring fiscal 20132014 was the sale of contentservices and servicescontent to our customers in the normal course of business. The primary uses of cash for operating activities were payments to suppliers for materials used in products sold, payments for direct costs necessary to conduct programs, and payments for selling, general, and administrative expenses.
Cash Flows from Investing Activities and Capital Expenditures
Our business is not generally considered to be capital intensive and we do not own or operate any manufacturing facilities. Ourprimary uses of cash for investing purposesactivities during fiscal 2013 were primarily comprised of business acquisitions,2014 included curriculum development, business acquisition costs, including the final contingent earn out payment from the acquisition of CoveyLink and purchasespayments to the former owners of computer hardware, software,NinetyFive 5 as part of the initial acquisition price, and other capital items usedthe purchase of property and equipment in the normal course of business. During fiscal 2013 we used $9.6 million of cash for investing activities compared with $4.4 million used in the prior year.
For the fiscal year ended August 31, 20132014, we used $4.2spent $7.8 million of cash in connection with business acquisitions. We paid $2.2 millionon capitalized curriculum, primarily for the fourthre-creation of The 7 Habits Signature Program, which is our best-selling solution and is sold throughout the world. For fiscal 2015, we anticipate that our expenditures for capitalized curriculum will decrease to approximately $5.0 million.
Our cash used for business acquisition activities totaled $6.2 million during fiscal 2014. In March 2014 we paid $3.5 million to the former owners of CoveyLink for the final of five potential earnoutannual earn out payments. The annual contingent earn out payments fromwere based on earnings growth over the acquisitionspecified measurement period and were classified as goodwill on our consolidated balance sheets when paid.
During the third quarter of CoveyLink Worldwide, LLC (CoveyLink) and $2.0 million for the acquisition of NinetyFive 5, LLC (NinetyFive 5). During fiscal 2013 we completed the acquisition of NinetyFive 5, an entity that provides sales performancesuccess training services. The consideration for thisthe acquisition consistsconsisted of an initial $4.2 million in cash payable in four installments through December 2013, and additional potential earnoutearn out payments up to a maximum of $8.5 million based on cumulative EBITDA as set forth in the purchase agreement. The remaining $2.3 million liability fromDuring December 2013, we paid the purchasefinal installment to the former owners of NinetyFive 5 and made cash payments totaling $2.3 million for this acquisition during fiscal 2014. We also have a contingent payment liability to the former owners of NinetyFive 5 that is classifiedrequired to be recorded at fair value. At August 31, 2014 the fair value of this liability was $2.5 million, which was recorded as a component of accrued liabilities at August 31, 2013. In addition, we have recorded the fair value of the liability for potential contingent earnout payments of $4.1 million in other long-term liabilities at August 31, 2013. However,on our consolidated balance sheet. Currently it is uncertain as to whether, or when, the actual paymentsvarious targets under the arrangement will be determined in future periods based on actual EBITDA results. See further discussion under “Contractual Obligations.”met; therefore, this potential liability will continue to be re-measured to fair value at the end of each reporting period.
“Millennial Generation” in their workforces. The purchase price totaled $0.5 million in cash, which was paid at the closing of the purchase agreement.
Our purchases of property and equipment, which totaled $3.5 million, consisted primarily of computer hardware, computer software, and leasehold improvements. We currently anticipate that our purchases of property and equipment will total approximately $3.8 million in fiscal 2015. We intend to replace our existing enterprise resource planning software beginning in fiscal 2015, which may result in increased capital spending compared with current expectations.
Cash Flows from Financing Activities
During fiscal 2012 we announced the approval of a plan to repurchase up to $10.0 million of our common stock. We intend to use cash in excess of $10.0 million, provided we have no balance outstanding on our revolving line of credit, for the purchases. Through August 31, 20132014, we have purchased a total of 73,320 shares of our common stock for $0.8 million under this plan. We anticipate that the purchasesmillion. Purchases of our common stock under this approved plan will increase the use of cash for financing activities in future periods.
Sources of Liquidity
We expect to meet our projected capital expenditures, service our existing financing obligation, and meet other working capital requirements during fiscal 2014 through2015 from current cash balances and future cash flows from operating activities. Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit and other financing alternatives, if necessary, for these expenditures. We extended the maturity date on ourOur Restated Credit Agreement during fiscal 2013 toexpires in March 2016 and we expect to renew the Restated Credit Agreement on an annuala regular basis to maintain the three-year availabilitylong-term borrowing capacity of this credit facility. Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources. 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.
We believe that our existing cash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be sufficient for us to maintain our operations in the foreseeable future. However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, 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 general economic conditions and the introduction of new curriculumsofferings and technology 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.
Contractual Obligations
We have not structured any special purpose 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 lease payments resulting from the sale of our
corporate campus (financing obligation); minimum operating lease payments primarily for domestic regional and foreign office space; payments to HP Enterprise Services (HP) for outsourcing services related to information systems, warehousing, and distribution services; short-term purchase obligations for inventory items and other products and services used in the ordinary course of business; and remaining payments associated with the acquisition of NinetyFive 5.to HP Enterprise Services (HP) for outsourcing services related to information systems, warehousing, and distribution services. Our expected payments on these obligations over the next five fiscal years and thereafter are as follows (in thousands):
| Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | |||||||||||||||||||||||||||||||||||||||||||||||
| Contractual Obligations | 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | Total | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | ||||||||||||||||||||||||||||||||||||||||||
| Required lease payments on corporate campus | $ | 3,307 | $ | 3,373 | $ | 3,440 | $ | 3,509 | $ | 3,579 | $ | 26,330 | $ | 43,538 | $ | 3,373 | $ | 3,440 | $ | 3,509 | $ | 3,579 | $ | 3,651 | $ | 22,679 | $ | 40,231 | ||||||||||||||||||||||||||||
Minimum operating lease payments(1) | 1,906 | 1,706 | 1,385 | 397 | 159 | 529 | 6,082 | 1,837 | 1,542 | 533 | 214 | 219 | 366 | 4,711 | ||||||||||||||||||||||||||||||||||||||||||
| Purchase obligations | 4,112 | - | - | - | - | - | 4,112 | |||||||||||||||||||||||||||||||||||||||||||||||||
Minimum required payments to HP for outsourcing services(2) | 2,207 | 2,222 | 1,383 | - | - | - | 5,812 | 2,222 | 1,383 | - | - | - | - | 3,605 | ||||||||||||||||||||||||||||||||||||||||||
| Purchase obligations | 4,273 | - | - | - | - | - | 4,273 | |||||||||||||||||||||||||||||||||||||||||||||||||
| NinetyFive 5 acquisition liability | 2,250 | - | - | - | - | - | 2,250 | |||||||||||||||||||||||||||||||||||||||||||||||||
NinetyFive 5 contingent earnout payments(3) | - | 2,167 | 2,167 | 2,166 | 2,000 | - | 8,500 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total expected contractual obligation payments | $ | 13,943 | $ | 9,468 | $ | 8,375 | $ | 6,072 | $ | 5,738 | $ | 26,859 | $ | 70,455 | ||||||||||||||||||||||||||||||||||||||||||
Total expected contractual obligation payments(3) | $ | 11,544 | $ | 6,365 | $ | 4,042 | $ | 3,793 | $ | 3,870 | $ | 23,045 | $ | 52,659 | ||||||||||||||||||||||||||||||||||||||||||
| (1) | The operating agreement with FC Organizational Products provides for reimbursement of a portion of the warehouse leasing costs, the impact of which would reduce the lease obligations disclosed in the table above. |
| (2) | Our obligation for outsourcing services contains an annual escalation based upon changes in the Employment Cost Index, the impact of which was not estimated in the above table. |
| (3) |
Our contractual obligations presented above exclude unrecognized tax benefits of $4.1$3.5 million for which we cannot make a reasonably reliable estimate of the amount and period of payment. For further information regarding our unrecognized tax benefits, refer to the notes to our consolidated financial statements as presented in Part II, Item 8 of this report on Form 10-K.
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 policies that we used to prepare our consolidated financial statements are primarily outlined in note 1 to the consolidated financial statements, which are presented in Part II, Item 8 of this Annual Report on Form 10-K. Some of those accounting policies require us to make assumptions and use judgments that may affect the amounts reported in our consolidated financial statements. Management regularly evaluates its estimates and assumptions and bases those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America. Actual results may differ from these estimates under different assumptions or conditions, including changes in economic and political conditions and other circumstances that are not in our control, but which may have an impact on these estimates and our actual financial results.
The following items require the most significant judgment and often involve complex estimates:
Revenue Recognition
We derive revenues primarily from the following sources:
| · | Training and Consulting Services – We provide training and consulting services to both organizations and individuals in leadership, productivity, strategic execution, trust, sales force performance, customer loyalty, and communication effectiveness skills. |
| · | Products – We sell books, audio media, and other related products. |
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) collectability 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.
Some of our training and consulting contracts contain multiple-element deliverables that include training along with other products and services. For transactions that contain more than one element, we recognize revenue in accordance with the guidance for multiple-element arrangements using the relative selling price method.
Our international strategy includes the use of licensees in countries where we do not have a wholly-ownedwholly owned operation. Licensee companies are unrelated entities that have been granted a license to translate our content and curriculum, adapt the content and curriculum to the local culture, and sell our training seminars and products in a specific country or region. Licensees are required to pay us royalties based upon a percentage of their sales to clients. We recognize royalty income each period based upon the sales information reported to us from our licensees. International royalty revenue is reported as a component of training and consulting service sales in our consolidated income statements.
Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns.
Share-Based Compensation
Our shareholders have approved performance basedperformance-based long-term incentive plans (LTIPs)(LTIP) that provide for grants of share-based performance awards to certain managerial personnel and executive management as directed by the Organization and Compensation Committee of the Board of Directors. The number of common shares that are vested and issued to LTIP participants in some plans may beis variable and all performance-based awards have vesting requirements dependentis based upon the achievement of specified financial performance objectives during a defined period.performance periods. Due to uncertainties related to the achievement of objectives and the variable number of common shares that may be issued under some LTIPs,the LTIP, we reevaluate our LTIP grants on a quarterly basis and adjust our share-based compensation expense for expected vesting dates and the expected number of shares expected to be awarded based upon actual and estimated financial results of the Company compared towith the performance goals set for the award. Adjustments to our share-basedthe number of shares awarded, and to the corresponding compensation expense, are made on a cumulative basis at the adjustment date based upon revisions to the estimated vesting date and/or theprobable number of common shares to be awarded.
The analysis of some of our performance-basedLTIP awards contains uncertainties because we are required to make assumptions and judgments about the eventual achievement of financial objectives and the number of shares that will vest in each LTIP grant. The assumptions and judgments that are essential to the analysis include forecasted sales and operating income levels during the specifiedLTIP service periods. The evaluation of performance-basedLTIP performance awards and the corresponding use of estimated amounts may produce additional volatility in our consolidated financial statements as we record cumulative adjustments based on the timing and probability of vesting and/orto the estimated number of common shares to be awarded under the performance-basedLTIP grants as described above.
We have also granted share-based compensation awards that have share price,share-price, or market-based, vesting conditions. For these market-based awardsAs a result, we used a Monte Carlo“Monte Carlo” simulation models to determine the fair value and expected term (derived service period) of these awards. The Monte Carlo pricing models require
expected service period of these awards. The Monte Carlo pricing models required the input of subjective assumptions, including items such as grant-date share price, common stock price volatility, dividend rates, and risk-free return rates.the expected term of the options. If underlying model input factors change, significantly, including changes in the price of our common stock on the grant date,and we use different assumptions for estimating share-based compensation expense related to future awards, our share-based compensation expense may differ materially from amountsthat recorded in the current or previous periods.period.
Accounts Receivable Valuation
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Our allowance for doubtful accounts calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the collectability 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 collectability 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 August 31, 20132014 would decrease our reported income from operations by approximately $0.1 million.
For further information regarding the calculation of our allowance for doubtful accounts, refer to the notes to our financial statements as presented in Item 8 of this report on Form 10-K.
Related Party Receivable
At August 31, 2013,2014, we had receivables from FC Organizational Products, an entity in which we own 19.5 percent, for reimbursement of certain operating costs such as warehousing and distribution costs, which are billed to us by third party providers, and for working capital and other advances, even though we are not obligated to provide advances to, or fund the losses of FCOP. We make use of estimates to account for these receivables, including estimates of the collectability of amounts receivable from FCOP in future periods and, based upon revisions to the timing of estimated collections in fiscal 2012, we were required to reclassify a portion of the receivable from current to long-term. In accordance with applicable accounting guidance, we were required to discount the long-term portion of the receivablesreceivable to its net present value using an estimated effective borrowing rate for FCOP.
We estimated the effective risk-adjusted borrowing rate to discount the long-term portion of the receivable at 15 percent, which was recorded as a discount on a related party receivable in our fiscal 2013 and fiscal 2012consolidated income statements. Our estimate of the effective borrowing rate required us to estimate a variety of factors, including the availability of debt financing for FCOP, projected borrowing rates for comparable debt, and the timing and realizability of projected cash flows from FCOP. These estimates were based on information known at the time of the preparation of these financial statements. A change in the assumptions and factors used, including estimated interest rates, may change the amount of discount taken. For instance, a one percent increase in the discount rate would have reduced our income before income taxes by $0.1 million during fiscal 2013.
Our assessments regarding the collectability of the FCOP receivable requiresrequire us to make assumptions and judgments regarding the financial health of FCOP and are dependent on projected financial information for FCOP in future periods. Such financial information contains inherent uncertainties, and is subject to factors that are not within our control. Failure to receive projected cash flows from FCOP in future periods may result in adverse consequences to our liquidity, financial position, and results of operations.
For further information regarding our investment in FCOP, refer to the notes to our financial statements as presented in Item 8 of this report on Form 10-K.
Inventory Valuation
Our inventories are primarily comprised of training materials and related accessories. Inventories are reduced to their fair market value through the use of inventory valuation reserves, which are recorded during the normal course of business. Our inventory valuation 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 valuation 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 an adverse impact upon our financial position and results of operations. For example, a 10 percent increase to our inventory valuation reserves at August 31, 20132014 would decrease our reported income from operations by $0.1 million.
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. 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 quantitatively 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. Our goodwill at August 31, 2013 was generated by the acquisition of CoveyLink Worldwide, LLC during fiscal 2009 and the subsequent payment of contingent annual earnout payments, and the acquisition of NinetyFive 5 in fiscal 2013.
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 qualitatively assess the fair value of these assets, and may require estimated future cash flows, an estimated appropriate royalty rate, and an estimated discount rate that reflects the inherent risk of future cash flows when these assets are evaluated on a quantitative basis. 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 methodologies for both indefinite-lived intangible assets and goodwill are also dependent upon the share price of our common stock and our corresponding market capitalization, which may differ from estimated royalties used in our impairment testing. Based upon the fiscal 20132014 evaluation of the Covey trade name and goodwill, our trade-name related revenues, licensee royalties, consolidated sales, and market capitalization would have to suffer significant reductions before we would be required to impair these long-lived assets.
The acquisition of NinetyFive 5 in fiscal 2013 requires us to reassess the fair value of the contingent earnoutearn out payments each reporting period. Although subsequent changes to the contingent consideration liability do not affect the goodwill generated from the acquisition transaction, the valuation of expected contingent consideration requires us to estimate future sales and profitability. These estimates require the use of numerous assumptions, many of which may change frequently and lead to increased or decreased operating income in future periods. For instance, we recorded reductions totaling $1.6 million to the fair value of the expected contingent earn out payment during fiscal 2014 which resulted in a corresponding reduction of selling, general, and administrative expenses.
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. IfAlthough we have not made any material recent changes to our long-lived assets impairment assessment methodology, 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.
Income Taxes
We regularly evaluate our United States federal and various state and foreign jurisdiction income tax exposures. We account for certain aspects of our income tax provision using the provisions of FASC 740-10-05, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. 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. The provisions of FASC 740-10-05 also provide guidance on de-recognition, classification, interest, and penalties on income taxes, accounting for income taxes in interim periods, and require increased disclosure of various income tax items. 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.
We establish valuation allowances for deferred tax assets when we estimate it is more likely than not that the tax assets will not be realized. The determination of whether valuation allowances are needed on our deferred income tax assets contains uncertainties because we must project future income, including the use of tax-planning strategies, by individual tax jurisdictions. Changes in industry and economic conditions and the competitive environment may impact the accuracy of our projections. We regularly assess the likelihood that our deferred tax assets will be realized and determine if adjustments to our valuation allowance are necessary.
REGULATORY COMPLIANCE
INFLATION AND CHANGING PRICES
Inflation has not had a material effect on our operations. However, future inflation may have an impact on the price of materials used in the production of training products and related accessories, including paper and related raw materials. We may not be able to pass on such increased costs to our customers.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain written and oral statements made by us 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 growth, expected introduction of new or refreshed curriculums,offerings, future training and consulting sales activity, renewal of existing contracts, the release and success of new publications, anticipated expenses, the adequacy of existing capital resources, projected cost reduction and strategic initiatives, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuation expenses, the seasonality of future sales, expectations about attracting new tenants to occupy vacant space at our corporate campus, the seasonal fluctuations in cash used for and provided by operating activities, future compliance with the terms and conditions of our Revolving Loan and Term Loan,Restated Credit Agreement, the ability to borrow on, and renew, our Revolving Loan, expected repayment of our Term Loan in future periods,Restated Credit Agreement, expectations regarding income tax expenses as well as tax assets and credits and the amount of cash expected to be paid for income taxes, estimated capital expenditures, 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 this annual report on Form 10-K for the fiscal year ended August 31, 2013,2014, 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 HP Enterprise Services 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; adverse effects on certain licensee’s performance due to civil unrest in some of the countries where our licensees operate; and other factors which may adversely affect our business.
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. 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 relatively 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.
ITEM 7A.7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk of Financial Instruments
We are exposed to financial instrument market risk primarily through fluctuations in foreign currency exchange rates and interest rates. To manage risks associated with foreign currency exchange and interest rates, we may make limited use of derivative financial instruments. Derivatives are financial instruments that derive their value from one or more underlying financial instruments. As a matter of policy, our derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. In addition, we do not enter into derivative contracts for trading or speculative purposes, nor are we party to any leveraged derivative instrument. The notional amounts of derivatives do not represent actual amounts exchanged by the parties to the instrument; and thus are not a measure of exposure to us through our use of derivatives. Additionally, we enter into derivative agreements only with highly rated counterparties and we do not expect to incur any losses resulting from non-performance by other parties.
Foreign Exchange Sensitivity
Due to the global nature of our operations, we are subject to risks associated with transactions that are denominated in currencies other than the United States dollar, as well as the effects of translating amounts denominated in foreign currencies to United States dollars as a normal part of the reporting process. The objective of our foreign currency risk management activities is to reduce foreign currency risk in the consolidated financial statements. In order to manage foreign currency risks, we may make limited use of foreign currency forward contracts and other foreign currency related derivative instruments. However, we did not utilize any foreign currency forward or related derivative contracts during fiscal 2013,2014, fiscal 2012,2013, or fiscal 2011.2012.
Interest Rate Sensitivity
At August 31, 2013,2014, we did not have any amounts drawn on our revolving line of credit facility and we repaid our Term Loan payable to the bank in August 2013.credit. Accordingly, our long-term obligations consisted primarily of a long-term lease agreement (financing obligation) associated with the sale of our corporate headquarters facility, deferred income taxes, and the fair value of expected earnoutearn out payments from the acquisition of NinetyFive 5. Our overall interest rate sensitivity is therefore primarily influenced by any amounts borrowed on our revolving line of credit facility and the prevailing interest rate on this instrument, which may create additional expense if interest rates increase in future periods. The effective interest rate on the line of credit facility was 2.82.7 percent at August 31, 20132014 and we do not currently anticipate significant borrowings on the line of credit in the foreseeable future. Our financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent.
During the fiscal years ended August 31, 2014, 2013, 2012, and 2011,2012, we were not party to any interest rate swap agreements or similar derivative instruments.
ITEM 8:8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Franklin Covey Co.
We have audited Franklin Covey Co.’s internal control over financial reporting as of August 31, 2013,2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Franklin Covey Co.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Franklin Covey Co. maintained, in all material respects, effective internal control over financial reporting as of August 31, 2013,2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Franklin Covey Co. as of August 31, 20132014 and 2012,2013, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows and shareholders’ equity for each of the three years in the period ended August 31, 20132014 and our report dated November 14, 20132014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Salt Lake City, Utah
November 14, 20132014
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Franklin Covey Co.
We have audited the accompanying consolidated balance sheets of Franklin Covey Co. as of August 31, 20132014 and 2012,2013, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows and shareholders’ equity for each of the three years in the period ended August 31, 2013.2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Franklin Covey Co. at August 31, 20132014 and 2012,2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2013,2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Franklin Covey Co.’s internal control over financial reporting as of August 31, 2013,2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated November 14, 20132014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Salt Lake City, Utah
November 14, 20132014
FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS
| AUGUST 31, | 2013 | 2012 | 2014 | 2013 | ||||||||||||
| In thousands, except per-share data | ||||||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 12,291 | $ | 11,011 | $ | 10,483 | $ | 12,291 | ||||||||
| Accounts receivable, less allowance for doubtful accounts of $982 and $851 | 52,684 | 38,087 | ||||||||||||||
| Accounts receivable, less allowance for doubtful accounts of $918 and $982 | 61,490 | 52,684 | ||||||||||||||
| Receivable from related party | 3,305 | 3,588 | 1,851 | 3,305 | ||||||||||||
| Inventories | 4,321 | 4,161 | 6,367 | 4,321 | ||||||||||||
| Income taxes receivable | 2,432 | - | ||||||||||||||
| Deferred income tax assets | 4,685 | 3,634 | 4,340 | 4,685 | ||||||||||||
| Prepaid expenses and other current assets | 3,822 | 3,714 | 6,053 | 3,822 | ||||||||||||
Total current assets | 81,108 | 64,195 | 93,016 | 81,108 | ||||||||||||
| Property and equipment, net | 17,180 | 18,496 | 17,271 | 17,180 | ||||||||||||
| Intangible assets, net | 60,654 | 59,205 | 57,177 | 60,654 | ||||||||||||
| Goodwill | 16,135 | 9,172 | 19,641 | 16,135 | ||||||||||||
| Long-term receivable from related party | 4,453 | 3,478 | 3,296 | 4,453 | ||||||||||||
| Other long-term assets | 9,875 | 9,534 | 14,785 | 9,875 | ||||||||||||
| $ | 189,405 | $ | 164,080 | $ | 205,186 | $ | 189,405 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Current portion of financing obligation | $ | 1,139 | $ | 992 | $ | 1,298 | $ | 1,139 | ||||||||
| Current portion of bank note payable | - | 2,500 | ||||||||||||||
| Accounts payable | 9,294 | 7,758 | 12,001 | 9,294 | ||||||||||||
| Income taxes payable | 1,365 | 869 | - | 1,365 | ||||||||||||
| Accrued liabilities | 31,140 | 24,530 | 29,586 | 31,140 | ||||||||||||
Total current liabilities | 42,938 | 36,649 | 42,885 | 42,938 | ||||||||||||
| Financing obligation, less current portion | 27,376 | 28,515 | 26,078 | 27,376 | ||||||||||||
| Bank note payable, less current potion | - | 208 | ||||||||||||||
| Other liabilities | 6,106 | 1,152 | 3,934 | 6,106 | ||||||||||||
| Deferred income tax liabilities | 6,479 | 7,001 | 5,575 | 6,479 | ||||||||||||
| Total liabilities | 82,899 | 73,525 | 78,472 | 82,899 | ||||||||||||
| Commitments and contingencies (Notes 8 and 9) | ||||||||||||||||
| Commitments and contingencies (Notes 7 and 8) | ||||||||||||||||
| Shareholders’ equity: | ||||||||||||||||
| Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued | 1,353 | 1,353 | 1,353 | 1,353 | ||||||||||||
| Additional paid-in capital | 210,227 | 182,534 | 207,148 | 210,227 | ||||||||||||
| Common stock warrants | - | 5,260 | ||||||||||||||
| Retained earnings | 40,429 | 26,110 | 58,496 | 40,429 | ||||||||||||
| Accumulated other comprehensive income | 1,686 | 3,410 | 1,451 | 1,686 | ||||||||||||
| Treasury stock at cost, 10,759 shares and 9,365 shares | (147,189 | ) | (128,112 | ) | ||||||||||||
| Treasury stock at cost, 10,266 shares and 10,759 shares | (141,734 | ) | (147,189 | ) | ||||||||||||
Total shareholders’ equity | 106,506 | 90,555 | 126,714 | 106,506 | ||||||||||||
| $ | 189,405 | $ | 164,080 | $ | 205,186 | $ | 189,405 | |||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| YEAR ENDED AUGUST 31, | 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | ||||||||||||||||||
| In thousands, except per-share amounts | ||||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||
| Training and consulting services | $ | 178,656 | $ | 158,779 | $ | 150,976 | $ | 193,720 | $ | 178,656 | $ | 158,779 | ||||||||||||
| Products | 8,114 | 8,456 | 7,455 | 7,518 | 8,114 | 8,456 | ||||||||||||||||||
| Leasing | 4,154 | 3,221 | 2,373 | 3,927 | 4,154 | 3,221 | ||||||||||||||||||
| 190,924 | 170,456 | 160,804 | 205,165 | 190,924 | 170,456 | |||||||||||||||||||
| Cost of sales: | ||||||||||||||||||||||||
| Training and consulting services | 56,864 | 52,161 | 51,942 | 61,474 | 56,864 | 52,161 | ||||||||||||||||||
| Products | 3,122 | 3,839 | 3,674 | 3,502 | 3,122 | 3,839 | ||||||||||||||||||
| Leasing | 1,949 | 1,773 | 1,714 | 1,923 | 1,949 | 1,773 | ||||||||||||||||||
| 61,935 | 57,773 | 57,330 | 66,899 | 61,935 | 57,773 | |||||||||||||||||||
| Gross profit | 128,989 | 112,683 | 103,474 | 138,266 | 128,989 | 112,683 | ||||||||||||||||||
| Selling, general, and administrative | 101,176 | 89,462 | 85,255 | 106,164 | 101,176 | 89,462 | ||||||||||||||||||
| Depreciation | 3,008 | 3,142 | 3,567 | 3,383 | 3,008 | 3,142 | ||||||||||||||||||
| Amortization | 3,191 | 2,499 | 3,540 | 3,954 | 3,191 | 2,499 | ||||||||||||||||||
| Income from operations | 21,614 | 17,580 | 11,112 | 24,765 | 21,614 | 17,580 | ||||||||||||||||||
| Interest income | 614 | 18 | 21 | 427 | 614 | 18 | ||||||||||||||||||
| Interest expense | (2,332 | ) | (2,482 | ) | (2,687 | ) | (2,237 | ) | (2,332 | ) | (2,482 | ) | ||||||||||||
| Discount on related-party receivables | (519 | ) | (1,369 | ) | - | (1,196 | ) | (519 | ) | (1,369 | ) | |||||||||||||
| Other income, net | 21 | - | - | - | 21 | - | ||||||||||||||||||
| Income before income taxes | 19,398 | 13,747 | 8,446 | 21,759 | 19,398 | 13,747 | ||||||||||||||||||
| Provision for income taxes | (5,079 | ) | (5,906 | ) | (3,639 | ) | (3,692 | ) | (5,079 | ) | (5,906 | ) | ||||||||||||
| Net income | $ | 14,319 | $ | 7,841 | $ | 4,807 | $ | 18,067 | $ | 14,319 | $ | 7,841 | ||||||||||||
| Net income per share: | ||||||||||||||||||||||||
| Basic | $ | 0.83 | $ | 0.44 | $ | 0.28 | $ | 1.08 | $ | 0.83 | $ | 0.44 | ||||||||||||
| Diluted | 0.80 | 0.43 | 0.27 | 1.07 | 0.80 | 0.43 | ||||||||||||||||||
| Weighted average number of common shares: | ||||||||||||||||||||||||
| Basic | 17,348 | 17,772 | 17,106 | 16,720 | 17,348 | 17,772 | ||||||||||||||||||
| Diluted | 17,971 | 18,360 | 17,547 | 16,947 | 17,971 | 18,360 | ||||||||||||||||||
| COMPREHENSIVE INCOME: | ||||||||||||||||||||||||
| Net income | $ | 14,319 | $ | 7,841 | $ | 4,807 | $ | 18,067 | $ | 14,319 | $ | 7,841 | ||||||||||||
| Foreign currency translation adjustments | (1,724 | ) | (182 | ) | 578 | (235 | ) | (1,724 | ) | (182 | ) | |||||||||||||
| Comprehensive income | $ | 12,595 | $ | 7,659 | $ | 5,385 | $ | 17,832 | $ | 12,595 | $ | 7,659 | ||||||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| YEAR ENDED AUGUST 31, | 2013 | 2012 | 2011 | |||||||||
| In thousands | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 14,319 | $ | 7,841 | $ | 4,807 | ||||||
| Adjustments to reconcile net income to net cash provided | ||||||||||||
| by operating activities: | ||||||||||||
| Depreciation and amortization | 6,131 | 5,698 | 7,107 | |||||||||
| Amortization of capitalized curriculum costs | 1,891 | 1,816 | 1,639 | |||||||||
| Deferred income taxes | (1,739 | ) | 2,708 | 2,092 | ||||||||
| Share-based compensation expense | 3,589 | 3,835 | 2,788 | |||||||||
| Excess income tax benefits from share-based compensation | (903 | ) | - | - | ||||||||
| Loss (gain) on disposals of assets | (17 | ) | 36 | 101 | ||||||||
| Changes in assets and liabilities, net of effect of acquired business: | ||||||||||||
| Increase in accounts receivable, net | (15,171 | ) | (5,810 | ) | (1,288 | ) | ||||||
| Decrease (increase) in inventories | (358 | ) | 96 | 382 | ||||||||
| Increase in receivable from related party | (692 | ) | (1,349 | ) | (688 | ) | ||||||
| Decrease (increase) in prepaid expenses and other assets | (122 | ) | (39 | ) | 2,128 | |||||||
| Increase (decrease) in accounts payable and accrued liabilities | 6,173 | (197 | ) | (3,534 | ) | |||||||
| Increase in income taxes payable | 1,504 | 587 | 65 | |||||||||
| Increase in other long-term liabilities | 923 | 340 | 44 | |||||||||
| Net cash provided by operating activities | 15,528 | 15,562 | 15,643 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Purchases of property and equipment | (2,174 | ) | (2,279 | ) | (2,326 | ) | ||||||
| Capitalized curriculum development and other intangible assets | (3,224 | ) | (2,113 | ) | (3,097 | ) | ||||||
| Acquisition of business, net of cash acquired | (4,185 | ) | - | (5,411 | ) | |||||||
| Net cash used for investing activities | (9,583 | ) | (4,392 | ) | (10,834 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from line of credit borrowings | - | 8,523 | 67,462 | |||||||||
| Payments on line of credit borrowings | - | (8,523 | ) | (76,994 | ) | |||||||
| Proceeds from notes payable financing | - | - | 5,000 | |||||||||
| Payments on notes payable financing | (2,708 | ) | (2,292 | ) | - | |||||||
| Principal payments on long-term debt and financing obligation | (1,022 | ) | (895 | ) | (673 | ) | ||||||
| Purchases of common stock for treasury | (1,309 | ) | (440 | ) | (218 | ) | ||||||
| Income tax benefits recorded in paid-in capital | 903 | - | - | |||||||||
| Proceeds from sales of common stock held in treasury | 495 | 435 | 328 | |||||||||
| Exercise of common stock warrants | (55 | ) | - | - | ||||||||
| Management stock loan activity | (138 | ) | - | - | ||||||||
| Net cash used for financing activities | (3,834 | ) | (3,192 | ) | (5,095 | ) | ||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | (831 | ) | 17 | (182 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | 1,280 | 7,995 | (468 | ) | ||||||||
| Cash and cash equivalents at beginning of the year | 11,011 | 3,016 | 3,484 | |||||||||
| Cash and cash equivalents at end of the year | $ | 12,291 | $ | 11,011 | $ | 3,016 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for income taxes | $ | 3,996 | $ | 2,330 | $ | 1,825 | ||||||
| Cash paid for interest | 2,322 | 2,473 | 2,702 | |||||||||
| Non-cash investing and financing activities: | ||||||||||||
| Acquisition of business financed by accrued liabilities | $ | 2,250 | $ | - | $ | - | ||||||
| Purchases of property and equipment financed by accounts payable | 101 | 481 | 143 | |||||||||
| YEAR ENDED AUGUST 31, | 2014 | 2013 | 2012 | |||||||||
| In thousands | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 18,067 | $ | 14,319 | $ | 7,841 | ||||||
| Adjustments to reconcile net income to net cash provided | ||||||||||||
| by operating activities: | ||||||||||||
| Depreciation and amortization | 7,326 | 6,131 | 5,698 | |||||||||
| Amortization of capitalized curriculum costs | 2,824 | 1,891 | 1,816 | |||||||||
| Deferred income taxes | (679 | ) | (1,739 | ) | 2,708 | |||||||
| Share-based compensation expense | 3,534 | 3,589 | 3,835 | |||||||||
| Excess income tax benefits from share-based compensation | (2,477 | ) | (903 | ) | - | |||||||
| Reduction of estimated earn out liability | (1,579 | ) | - | - | ||||||||
| Loss (gain) on disposals of assets | - | (17 | ) | 36 | ||||||||
| Changes in assets and liabilities, net of effect of acquired business: | ||||||||||||
| Increase in accounts receivable, net | (9,548 | ) | (15,171 | ) | (5,810 | ) | ||||||
| Decrease (increase) in inventories | (2,136 | ) | (358 | ) | 96 | |||||||
| Decrease (increase) in receivable from related party | 2,611 | (692 | ) | (1,349 | ) | |||||||
| Increase in prepaid expenses and other assets | (1,543 | ) | (122 | ) | (39 | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | 3,646 | 6,173 | (197 | ) | ||||||||
| Increase (decrease) in income taxes payable/receivable | (1,347 | ) | 1,504 | 587 | ||||||||
| Increase (decrease) in other long-term liabilities | (575 | ) | 923 | 340 | ||||||||
| Net cash provided by operating activities | 18,124 | 15,528 | 15,562 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Purchases of property and equipment | (3,470 | ) | (2,174 | ) | (2,279 | ) | ||||||
| Capitalized curriculum development and other intangible assets | (7,787 | ) | (3,224 | ) | (2,113 | ) | ||||||
| Acquisition of business, net of cash acquired | (6,167 | ) | (4,185 | ) | - | |||||||
| Net cash used for investing activities | (17,424 | ) | (9,583 | ) | (4,392 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from line of credit borrowings | 35,331 | - | 8,523 | |||||||||
| Payments on line of credit borrowings | (35,331 | ) | - | (8,523 | ) | |||||||
| Payments on notes payable financing | - | (2,708 | ) | (2,292 | ) | |||||||
| Principal payments on long-term debt and financing obligation | (1,155 | ) | (1,022 | ) | (895 | ) | ||||||
| Purchases of common stock for treasury | (4,381 | ) | (1,309 | ) | (440 | ) | ||||||
| Income tax benefits recorded in paid-in capital | 2,477 | 903 | - | |||||||||
| Proceeds from sales of common stock held in treasury | 614 | 495 | 435 | |||||||||
| Exercise of common stock warrants | - | (55 | ) | - | ||||||||
| Management stock loan activity | - | (138 | ) | - | ||||||||
| Net cash used for financing activities | (2,445 | ) | (3,834 | ) | (3,192 | ) | ||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | (63 | ) | (831 | ) | 17 | |||||||
| Net increase (decrease) in cash and cash equivalents | (1,808 | ) | 1,280 | 7,995 | ||||||||
| Cash and cash equivalents at beginning of the year | 12,291 | 11,011 | 3,016 | |||||||||
| Cash and cash equivalents at end of the year | $ | 10,483 | $ | 12,291 | $ | 11,011 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for income taxes | $ | 6,323 | $ | 3,996 | $ | 2,330 | ||||||
| Cash paid for interest | 2,237 | 2,322 | 2,473 | |||||||||
| Non-cash investing and financing activities: | ||||||||||||
| Purchases of property and equipment financed by accounts payable | $ | 104 | $ | 101 | $ | 481 | ||||||
| Acquisition of business financed by accrued liabilities | - | 2,250 | - | |||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common | Common | Additional | Common | Retained | Comprehensive | Treasury | Treasury | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Shares | Stock Amount | Paid-In Capital | Stock Warrants | Earnings | Income | Stock Shares | Stock Amount | Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Common Stock Warrants | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock Shares | Treasury Stock Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| In thousands | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2010 | 27,056 | $ | 1,353 | $ | 183,794 | $ | 7,597 | $ | 13,462 | $ | 3,014 | (10,041 | ) | $ | (138,185 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock from | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| treasury | (1,276 | ) | 117 | 1,604 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (21 | ) | (218 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unvested share award | (526 | ) | 37 | 526 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 2,788 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrant activity | (5,894 | ) | (2,337 | ) | 596 | 8,229 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Management stock loan | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| payments | 637 | (76 | ) | (637 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-qualified deferred | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| compensation plan activity | (8 | ) | 2 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| adjustments | 578 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 4,807 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2011 | 27,056 | 1,353 | 179,515 | 5,260 | 18,269 | 3,592 | (9,386 | ) | (128,673 | ) | 27,056 | $ | 1,353 | $ | 179,515 | $ | 5,260 | $ | 18,269 | $ | 3,592 | (9,386 | ) | $ | (128,673 | ) | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock from | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| treasury | (358 | ) | 60 | 800 | (358 | ) | 60 | 800 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (44 | ) | (440 | ) | (44 | ) | (440 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unvested share award | (514 | ) | 37 | 514 | (514 | ) | 37 | 514 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 3,835 | 3,835 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Management stock loan | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| activity | 313 | (32 | ) | (313 | ) | 313 | (32 | ) | (313 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of share-based award | (249 | ) | (249 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| adjustments | (182 | ) | (182 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 7,841 | 7,841 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2012 | 27,056 | 1,353 | 182,534 | 5,260 | 26,110 | 3,410 | (9,365 | ) | (128,112 | ) | 27,056 | 1,353 | 182,534 | 5,260 | 26,110 | 3,410 | (9,365 | ) | (128,112 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock from | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| treasury | (3,341 | ) | 279 | 3,836 | (3,341 | ) | 279 | 3,836 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (113 | ) | (1,309 | ) | (113 | ) | (1,309 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unvested share award | (421 | ) | 31 | 421 | (421 | ) | 31 | 421 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 3,457 | 3,457 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Management stock loan | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| activity | 45,379 | (3,302 | ) | (45,514 | ) | 45,379 | (3,302 | ) | (45,514 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrant activity | (18,273 | ) | (5,260 | ) | 1,708 | 23,478 | (18,273 | ) | (5,260 | ) | 1,708 | 23,478 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| adjustments | (1,724 | ) | (1,724 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefits recorded in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| paid-in capital | 903 | 903 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | (11 | ) | 3 | 11 | (11 | ) | 3 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 14,319 | 14,319 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2013 | 27,056 | $ | 1,353 | $ | 210,227 | $ | - | $ | 40,429 | $ | 1,686 | (10,759 | ) | $ | (147,189 | ) | 27,056 | 1,353 | 210,227 | - | 40,429 | 1,686 | (10,759 | ) | (147,189 | ) | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock from | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| treasury | (9,010 | ) | 698 | 9,624 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | (222 | ) | (4,381 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unvested share award | (202 | ) | 15 | 202 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 3,666 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| adjustments | (235 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefits recorded in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| paid-in capital | 2,477 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | (10 | ) | 2 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 18,067 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2014 | 27,056 | $ | 1,353 | $ | 207,148 | $ | - | $ | 58,496 | $ | 1,451 | (10,266 | ) | $ | (141,734 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Franklin Covey Co. (hereafter referred to as we, us, our, or the Company) is a global company specializing in performance improvement. We help individuals and organizations achieve results that require a change in human behavior and our mission is to “enable greatness in people and organizations everywhere.” Our expertise is in the following seven areas: Leadership, Execution, Productivity, Trust, Sales Performance, Customer Loyalty, and Education. Our offerings are described in further detail at www.franklincovey.com.www.franklincovey.com and elsewhere in this report. We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training and products based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, The Leader In Me, and The Four Disciplines of Execution, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, and Educational improvement. Through our organizational research and curriculum development efforts, we seek to consistently create, develop, and introduce new services and products that will help our clientsindividuals and organizations achieve greatness.their own great purposes.
Fiscal Year
The Company utilizes a modified 52/53-week fiscal year that ends on August 31 of each year. Corresponding quarterly periods generally consist of 13-week periods that ended on DecemberNovember 30, 2013, March 1, 2012, March 2, 2013,2014, and June 1, 2013May 31, 2014 during fiscal 2013.2014. Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, which consist of Franklin Development Corp., and our offices in Japan, the United Kingdom, Australia, and Australia.Korea (opened in January 2014). Our international direct office in Korea was sold effective August 31, 2014. Intercompany balances and transactions are eliminated in consolidation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Some of our cash is deposited with financial institutions located throughout the United States of America and at banks in foreign countries where we operate subsidiary offices, and at times may exceed insured limits. We consider all highly liquid debt instruments with a maturity date of three months or less to be cash equivalents. We did not hold a significant amount of investments that would be considered cash equivalent instruments at August 31, 20132014 or 2012.2013.
Inventories
Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out method. Elements of cost in inventories generally include raw materials, direct labor, and overhead. Cash flows from the sales of inventory are included in cash flows provided by operating activities in our consolidated statements of cash flows. Our inventories are comprised primarily of training materials, books, and related accessories, and consisted of the following (in thousands):
| AUGUST 31, | 2013 | 2012 | 2014 | 2013 | ||||||||||||
| Finished goods | $ | 4,253 | $ | 4,028 | $ | 6,295 | $ | 4,253 | ||||||||
| Raw materials | 68 | 133 | 72 | 68 | ||||||||||||
| $ | 4,321 | $ | 4,161 | $ | 6,367 | $ | 4,321 | |||||||||
Provision is made to reduce excess and obsolete inventories to their estimated net realizable value. In assessing the valuation of inventories, we make judgments regarding future demand requirements and compare these estimates with current and committed inventory levels. Inventory requirements may change based on projected customer demand, training curriculum life-cycle changes, longer- or shorter-than-expected usage periods, and other factors that could affect the valuation of our inventories.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense, which includes depreciation on our corporate campus that is accounted for as a financing obligation (Note 7)6), and the amortization of assets recorded under capital lease obligations, is calculated using the straight-line method over the lesser of the expected useful life of the asset or the contracted lease period. We generally use the following depreciable lives for our major classifications of property and equipment:
| Description | Useful Lives |
| Buildings | 20 years |
| Machinery and equipment | 3–7 years |
| Computer hardware and software | 3–5 years |
| Furniture, fixtures, and leasehold improvements | 5–8 years |
Leasehold improvements are amortized over the lesser of the useful economic life of the asset or the contracted lease period. We expense costs for repairs and maintenance as incurred. Gains and losses resulting from the sale of property and equipment are recorded in current operations.
Impairment of Long-Lived Assets
Long-lived tangible assets and definite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use an estimate of undiscounted future net cash flows of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the anticipated future cash flows of the assets, we recognize an impairment loss equal to the difference between the carrying values of the assets and their estimated fair values. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets. The evaluation of long-lived assets requires us to use estimates of future cash flows. If forecasts and assumptions used to support the realizability of our long-lived tangible and definite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.
Indefinite-Lived Intangible Assets and Goodwill
Intangible assets that are deemed to have an indefinite life and acquired goodwill are not amortized, but rather are tested for impairment on an annual basis or more often if events or circumstances indicate that a potential impairment exists. The Covey trade name intangible asset (Note 5)4) has been deemed to have an indefinite life. This intangible asset is tested for impairment using qualitative factors or the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars and work sessions, international licensee sales, and related products. Based on the fiscal 20132014 evaluation of the Covey trade name, we believe the fair value of the Covey trade name substantially exceeds its carrying value. No impairment charges were recorded against the Covey trade name during the fiscal years ended August 31, 2014, 2013, 2012, or 2011.2012.
Capitalized Curriculum Development Costs
During the normal course of business, we develop training courses and related materials that we sell to our clients. Capitalized curriculum development costs include certain expenditures to develop course materials such as video segments, course manuals, and other related materials. In fiscal 2014, the majority of our capital spending on curriculum was for our re-created The 7 Habits of Highly Effective People – Signature Edition, which is our best-selling curriculum throughout the world. Generally, curriculum costs are capitalized when there is a major revision to an existing course that requires a significant re-write of the course materials or curriculum. Costs incurred to maintain existing offerings are expensed when incurred. In addition, development costs incurred in the research and development of new curriculum and software products to be sold, leased, or otherwise marketed are expensed as incurred until economic feasibility has been established.
During fiscal 20132014 and in prior years, we capitalized costs incurred for the development of various curriculums. Capitalized development costs are generally amortized over a five-year life, which is based on numerous factors, including expected cycles of major changes to our content. Capitalized curriculum development costs are reported as a component of other long-term assets in our consolidated balance sheets and totaled $7.4$12.4 million and $6.7$7.4 million at August 31, 20132014 and 2012.2013. Amortization of capitalized curriculum development costs is reported as a component of cost of sales.
Accrued Liabilities
Significant components of our accrued liabilities were as follows (in thousands):
| AUGUST 31, | 2013 | 2012 | 2014 | 2013 | ||||||||||||
| Unearned revenue | $ | 10,350 | $ | 7,063 | ||||||||||||
| Accrued compensation | $ | 11,804 | $ | 9,549 | 10,336 | 11,804 | ||||||||||
| Unearned revenue | 7,063 | 4,780 | ||||||||||||||
| Intellectual property royalties | 1,468 | 1,866 | ||||||||||||||
| NinetyFive 5 acquisition payable | 2,250 | - | - | 2,250 | ||||||||||||
| Intellectual property royalties | 1,866 | 1,907 | ||||||||||||||
| Customer credits | 913 | 1,421 | ||||||||||||||
| Other accrued liabilities | 7,244 | 6,873 | 7,432 | 8,157 | ||||||||||||
| $ | 31,140 | $ | 24,530 | $ | 29,586 | $ | 31,140 | |||||||||
Foreign Currency Translation and Transactions
The functional currencies of our foreign operations are the reported local currencies. Translation adjustments result from translating our foreign subsidiaries’ financial statements into United States dollars. The balance sheet accounts of our foreign subsidiaries are translated into United States dollars
using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated using average exchange rates for each month during the fiscal year. The resulting translation gains or losses
were recorded as a component of accumulated other comprehensive income in shareholders’ equity. Foreign currency transaction gains and losses totaled a loss of $0.1 million, a gain of $0.2 million, and a loss of $0.1 million and a gain of $14,000 for the fiscal years ended August 31, 2014, 2013, 2012, and 2011,2012, respectively.
Derivative Instruments
During the normal course of business, we are exposed to risks associated with foreign currency exchange rate and interest rate fluctuations. Foreign currency exchange rate exposures result from the Company’s operating results, assets, and liabilities that are denominated in currencies other than the United States dollar. In order to limit our exposure to these elements, we may make limited use of derivative instruments. Each derivative instrument that is designated as a hedge instrument is recorded on the balance sheet at its fair value. Changes in the fair value of derivative instruments that qualify for hedge accounting are recorded in accumulated other comprehensive income, which is a component of shareholders’ equity. Changes in the fair value of derivative instruments that are not designated as hedge instruments are immediately recognized as a component of selling, general, and administrative expense in our consolidated income statements.
Sales Taxes
We collect sales tax on qualifying transactions with customers based upon applicable sales tax rates in various jurisdictions. We account for sales taxes collected using the net method; accordingly, we do not include sales taxes in net sales reported in our consolidated income statements.
Revenue Recognition
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) collectability 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.
Some of our training and consulting contracts contain multiple element deliverables that include training along with other products and services. For transactions that contain more than one element, we recognize revenue in accordance with the guidance for multiple element arrangements using the relative selling price method.
Our international strategy includes the use of licensees in countries where we do not have a wholly-owned direct office. 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 content in a specific country or region. Licensees are required to pay us royalties based upon a percentage of their sales to clients. We recognize royalty income each period based upon the sales information reported to us from our licensees. Licensee royalty revenues are included as a component of training sales and totaled $13.8 million, $12.9 million, $11.8 million, and $10.6$11.8 million for the fiscal years ended August 31, 2014, 2013, 2012, and 2011.2012.
Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns.
Share-Based Compensation
We record the compensation expense for all share based-paymentsshare-based payments to employees and non-employees, including grants of stock options and the compensatory elements of our employee stock purchase plan, in our consolidated income statements based upon their fair values over the requisite service period. For more information on our share-based compensation plans, refer to Note 13.11.
Shipping and Handling Fees and Costs
All shipping and handling fees billed to customers are recorded as a component of net sales. All costs incurred related to the shipping and handling of products are recorded in cost of sales.
Advertising Costs
Costs for newspaper, television, radio, and other advertising are expensed as incurred or recognized over the period of expected benefit for direct response and catalog advertising. Direct response advertising costs, which consist primarily of printing and mailing costs for seminar mailers, are charged to expense over the period of projected benefit, which ranges from three to 12 months.incurred. Advertising costs included in selling, general, and administrative expenses totaled $7.5 million, $7.0 million, and $5.3 million and $3.1 million infor the fiscal years ended August 31, 2013, 2012, and 2011. Our direct response advertising costs reported in other current assets totaled $0.1 million and $0.2 million at August 31,2014, 2013, and 2012, respectively.2012.
Income Taxes
Our income tax provision has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The income tax provision represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred income taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for tax rates and tax laws when changes are enacted. A valuation allowance is provided against deferred income tax assets when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. Interest and penalties related to uncertain tax positions are recognized as components of income tax expense in our consolidated income statements.
We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.
We provide for income taxes, net of applicable foreign tax credits, on temporary differences in our investment in foreign subsidiaries, which consist primarily of unrepatriated earnings.
Comprehensive Income
Comprehensive income includes changes to equity accounts that were not the result of transactions with shareholders. Comprehensive income is comprised of net income or loss and other comprehensive income and loss items. Our other comprehensive income and losses generally consist of changes in the cumulative foreign currency translation adjustment, net of tax.
On March 11, 2013 we acquired substantiallyMay 28, 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This new standard was issued in conjunction with the International Accounting Standards Board and is designed to create a single, principles-based process by which all ofbusinesses must calculate revenue. The new standard replaces numerous individual, industry-specific revenue rules found in U.S. generally accepted accounting principles and is required to be adopted in fiscal years beginning after December 15, 2016 and for interim periods therein. The new standard may be applied using the assets“full retrospective” or “modified retrospective” approach. As of NinetyFive 5 LLC (NinetyFive 5). NinetyFive 5 provides sales success training services that complement our existing sales performance content and we expect NinetyFive 5 to become a key component of our Sales Performance practice in future periods. The purchase price was $4.2 million in cash, payable in four installments through December 6, 2013, $2.0 million of which was paid through August 31, 2013, plus contingent earnout payments up to a maximum2014, we have not yet determined the method of $8.5 million, basedadoption nor the impact that ASU No. 2014-09 will have on cumulative earnings before interest, income taxes, depreciation, and amortization (EBITDA) as set forth in the purchase agreement.our reported revenue or results of operations.
| Computer equipment | $ | 14 | ||
| Intangible assets (Note 5) | 3,989 | |||
| Goodwill | 4,728 | |||
| Loss on reacquired license arrangement | 950 | |||
| Purchase price payable and unearned revenue | (2,651 | ) | ||
| Contigent earn-out liability (long-term liabilities) | (4,109 | ) | ||
| Gain on equity ownership interest | (971 | ) | ||
| Cash paid | $ | 1,950 |
| Gain on equity ownership interest | $ | 971 | ||
| Loss on reacquired license arrangement | (950 | ) | ||
| Other income, net | $ | 21 |
| TRADE ACCOUNTS RECEIVABLE |
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts represents our best estimate of the amount of probable credit losses in the existing accounts receivable balance. We determine the allowance for doubtful accounts based upon historical write-off experience and current economic conditions, and we review the adequacy of the allowance for doubtful accounts on a regular basis. Receivable balances past due over 90 days, which exceed a specified dollar amount, are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance sheet credit exposure related to our customers nor do we generally require collateral or other security agreements from our customers.
Activity in our allowance for doubtful accounts was comprised of the following for the periods indicated (in thousands):
| YEAR ENDED | ||||||||||||||||||||||||
| AUGUST 31, | 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | ||||||||||||||||||
| Beginning balance | $ | 851 | $ | 798 | $ | 718 | $ | 982 | $ | 851 | $ | 798 | ||||||||||||
| Charged to costs and expenses | 190 | 224 | 188 | 141 | 190 | 224 | ||||||||||||||||||
| Deductions | (59 | ) | (171 | ) | (108 | ) | (205 | ) | (59 | ) | (171 | ) | ||||||||||||
| Ending balance | $ | 982 | $ | 851 | $ | 798 | $ | 918 | $ | 982 | $ | 851 | ||||||||||||
Deductions on the foregoing table represent the write-off of amounts deemed uncollectible during the fiscal year.year presented. During fiscal 2012, our recoveries of previously written off accounts totaled approximately $72,000 and was included in amounts charged to costs and expenses in the above table. Recoveries of amounts previously written off were insignificant in fiscal 20132014 and fiscal 2011.2013.
| PROPERTY AND EQUIPMENT |
Our property and equipment were comprised of the following (in thousands):
| AUGUST 31, | 2013 | 2012 | 2014 | 2013 | ||||||||||||
| Land and improvements | $ | 1,312 | $ | 1,312 | $ | 1,312 | $ | 1,312 | ||||||||
| Buildings | 31,556 | 31,556 | 31,556 | 31,556 | ||||||||||||
| Machinery and equipment | 2,224 | 2,295 | 2,243 | 2,224 | ||||||||||||
| Computer hardware and software | 17,002 | 19,792 | 17,685 | 17,002 | ||||||||||||
| Furniture, fixtures, and leasehold | ||||||||||||||||
| improvements | 11,536 | 11,635 | 12,538 | 11,536 | ||||||||||||
| 63,630 | 66,590 | 65,334 | 63,630 | |||||||||||||
| Less accumulated depreciation | (46,450 | ) | (48,094 | ) | (48,063 | ) | (46,450 | ) | ||||||||
| $ | 17,180 | $ | 18,496 | $ | 17,271 | $ | 17,180 | |||||||||
| INTANGIBLE ASSETS AND GOODWILL |
Our intangible assets were comprised of the following (in thousands):
| Gross Carrying | Accumulated | Net Carrying | ||||||||||||||||||||||
| AUGUST 31, 2014 | Amount | Amortization | Amount | |||||||||||||||||||||
| Definite-lived intangible assets: | ||||||||||||||||||||||||
| License rights | $ | 27,000 | $ | (14,915 | ) | $ | 12,085 | |||||||||||||||||
| Acquired curriculum | 58,555 | (39,009 | ) | 19,546 | ||||||||||||||||||||
| Customer lists | 16,827 | (15,953 | ) | 874 | ||||||||||||||||||||
| Internally developed software | 2,049 | (1,025 | ) | 1,024 | ||||||||||||||||||||
| Trade names | 1,250 | (602 | ) | 648 | ||||||||||||||||||||
| 105,681 | (71,504 | ) | 34,177 | |||||||||||||||||||||
| Indefinite-lived intangible asset: | ||||||||||||||||||||||||
| Covey trade name | 23,000 | - | 23,000 | |||||||||||||||||||||
| $ | 128,681 | $ | (71,504 | ) | $ | 57,177 | ||||||||||||||||||
| Gross Carrying | Accumulated | Net Carrying | ||||||||||||||||||||||
| AUGUST 31, 2013 | Amount | Amortization | Amount | |||||||||||||||||||||
| Definite-lived intangible assets: | ||||||||||||||||||||||||
| License rights | $ | 27,000 | $ | (13,978 | ) | $ | 13,022 | $ | 27,000 | $ | (13,978 | ) | $ | 13,022 | ||||||||||
| Acquired curriculum | 58,427 | (37,550 | ) | 20,877 | 58,427 | (37,550 | ) | 20,877 | ||||||||||||||||
| Customer lists | 16,685 | (15,426 | ) | 1,259 | 16,685 | (15,426 | ) | 1,259 | ||||||||||||||||
| Internally developed software | 2,049 | (341 | ) | 1,708 | 2,049 | (341 | ) | 1,708 | ||||||||||||||||
| Trade names | 1,219 | (431 | ) | 788 | 1,219 | (431 | ) | 788 | ||||||||||||||||
| 105,380 | (67,726 | ) | 37,654 | 105,380 | (67,726 | ) | 37,654 | |||||||||||||||||
| Indefinite-lived intangible asset: | ||||||||||||||||||||||||
| Covey trade name | 23,000 | - | 23,000 | 23,000 | - | 23,000 | ||||||||||||||||||
| $ | 128,380 | $ | (67,726 | ) | $ | 60,654 | $ | 128,380 | $ | (67,726 | ) | $ | 60,654 | |||||||||||
| AUGUST 31, 2012 | ||||||||||||||||||||||||
| Definite-lived intangible assets: | ||||||||||||||||||||||||
| License rights | $ | 27,000 | $ | (13,041 | ) | $ | 13,959 | |||||||||||||||||
| Acquired curriculum | 58,284 | (36,052 | ) | 22,232 | ||||||||||||||||||||
| Customer lists | 15,111 | (15,097 | ) | 14 | ||||||||||||||||||||
| Trade names | 377 | (377 | ) | - | ||||||||||||||||||||
| 100,772 | (64,567 | ) | 36,205 | |||||||||||||||||||||
| Indefinite-lived intangible asset: | ||||||||||||||||||||||||
| Covey trade name | 23,000 | - | 23,000 | |||||||||||||||||||||
| $ | 123,772 | $ | (64,567 | ) | $ | 59,205 | ||||||||||||||||||
Our intangible assets are amortized over the estimated useful life of the asset. The range of remaining estimated useful lives and weighted-average amortization period over which we are amortizing the major categories of definite-lived intangible assets at August 31, 20132014 were as follows:
Category of Intangible Asset | Range of Remaining Estimated Useful Lives | Weighted Average Original Amortization Period |
| License rights | 30 years | |
| Curriculum | 26 years | |
| Customer lists | 14 years | |
| Internally developed software | 3 years | |
| Trade names | 3 to 5 years | 5 years |
| Category of | Estimated Useful | ||||
| Intangible Asset | Amount | Life | |||
| $ | | ||||
| 5 years | |||||
| | 5 years | ||||
| | 5 years | ||||
| $ | | ||||
Our goodwill balance at August 31, 20132014 was generated from the fiscal 2009 acquisition of CoveyLink Worldwide, LLC (CoveyLink) and, the fiscal 2013 acquisition of NinetyFive 5.5, and the fiscal 2014 acquisition of Red Tree, Inc. The previous owners of
CoveyLink, which includes a brother of one of our executive officers, arewere entitled to earn annual contingent payments based upon earnings growth over the subsequent five years. During fiscal 2013 we paid $2.2 million in cash to the former owners of CoveyLink for the fourth contingent payment. There was no payment required in fiscal 2012 for the third contingent payment. These contingent payments were classified as goodwill on our consolidated balance sheets when paid according to previously existing business combination guidance. Our consolidated goodwill changed as follows during fiscal 20132014 and 20122013 (in thousands):
| Balance at August 31, 2011 | $ | 9,172 | ||||||
| Accumulated impairments | - | |||||||
| Balance at August 31, 2012 | 9,172 | $ | 9,172 | |||||
| Contingent earnout payment from | ||||||||
| Contingent earn out payment on | ||||||||
| CoveyLink acquisition | 2,235 | 2,235 | ||||||
| Acquisition of NinetyFive 5 | 4,728 | 4,728 | ||||||
| Accumulated impairments | - | - | ||||||
| Balance at August 31, 2013 | $ | 16,135 | 16,135 | |||||
| Contingent earn out payment on | ||||||||
| CoveyLink acquisition | 3,456 | |||||||
| Acquisition of Red Tree, Inc. | 50 | |||||||
| Accumulated impairments | - | |||||||
| Balance at August 31, 2014 | $ | 19,641 | ||||||
The goodwill generated by the Red Tree and NinetyFive 5 acquisition isacquisitions are primarily attributable to the organization, methodologies, and related processes developed by NinetyFive 5curriculums that complement our existing sales performancepractices and content. All of the goodwill generated from the acquisition of Red Tree and NinetyFive 5 is expected to be deductible for income tax purposes.
Our aggregate amortization expense from definite-lived intangible assets totaled $4.0 million, $3.2 million, $2.5 million, and $3.5$2.5 million for fiscal years 2014, 2013, 2012, and 2011.2012. Amortization expense forfrom our intangible assets over the next five years is expected to be as follows (in thousands):
| YEAR ENDING | ||||||||
| AUGUST 31, | ||||||||
| 2014 | $ | 3,834 | ||||||
| 2015 | 3,633 | $ | 3,730 | |||||
| 2016 | 3,187 | 3,266 | ||||||
| 2017 | 2,817 | 2,886 | ||||||
| 2018 | 2,665 | 2,731 | ||||||
| 2019 | 2,491 | |||||||
| LINE OF CREDIT |
During fiscal 2011, we entered into an amended and restated secured credit agreement (the Restated Credit Agreement) with our existing lender. The Restated Credit Agreement providesprovided a revolving line of credit facility (the Revolving Line of Credit) with a maximum borrowing amount of $10.0 million and a term loan (the Term Loan) with maximum available borrowing of up to $5.0 million. Both credit facilities may be used for general business purposes.
On March 25, 2013, we entered into the Third Modification Agreement to the existing Restated Credit Agreement. The primary purposes of the Third Modification Agreement arewere to extend the maturity date of the Restated Credit Agreement, as subsequently modified, from March 31, 2015 to March 31, 2016 and to increase the caps for permitted business acquisitions.
The Revolving Line of Credit may be used for general business purposes. The key terms and conditions of the Revolving Line of Credit under the Third Modification Agreement are as follows:
· | Available Credit – The |
| · | Maturity Date – The maturity date of the Revolving Line of Credit is |
· | Interest Rate – The effective interest rate continues to be LIBOR plus 2.50 percent per annum. The unused credit fee on the facility is .33 percent per annum. |
| · | Financial Covenants – The Revolving Line of Credit requires us to be in compliance with specified financial covenants, including (a) a funded debt to EBITDAR (earnings before interest, taxes, depreciation, amortization, and rental expense) ratio of less than 3.00 to 1.00; (b) a fixed charge coverage ratio greater than 1.5 to 1.0; and (c) an annual limit on capital expenditures (not including capitalized curriculum development) of $8.0 million. |
In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the Restated Credit Agreement. At August 31, 2013,2014, we believe that we were in compliance with the terms and covenants applicable to the Third Modification Agreement. The effective interest rate on our Revolving Line of Credit was 2.82.7 percent at August 31, 20132014 and 2.72.8 percent August 31, 2012.2013.
In connection with the Restated Credit Agreement, we entered into a promissory note, a security agreement, repayment guaranty agreements, and a pledge and security agreement. These agreements pledge substantially all of our assets located in the United States to the lender as collateral for borrowings under the Restated Credit Agreement and subsequent amendments. We had no outstanding borrowings on the Revolving Line of Credit at August 31, 20132014 or August 31, 2012.
| FINANCING OBLIGATION |
In connection with the sale and leaseback of our corporate headquarters facility located in Salt Lake City, Utah, we entered into a 20-year master lease agreement with the purchaser, an unrelated private investment group. The 20-year master lease agreement also contains six five-year renewal options that will allow us to maintain our operations at the current location for up to 50 years. Although the corporate headquarters facility was sold and the Company has no legal ownership of the property, under applicable accounting guidance we were prohibited from recording the transaction as a sale since we have subleased a significant portion of the property that was sold to other tenants.sold. Accordingly, we must account for the sale as a financing transaction, which requires us to continue reporting the corporate headquarters facility as an asset and to record a financing obligation for the sale price.
The financing obligation on our corporate campus was comprised of the following (in thousands):
| AUGUST 31, | 2014 | 2013 | ||||||
| Financing obligation payable in | ||||||||
| monthly installments of $280 at | ||||||||
| August 31, 2014, including | ||||||||
| principal and interest, with two | ||||||||
| percent annual increases | ||||||||
| (imputed interest at 7.7%), | ||||||||
| through June 2025 | $ | 27,376 | $ | 28,515 | ||||
| Less current portion | (1,298 | ) | (1,139 | ) | ||||
| Total financing obligation, | ||||||||
| less current portion | $ | 26,078 | $ | 27,376 | ||||
| AUGUST 31, | 2013 | 2012 | ||||||
| Financing obligation payable in | ||||||||
| monthly installments of $275 at | ||||||||
| August 31, 2013, including | ||||||||
| principal and interest, with two | ||||||||
| percent annual increases | ||||||||
| (imputed interest at 7.7%), | ||||||||
| through June 2025 | $ | 28,515 | $ | 29,507 | ||||
| Less current portion | (1,139 | ) | (992 | ) | ||||
| Total financing obligation, | ||||||||
| less current portion | $ | 27,376 | $ | 28,515 | ||||
Future principal maturities of our financing obligation were as follows at August 31, 20132014 (in thousands):
| YEAR ENDING | ||||||||
| AUGUST 31, | ||||||||
| 2014 | $ | 1,139 | ||||||
| 2015 | 1,298 | $ | 1,298 | |||||
| 2016 | 1,473 | 1,473 | ||||||
| 2017 | 1,662 | 1,662 | ||||||
| 2018 | 1,868 | 1,868 | ||||||
| 2019 | 2,092 | |||||||
| Thereafter | 21,075 | 18,983 | ||||||
| $ | 28,515 | $ | 27,376 | |||||
Our remaining future minimum payments under the financing obligation in the initial 20-year lease term are as follows (in thousands):
| YEAR ENDING | ||||||||
| AUGUST 31, | ||||||||
| 2014 | $ | 3,307 | ||||||
| 2015 | 3,373 | $ | 3,373 | |||||
| 2016 | 3,440 | 3,440 | ||||||
| 2017 | 3,509 | 3,509 | ||||||
| 2018 | 3,579 | 3,579 | ||||||
| 2019 | 3,651 | |||||||
| Thereafter | 26,330 | 22,679 | ||||||
| Total future minimum financing | ||||||||
| obligation payments | 43,538 | 40,231 | ||||||
| Less interest | (16,335 | ) | (14,167 | ) | ||||
| Present value of future minimum | ||||||||
| financing obligation payments | $ | 27,203 | $ | 26,064 | ||||
The $1.3 million difference between the carrying value of the financing obligation and the present value of the future minimum financing obligation payments represents the carrying value of the land sold in the financing transaction, which is not depreciated. At the conclusion of the master lease agreement, the remaining financing obligation and carrying value of the land will be written off our financial statements.
| OPERATING LEASES |
Lease Expense
In the normal course of business, we lease office space and warehouse and distribution facilities under non-cancelable operating lease agreements. We rent office space, primarily for international and domestic regional sales administration offices, in commercial office complexes that are conducive to sales and administrative operations. We also rent warehousing and distribution facilities that are designed to provide secure storage and efficient distribution of our training products, books, and accessories. These operating lease agreements often contain renewal options that may be exercised at our discretion after the completion of the base rental term. In addition, many of the rental agreements provide for regular increases to the base rental rate at specified intervals, which usually occur on an annual basis. At August 31, 2013,2014, we had operating leases that havewith remaining terms ranging from approximatelyless than one year to approximately eightseven years. Following the sale of our consumer solutions business unit assets, FC Organizational Products is contractually obligated to pay to us a portion of the minimum rental payments on certain warehouse and distribution facilities that they are using, although we are still responsible for the gross required minimum lease payments. The following table summarizes our future minimum lease payments under operating lease agreements and the lease amounts receivable from FC Organizational Products at August 31, 20132014 (in thousands):
| Required | Receivable | Net Required | ||||||||||
| Minimum | from FC | Minimum | ||||||||||
| YEAR ENDING | Lease | Organizational | Lease | |||||||||
| AUGUST 31, | Payments | Products | Payments | |||||||||
| 2014 | $ | 1,906 | $ | (584 | ) | $ | 1,322 | |||||
| 2015 | 1,706 | (632 | ) | 1,074 | ||||||||
| 2016 | 1,385 | (535 | ) | 850 | ||||||||
| 2017 | 397 | - | 397 | |||||||||
| 2018 | 159 | - | 159 | |||||||||
| Thereafter | 529 | - | 529 | |||||||||
| $ | 6,082 | $ | (1,751 | ) | $ | 4,331 | ||||||
| Required | Receivable | Net Required | ||||||||||
| Minimum | from FC | Minimum | ||||||||||
| YEAR ENDING | Lease | Organizational | Lease | |||||||||
| AUGUST 31, | Payments | Products | Payments | |||||||||
| 2015 | $ | 1,837 | $ | (632 | ) | $ | 1,205 | |||||
| 2016 | 1,542 | (535 | ) | 1,007 | ||||||||
| 2017 | 533 | - | 533 | |||||||||
| 2018 | 214 | - | 214 | |||||||||
| 2019 | 219 | - | 219 | |||||||||
| Thereafter | 366 | - | 366 | |||||||||
| $ | 4,711 | $ | (1,167 | ) | $ | 3,544 | ||||||
We recognize lease expense on a straight-line basis over the life of the lease agreement. Contingent rent expense is recognized as it is incurred and was insignificant for the periods presented in this report.presented. Total rent expense recorded in selling, general, and administrative expense from operating lease agreements was $2.2 million $2.2 million, and $2.7 million for each of the fiscal years ended August 31, 2014, 2013, 2012, and 2011.2012.
Lease Income
We have subleased a significant portionthe majority of our corporate headquarters campus located in Salt Lake City, Utah to multiple, unrelated tenants as well as to FC Organizational Products. We recognize sublease income on a straight-line basis over the life of the sublease agreement. The cost basis of the office space available for lease was $34.6$35.4 million, which had a carrying value of $11.7$11.3 million at August 31, 2013.2014. The following future minimum lease payments due to us from our sublease agreements at August 31, 20132014 include lease income of approximately $0.8 million per year from FC Organizational Products. AllThe majority of lease income discloseddue to us after fiscal 20182019 is due from FC Organizational Products (in thousands):
| YEAR ENDING | ||||||||
| AUGUST 31, | ||||||||
| 2014 | $ | 3,046 | ||||||
| 2015 | 2,906 | $ | 4,143 | |||||
| 2016 | 2,404 | 3,688 | ||||||
| 2017 | 1,358 | 2,707 | ||||||
| 2018 | 1,162 | 2,726 | ||||||
| 2019 | 1,425 | |||||||
| Thereafter | 5,697 | 5,526 | ||||||
| $ | 16,573 | $ | 20,215 | |||||
Sublease revenue totaled $3.9 million, $4.2 million, $3.2 million, and $2.4$3.2 million during the fiscal years ended August 31, 2014, 2013, 2012, and 2011.
| COMMITMENTS AND CONTINGENCIES |
Information Systems and Warehouse Outsourcing Contract
We have an outsourcing contract with HP Enterprise Services (HP) to provide information technology system support and product warehousing and distribution services. During fiscal 2013, our warehouse and distribution agreement was amended to remove remaining fixed charges on our Salt Lake City warehouse facility. We are now contractually obligated to pay a monthly fixed charge for warehousing services at an HP facility in Des Moines, Iowa plus a variable charge based on certain warehouse activities. Because of the variable component of the agreement, our payments to HP may fluctuate in
future periods based upon sales and activity levels. The warehouse and distribution fixed charge increases by two percent each year plus an escalation clause based upon changes in the Employment Cost Index.
The following schedule summarizes our estimated minimum information systems support and fixed warehouse and distribution charges, without the effect of estimated escalation charges, to HP for services over the remaining life of the outsourcing contract, which expires induring fiscal 2016 (in thousands):
| Estimated | Estimated | |||||||
| Gross | Gross | |||||||
| YEAR ENDING | Minimum and | Minimum and | ||||||
| AUGUST 31, | Fixed Charges | Fixed Charges | ||||||
| 2014 | $ | 2,207 | ||||||
| 2015 | 2,222 | $ | 2,222 | |||||
| 2016 | 1,383 | 1,383 | ||||||
| $ | 5,812 | $ | 3,605 | |||||
During fiscal years 2014, 2013, 2012, and 2011,2012, we expensed $5.0$5.2 million, $5.0 million, and $6.6$5.0 million for services provided under the terms of the HP outsourcing contract. The total amount expensed each year under the HP contract includes freight charges, which are billed to the Company based upon activity. Freight charges included in our HP outsourcing costs totaled $2.2 million, $1.8$2.2 million, and $1.6$1.8 million during the years ended August 31, 2014, 2013, 2012, and 2011.2012.
The outsourcing contracts contain early termination provisions that we may exercise under certain conditions. However, in order to exercise the early termination provisions, we would have to pay specified penalties to HP depending upon the circumstances of the contract termination.
Purchase Commitments
During the normal course of business, we issue purchase orders to various external vendors for products and services. At August 31, 2013,2014, we had open purchase commitments totaling $4.3$4.1 million for products and services to be delivered primarily in fiscal 2014.2015. Other purchase commitments for materials, supplies, and other items incidental to the ordinary conduct of business were immaterial, both individually and in aggregate, to the Company’s operations at August 31, 2013.2014.
Legal Matters and Loss Contingencies
During fiscal 2012, a former software vendor performed a license review and claimed that in prior years we had used certain software modules that we were not licensed to use. After reviewing the claims from the vendor, we determined that the amounts claimed by the vendor were not consistent with our previously existing software licensing agreement. We are actively disputing these claims and believe that a settlement is reasonably possible. However, at August 31, 2013 we believe that the amount of such settlement would be immaterial to our consolidated financial statements.settled this complaint during fiscal 2014 for an insignificant amount.
We are also the subject of certain other legal actions, which we consider routine to our business activities. At August 31, 2013,2014, we believe that, after consultation with legal counsel, any potential liability to us under these other actions will not materially affect our financial position, liquidity, or results of operations.
| SHAREHOLDERS’ EQUITY |
Preferred Stock
We have 14.0 million shares of preferred stock authorized for issuance. However, atAt August 31, 2014 and 2013, no shares of preferred stock were issued or outstanding.
Common Stock Warrants
Pursuant to the terms of a preferred stock recapitalization plan completed in fiscal 2005, we completed a one-to-four forward split of our existing Series A preferred stock and then bifurcated each share of Series A preferred stock into a new share of Series A preferred stock that was no longer convertible into common stock, and a warrant to purchase shares of common stock. In connection with the recapitalization plan, we issued warrants to purchase 6.2 million shares of common stock with an exercise price of $8.00 per share. These warrantsshare that expired on March 8, 2013.
Knowledge Capital Investment Group (Knowledge Capital), a related entity that originally held a warrant to purchase 5.9 million shares of our common stock (such warrant is included in the 6.2 million warrants discussed above), exercised its warrant at various dates in fiscal 2013 and fiscal 2011 according to the terms of a fiscal 2011 exercise agreement, and received a total of 2.2 million shares of our common stock from shares held in treasury. In the fiscal 2011 exercise agreement, Knowledge Capital agreed to the following:
| 1. | To exercise its remaining warrant shares on a net settlement basis. |
| 2. | Not to exercise its right to cause the Company to file a registration statement with respect to the resale of any of the shares owned by Knowledge Capital (including shares already owned by Knowledge Capital) prior to the earlier of (i) March 8, 2013 (the expiration of the warrant) and (ii) one year after the date on which the warrant has been exercised in full (the Stand-Off Period). |
| 3. | If Knowledge Capital intends to sell any of our common shares (including shares previously owned by Knowledge Capital) in the market during the Stand-Off Period on an unregistered basis, Knowledge Capital will notify us in writing of such intent, including the details surrounding such sale, at least five trading days before commencing such sales, and, if requested by us, will refrain from selling shares of our common stock for up to 120 days after the date Knowledge Capital intended to begin such sales in order to permit us to arrange for an |
underwritten or other organized sale of these shares. This action includes filing with the Securities and Exchange Commission, if applicable and required, an effective registration statement covering the sale of the shares in the manner proposed by Knowledge Capital or as otherwise agreed to by Knowledge Capital and us.
| 4. | To discuss with us any proposal by us to purchase such shares during the 120-day period. |
In exchange for these considerations, we agreed to waive our right to pay cash in lieu of shares upon exercises of the warrant. Two members of our Board of Directors, including our Chief Executive Officer, have an equity interest in Knowledge Capital. This transaction and agreement was approved by members of our Board of Directors who are not affiliated with Knowledge Capital and had no economic interest in the warrant. As of August 31, 2014, Knowledge Capital has not sold any of its shares received from the exercise of the stock warrants.
Treasury Stock
On March 26, 2012 our Board of Directors approved a plan to purchase up to $10.0 million of the Company’s outstanding common stock. We intend to use available cash in excess of $10.0 million, provided we have no balance outstanding on our line of credit, to make the purchases. All previously existing common stock repurchase plans were canceled. Common stock purchases under this approved plan are made at our discretion based on prevailing market prices and are subject to customary regulatory requirements and considerations. We do not have a timetable for the purchase of these common shares, and the authorization by the Board of Directors does not have an expiration date. Through August 31, 2013,2014, we have purchased a total of 73,320 shares of our common stock for $0.8 million under the terms of this repurchase plan.
| FINANCIAL INSTRUMENTS |
Fair Value of Financial Instruments
The book value of our financial instruments at August 31, 20132014 and 20122013 approximated their fair values. The assessment of the fair values of our financial instruments is based on a variety of factors and assumptions. Accordingly, the fair values may not represent the actual values of the financial instruments that could have been realized at August 31, 20132014 or 2012,2013, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement. The following methods and assumptions were used to determine the fair values of our financial instruments, none of which were held for trading or speculative purposes:
Cash, Cash Equivalents, and Accounts Receivable – The carrying amounts of cash, cash equivalents, and accounts receivable approximate their fair values due to the liquidity and short-term maturity of these instruments.
Other Assets – Our other assets, including notes receivable, were recorded at the net realizable value of estimated future cash flows from these instruments.
Debt Obligations – At August 31, 2013,2014, our debt obligations consisted of a variable-rate revolving line of credit. The Revolving Line of Credit agreement is renewed on an annuala regular basis and the terms are reflective of current market conditions. As a result, the carrying value of an obligation on the Revolving Line of Credit approximates its fair value.
Contingent Earn Out Payment Liability – During fiscal 2013, we acquired Ninety Five 5, LLC (Ninety Five 5, refer to Note 16). We reassess the normal coursefair value of business,expected contingent consideration and the corresponding liability each period using the Probability Weighted Expected Return Method, which is consistent with the initial measurement of expected earn out liability. This fair value measurement is considered a Level 3 measurement because we are exposedestimate projected earnings during the earn-out period utilizing various potential pay-out scenarios. Probabilities were applied to fluctuations in foreign currency exchange rates due to our international operationseach potential scenario and interest rates. To manage risks associated with foreign currency exchange and interest rates, we may make limited usethe resulting values were discounted using a rate that considered NinetyFive 5’s weighted average cost of derivative financial instruments as described below.
| Contingent earn out liability at beginning of year | $ | 4,109 | ||
| Reduction of contingent earn out liability | (1,579 | ) | ||
| Contingent earn out liability at end of year | $ | 2,530 |
Changes to the limited nature ofestimated liability are reflected in selling, general, and administrative expenses in our current interest rate risk, we do not make regular use of interest rate derivatives, and we were not a party to any interest rate derivative instruments during the fiscal years ended August 31, 2013, 2012, or 2011.consolidated income statements.
Overview
We utilize various share-based compensation plans as integral components of our overall compensation and associate retention strategy. Our shareholders have approved various stock incentive plans that permit us to grant performance awards, unvested share awards, stock options, and employee stock
purchase plan (ESPP) shares. In addition, our Board of Directors and shareholders may, from time to
time, approve fully vested share awards. The Organization and Compensation Committee of the Board of Directors (the Compensation Committee) has responsibility for the approval and oversight of our share-based compensation plans. At August 31, 2013,2014, our stock option incentive plan, which permits the granting of performance awards, unvested stock awards to non-employee members of the Board of Directors and employees, and incentive stock options had approximately 526,000409,000 shares available for granting. Our 2004 ESPP had approximately 569,000532,000 shares remaining for purchase by plan participants as of August 31, 2013.2014. The total compensation expense of our share-based compensation plans for the fiscal years ended August 31, 2014, 2013, 2012, and 20112012 were as follows (in thousands):
| YEAR ENDED | ||||||||||||||||||||||||
| AUGUST 31, | 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | ||||||||||||||||||
| Performance awards | $ | 2,504 | $ | 3,188 | $ | 827 | $ | 2,716 | $ | 2,504 | $ | 3,188 | ||||||||||||
| Fully vested share awards | 371 | 112 | 62 | |||||||||||||||||||||
| Unvested share awards | 334 | 383 | 340 | |||||||||||||||||||||
| Compensation cost of the ESPP | 113 | 92 | 77 | |||||||||||||||||||||
| Management stock loans | 498 | - | - | - | 498 | - | ||||||||||||||||||
| Unvested share awards | 383 | 340 | 411 | |||||||||||||||||||||
| Stock options | - | 168 | 820 | - | - | 168 | ||||||||||||||||||
| Fully vested share awards | 112 | 62 | 669 | |||||||||||||||||||||
| Compensation cost of the ESPP | 92 | 77 | 61 | |||||||||||||||||||||
| $ | 3,589 | $ | 3,835 | $ | 2,788 | $ | 3,534 | $ | 3,589 | $ | 3,835 | |||||||||||||